##### 



As filed with the Securities and Exchange Commission on April 16, 2003

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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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, 2002
Commission file number: 1-15156



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TELEKOM AUSTRIA AG(Exact name of Registrant as specified in its charter)

AUSTRIA(Jurisdiction of incorporation or organization)

Schwarzenbergplatz 3, 1010 Vienna, Austria(Address of principal executive offices)

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

|                                                      |  |                                               
|----------------------------------------------------- |  | ----------------------------------------------
|Title of each class                                   |  | Name of each exchange on which registered     
|                                                      |  |                                               
|American Depositary Shares, representing Common Stock |  | New York Stock Exchange                       
|                                                     
|Common Stock, no par value                            |  | Vienna Stock Exchange
New York Stock Exchange*



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|* |  | Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  |                                                                                                                                                                     

Securities registered or to be registered pursuant to Section 12(g) of the Act.

NONE



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

NONE



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Indicate the number of outstanding shares of each of the issuers classes
of capital or common stock as of the close of the period covered by the annual
report:

|                           |  |  |             | 
|-------------------------- |  |  | ----------- | 
|Common Stock, no par value |  |  | 500,000,000 | 

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 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.

|    |  |     |  |      |  |   
|--- |  | --- |  | ---- |  | --
|[x] |  | Yes |  | [  ] |  | No

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

|     |  |         |  |     |  |        
|---- |  | ------- |  | --- |  | -------
|[  ] |  | Item 17 |  | [x] |  | Item 18



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TABLE OF CONTENTS

|         |  |                                                                              |  |    
|-------- |  | ---------------------------------------------------------------------------- |  | ---
|         |  | PART I                                                                       |  |    
|        
|Item 1.  |  | Identity of Directors, Senior Management and Advisors                        |  | 2  
|Item 2.  |  | Offer Statistics and Expected Timetable                                      |  | 2  
|Item 3.  |  | Key Information                                                              |  | 2  
|         |  | Selected financial and other data                                            |  | 2  
|         |  | Dividends                                                                    |  | 6  
|         |  | Exchange rate information                                                    |  | 7  
|         |  | Risk factors                                                                 |  | 8  
|Item 4.  |  | Information on the Company                                                   |  | 12 
|         |  | History and development of the company                                       |  | 12 
|         |  | Business overview                                                            |  | 14 
|         |  | Fixed line services                                                          |  | 15 
|         |  | Mobile communications services                                               |  | 21 
|         |  | Data communications services                                                 |  | 26 
|         |  | Internet services                                                            |  | 28 
|         |  | Sales, marketing and customer care                                           |  | 31 
|         |  | Networks                                                                     |  | 33 
|         |  | Information technology/Operations support systems                            |  | 36 
|         |  | Competition                                                                  |  | 36 
|         |  | Properties                                                                   |  | 38 
|         |  | Capital expenditures                                                         |  | 38 
|         |  | Regulation and legal framework                                               |  | 39 
|Item 5.  |  | Operating and Financial Review and Prospects                                 |  | 56 
|         |  | Overview                                                                     |  | 56 
|         |  | Results of operations                                                        |  | 63 
|         |  | 2002 compared to 2001                                                        |  | 63 
|         |  | 2001 compared to 2000                                                        |  | 85 
|         |  | Liquidity and capital resources                                              |  | 100
|Item 6.  |  | Directors, Senior Management and Employees                                   |  | 106
|Item 7.  |  | Major Shareholders and Related Party Transactions                            |  | 111
|Item 8.  |  | Financial Information                                                        |  | 116
|Item 9.  |  | The Offer and Listing                                                        |  | 120
|Item 10. |  | Additional Information                                                       |  | 121
|Item 11. |  | Quantitative and Qualitative Disclosures About Market Risk                   |  | 136
|         |  |                                                                              |  |    
|         |  | PART II                                                                      |  |    
|         |  |                                                                              |  |    
|Item 12. |  | Description of Securities Other than Equity Securities                       |  | 139
|Item 13. |  | Defaults, Dividend Arrearages and Delinquencies                              |  | 139
|Item 14. |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 139
|Item 15. |  | Controls and Procedures                                                      |  | 139
|Item 16. |  | [Reserved]                                                                   |  | 139
|         |  |                                                                              |  |    
|         |  | PART III                                                                     |  |    
|         |  |                                                                              |  |    
|Item 17. |  | Financial Statements                                                         |  | 139
|Item 18. |  | Financial Statements                                                         |  | 139
|Item 19. |  | Exhibits                                                                     |  | 139

i



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##### 



REFERENCES

In this annual report, Telekom Austria or we refer to Telekom Austria
AG and its consolidated subsidiaries, of which mobilkom austria and its
subsidiaries are a part of. mobilkom austria refers to mobilkom austria AG &
Co KG and mobilkom austria group refers to mobilkom austria and its
subsidiaries.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that involve risks
and uncertainties. These forward-looking statements are usually accompanied by
words such as believe, intend, anticipate, plan, expect and similar
expressions. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
the risks described in Key Information  Risk factors, and elsewhere in this
annual report. Forward-looking statements involve inherent risks and
uncertainties. We caution that a number of important factors could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statement. These factors include, but are not limited to, the
following:



| |  |  | the level of demand for telecommunications services or equipment,
particularly with regard to access lines, traffic, bandwidth and new
products;                                                                                                                          
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | competitive forces in liberalized markets, including pricing
pressures, technological developments, alternative routing developments
and new access technologies, and our ability to retain market share in
the face of competition from existing and new market entrants;
|
| |  |  | the effects of our tariff reduction initiatives or other marketing initiatives;                                                                                                                                                                                           
|
| |  |  | the impact of insolvencies of our major customers or international suppliers;                                                                                                                                                                                             
|
| |  |  | the regulatory developments and changes, including the levels of
tariffs, the terms of interconnection, unbundling of access lines and
international settlement arrangements;                                                                                             
|
| |  |  | our ability to achieve cost savings and realize productivity
improvements;                                                                                                                                                                                                
|
| |  |  | the success of new business, operating and financial initiatives,
many of which involve start-up costs, and new systems and applications,
particularly with regard to the integration of service offerings of our
newly integrated subsidiaries;                          
|
| |  |  | our ability to secure the licenses we need to offer new services
and the cost of these licenses and related network infrastructure build
outs;                                                                                                                            
|
| |  |  | the progress of our domestic and international investments, joint
ventures and alliances;                                                                                                                                                                                 
|
| |  |  | the impact of our new business strategies and transformation
process including the reintegration of subsidiaries and 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; and                                                                                                                                                                    
|
| |  |  | general economic conditions, government and regulatory policies,
new legislation and business conditions in the markets we serve.                                                                                                                                         

Unless otherwise stated, references to market share, penetration rates and
other market data throughout this annual report are estimates we have made
based on official and unofficial published sources and our operating and
marketing records. While we believe our estimates are accurate, estimates
are inherently uncertain and those by other persons may differ from our
estimates.

1



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##### 



PART I

Item 1. Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

SELECTED FINANCIAL AND OTHER DATA

The following tables present a summary of consolidated financial and
operating data for Telekom Austria. The financial data presented in these
tables are derived from the consolidated financial statements which have been
prepared in accordance with U.S. GAAP and are included elsewhere in this annual
report. You should read those sections for a further explanation of the
financial data summarized here. For a description of other factors which have
affected or may affect our financial results, see  Risk factors and
Operating and Financial Review and Prospects.

Prior to June 28, 2002, Telekom Austria held a 74.999% interest in
mobilkom austria. Due to certain substantive participating rights held by the
minority shareholder, Telecom Italia Mobile International N.V., Telekom
Austrias investment in mobilkom austria was accounted for under the equity
method.

On June 28, 2002, we acquired 100% of Autel Beteiligungs GmbH, which held
a 25.001% stake in mobilkom austria, from Telecom Italia Mobile International
N.V., bringing our total interest in mobilkom austria to 100%. Consequently, we
have consolidated mobilkom austria group effective June 28, 2002. The
consolidated statement of operations for the year ending December 31, 2002
reflects Telekom Austrias equity in earnings of mobilkom austria group through
June 28, 2002 and mobilkom austria groups results of operations for the period
June 28, 2002 until December 31, 2002.

The consolidated financial statements for the years ended December 31,
1998, 1999, 2000 and 2001 have been audited in accordance with auditing
standards generally accepted in the United States of America by KPMG Austria
GmbH Wirtschaftsprüfungs- und Steuerberatungsgesellschaft and Grant Thornton 
Jonasch & Platzer Wirtschaftsprüfungs- und Steuerberatungsgesellschaft-OHG. The
consolidated financial statements of Telekom Austria for the year ended
December 31, 2002 have been audited in accordance with auditing standards
generally accepted in the United States of America by KPMG Alpen-Treuhand GmbH,
Wirtschaftsprüfungs- und Steuerberatungsgesellschaft. The consolidated
financial statements of mobilkom austria group for the year ended December 31,
2002 have been audited in accordance with auditing standards generally accepted
in the United States of America by Grant Thornton Wirtschaftsprüfungs- und
Steuerberatungs-GmbH.

Totals in the following tables may differ from the sum of their components
as a result of rounding effects.

2



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##### 



|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |        |          |       |       | 
|-------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------ | ---------------------------------------------------- | ----------------------------------------------------------------------------- | -------- | ----------------------- | ------- | -------- | -------- | ----------------------------------------------- | ------- | -------- | -------- | ------ | -------- | -------- | -------- | ------ | ------- | ------ | -------- | ----- | ----- | 
|                                                                                 |                                               |                          |                                                      |                                                                               |          | Year ended December 31,
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                        
|                                                                                 |                                               |                          |                                                      |                                                                               |          | 2002                    |         | 2001     |          | 2000                                            |         | 1999     |          | 1998  
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |       
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          | (in EUR millions, except per share information) |         |          |          |       
|Consolidated statements of operations:                                           |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|Operating revenues (1)                                                           |                                               |                          | 3,118.1                                              |                                                                               |          |                         | 2,659.7 |          |          |                                                 | 2,814.4 |          |          |        | 2,948.2  |          |          |        | 2,830.4 |       
|Operating expenses:                                                              |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|                                                                                 | Materials                                     |                          |                                                      | (196.4                                                                        | )        |                         |         | (71.9    | )        |                                                 |         | (108.2   | )        |        |          | (133.7   | )        |        |         | (97.7  | )       
|                                                                                 | Employee costs, including benefits and taxes  |                          |                                                      | (571.3                                                                        | )        |                         |         | (567.1   | )        |                                                 |         | (856.7   | )        |        |          | (645.6   | )        |        |         | (555.1 | )       
|                                                                                 | Idle Workforce                                |                          |                                                      | (29.4                                                                         | )        |                         |         | (52.0    | )        |                                                 |         | (8.9     | )        |        |          |         |          |        |         |       |         
|                                                                                 | Depreciation and amortization                 |                          |                                                      | (1,016.3                                                                      | )        |                         |         | (904.1   | )        |                                                 |         | (913.8   | )        |        |          | (864.5   | )        |        |         | (814.6 | )       
|                                                                                 | Impairment charges                            |                          |                                                      | (41.9                                                                         | )        |                         |         | (145.1   | )        |                                                 |         | (2.1     | )        |        |          |         |          |        |         |       |         
|                                                                                 | Net loss from retirement of long lived assets |                          |                                                      | (18.7                                                                         | )        |                         |         |         |          |                                                 |         |         |          |        |          |         |          |        |         |       |         
|                                                                                 | Other operating expenses                      |                          |                                                      | (1,186.7                                                                      | )        |                         |         | (1,114.9 | )        |                                                 |         | (1,223.9 | )        |        |          | (1,036.7 | )        |        |         | (759.0 | )       
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|                                                                                 |                                               | Total operating expenses |                                                      |                                                                               | (3,060.7 | )                       |         |          | (2,855.1 | )                                               |         |          | (3,113.6 | )      |          |          | (2,680.5 | )      |         |        | (2,226.4 | )    
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|                                                                                 |                                               |                          |                                                      | Operating income (loss)                                                       |          |                         | 57.4    |          |          |                                                 | (195.4  | )        |          |        | (299.2   | )        |          |        | 267.6   |        |          |       | 604.0 | 
|Other income (expense):                                                          |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|                                                                                 | Interest income                               |                          |                                                      | 88.2                                                                          |          |                         |         | 82.7     |          |                                                 |         | 78.6     |          |        |          | 66.7     |          |        |         | 40.4   |         
|                                                                                 | Interest expense                              |                          |                                                      | (244.6                                                                        | )        |                         |         | (241.0   | )        |                                                 |         | (239.9   | )        |        |          | (228.1   | )        |        |         | (212.0 | )       
|                                                                                 | Dividend income                               |                          |                                                      | 0.4                                                                           |          |                         |         | 2.2      |          |                                                 |         | 1.4      |          |        |          | 1.2      |          |        |         | 0.7    |         
|                                                                                 | Equity in earnings of affiliates              |                          |                                                      | 140.5                                                                         |          |                         |         | 195.4    |          |                                                 |         | 36.3     |          |        |          | 117.5    |          |        |         | 136.5  |         
|                                                                                 | Other, net                                    |                          |                                                      | 1.9                                                                           |          |                         |         | (44.0    | )        |                                                 |         | (38.2    | )        |        |          | (9.5     | )        |        |         | (6.3   | )       
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|                                                                                 |                                               |                          |                                                      | Income (loss) before income taxes, minority interests
and extraordinary items |          |                         | 43.8    |          |          |                                                 | (200.1  | )        |          |        | (461.0   | )        |          |        | 215.4   |        |          |       | 563.3 | 
|Income tax benefit (expense)                                                     |                                               |                          | (26.1                                                | )                                                                             |          |                         | 94.9    |          |          |                                                 | 178.8   |          |          |        | (14.5    | )        |          |        | (123.4  | )     
|Minority interests                                                               |                                               |                          | (4.9                                                 | )                                                                             |          |                         | 0.6     |          |          |                                                 | 0.1     |          |          |        |         |          |          |        |        |       
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|                                                                                 |                                               |                          |                                                      | Net income (loss) before extraordinary items                                  |          |                         | 12.8    |          |          |                                                 | (104.6  | )        |          |        | (282.1   | )        |          |        | 200.9   |        |          |       | 439.9 | 
|Extraordinary loss, net of tax                                                   |                                               |                          | 0.0                                                  |                                                                               |          |                         | 0.0     |          |          |                                                 | (3.5    | )        |          |        | (0.7     | )        |          |        | (10.4   | )     
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|                                                                                 |                                               |                          |                                                      | Net income (loss)                                                             |          |                         | 12.8    |          |          |                                                 | (104.6  | )        |          |        | (285.6   | )        |          |        | 200.2   |        |          |       | 429.5 | 
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|Basic and fully diluted earnings (loss) per share                                |                                               |                          | 0.03                                                 |                                                                               |          |                         | (0.21   | )        |          |                                                 | (0.57   | )        |          |        | 0.40     |          |          |        | 0.86    |       
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|Basic and fully diluted earnings (loss) per share, excluding extraordinary items |                                               |                          | 0.03                                                 |                                                                               |          |                         | (0.21   | )        |          |                                                 | (0.56   | )        |          |        | 0.40     |          |          |        | 0.88    |       
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|Dividends declared and paid per share                                            |                                               |                          |                                                     |                                                                               |          |                         |        |          |          |                                                 | 0.28    |          |          |        | 0.67     |          |          |        | 0.41    |       
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|Consolidated cash flow data:                                                     |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|Cash generated from operations                                                   |                                               |                          | 1,171.4                                              |                                                                               |          |                         | 842.4   |          |          |                                                 | 1,007.7 |          |          |        | 1,211.7  |          |          |        | 1,197.2 |       
|Cash used in investing activities                                                |                                               |                          | (1,176.0                                             | )                                                                             |          |                         | (453.2  | )        |          |                                                 | (893.7  | )        |          |        | (596.2   | )        |          |        | (916.9  | )     
|Cash from (used in) financing activities                                         |                                               |                          | 1.8                                                  |                                                                               |          |                         | (380.7  | )        |          |                                                 | (476.5  | )        |          |        | (1,015.1 | )        |          |        | 496.3   |       
|Effect of exchange rate differences                                              |                                               |                          | 3.7                                                  |                                                                               |          |                         | 0.1     |          |          |                                                 | 0.2     |          |          |        |         |          |          |        |        |       
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       
|                                                                                 |                                               |                          | Net increase (decrease) in cash and cash equivalents |                                                                               |          | 0.9                     |         |          |          | 8.7                                             |         |          |          | (362.4 | )        |          |          | (399.7 | )       |        |          | 776.5 |      
|                                                                                 |                                               |                          |                                                      |                                                                               |          |                         |         |          |          |                                                 |         |          |          |        |          |          |          |        |         |       

3



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|                                 |                                             |  |                 |         |      |  |      |         |      |  |                   |         |  |  |  |         |  |  |  |         | 
|-------------------------------- | ------------------------------------------- |  | --------------- | ------- | ---- |  | ---- | ------- | ---- |  | ----------------- | ------- |  |  |  | ------- |  |  |  | ------- | 
|                                 |                                             |  | At December 31,
|                                 |                                             |  |                
|                                 |                                             |  | 2002            |         | 2001 |  | 2000 |         | 1999 |  | 1998             
|                                 |                                             |  |                 |         |      |  |      |         |      |  |                  
|                                 |                                             |  |                 |         |      |  |      |         |      |  | (in EUR millions) |         |  |  | 
|Consolidated balance sheet data: |                                             |  |                 |         |      |  |      |         |      |  |                   |         |  |  |  |         |  |  |  |        
|Assets:                          |                                             |  |                 |         |      |  |      |         |      |  |                   |         |  |  |  |         |  |  |  |        
|                                 | Current assets                              |  |                 | 865.3   |      |  |      | 839.2   |      |  |                   | 912.0   |  |  |  | 1,422.0 |  |  |  | 1,957.3 | 
|                                 | Property, plant and equipment, net          |  |                 | 5,000.7 |      |  |      | 4,591.8 |      |  |                   | 5,069.5 |  |  |  | 5,411.1 |  |  |  | 5,603.1 | 
|                                 | Intangible assets, net (2)                  |  |                 | 1,316.6 |      |  |      | 80.7    |      |  |                   | 230.3   |  |  |  | 16.5    |  |  |  | 17.4    | 
|                                 | Investments                                 |  |                 | 171.3   |      |  |      | 682.2   |      |  |                   | 768.6   |  |  |  | 684.8   |  |  |  | 524.3   | 
|                                 | Other assets and deferred tax assets        |  |                 | 1,180.4 |      |  |      | 1,315.5 |      |  |                   | 864.3   |  |  |  | 693.3   |  |  |  | 154.1   | 
|                                 | Due from related parties (longterm)         |  |                 | 0.0     |      |  |      | 218.0   |      |  |                   | 218.0   |  |  |  | 0.0     |  |  |  | 0.0     | 
|                                 |                                             |  |                 |         |      |  |      |         |      |  |                   |         |  |  |  |         |  |  |  |        
|                                 | Total assets                                |  |                 | 8,534.3 |      |  |      | 7,727.3 |      |  |                   | 8,062.7 |  |  |  | 8,227.8 |  |  |  | 8,256.2 | 
|                                 |                                             |  |                 |         |      |  |      |         |      |  |                   |         |  |  |  |         |  |  |  |        
|Liabilities:                     |                                             |  |                 |         |      |  |      |         |      |  |                   |         |  |  |  |         |  |  |  |        
|                                 | Current liabilities                         |  |                 | 2,531.0 |      |  |      | 1,680.1 |      |  |                   | 1,799.4 |  |  |  | 1,755.9 |  |  |  | 2,016.7 | 
|                                 | Long-term debt, net of current portion      |  |                 | 2,079.9 |      |  |      | 2,005.2 |      |  |                   | 2,353.9 |  |  |  | 2,319.1 |  |  |  | 2,666.2 | 
|                                 | Lease obligations, net of current portion   |  |                 | 1,076.4 |      |  |      | 1,086.9 |      |  |                   | 799.0   |  |  |  | 757.3   |  |  |  | 142.1   | 
|                                 | Employee benefit obligations                |  |                 | 232.5   |      |  |      | 378.1   |      |  |                   | 448.5   |  |  |  | 248.5   |  |  |  | 213.8   | 
|                                 | Other liabilities and deferred income taxes |  |                 | 105.0   |      |  |      | 76.6    |      |  |                   | 58.3    |  |  |  | 116.9   |  |  |  | 54.1    | 
|                                 |                                             |  |                 |         |      |  |      |         |      |  |                   |         |  |  |  |         |  |  |  |        
|                                 | Total liabilities(3)                        |  |                 | 6,024.8 |      |  |      | 5,226.9 |      |  |                   | 5,459.1 |  |  |  | 5,197.7 |  |  |  | 5,092.8 | 
|                                 | Stockholders equity                        |  |                 | 2,509.5 |      |  |      | 2,500.4 |      |  |                   | 2,603.6 |  |  |  | 3,030.1 |  |  |  | 3,163.4 | 
|                                 |                                             |  |                 |         |      |  |      |         |      |  |                   |         |  |  |  |         |  |  |  |        
|                                 | Total liabilities and Stockholders equity  |  |                 | 8,534.3 |      |  |      | 7,727.3 |      |  |                   | 8,062.7 |  |  |  | 8,227.8 |  |  |  | 8,256.2 | 
|                                 |                                             |  |                 |         |      |  |      |         |      |  |                   |         |  |  |  |         |  |  |  |        

|                                                                                           |                                                              |                       |        |                                        |         |      |        |         |         |      |        |         |         |  |        |         |         |  |        |         |         | 
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------ | --------------------- | ------ | -------------------------------------- | ------- | ---- | ------ | ------- | ------- | ---- | ------ | ------- | ------- |  | ------ | ------- | ------- |  | ------ | ------- | ------- | 
|                                                                                           |                                                              |                       |        | At and for the year ended December 31,
|                                                                                           |                                                              |                       |        |                                       
|                                                                                           |                                                              |                       |        | 2002                                   |         | 2001 |        | 2000    |         | 1999 |        | 1998   
|                                                                                           |                                                              |                       |        |                                        |         |      |        |         |         |      |        |        
|Other data:                                                                                |                                                              |                       |        |                                        |         |      |        |         |         |      |        |         |         |  |        |         |         |  |        |        
|                                                                                           | Total consolidated EBITDA (as adjusted) (in EUR millions)(4) |                       |        | 1,163.7                                |         |      |        | 905.7   |         |      |        | 625.6   |         |  |        | 1,132.2 |         |  |        | 1,418.6 |        
|Number of fixed lines (in thousands)                                                       |                                                              |                       |        |                                        |         |      |        |         |         |      |        |         |         |  |        |         |         |  |        |        
|                                                                                           | PSTN access lines                                            |                       |        | 2,659.1                                |         |      |        | 2,759.8 |         |      |        | 2,929.1 |         |  |        | 3,201.6 |         |  |        | 3,570.1 |        
|                                                                                           | Basic ISDN access lines                                      |                       |        | 430.1                                  |         |      |        | 398.7   |         |      |        | 331.9   |         |  |        | 247.0   |         |  |        | 152.2   |        
|                                                                                           | Multi ISDN access lines                                      |                       |        | 8.1                                    |         |      |        | 8.3     |         |      |        | 8.0     |         |  |        | 5.6     |         |  |        | 4.1     |        
|                                                                                           |                                                              |                       |        |                                        |         |      |        |         |         |      |        |         |         |  |        |         |         |  |        |        
|                                                                                           |                                                              | Total access lines    |        |                                        | 3,097.3 |      |        |         | 3,166.9 |      |        |         | 3,269.0 |  |        |         | 3,454.2 |  |        |         | 3,726.4 | 
|                                                                                           |                                                              |                       |        |                                        |         |      |        |         |         |      |        |         |         |  |        |         |         |  |        |        
|                                                                                           |                                                              | thereof ADSL          |        |                                        | 174.1   |      |        |         | 100.6   |      |        |         | 38.5    |  |        |         | 0.9     |  |        |         |        | 
|                                                                                           |                                                              | Total access channels |        |                                        | 3,762.3 |      |        |         | 3,806.2 |      |        |         | 3,832.9 |  |        |         | 3,862.4 |  |        |         | 3,996.6 | 
|Fixed line traffic (in millions of minutes)                                                |                                                              |                       | 10,210 |                                        |         |      | 10,969 |         |         |      | 12,555 |         |         |  | 14,477 |         |         |  | 14,169 |        
|Number of mobile communications customers (in thousands)                                   |                                                              |                       |        |                                        |         |      |        |         |         |      |        |         |         |  |        |         |         |  |        |        
|                                                                                           |                                                              | Austria               |        |                                        | 3,001.4 |      |        |         | 2,849.9 |      |        |         | 2,804.3 |  |        |         | 2,259.8 |  |        |         | 1,480.9 | 
|                                                                                           |                                                              | Croatia               |        |                                        | 1,097.8 |      |        |         | 855.7   |      |        |         | 531.4   |  |        |         | 155.1   |  |        |         | 0.0     | 
|                                                                                           |                                                              | Slovenia              |        |                                        | 350.0   |      |        |         | 269.6   |      |        |         |        |  |        |         |        |  |        |         |        | 
|                                                                                           |                                                              | Liechtenstein         |        |                                        | 2.0     |      |        |         | 1.3     |      |        |         | 0.2     |  |        |         |        |  |        |         |        | 
|                                                                                           |                                                              |                       |        |                                        |         |      |        |         |         |      |        |         |         |  |        |         |         |  |        |        
|                                                                                           |                                                              | Total                 |        |                                        | 4,451.2 |      |        |         | 3,976.5 |      |        |         | 3,335.9 |  |        |         | 2,414.9 |  |        |         | 1,480.9 | 
|                                                                                           |                                                              |                       |        |                                        |         |      |        |         |         |      |        |         |         |  |        |         |         |  |        |        
|Mobile communications traffic in Austria (in millions of minutes)                          |                                                              |                       | 4,124  |                                        |         |      | 3,695  |         |         |      | 3,178  |         |         |  | 2,349  |         |         |  | 1,530  |        
|Internet customers (in thousands)                                                          |                                                              |                       |        |                                        |         |      |        |         |         |      |        |         |         |  |        |         |         |  |        |        
|                                                                                           |                                                              | Austria (5)           |        |                                        | 846.5   |      |        |         | 666.4   |      |        |         | 293.4   |  |        |         | 106.1   |  |        |         | 58.8    | 
|                                                                                           |                                                              | Czech Republic        |        |                                        | 275.3   |      |        |         | 238.2   |      |        |         | 188.7   |  |        |         |        |  |        |         |        | 
|Total number of full-time equivalent employees, including mobilkom austria group (average) |                                                              |                       | 15,714 |                                        |         |      | 17,549 |         |         |      | 18,560 |         |         |  | 18,650 |         |         |  | 18,720 |        
|                                                                                           |                                                              |                       |        |                                        |         |      |        |         |         |      |        |         |         |  |        |         |         |  |        |        

4



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##### 





---

|(1) |  | 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
fixed line services segment would have been lower by EUR 257.2 million. This
change had no impact on operating income.                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In 2002, net intangible assets increased to EUR 1,316.6 million due to
the addition of goodwill, licenses, brandnames and subscriber base
relating to the acquisition and consolidation of mobilkom austria group.
For further information see note (8) of the accompanying financial
statements.                                                                                                                                                                                                                                     
|   
|(3) |  | On June 28, 2002 we acquired the remaining 25.001% of mobilkom austria
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 for the period June 28, 2002 until December 31, 2002
and are therefore not directly comparable with previous years.                                                                                          
|   
|(4) |  | We have calculated EBITDA based on operating income before depreciation,
amortization and impairment charges and excluding the costs for idle
workforce. Additionally, in 2002 consolidated EBITDA (as adjusted)
excludes a net loss from retirement of long-lived assets of EUR 18.7
million due to a change in U.S. GAAP that requires such losses to be
reported in operating income. Prior to 2002, net losses from retirements
of long-lived assets are reported in other income, net, which is
excluded from operating income.
|   
|    |  | EBITDA is used to measure the performance of segments because we think it is
a good measure to show how our business is managed since it is commonly used
in telecommunications industry as a comparative measure of financial
performance by excluding certain variables that affect net income but do not
relate to all financial aspects of a telecommunications operation.                                                                                                                                                        
|   
|    |  | EBITDA is also used to measure the performance of segments because we
believe it is a widely accepted indicator of our ability to incur and
service debt. EBITDA does not give effect to cash used for debt service
requirements and does not reflect funds available for dividends,
reinvestments and other discretionary uses. In addition, because we have
adjusted EBITDA as presented herein, this may not be comparable to similarly
titled measures reported by other companies.                                               
|   
|    |  | For further information see Operating and Financial Review and Prospects 
Results of operations  2002 compared to 2001.                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(5) |  | The total number of internet customers excludes our approximately 31,000
ADSL wholesale customers who are part of our fixed line segment as of
December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                     

5



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##### 



DIVIDENDS

The following table sets forth the annual dividends declared and paid per
share based on 500,000,000 shares outstanding with respect to each of the
financial years indicated. Dividends declared and denominated in U.S. dollars
are based on the noon buying rate on December 31, 2002, which translated to EUR
1.00 = USD 1.0485.

|                    |  |                                       |      |     |  |     |      |  |  |  |      | 
|------------------- |  | ------------------------------------- | ---- | --- |  | --- | ---- |  |  |  | ---- | 
|                    |  | Dividends declared and paid per share
|                    |  |                                      
|For the fiscal year |  | ATS                                   |      | EUR |  | USD
|                    |  |                                       |      |     |  |    
|1999                |  |                                       | 3.87 |     |  |     | 0.28 |  |  |  | 0.29 | 
|1998                |  |                                       | 9.16 |     |  |     | 0.67 |  |  |  | 0.70 | 
|1997                |  |                                       | 5.60 |     |  |     | 0.41 |  |  |  | 0.43 | 

For fiscal year 1998, Telekom Austria paid an aggregate cash dividend of
EUR 333.2 million in 1999. For fiscal year 1999, Telekom Austria paid an
aggregate cash dividend of EUR 140.5 million in 2000. We did not pay dividends
for 2000 and 2001. We will not pay a dividend for fiscal year 2002, but in case
that our results show a sufficient net income after tax as required under the
Austrian stock corporation act we intend to pay a dividend for fiscal year 2003
in 2004. Under Austrian law, we may pay dividends only from net income as shown
in the annual financial statements of Telekom Austria AG prepared under
Austrian GAAP. We intend to pay a dividend in the amount of 50% of such profit
for fiscal year 2003 in 2004. Nevertheless, the payment of future dividends
depends on our earnings, financial condition and other factors, including cash
requirements, our future prospects, taxation, regulations and the pay-out
ratios of other European telecommunications operators. Investors should not
assume that any dividend will actually be paid or make any assumption about the
amount which may be paid in any given year. Furthermore, because dividends we
paid out during prior years reflected our status as a state-owned company prior
to 1998 and thereafter the terms of an agreement among our major shareholders,
which has since been terminated, our historical pay-out ratio of dividends
should not be considered as indicative of our future dividend pay-out ratio.

Any dividends paid will be subject to Austrian withholding tax. For
further information on Austrian withholding tax, see Additional
Information 
Taxation  Austrian taxation.

The shareholders agreement between ÖIAG, Telecom Italia and Telekom
Austria specified a dividend policy stating that at least 50% of the annual
surplus must be distributed. The shareholders agreement was terminated in
November 2002. See Major Shareholders and Related Party Transactions. Future
dividends will be paid in Euro. Cash dividends payable to holders of ADSs
listed on the New York Stock Exchange will be paid to The Bank of New York,
which will convert the dividends into U.S. dollars, at the rate of exchange
applicable on the date such dividends are paid, for disbursement to such
holders. Cash dividends payable to the holders of shares listed on the Vienna
Stock Exchange will be paid to Bank Austria Creditanstalt Aktiengesellschaft,
as paying agents, in Euro for disbursement to shareholders.

6



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##### 



EXCHANGE RATE INFORMATION

Telekom Austria published its consolidated financial statements for 1998
and 1999 in Austrian Schilling in accordance with Austrian GAAP. These
financial statements were restated in Euro in accordance with U.S. GAAP for
purposes of this annual report. Beginning with fiscal year 2000, Telekom
Austria began publishing its financial statements in Euro in accordance with
U.S. GAAP.

Effective January 1, 1999, Austria and eleven other member states of the
European Union have adopted the Euro as the single currency in substitution for
their then existing national currencies. On March 1, 2002, the Euro became the
sole legal tender for Austria and the Austrian Schilling was withdrawn from
circulation. Our financial statements and certain other amounts stated in Euro
appearing in this document have been translated from Austrian Schilling at the
official fixed conversion rate of EUR 1.00 = 13.7603 Austrian Schilling.

Our shares are quoted in Euro on the Vienna Stock Exchange. Our ADSs are
quoted in U.S. dollars and traded on the New York Stock Exchange.

Exchange rate fluctuations between the Euro and U.S. dollar may affect the
U.S. dollar equivalent of the Euro price of our shares on the Vienna Stock
Exchange and, as a result, are likely to affect the market price of the ADSs on
the New York Stock Exchange. In the future we will declare any cash dividends
in Euro and exchange rate fluctuations will affect the U.S. dollar amounts
received by holders of ADSs on conversion of cash dividends on the shares
represented by the ADSs.

The following table shows, for the periods indicated, information
concerning the exchange rate between the U.S. dollar and the Euro. These rates
are provided solely for your convenience. We do not represent that the Euro
could be converted into U.S. dollars at these rates or at any other rate. The
table below shows the averages of the relevant exchange rates on the last
business day of each month during the period specified. The high and low
columns show the highest and lowest quotes, respectively, on any business day
during the relevant period. On April 10, 2003, the noon buying rate translated
to EUR 1.00 = USD 1.0803.

|                             |                               |                     |        |                               |        |         |        |        |        |     |        |        |        |  |        |        |        | 
|---------------------------- | ----------------------------- | ------------------- | ------ | ----------------------------- | ------ | ------- | ------ | ------ | ------ | --- | ------ | ------ | ------ |  | ------ | ------ | ------ | 
|                             |                               |                     |        | End of period                 |        | Average |        | High   |        | Low
|                             |                               |                     |        |                               |        |         |        |        |        |    
|                             |                               |                     |        | U.S. dollars per EUR 1.00 (1)
|Year ended December 31, 2000 |                               |                     | 0.9388 |                               |        |         | 0.9207 |        |        |     | 1.0335 |        |        |  | 0.8270 |       
|Year ended December 31, 2001 |                               |                     | 0.8901 |                               |        |         | 0.8909 |        |        |     | 0.9535 |        |        |  | 0.8370 |       
|                             | October 2002                  |                     |        | 0.9881                        |        |         |        | 0.9812 |        |     |        | 0.9881 |        |  |        | 0.9708 |       
|                             | November 2002                 |                     |        | 0.9932                        |        |         |        | 1.0013 |        |     |        | 1.0139 |        |  |        | 0.9895 |       
|                             | December 2002                 |                     |        | 1.0485                        |        |         |        | 1.0194 |        |     |        | 1.0485 |        |  |        | 0.9927 |       
|                             |                               | Fourth Quarter 2002 |        |                               | 1.0485 |         |        |        | 1.0099 |     |        |        | 1.0485 |  |        |        | 0.9708 | 
|Year ended December 31, 2002 |                               |                     | 1.0485 |                               |        |         | 0.9495 |        |        |     | 1.0485 |        |        |  | 0.8594 |       
|                             | January 2003                  |                     |        | 1.0739                        |        |         |        | 1.0622 |        |     |        | 1.0861 |        |  |        | 1.0361 |       
|                             | February 2003                 |                     |        | 1.0779                        |        |         |        | 1.0785 |        |     |        | 1.0875 |        |  |        | 1.0708 |       
|                             | March 2003                    |                     |        | 1.0900                        |        |         |        | 1.0797 |        |     |        | 1.1062 |        |  |        | 1.0545 |       
|                             |                               | First Quarter 2003  |        |                               | 1.0900 |         |        |        | 1.0806 |     |        |        | 1.1062 |  |        |        | 1.0361 | 
|                             | April 2003 (through April 10) |                     |        | 1.0803                        |        |         |        | 1.0743 |        |     |        | 1.0904 |        |  |        | 1.0621 |       



---

|(1) |  | Based on the U.S. Federal Reserve Bank noon buying rate for the Euro. The
average exchange rates for 2000, 2001 and 2002 are calculated using the
rate on the last business day of each month during the given period.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7



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##### 



RISK FACTORS

You should carefully consider the risks described below and other information
in this document. The occurrence of anyof the following events could harm
Telekom Austria and lead to a decline in the value of your ordinary shares.

Risks relating to our business

We expect continuing competition in the fixed line and mobile communications
markets which may have a negative impact on our revenues and profitability.

Several of our existing and potential competitors in each of our business
segments are affiliated with international telecommunications operators, some
of which are incumbents in their own countries of origin, that have substantial
financial resources. In addition, on the basis of the interconnection rates
fixed by the regulatory authority and the availability of access to subscriber
lines, numerous competitors are able to compete with us in our fixed line
business with minimal or modest investments in network infrastructure and with
prices that undercut our tariffs.

The Austrian mobile communications market currently has four GSM operators
with UMTS licenses and two additional UMTS license holders. One of the latter,
Hutchison Whampoa, will probably commence operations in the first half of 2003,
whereas the other one has already suspended its operations in Austria. In
addition, one of our competitors in the fixed line business, TELE 2, has
entered the mobile communications market in February 2003 as a service provider
reselling mobile communications services of our competitor, Connect Austria,
under its own brand name. TELE 2 intends to become a Mobile Virtual Network
Operator (MVNO), with its own access number, after the new amended
Telecommunication Act which may become effective after July 24, 2003. As a
result of these new entrants, competition in mobile communications is likely to
increase, which may impact our profitability.

The amount paid for UMTS licenses in Austria was only EUR 103 per capita,
as compared to an average of EUR 630 per capita in other European countries. We
spent EUR 70 million on infrastructure and network planning by the end of 2002
and we expect that the costs of the build out will amount up to EUR 640 million
in total by the end of 2010. We cannot assure investors that revenues generated
from the UMTS technology will continue to justify the cost of the license or
the construction of the UMTS infrastructure. Due to shortage in handsets we
will have to hold the commercial launch of UMTS until sufficient UMTS handsets
are available for our customers.

As a result of liberalization, we have lost market share in the fixed line
and mobile communications services markets and we have reduced our tariffs in
response to increasing downward pressure on tariffs. Intensifying competition
from existing and new operators may result in additional losses of market share
and further tariff reductions. Other factors that may increase competition
include new forms of telecommunications that circumvent conventional tariff
structures as well as licensening schemes and alternative technologies such as
providing wireless access. See Information on the Company  Competition.

Furthermore, to date, the Austrian Telecommunications Act does not include
any obligation for mobile operators to make mobile number portability available
to customers. The new European Regulatory Framework does, however, specify such
an obligation. This obligation will have to be implemented in Austria by July
2003. Although mobilkom austria has objected to some provisions of the proposed
Telecommunications Act relating to mobile number portability, we are
participating in discussions between mobile operators and the regulatory
authority with a view to implementing a solution by July 2003. Because of
continuing competition, the main challenge we face is maintaining our
leadership in the Austrian telecommunications market. If we do not manage to
maintain this leadership, our revenues, profitability and growth may be
adversely affected.

Approximately 90% of our revenues come from the Austrian market. Growth in
the Austrian mobile communications market has slowed down and the fixed line
market is saturated. If we have difficulties retaining our customers and
finding new sources of revenues through the introduction of new products our
profitability may decline.

Our primary business is the provision of communications services in
Austria. While we expect moderate growth for mobile communications, data
communications and internet services we expect no growth in the use of voice
telephony through fixed lines. The number of fixed lines may further diminish
as more customers migrate to mobile communications and alternative fixed
network operators.

8



---



##### 



Austria has one of the highest penetration rates of mobile communications
in Europe, reaching approximately 83.1% at December 31, 2002. Although
competition based on handset subsidies has diminished in Austria, competition
based on price, subscription options offered, coverage and service quality
remains intense. Since the market is reaching maturity in terms of subscriber
growth, we are focusing on retention of the existing customer base. Since
customer retention expenses are substantial, significant customer defections
would have an adverse effect on our results of operations.

We need to complete the implementation of a sizeable reduction of our
existing workforce.

To cut our costs and enhance our competitiveness, we have substantially
reduced our existing workforce and we intend to continue to do so over the next
few years and improve productivity. However, approximately 57% of all employees
of our group are civil servants who cannot be dismissed except for cause. The
measures we have implemented include early retirement packages that entail
significant costs in the short-term. We cannot assure you that these measures
will be successful in achieving a reduction of personnel costs. In addition,
these measures may have a negative overall impact on the morale of our
employees.

Our customer tariffs for fixed line services are generally subject to
prior approval by the regulatory authority and we may be forced to decrease our
fixed or mobile interconnection rates. These restrictions may limit our
flexibility in pricing, particularly in bidding for contracts from the public
sector, and may adversely affect our profitability.

Changes to our tariff structure are generally subject to prior approval by
the regulatory authority, whereas our competitors are generally free to alter
their prices without any prior approval. As a consequence, our competitors may
be more nimble at setting a pricing structure that exploits changes in the
market, thus increasing their market shares. Our interconnection rates in our
fixed and mobile networks may be decreased by the regulatory authority in 2003
again, which may adversely affect our profitability. They may also be more
successful in bidding for contracts from the public sector which could have an
adverse effect on our results of operations. For further information see
Information on the Company  Regulation and legal framework  Legal framework
 Procurement law and Telecommunications Act.

The extent to which we must share our infrastructure with our competitors
remains to be settled by a new telecommunications act, the Austrian regulatory
authority and the courts. A regulatory framework unfavorable to us in any of
the markets in which we operate could cause our revenues and growth to decline.

The adoption of new, or modifications to existing laws, regulations,
licenses or policies by the regulatory authorities overseeing the Austrian
telecommunications market or interpretations thereof by the courts, may have a
material adverse impact on our business, financial condition and results of
operations.

Some important regulatory issues remain to be settled. These include the
following:



| |  |  | We do not know the extent to which we will be obliged to share our
infrastructure, including technical facilities and administrative
services, with other operators or the price we may charge for such
sharing. The new EU regulatory framework has to be implemented into
national law. Thus, the principle of neutrality in terms of technology
could lead to an extended regulation of infrastructure and services
which have not been subject to regulation so far, e.g., mobile
communications and the internet. In July 2002, the Minister of
Infrastructure published a proposal for a revised Telecommunications
Act which would enlarge the competences of the regulatory authority. In
several decisions in 2001, the regulatory authority decided that we
must also allow partial unbundling of our local loop to other fixed
network operators and to internet service providers. We have appealed
these decisions. If we are not successful, the decisions could
significantly affect our profitability and, with respect to access to
internet service providers, the integrity of our network.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We are required to provide other telephone network operators access
to our local network infrastructure at fees determined by the
regulatory authority. These fees are currently subject to several
appeals pending before the Austrian High Courts. The outcome of these
proceedings is uncertain. Should the courts reduce our fees,
particularly if they are reduced retroactively, our competitive
strength may be damaged and our revenues may decline. In addition, if
the regulatory authority decides to significantly decrease the price
for providing these services, it could affect our competitiveness and
decrease our revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | In July 2002, the regulatory authority ordered us to submit to it
for review by October 7, 2002 a resale offer covering access services
to enable all our competitors to bill, among other things, monthly line
rental costs directly to the customers. We are currently negotiating
the exact conditions, particularly the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

9



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##### 





| |  |  | prices, with several competitors. Competitors who accept our approved
offer would gain direct access to those customers, which could have a
serious adverse impact on our customer relationships, and potentially, on
our revenues.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The risk relating to the insolvency of major customers or international
suppliers may have an impact on our revenues or profitability.

Some of our large wholesale customers face severe liquidity constraints.
Insolvencies of these customers might expose us to risks in connection with
settlement of our accounts receivables. Insolvencies of major international
suppliers of bandwidth might have an adverse effect on the availability of the
connectivity we need to provide services to our customers.

The value of our international investments in telecommunications companies
outside Austria, particularly in Central and Southeastern Europe, may be
adversely affected by political, economic and legal developments in these
countries.

We have made significant equity investments in telecommunications
operators in the Czech Republic, Slovenia and Croatia and may make further
investments in countries of Central and Southeastern Europe. These countries
have political, economic, and legal systems that are still in the process of
transformation. Political or economic disruption or changes in laws and their
application may harm the companies in which we have invested. This may impair
the value of these investments.

Actual or perceived health risks or other problems relating to mobile
handsets or transmission masts could lead to litigation or decreased mobile
communications usage.

Concern has been expressed that the electromagnetic signals from mobile
handsets and transmission masts, which serve as antennae for transmitting radio
signals, may pose health risks and interfere with the operation of electronic
equipment. Actual or perceived risks of transmitters and receivers, and related
publicity, litigation or legislative actions could reduce the growth rate of
our mobile communications business, customer base, or average usage per
customer. Environmental objections may also impair our ability to augment our
infrastructure, including primarily our mobile network, and reduce the
willingness of contract partners to renew site contracts for mobile sites in
the upcoming years.

Risks relating to our shares

Our major shareholder, ÖIAG, will continue to exercise significant
influence over our strategic direction and major corporate actions, and ÖIAGs
interests may not be aligned with those of other shareholders.

Österreichische Industrieholding AG(ÖIAG) continues to hold a controlling
interest in our shares. This level of shareholding gives ÖIAG very significant
rights to determine our strategic direction and to determine what matters are
brought to shareholders for a vote. The issues that may be influenced by ÖIAG
include any merger, any acquisition or divestiture of material assets, approval
of the annual financial statements, declaration of dividends, capital
increases, and the election and removal of members of our Supervisory Board.
The interests of ÖIAG in deciding these matters and the factors ÖIAG considers
in exercising its votes could be different from other shareholders interests.
This could have the effect of delaying, or preventing a change of control, or a
merger, consolidation, takeover or other business combination that shareholders
might otherwise approve. For further information see Major Shareholders and
Related Party Transactions  Relationship with the Republic of Austria and
ÖIAG.

The future sale of a substantial number of our shares or ADSs could
negatively affect our share price.

The agreements signed on June 6, 2002 among ÖIAG, Telecom Italia
International (TII) and ourselves permit ÖIAG and TII to dispose of their
shares in us in the public market as well as in private transactions. According
to certain agreements signed between TII and ÖIAG, TII is entitled to sell up
to all of its shares in us in one or more public market or private
transactions. In addition, although the agreements signed on June 6, 2002 limit
the circumstances under which we may undertake a capital increase, such an
increase may be undertaken for an acquisition or to obtain or maintain an
investment grade credit rating. See Major Shareholders and Related Party
Transactions  Relationship with Telecom Italia.

In addition, we, ÖIAG and TII have agreed with three investment banks
which acted as joint global coordinators in connection with the sale of
75,000,000 of our shares by TII in November 2002 that each of us,

10



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ÖIAG and TII will not sell additional of Telekom Austria shares until May 7,
2003 without the prior written consent of the three investment banks.

The market price of our shares could fall as a result of sales of
substantial amounts of shares in the public market, or that a large number of
shares is available for sale.

ÖIAG is now free to sell the shares they own in us to another investor,
which could lead to a change in control of Telekom Austria.

The prohibitions contained in the shareholders agreement between ÖIAG and
TII on selling shares in us, terminated upon the sale by TII of 75,000,000 of
our shares in November 2002. ÖIAG is now free to sell its shares in us in a
private sale to another investor. See Major Shareholders and Related Party
Transactions  Relationship with Telecom Italia. In March 2003, the newly
formed Austrian government announced its stated policy to privatize us
entirely.

A change of control as defined in the Austrian Takeover Act would require
the investor to make a compulsory offer to our remaining shareholders, which
may be at a price which represents a discount of up to 15% below the highest
sum paid by the investor to any of our former shareholders in the preceding
twelve months. A change of control followed by a compulsory offer would
therefore be likely to reduce the liquidity of our shares in the public markets
and could eventually lead to their delisting from the Vienna and New York Stock
Exchanges. See Additional Information  Takeover rules.

Currency fluctuations may adversely affect the trading prices of our
common stock and ADSs and the value of any distributions we make.

The value of the Euro against the U.S. dollar has appreciated
significantly since January 2002. Before that point the value of the Euro
against the U.S. dollar had generally declined and had fluctuated
significantly. Because our common stock is traded in Euro and our ADSs are
traded in U.S. dollars, fluctuations in the exchange rate between the two
currencies may affect the relative value of your investment. In addition,
should we make any distribution on our common stock in Euro, the depositary
will convert such distributions to U.S. dollars. If exchange rates fluctuate
before the depositary converts the currencies, shareholders may lose some of
the value of the distribution.

Shareholders rights are governed by Austrian law and differ in some
respects from the rights of shareholders under U.S. law.

We are a stock corporation organized under the laws of the Republic of
Austria. The rights of holders of our ordinary shares, and, therefore, many of
the rights of our ADS holders are governed by our Articles of Association and
by Austrian law and the laws of the European Union. These rights differ in some
respects from the rights of shareholders in typical U.S. corporations. In
particular, Austrian law significantly limits the circumstances under which
shareholders of Austrian corporations may bring derivative actions. In
addition, it may be difficult for shareholders to prevail in a claim against us
under, or to enforce liabilities predicated upon, U.S. securities laws.

It may notbepossible for shareholders to enforce judgments of U.S.
courts against members of our Supervisory Board or Management Board.

Telekom Austria is an Austrian stock corporation. The members of our
Supervisory Board and Management Board are non-residents of the United States.
In addition, our assets and the assets of members of our Supervisory Board and
Management Board are located in whole or in substantial part outside the United
States. As a result, it may not be possible for shareholders to enforce against
us or the members of our Supervisory Board and Management Board judgments
obtained in United States courts based on the civil liability provisions of the
securities laws of the United States. In addition, awards of punitive damages
and judgments rendered in the United States or elsewhere may be unenforceable
in Austria.

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Item 4. Information on the Company

HISTORY AND DEVELOPMENT OF THE COMPANY

Telekom Austria AG is a stock corporation (Aktiengesellschaft) organized
under the laws of the Republic of Austria. It is the parent company of the
consolidated Telekom Austria Group (Telekom Austria) providing a wide range
of advanced fixed line, mobile, data and other communications services, such as
internet.

The corporate headquarters and the principal executive offices of Telekom
Austria are located at Schwarzenbergplatz 3, 1010 Vienna, Austria and are
expected to be transferred to Lassallestraße 9, 1020 Vienna in the course of
2003. The telephone number is +43 (0)590591 0 and our homepage on the World
Wide Web is at http://www.telekom.at. Reference to our website does not
incorporate the information contained on the website into this annual report.

Our agent for service of process in the United States is CT Corporation
System, 111 Eighth Avenue, New York, New York, 10011.

Before the liberalization of the Austrian telecommunications market in
1998, the Post- und Telegraphenverwaltung, or PTV, and its successor Post und
Telekom Austria AG, or PTA, had the exclusive right to provide
telecommunications services in Austria. PTV was an integrated part of the
federal property administration of the Republic of Austria and a department of
the Federal Ministry of Science and Transportation. As a consequence of the
liberalization of the telecommunications sector, PTV was transformed into a
private stock corporation. The Austrian Post Restructuring Act
(Poststrukturgesetz) of 1996 created Post und Telekom Austria AGas the
successor to PTV to continue its activities in telecommunications, postal
services, and public transportation. PTA was created on May 1, 1996 as a
wholly-owned subsidiary of Post- und Telekom Beteiligungsgesellschaft mbH, or
PTBG, a holding company wholly-owned by the Republic of Austria, which
exercised its ownership through the Federal Minister of Finance.

In October 1996, Post und Telekom Austria AGtransferred its mobile
communications business to its wholly-owned subsidiary mobilkom austria. In
April 1997, Post und Telekom Austria AGsold 25% plus one share of mobilkom
austria to STET Mobile Holding N.V., at the time a joint subsidiary of STET
International S.p.A., Telecom Italia Mobile S.p.A. and Telecom Italia.

In July 1998, Post und Telekom Austria AGs telecommunications business
became Telekom Austria AG owned by Post und Telekom Austria AG. Only a few
months later in October 1998, Post und Telekom Austria AGsold 25.00007% of
Telekom Austria to STET International Netherlands N.V., a joint subsidiary of
STET International and Telecom Italia.

In May 2000, the Austrian parliament passed the ÖIAG Act 2000 (ÖIAG-Gesetz
2000), under which PTBG and Post und Telekom Austria AG, the latter owning
74.99993% of Telekom Austria, merged with Österreichische Industrieholding AG
(ÖIAG), an industrial holding company wholly owned by the Republic of Austria.
As a result, ÖIAG held 74.99993% of the share capital of Telekom Austria, and
Telecom Italia indirectly held the remainder.

In November 2000, ÖIAG, sold a portion of its shareholding in Telekom
Austria as part of the initial public offering in Austria and the United States
of America and as a private placement elsewhere. As a result, 22.4% of our
share capital was held by widely dispersed retail and institutional investors.
After the offering, ÖIAG retained 47.8% (currently 47.2%) of our share capital.
Telecom Italia S.p.A., through a subsidiary, owned the remaining 29.8%.

In May 2002, we decided to reintegrate some of our main subsidiaries into
Telekom Austria. On October 1, 2002, we merged with our wholly owned
subsidiaries Datakom Austria GmbH, Jet2Web Internet Services GmbH and Jet2Web
Network Services GmbH and the wholly owned subsidiary of Datakom Austria GmbH,
Datakom International Solutions GmbH, effective as of December 31, 2001. We
believe that these mergers will strengthen our market position by establishing
a customer-focused organization of our wireline segment, comprising voice
telephony, data communications and internet.

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Change in mobilkom austrias corporate form and ownership

In March 2001, in order to realize a number of benefits, including an
increase in Telekom Austrias liquidity and favorable tax treatment, we
converted mobilkom austria AG into a limited partnership called mobilkom
austria AG & Co KG. The conversion did not change our interest in mobilkom
austria, or the rights of the two shareholders in mobilkom austria, except as
described under Major Shareholders and Related Party Transactions. A newly
formed mobilkom austria AG was created to act as general partner of mobilkom
austria AG & Co KG.

Prior to June 28, 2002, Telekom Austria held 75% minus one share of common
stock interest in mobilkom austria AG and a 74.999% interest in mobilkom
austria AG & Co KG. On June 28, 2002, we acquired 100% of Autel Beteiligungs
GmbH, which held 25% plus one share of common stock interest in mobilkom
austria AG and 25.001% stake in mobilkom austria AG & Co KG, from Telecom
Italia Mobile International N.V. (the successor of STET Mobile Holding N.V.),
bringing our total interest in mobilkom austria to 100%. For further
information see  Major Shareholders and Related Party Transactions -
Relationship with Telecom Italia.

Change in Telekom Austria AGs ownership

On June 28, 2002, Telecom Italia and ÖIAG agreed upon a structure of
phased exit of both parties and entered into a Share Transfer Restriction
Agreement. For further information see Major Shareholders and Related Party
Transactions  Relationship with Telecom Italia. Pursuant to the Share
Transfer Restriction Agreement on November 8, 2002 Telecom Italia sold
75,000,000 shares in a private placement to institutional investors in the
United States of America (qualified institutional buyers) as well as to
professional investors in Austria and outside the Unites States of America
under Regulation S of the U.S. Securities Act of 1933. This transaction
decreased the stake of Telecom Italia International N.V., a subsidiary of
Telecom Italia S.p.A., in Telekom Austria AG to 14.8%. As a result of the
termination of the syndicate agreement between ÖIAG and Telecom Italia, both of
Telecom Italias representatives have resigned from Telekom Austrias
Supervisory Board. For further information see  Major Shareholders and Related
Party Transactions  Relationship with Telecom Italia.

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BUSINESS OVERVIEW

We operate our business in the following four strategic business segments:



| |  |  | fixed line services, including traditional voice telephony;
| | - |  | -----------------------------------------------------------
|
| |  |  | mobile communications services;                            
|
| |  |  | data communications services; and                          
|
| |  |  | internet services.                                         

We are the market leader in Austria in all of our business segments.

On May 21, 2002, our Supervisory Board approved the reintegration and
merger of Datakom Austria GmbH, Datakom International Solutions GmbH, Jet2Web
Internet Services GmbH and Jet2Web Network Services GmbH into Telekom Austria.
We believe that these mergers will strengthen our market position by combining
our voice telephony, internet and data communications activities into one
customer-focused organization. On October 1, 2002 these companies have been
incorporated into Telekom Austria with effect from December 31,
2001. As of January 1, 2003 we finalized the reorganization of
our operation into two distinct operating segments, wireline, which
will include fixed line, data communications and internet services
and wireless, consisting of the mobile communications segment and a
third segment others which includes primarily our treasury
activities.

Starting in 2000, we have worked intensively to improve our image among
consumers. We launched an extensive marketing campaign aimed at improving our
image as a service-orientated organization. An independent Austrian market
research company ranked us as having the best impression of overall advertising
and the best overall image, gave us the second place for our pricing image in
Austria, and found a 98% awareness of our brand by the Austrian population.

The reintegration of our data and internet services businesses into
Telekom Austria AG will enable us to offer customers one-stop solutions for a
full range of integrated services. We have also implemented additional customer
service initiatives such as campaigns to change the customers price perception
of our products, welcome calls for new customers, special tariff offers for a
limited period, days on which certain voice minutes are free of charge and
other activities to improve customer retention and to win back customers. In
June 2002, we introduced a new brand and logo meant to demonstrate our
commitment to our customers and to symbolize stability, confidence, security
and competence.

Overview of Telekom Austrias revenues

Our operating revenues are derived principally from fixed line services,
which consist primarily of traffic and access related services of voice
telephony, and mobile communications services. We also obtain revenues from
data communications services and internet services. The growth in mobile
communications and internet services, including revenues from subsidiaries
outside of Austria has offset the decline in fixed line services. The following
table shows our operating revenues for each of our reporting segments for the
years 2000 to 2002.

On June 28, 2002 we acquired Telecom Italia Mobile Internationals stake
in mobilkom austria. As a result of the acquisition, we gained full strategic
and operating control of our mobile communications business. Thus, our
consolidated statement of operations for the fiscal year ending 2002 reflects
our equity in earnings of mobilkom austria group through June 28, 2002, and
consolidates mobilkom austria groups results of operations for the period from
June 28, 2002 until December 31, 2002.

Our consolidated figures are therefore not directly comparable with
previous years. Furthermore, although we were unable to consolidate mobilkom
austria group in prior years, we have always managed the business of mobilkom
austria group. To facilitate a discussion of results on a comparable basis, we
are providing supplemental total managed data below. The total managed data
shown in this report include 100% of mobilkom austria groups financial
statements for all periods presented. For a discussion of our operating
revenues and more details, see also Operating and Financial Review and
Prospects  Results.

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|                                                        |                                  |  |                   |         |      |  |         |         |  |  |         |         | 
|------------------------------------------------------- | -------------------------------- |  | ----------------- | ------- | ---- |  | ------- | ------- |  |  | ------- | ------- | 
|                                                        |                                  |  | 2002              |         | 2001 |  | 2000   
|                                                        |                                  |  |                   |         |      |  |        
|                                                        |                                  |  | (in EUR millions)
|Operating revenues:                                     |                                  |  |                   |         |      |  |         |         |  |  |         |        
|Fixed line services                                     |                                  |  | 2,057.2           |         |      |  | 2,456.7 |         |  |  | 2,654.8 |        
|Data communications services                            |                                  |  | 330.0             |         |      |  | 330.2   |         |  |  | 312.8   |        
|Internet services                                       |                                  |  | 119.6             |         |      |  | 99.5    |         |  |  | 61.1    |        
|Mobile communications services                          |                                  |  | 1,002.5           |         |      |  |        |         |  |  |        |        
|Intersegmental eliminations and others                  |                                  |  | (391.2            | )       |      |  | (226.7  | )       |  |  | (214.4  | )      
|                                                        |                                  |  |                   |         |      |  |         |         |  |  |         |        
|                                                        | Consolidated operating revenues  |  |                   | 3,118.1 |      |  |         | 2,659.7 |  |  |         | 2,814.4 | 
|                                                        |                                  |  |                   |         |      |  |         |         |  |  |         |        
|Mobile communications services -
prior to consolidation |                                  |  | 906.9             |         |      |  | 1,713.2 |         |  |  | 1,501.0 |        
|Intersegmental eliminations                             |                                  |  | (116.8            | )       |      |  | (429.4  | )       |  |  | (418.3  | )      
|                                                        |                                  |  |                   |         |      |  |         |         |  |  |         |        
|                                                        | Total managed operating revenues |  |                   | 3,908.2 |      |  |         | 3,943.5 |  |  |         | 3,897.2 | 
|                                                        |                                  |  |                   |         |      |  |         |         |  |  |         |        

Approximately 10% of Telekom Austrias total managed revenues in 2002 are
derived from activities outside of Austria, mainly in the mobile communications
services.

Austria has demonstrated a strong demand for communications services, with
a mobile user penetration rate of approximately 83.1% at December 31, 2002, one
of the highest in the European Union. Internet user penetration in Austria was
approximately 50% at the same date based on a population of 6.7 million persons
aged 14 and older, placing Austria above the average of the European Union
countries (source: AIM Austrian Internet Monitor, FesselGfK/Integral, 4th
quarter 2002).

Fixed line services

In 2002, our fixed line services segment generated revenues of EUR 2,057.2
million before intersegmental eliminations. Fixed line voice telephony services
in particular continue to be our most significant revenue
contributor, representing approximately 53% of total managed revenues in
2002. Approximately 13% are internal revenues, mainly with the mobile
communications segment and with the data communications segment.

Market position

We are the leading provider of fixed line telecommunications services in
Austria. At December 31, 2002, we had a market share of 55.3% of voice
telephony, including internet dial-up, carried over fixed network based on
traffic volume and we serviced 3.1 million access lines in Austria, of which
438,200 operate on our Integrated Services Digital Networks (ISDN). ISDN
networks allow simultaneous, fully digital transmission of voice and data at
higher speed than over normal access lines. Our network infrastructure covers
all of Austria and is fully digital. We are also the leading provider of
wholesale fixed line services in Austria. In 1999, we were one of the first
incumbent telecommunications companies in Europe to introduce Asymmetrical
Digital Subscriber Lines (ADSL) services. ADSL is one of the xDSL technologies
that permits the transmission of data at very high speeds using a standard
copper access line.

In 2002, for the first time since the liberalization of the
telecommunications market in Austria, we were able to stabilize our fixed line
market position and even increase our market share in the second and third
quarter of 2002. At the end of 2001, we identified three main drivers to
improve business performance, which were implemented in 2002: targeted win-back
campaigns, mobilization of the most important sales channels, and promotional
campaigns.

Primary services

Fixed line services is our largest business segment and includes:



| |  |  | network access for end users;                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | traffic services, including local, national and international long
distance, fixed-to-mobile and internet dial-up calls; and
|
| |  |  | services provided to other carriers.                                                                                        

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We also offer other products and services, including customer premises
equipment, value-added services, call management services, public payphone
services, call center services and directory publications.

Access

We provide traditional telephone line access, also called Public Switched
Telephone Network access (PSTN), and ISDN basic and multi access. Unlike a PSTN
telephone line which offers a single access channel, an ISDN basic line
provides two channels and an ISDN multi-line provides 30 channels which can be
used for simultaneous voice and data transmission at higher speeds. Since
November 1999, we have offered our customers high speed data transmission via
ADSL. In 2002 the whole ADSL-access-portfolio (AonSpeed) with modules for
download volume or online time was re-launched in order to increase the
flexibility for the customers and therefore the customer value. At December 31,
2002, we had installed about 174,100 ADSL lines. We are required by law to
grant other operators access to our subscriber lines, also called the local
loop. In addition, under the Austrian universal service obligation, we are
required to provide the following services throughout Austria:



| |  |  | access to public voice telephony via a fixed line including fax, modem and data transmission;
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | free and unrestricted access to emergency services;                                          
|
| |  |  | access to directory inquiry services;                                                        
|
| |  |  | access to telephone directories; and                                                         
|
| |  |  | nationwide provision of public payphone services at accessible locations.                    

Traffic services

We offer a variety of calling services to residential and business
customers throughout Austria. These services include local, long distance,
fixed-to-mobile and internet dial-up at different tariffs. We provide
international fixed line voice services to destinations worldwide.

Carrier services

Our carrier services unit is providing wholesale services for both
national and international fixed and mobile telecommunications operators.

Our domestic carrier services include call origination and termination,
transit and access to other services, including freephone and premium rate
services, emergency and directory inquiry services. At December 31, 2002, we
had entered into interconnection agreements with 22 fixed-line and 6 mobile
licensed operators in Austria. Separate fixed and mobile interconnection
agreements were entered into with all six mobile operators. Our international
carrier services include:



| |  |  | Call termination. We deliver international incoming calls to
Telekom Austria customers or subscribers of other network operators.                                                                                                                                                        
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Voice transit service. This service consists of routing traffic via
our international network. We also act as account intermediary.                                                                                                                                                      
|
| |  |  | Signaling for international roaming.                                                                                                                                                                                                                                                     
|
| |  |  | Bandwidth transit services. Due to Austrias geographic location,
we are in a position to offer transit capacity on our international
network among the eight countries that border Austria.                                                                                             
|
| |  |  | International internet access. We provide connections to the
networks of other European countries, the United States and worldwide.                                                                                                                                                      
|
| |  |  | Network build out. We use our technical experience to plan, build
out, operate and maintain networks for our competitors.                                                                                                                                                                
|
| |  |  | With the extension of the Jet2Web Stream we expanded our broadband
activities abroad. The transmission capacity of the fiber optic ring
built in 2001 to connect Vienna to Prague, Frankfurt, Munich and
Salzburg had to be increased in 2002. The second part of this network
connecting

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| |  |  | Vienna, Bratislava and Budapest started operation in mid 2002. An
extension of the network to Slovenia and Italy is currently in
preparation. A further extension to Croatia is planned for the third
quarter of 2003. All parts of this network can be expanded up to 320Gbit/s
which would allow us to adjust capacity step-by-step to growing demand.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Access lines and traffic volume

Access lines

The following table shows selected data relating to our PSTN and ISDN
lines for the periods indicated. The figures exclude payphones, but include our
internal lines and approximately 259,100 lines for qualifying low income
persons at December 31, 2002. The service for low income persons includes free
monthly rental and one hour of free local traffic per month. We receive
reimbursement from the government for each of these lines. For further
information see - Regulation and legal framework  Major regulatory decisions
affecting Telekom Austria. Each PSTN line includes one access channel, each
basic ISDN line includes two access channels and each multi ISDN line includes
30 access channels.

|                       |                         |                       |               |         |                 |       |      |         |         |       |  |         |         |      | 
|---------------------- | ----------------------- | --------------------- | ------------- | ------- | --------------- | ----- | ---- | ------- | ------- | ----- |  | ------- | ------- | ---- | 
|                       |                         |                       |               |         | At December 31,
|                       |                         |                       |               |         |                
|                       |                         |                       |               |         | 2002            |       | 2001 |         | 2000   
|                       |                         |                       |               |         |                 |       |      |         |        
|                       |                         |                       |               |         | (in thousands) 
|Number of fixed lines: |                         |                       |               |         |                 |       |      |         |         |       |  |        
|                       | PSTN access lines       |                       |               | 2,659.1 |                 |       |      | 2,759.8 |         |       |  | 2,929.1 |        
|                       | Basic ISDN access lines |                       |               | 430.1   |                 |       |      | 398.7   |         |       |  | 331.9   |        
|                       | Multi ISDN access lines |                       |               | 8.1     |                 |       |      | 8.3     |         |       |  | 8.0     |        
|                       |                         |                       |               |         |                 |       |      |         |         |       |  |        
|                       |                         | Total access lines    |               |         | 3,097.3         |       |      |         | 3,166.9 |       |  |         | 3,269.0 |     
|                       |                         |                       |               |         |                 |       |      |         |         |       |  |        
|                       |                         |                       | of which ADSL |         |                 | 174.1 |      |         |         | 100.6 |  |         |         | 38.5 | 
|                       |                         | Total access channels |               |         | 3,762.3         |       |      |         | 3,806.2 |       |  |         | 3,832.9 |     

To date, the major portion of the demand for our ISDN lines has come from
business customers. The number of our ISDN lines increased from approximately
407,000 at December 31, 2001, to approximately 438,200 at December 31, 2002,
representing an increase of 7.7%. The decline in the number of our PSTN lines
is primarily due to increased migration to mobile networks and substitution by
ISDN lines. At December 31, 2002, we had installed approximately 174,100 ADSL
lines, of which 17.8% are provided to other operators.

Traffic volume

The following table shows selected information regarding our national
fixed line traffic for the periods indicated. It includes all minutes of tariff
packages that are charged generally by the minute, as well as free minutes at
certain times of the week.

|                    |                                |                          |  |                             |        |      |  |       |        |  |  |       |        | 
|------------------- | ------------------------------ | ------------------------ |  | --------------------------- | ------ | ---- |  | ----- | ------ |  |  | ----- | ------ | 
|                    |                                |                          |  | Year ended December 31,    
|                    |                                |                          |  |                            
|                    |                                |                          |  | 2002                        |        | 2001 |  | 2000 
|                    |                                |                          |  |                             |        |      |  |      
|                    |                                |                          |  | (in millions of
minutes)(1)
|Fixed line traffic: |                                |                          |  |                             |        |      |  |       |        |  |  |      
|                    | Local traffic                  |                          |  | 3,765                       |        |      |  | 4,335 |        |  |  | 6,227 |       
|                    | National long distance traffic |                          |  | 842                         |        |      |  | 823   |        |  |  | 1,008 |       
|                    | Fixed-to-mobile traffic        |                          |  | 826                         |        |      |  | 830   |        |  |  | 941   |       
|                    | International traffic          |                          |  | 472                         |        |      |  | 476   |        |  |  | 507   |       
|                    | Internet dial-up traffic       |                          |  | 4,305                       |        |      |  | 4,505 |        |  |  | 3,872 |       
|                    |                                |                          |  |                             |        |      |  |       |        |  |  |      
|                    |                                | Total fixed line traffic |  |                             | 10,210 |      |  |       | 10,969 |  |  |       | 12,555 | 
|                    |                                |                          |  |                             |        |      |  |       |        |  |  |       |       



---

|(1) |  | All amounts exclude interconnection traffic, products offered under flat
fee, and payphone traffic.
|--- |  | ---------------------------------------------------------------------------------------------------

Our one-time internet offer, Complete, is not included in the data
presented above. Although we stopped offering this flat rate internet product
in 2000, for which the minutes used are not charged, the corresponding traffic
still exists as shown in the table below.

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|                       |  |                          |       |      |  |      |       |  |  |  |       | 
|---------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                       |  | Year ended December 31, 
|                       |  |                         
|                       |  | 2002                     |       | 2001 |  | 2000
|                       |  |                          |       |      |  |     
|                       |  | (in millions of minutes)
|Onetime Internet offer |  |                          | 3,801 |      |  |      | 3,593 |  |  |  | 2,817 | 

The overall mix of our fixed line traffic continued to change during 2002,
reflecting an increasingly competitive environment. In 2002, the decrease in
traffic was due to the loss of market share in the local and internet dial-up
traffic.

In 2002, our customers generated 471 million minutes of outgoing
international traffic through our fixed line network, compared to 476 million
minutes in 2001 and 507 million minutes in 2000. We introduced new tariffs in
2000 which lowered the average tariffs for international tariffs and changed
the perception of our customers that international calls are high priced. This
resulted in a reduction of decline rates in minutes of outgoing traffic of 0.9%
in 2002 compared to 6.1% in 2001. Our principal outgoing international traffic
routes are to Germany, Switzerland and Italy and accounted for approximately
53.7% of our total outgoing international traffic during 2002.

Carrier traffic

Our incoming and outgoing international traffic includes calls to and from
our customers and customers of other network operators routed through our
network. Traffic minutes of international incoming and outgoing calls,
especially incoming calls to fixed and mobile networks, increased due to more
effective sales activities.

Tariffs

The introduction of new tariffs for national and international calls in
2000 resulted in tariff reductions of up to 58%. With the introduction of our
pay-per-second tariff scheme, the so-called TikTak tariffs, in 2001, we
reduced the average decline of our voice market share. At the end of 2002, the
TikTak tariff scheme accounted for 14.8% of our traffic volume. At December 31,
2002, more than 840,300 customers had opted for one of the TikTak tariff
packages.

Our increased marketing efforts to win back former customers resulted in
the conversion of 628,300 of our former customers into TikTak tariff customers
in 2002. The table below shows the trend of our average tariffs. Due to
increased marketing efforts and growing competition, our average tariffs fell
in all categories in comparison to 2001. The total average tariff for voice
services decreased by 8.9% in comparison to the prior year. The average tariffs
are calculated by dividing the revenues in each category by the total minutes
as reported in the table on fixed line traffic.

|                 |                                |                        |  |                         |       |      |  |       |       |  |  |       |       | 
|---------------- | ------------------------------ | ---------------------- |  | ----------------------- | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                 |                                |                        |  | Year ended December 31,
|                 |                                |                        |  |                        
|                 |                                |                        |  | 2002                    |       | 2001 |  | 2000 
|                 |                                |                        |  |                         |       |      |  |      
|Average tariffs: |                                |                        |  |                         |       |      |  |       |       |  |  |      
|                 | Local traffic                  |                        |  | 0.047                   |       |      |  | 0.054 |       |  |  | 0.055 |      
|                 | National long distance traffic |                        |  | 0.053                   |       |      |  | 0.065 |       |  |  | 0.095 |      
|                 | Fixed-to-mobile traffic        |                        |  | 0.189                   |       |      |  | 0.201 |       |  |  | 0.227 |      
|                 | International traffic          |                        |  | 0.213                   |       |      |  | 0.244 |       |  |  | 0.289 |      
|                 | Internet dial-up traffic       |                        |  | 0.016                   |       |      |  | 0.017 |       |  |  | 0.020 |      
|                 |                                |                        |  |                         |       |      |  |       |       |  |  |      
|                 |                                | Average tariff (Voice) |  |                         | 0.081 |      |  |       | 0.088 |  |  |       | 0.092 | 
|                 |                                |                        |  |                         |       |      |  |       |       |  |  |      

Access tariffs

Our TikTak tariff options allow billing in seconds rather than by pulse
and are adapted to our customers calling patterns.

TikTak Privateoffers lower voice tariffs for a slightly higher monthly
rental fee. The monthly rental includes 60 minutes of free calls in off-peak
time in the Austrian fixed line network each month (Monday to Friday 6 p.m. to
8 a.m., Saturday, Sunday and holidays) and features a nationwide BestFriend
tariff of EUR 0.02 per minute. The minimum term of contract is one year.

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TikTak Familyis a special offer for second home owners. With TikTak
Family customers get two telephone access lines for a monthly rental of EUR 21
per month at the low-priced TikTak tariff rates. The monthly rental includes 60
minutes of free calls per access line in off-peak time in the Austrian fixed
line network each month (Monday to Friday 6 p.m. to 8 a.m., Saturday, Sunday
and holidays).

TikTak Weekendoffers Austria-wide low voice tariffs during the week and
free of charge telephone calls on weekends from Friday 6 p.m. until Monday 8
a.m. as well as on public holidays. The tariffs per minute are equal to those
of TikTak Private and TikTak Family but TikTak Weekend does not offer a
BestFriend tariff.

TikTak Internationaloffers especially low tariffs to one selected
international destination. The monthly rental already includes the foreign
destination that customers choose to call for only EUR 0.116 per minute in
off-peak time. The domestic tariffs per minute are equal to those of TikTak
Private and TikTak Family but TikTak International does not offer a BestFriend
tariff.

TikTak Businessis a similar package offered to our business customers.
The monthly rental contains 3 international destinations of free choice and 60
free minutes in the Austrian fixed line network. We also offer our TikTak
packages in connection with ADSL-access.

TikTak Officeis a special tariff for small businesses which offers
similar features like the TikTak Private for residential customers. The monthly
rental includes 60 minutes of free calls in off-peak time in the Austrian fixed
line network each month (Monday to Friday 6 p.m. to 8 a.m., Saturday, Sunday
and holidays) and features a nationwide OfficePartner tariff of EUR 0.01667 per
minute (excluding taxes), but without a minimum term of contract.

National traffic tariffs

We apply special tariffs to certain services, including value-added
services (telephone numbers with the prefixes 07, 08, 09), public services such
as information, emergency, or satellite communications.

With our prepaid Telekom Austria Calling Card it is possible to make calls
without cash from both fixed line and mobile telephones from Austria to about
200 countries. Irrespective of time zone or week day, the cost of a telephone
call is calculated according to the tariff zone on the basis of a standard flat
rate.

Carrier services tariffs

We receive payments for terminating international traffic and pay
international carriers to carry and terminate our outgoing calls in other
countries. These receipts and payments are based on settlement rates negotiated
with other international carriers on a bilateral basis.

In addition, we receive payments for national interconnection traffic and
pay other national carriers to carry and terminate calls from our customers in
their networks.

The range for termination tariffs to mobile networks is from EUR 0.1125
(mobilkom austria) up to EUR 0.1962 (tele.ring), mobile origination tariffs are
EUR 0.1075 (mobilkom austria) up to EUR 0.1962 (tele.ring). Peak and off-peak
tariffs are exactly the same.

Our main source of interconnection costs arises from calls to mobile
networks. From August 1, 2001 until March 31, 2002 the rates for termination to
the mobilkom austria network were EUR 0.125 per minute. From April 1, 2002
until December 31, 2002, mobilkom austria was required by the regulatory
authority to lower its interconnection fees to EUR 0.1125. However
interconnection for calls terminating in T-Mobiles and Connect Austrias
networks are EUR 0.138. The fee for terminating calls in the networks of
tele.ring and Hutchison 3G Austria is EUR 0.1962. Hutchison 3Gs mobile
termination fee is only applicable if Hutchison 3G Austrias mobile network
reaches a coverage of more than 20% of Austria. If the coverage remains below
20% Hutchison 3G Austria will have to choose one of the other four mobile
network operators as its national roaming partner and will only be able to
charge the same fee as that operator.

Other services

Leased Lines

The leased line business area generates revenues by leasing fixed lines to
the customers for their exclusive and dedicated use.

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Our leased line basic service establishes a permanent connection for the
transmission of voice and data traffic between two geographically separate
points or between a point and several other points. These points can be
entirely within Austria or partly in Austria and partly abroad. We lease lines
to other local telephone operators and mobile service providers, who use such
lines as part of their networks. We also lease lines to providers of data
services. For more information see  Data communications services.

Customer premises equipment

We are a leading provider of telecommunications equipment, systems,
related post-sales maintenance, and service for residential and business
customers in Austria. As in most European Union member states, the market in
Austria for such equipment and systems, commonly known as customer premises
equipment, is characterized by high competition and low profit margins. We
believe, however, that the supply and servicing of customer premises equipment
is an essential element of providing a full service to our customers. Through
the provision of customer premises equipment, we are able to develop closer
relationships with our customers, encourage the use of new technologies and
cross-sell other services such as ISDN and ADSL. It also helps us to understand
better our customers evolving telecommunications needs. We sell and lease
customer premises equipment manufactured by leading vendors through retail
outlets, including our own call centers, our Telekom and A1 SHOPs, direct sales
force (for business customers), our door-to-door agents, as well as third-party
distributors. Our range of customer premises equipment includes:



| |  |  | telephone systems, fax machines, telephones and accessories;                
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | mobile products;                                                            
|
| |  |  | systems which help corporate customers to manage their telephone extensions;
|
| |  |  | maintenance services;                                                       
|
| |  |  | personal computer hardware for internet access, including modems; and       
|
| |  |  | peripheral multimedia devices like digital cameras and MP3-players.         

We plan to grow our customer premises equipment business by exploiting
opportunities arising from the convergence of information technology and
telecommunications systems, and systems integration and internet services.

Value-added services

Our current portfolio of value-added services includes:



| |  |  | freephone services, which enable a user to call a telephone number free of charge;                                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | shared cost service, which allows callers and call recipients to share call charges;                                                                                     
|
| |  |  | premium rate services, which charge the caller a higher than
standard telephone rate, a portion of which is passed on to the
information provider called by the customer;
|
| |  |  | audiotext services, which are automated message services;                                                                                                                
|
| |  |  | video-conferencing;                                                                                                                                                      
|
| |  |  | calling cards; and                                                                                                                                                       
|
| |  |  | information services.                                                                                                                                                    

Since the second half of 2001 we have observed a decrease in the demand for
premium-rate and freephone services, as a result of the general economic
slowdown as well as the competition. However the demand for shared cost
services has constantly been growing. We expect to regain market share in the
area of premium-rate services as well as in the area of freephone and shared
cost services due to our product innovations and variations launched in 2002.

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Call management services

We offer a range of call management services comprising digital voicemail,
call waiting, call forwarding, three-way conference calls and caller
identification.

Public payphone services

We are the principal provider of public payphones in Austria and operate
approximately 23,800 payphones across Austria. At December 31, 2002, 39.9% of
our payphones were prepaid-card operated. Due to the transition to the Euro we
converted our payphones. In addition, the number of payphones was reduced by
6.1%. Our goal is to transform selected payphones located primarily in premium
locations into multimedia outlets with internet access. Our revenues from
payphones decreased in the year ended December 31, 2002, as a result of a
number of factors, including increased mobile phone penetration, and the use of
prepaid calling card products. Tariffs for payphones are separated from fixed
voice tariffs. Therefore, tariff reductions for fixed line calls did not impact
payphone revenues.

Call center services

We provide national and international directory services, time and weather
information and other services such as conference calling.

We offer call center services to third parties such as catalogue-based
retail sales companies. We also offer complete call center solutions that
include personnel training and sale and installation of call center equipment.

Directory publications

Herold is the leader of the telephone directory market in Austria. We
publish and distribute telephone directories through Herold. Herold has the
exclusive ownership of the Austrian trademark Herolds Gelbe Seiten (Herolds
Yellow Pages). We own 26% of Herolds issued share capital. On
April 15, 2003, we entered into a share purchase agreement for
the sale of our holding in Herold to an investor group led by Veronis
Suhler Stevenson and 3i. The agreement is still subject to approval
by the Austrian Cartel court and the ability of the majority
shareholder to sell its stake in Herold. After the sale Herold will
continue to publish our telephone directories.

Mobile communications services

Our mobile communications services segment is represented by mobilkom
austria group which is comprised of mobilkom austria and its subsidiaries.
mobilkom austria group generated revenues of EUR 1,909.5 million in 2002, EUR
1,713.2 million in 2001 and EUR 1,501.0 million in 2000, before intersegmental
eliminations. In addition to providing mobile communications services in
Austria, we also provide mobile communications services through VIPnet in
Croatia, Si.mobil in Slovenia and mobilkom [liechtenstein] in Liechtenstein,
representing approximately 20% of our mobile communications revenues excluding
intercompany revenues within the mobile segment in 2002 compared to 16% and 10%
in 2001 and 2000 respectively.

We had approximately 4.5 million mobile communications customers at the
end of 2002 representing an 11.9% increase compared to 2001. The mobile
communications services segment covers a total population of close to 15
million. Wireless market penetration ranges from 52% in Croatia and 75% in
Slovenia to 83% in Austria.

On January 7, 2003 mobilkom austria group entered into an exclusive
partnership with Vodafone to co-operate in the Austrian, Croatian and Slovenian
markets. The co-operation will extend the range of existing products and
services of mobilkom austria group and improve the product portfolio in
particular for business customers. Both companies will collaborate in the field
of roaming, purchasing, development of new products and services, technical
platforms, global account management and joint marketing initiatives. Eurocall,
the first joint product, was launched in the first quarter 2003, offering
favorable and transparent roaming prices to users in 26 European countries.

Austria

Market position

We are the leading provider of mobile communications services in Austria
with approximately 3 million customers at December 31, 2002, which represented
a total market share of about 44.4% of the Austrian mobile communications
market, in comparison to 42.9% at the end of 2001. Our mobile business has
experienced rapid growth in recent years as the mobile penetration rate in
Austria increased from approximately 15% at

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December 31, 1997 to 83.1% at December 31, 2002. However, in 2002, the
penetration rate increased only slightly by 1% compared to 2001. We believe
that we have a strong market position as a result of our customer-focused
services, two well recognized brands in Austria (mobilkom austria and A1) and
broad network coverage.

In August 2000, we were one of the first mobile communications operators
worldwide to launch a nationwide and commercially operated network based on
general packet radio system, or GPRS. GPRS is a technology which is a data
service enhancement for Global System for Mobile Communication, or GSM. GSM is
one of the leading standards for digital wireless communications. We are
currently implementing a system that will provide even faster data transmission
by optimizing the data compression for GPRS.

On November 8, 2001, we purchased 49% of paybox österreich AG. paybox
österreich AG is the holding company of paybox austria AG and has been offering
mobile payment services since January 2001. Following a Europe-wide
reorganization of the paybox group, we plan to acquire 100% ownership of paybox
CEE, thereby also assuming full ownership of paybox österreich AG in June 2003.
This acquisition will allow us to offer m-commerce (mobile commerce) solutions
both in Austria as well as in Southeastern Europe.

In January 2002, mobilkom austria was, worldwide, the first mobile
communications service provider who was assigned a bank license. This license
allowed us to found our 100% subsidiary A1 BANK AG through which we aim to
enable a broad range of m-commerce services.

In February 2002, we discontinued our analog mobile operations, and we
began to use the net infrastructure for the expansion of the GSM-GPRS network
and the rollout of the Universal Mobile Telecommunications System (UMTS)
network. UMTS allows for packet-switching and would allow operators to transmit
data rates exceeding significantly those of the existing mobile systems. It
also permits implementation of multimedia applications that integrate voice,
video, and data communications.

We were the first European operator to set up a national UMTS network,
with a technical launch in September 2002. The UMTS network is used by some
selected mobilkom austria employees internally and by suppliers and partners
for the development of content services. However, it will only be launched
commercially as soon as handsets become available, with an expected
commencement in mid 2003.mobilkom austria currently covers 40% of the Austrian
population with its UMTS network and is designing and testing various kinds of
products and services.

Services

We offer a wide range of digital mobile communications products and
services including value-added services such as voicemail, information
services, m-commerce, mobile internet access, mobile office solutions,
telematics (a combination of location-based services and remote control),
service for using three mobile phones under the same number, short messaging
services (SMS) and multimedia messaging services (MMS). Location-based services
encompass all services where information about the location of the consumer is
needed, like finding the closest hospital, restaurant, post office or grocery
store and other location based information.

Whereas with SMS only text-based messages can be sent, MMS offers the
ability to send and receive rich media messages comprising a combination of
text, sounds, images and video to and from MMS capable handsets. In addition,
MMS can also be sent and received via special internet platforms, such as the
mobilkom austria portal A1.net. The portal A1.net uses the internet to promote,
adapt and sell various products for our mobile phone services.

Contract services.For our contract customers we offer dedicated customer
service and special tariff packages. Our customized products are targeted at
all segments from residential customers to large corporate accounts. Our large
corporate customers benefit from a range of specialized corporate services such
as mobile communications with full virtual private network functionalities. For
instance, our A1 MOBILE OFFICE product combines hardware and software that
allows internet access, voice, data and fax communications via mobile phone.
Our GPRS product, A1 DATA GUARD, enables employees to have secure access to
their employers internal computer network via their mobile phone. Furthermore,
mobilkom austria group offers solutions for virtual private networking (VPN) to
its business customers. VPN is a network designed for a corporate or
governmental entity using the infrastructures of a carrier and providing
customized services.

Prepaid services. Prepaid products are marketed primarily to lower volume
mobile phone users. The advantages of prepaid services for us are decreased
credit risk, lower costs of sales, increased traffic levels and reduced
administrative costs. From its introduction until 2000, our prepaid service
experienced rapid growth and was a significant element in the growth of our
mobile customer base. In 2002, we observed a saturation of the market.

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M-commerce services.In the past two years we enlarged our range of
m-commerce (mobile commerce) services. For instance, since April 2001,
customers have been able to order more than 50,000 items from an Austrian
mail-order house via their mobile phones, and since winter 2001, they can
purchase ski tickets. In 2002, we continued to enlarge our service offerings:
event ticketing, closing of a short-term insurance contract for major sports
injuries, paying at vending machines and betting via mobile phone.

In January, 2003, we started the testing phase for m-parking service in
Vienna, Austria. m-parking enables car drivers to pay short-term parking fees
via their mobile phone, processed through our subsidiary A1 BANK. A1 BANK
administers the funds generated through parking management in trust for the
City of Vienna, Austria.

International roaming services.International roaming enables our digital
customers, to make and receive calls with their mobile phones in other
countries using the networks of operators with whom we have entered into
international roaming agreements. At December 31, 2002, we had international
roaming agreements with 227 mobile network operators in 105 countries.
Additionally, we offered to our registered prepaid customers roaming in 12
countries with 16 mobile operators and to unregistered prepaid customers
roaming in 11 countries with 13 mobile operators. At December 31, 2002, we had
signed 13 GPRS roaming agreements which cover 12 countries.

Other mobile phone services.The portfolio of entertainment services
targeted primarily at the youth market was enlarged in 2002 by the A1 GAME
ZONE, which offers games for mobile devices. These games can either be accessed
through Wireless Application Protocol (WAP) or using the SMS technology. WAP
allows access to Internet using mobile handsets, even without the use of a
computer.

We phased out our paging network in September 2002. Instead we offer SMS
PRO for emergency and yellow cab services as a special, SMS-based, high
performance solution. SMS PRO offers in comparison to paging a better standard
of convenience like web-based group administration, web-based alert function,
full compatibility to Telemetries, delivery reports and high performance
two-way emergency communication.

Customers and traffic

Customers

We have experienced substantial growth in our mobile customer base over
the past few years. According to our own market research, there were about 6.76
million mobile customers in Austria in December 2002, representing a mobile
penetration rate of 83.1% of the population. Of 26 European countries surveyed
at the end of 2002, Austria has one of the highest penetration rates of mobile
communications in Europe. The growth of the penetration rate has slowed down.
As a result of the market saturation we have focused on retaining customers
rather than acquiring new customers. We expect growth in the medium-term will
be driven by new data services as well as the expansion of mobile technology to
new products and services. In December 2002, our mobile customers represented
approximately 44.4% of the mobile communications market in Austria, 1.5% higher
than at the end of 2001.

The following table shows selected customer and market share data for our
digital and analog services in Austria at the dates specified. Customer totals
are based on total customer identification numbers issued. The size of this
market has been estimated by us.

|                           |                      |                                  |         |                 |         |      |         |                |         |      |         |      |         |   |         |  |         |   |         |  |         |  
|-------------------------- | -------------------- | -------------------------------- | ------- | --------------- | ------- | ---- | ------- | -------------- | ------- | ---- | ------- | ---- | ------- | - | ------- |  | ------- | - | ------- |  | ------- | -
|                           |                      |                                  |         | At December 31,
|                           |                      |                                  |         |                
|                           |                      |                                  |         | 2002            |         | 2001 |         | 2000           |         | 1999 |         | 1998
|                           |                      |                                  |         |                 |         |      |         |                |         |      |         |     
|                           |                      |                                  |         |                 |         |      |         | (in thousands) |         |      |         |      |         |   |         | 
|Customers at end of period |                      |                                  |         |                 |         |      |         |                |         |      |         |      |         |   |         |  |         |   |         | 
|                           | (digital and analog) |                                  |         |                 |         |      |         |                |         |      |         |      |         |   |         |  |         |   |         |  |        
|                           |                      | Contract                         |         |                 | 1,574.9 |      |         |                | 1,439.4 |      |         |      | 1,336.6 |   |         |  | 1,218.4 |   |         |  | 955.5   |  
|                           |                      | Prepaid                          |         |                 | 1,426.5 |      |         |                | 1,410.5 |      |         |      | 1,467.7 |   |         |  | 1,041.4 |   |         |  | 525.4   |  
|                           |                      | Growth in digital                |         |                 | 8.1     | %    |         |                | 5.1     | %    |         |      | 28.6    | % |         |  | 60.4    | % |         |  | 85.8    | %
|Total customers            |                      |                                  | 3,001.4 |                 |         |      | 2,849.9 |                |         |      | 2,804.3 |      |         |   | 2,259.8 |  |         |   | 1,480.9 | 
|                           |                      |                                  |         |                 |         |      |         |                |         |      |         |      |         |   |         |  |         |   |         | 
|                           |                      | Net additions                    |         |                 | 151.5   |      |         |                | 45.6    |      |         |      | 544.5   |   |         |  | 779.0   |   |         |  | 541.2   |  
|Market Information         |                      |                                  |         |                 |         |      |         |                |         |      |         |      |         |   |         |  |         |   |         | 
|                           |                      | Total market for
mobile services |         |                 | 6,762.8 |      |         |                | 6,650.3 |      |         |      | 6,252.8 |   |         |  | 4,250.4 |   |         |  | 2,307.9 |  
|                           |                      | Our total market
share           |         |                 | 44.4    | %    |         |                | 42.9    | %    |         |      | 44.8    | % |         |  | 53.2    | % |         |  | 64.2    | %

Our customer base increased to more than 3 million customers in 2002, of
which 1.6 million were contract customers and 1.4 million prepaid customers. In
2002, we deactivated our analog network with approximately 73,000 customer at
the beginning of that year. We were able to migrate a majority of these
customers into our digital network. By focusing on contract customers with a
higher yield we were able to achieve the highest growth in this area.

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In addition, we were able to reduce our churn rate in both areas. Churn
rate provides insight into the growth or decline of the subscriber base as well
as the average length of participation in the service. Our Austrian churn rate
is calculated based on the total number of customers who discontinue their use
of our service in a 12 month period, divided by the average number of total
customers during that period. A prepaid customer is disconnected 13 months
following the last account deposit. In 2002, our GSM contract churn rate was
10.2% and our GSM prepaid churn rate was 24.2%. These rates are in line with
the average churn rate of mobile operators in European Union countries where
mobile operators subsidize handsets given to customers as an incentive to
switch operators. Subsidized handsets have been available in Austria since late
1998.

We focus on keeping our churn rate low, with particular emphasis on
retaining high value customers and optimizing the satisfaction of our
customers. As part of our aim to encourage customer loyalty, we introduced a
points-based customer loyalty program in April 1999 for which approximately one
million customers were registered at December 31, 2002. Participants earn one
point per call minute. This minute-based points accrual mechanism will be
changed into a revenue-based accrual in 2003. The collected points entitle
customers to purchase new subsidized handsets and accessories for mobile
phones. We actively manage churn through customer relationship management
systems, developing our own distribution and logistics capabilities, direct
marketing and other retention initiatives.

Traffic

The following table shows for the periods indicated traffic volume of our
customers excluding visitor roamers, average number of customers, and the
average monthly traffic per customer in Austria for the periods indicated.
Customer traffic comprises outgoing calls made in Austria and abroad and
incoming calls received by our customers abroad and excludes traffic from
internal lines and from visitor roamers.

|                                           |  |                         |         |      |  |      |         |  |  |  |         | 
|------------------------------------------ |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                                           |  | Year ended December 31,
|                                           |  |                        
|                                           |  | 2002                    |         | 2001 |  | 2000
|                                           |  |                         |         |      |  |     
|Traffic (in millions of minutes)           |  |                         | 4,124   |      |  |      | 3,695   |  |  |  | 3,178   | 
|Average number of customers
(in thousands) |  |                         | 2,895.7 |      |  |      | 2,829.0 |  |  |  | 2,544.4 | 
|Minutes per customer per month             |  |                         | 119     |      |  |      | 109     |  |  |  | 104     | 

Tariffs

We offer promotional packages intended to attract and retain customers,
such as free connection, bundled airtime minutes, and innovative tariff
packages such as A1 FRIENDS, which allows a customer to choose three mobile
numbers within our A1 network to which calls can be made at reduced rates. In
addition, we intend to continue to focus on attracting and retaining
high-volume corporate customers by offering flexible corporate tariff
structures, volume discounts and handset upgrades.

Croatia

In September 1998, Croatia awarded its second GSM license to VIPnet, a
consortium in which we have held an interest through mobilkom austria since
1998. We increased our stake in VIPnet by 5% on May 28, 2002 and further by 9%
on January 30, 2003 bringing our total interest in VIPnet to 80%. VIPnet
started operations on July 1, 1999, and by December 31, 2002 it served 1.1
million customers (84% of them use prepaid services), increasing its customer
base in 2002 by 28.3% compared to December 31, 2001. Compared to many European
mobile operators VIPnet had a low annual churn rate of 16.7% in 2002. VIPnet
accounts for a 48.2% share of the Croatian mobile communications market.
Croatias mobile communications penetration rate was 39% in December 31, 2001
and increased to 52% in December 31, 2002.

VIPnets principal activities are the operation of its mobile
communications network in Croatia and ancillary sales and trading activities.
VIPnet distributes its products at 19 outlets (VIP centers), which operate in
the major metropolitan areas in Croatia. Furthermore, there are 188 VIP
partners located in 43 towns, and 32 VIPonline partners. The prepaid products
are additionally distributed through its over 1200 VIPme shops and stores, as
well as 5,500 VIPme voucher points of sale and 355 automatic teller machines.
Moreover, VIPnet provides fixed line internet access services, an internet portal and 21 internet corners in
the main tourist regions in Croatia. VIPnet has become the second largest fixed
line internet service provider in Croatia.

In mid-2001, VIPnet started targeting the corporate market by launching
products for small and medium-sized enterprises. By introducing VPN, VIPnet was
able to increase its business customers share. VIPnet was the first player in
the Croatian market to offer advanced technology solutions such as GPRS and
GPRS roaming.

24



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Croatia has a high number of visitor roamers especially in summer season.
In m-commerce and location-based services VIPnet took a leading role in the
market and is constantly developing innovative services in this field.

In June 2002, VIPnet commercially launched MMS services. In addition to
standard MMS service, customers are able to receive information from VIPnet,
containing images and photographs in conjunction with text. In 2002, VIPnet
customers sent more than 815 million SMS, which represents an increase by 88%
in comparison to the prior year. On average, customers sent more than 70 SMS
monthly, which is one of the highest SMS usage rates in Europe. In September
2001, VIPnet introduced a new service that enables all GSM customers to pay
their short-term parking fees with SMS. VIPparking can be used in 10 major
towns in Croatia and 15% of all short-term parking fees were paid by SMS in
2002.

VIPnet will participate in the next UMTS license auction provided the
commercial conditions are acceptable.

Slovenia

In February 2001 we purchased a 75% plus one share interest in Si.mobil, a
Slovenian mobile communications provider. We consolidate Si.mobil at 100%
because we hold an option to purchase the shares for a fixed price we do not
currently own. At the end of December 2002 the final closing of the purchase of
the remaining shares was postponed until 2007. For further information see note
(2) of the accompanying financial statements.

At December 31, 2002, Slovenia had a mobile penetration rate of 74.7%, and
Si.mobil had a market share of 23.4% of the mobile communications market in
Slovenia making it the second largest mobile operator in Slovenia. The number
of customers in Si.mobil amounted to 350,000 by the end of 2002, which
represents an increase of the customer base by 30% compared to end of 2001. The
contract customer base accounts for 44% of the total subscriber base.

Liechtenstein

On November 16, 1999, the Principality of Liechtenstein granted a GSM
license to mobilkom [liechtenstein] AG, a wholly owned subsidiary of mobilkom
austria. mobilkom [liechtenstein] launched services on September 13, 2000.
Furthermore, mobilkom [liechtenstein] started premium-rate services and
services for mobile virtual network operators, which are interconnection
margin-businesses that account for a substantial part of its financial results.

The penetration rate in Liechtenstein reached 71% at December 31, 2002.
The subscriber base of mobilkom [liechtenstein] amounts to about 2,000 (all of
them contract customers), thus accounting for a 9% share of the mobile
communications market in Liechtenstein. mobilkom [liechtenstein] is the second
largest mobile communications provider in this highly competitive market.

Data communications services

Telekom Austrias data communications services generated revenues of EUR
330.0 million in 2002 and EUR 330.2 million in 2001, in each case before
intersegmental eliminations. About 20% of the revenues are generated internally
 mainly by providing corporate network services to the mobile communications
segment. The data communications services segment encompasses the business
activities of Datakom Austria GmbH, which was reintegrated in 2002.

Market position

We are the overall market leader for data communications services in
Austria. In particular, we believe that we are the market leader in our core
service areas of leased lines and switched data networks. Although the weak
economic environment impacted negatively on the Austrian data communications
market, we managed to stabilize our revenues and increase our market share.

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Services

We offer a wide range of national and international data communications services, including:



| |  |  | corporate network services;                                                     
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | leased lines and related services;                                              
|
| |  |  | switched data transmission services on different levels of speed and volume; and
|
| |  |  | data value-added services.                                                      

As we are Austrias leader in the leased lines market, the regulatory
authority requires us to give other operators access to our leased lines
network.

Corporate network services

We offer a wide range of corporate network services, including planning,
installation, network management, and maintenance of corporate-wide
communications networks. These services include:



| |  |  | Corporate network office packages. These are full-service products
for companies, providing them with an entire network infrastructure.
These service products are provided in flexible modules to meet
customized consumer needs;                             
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Corporate intranet services. We design and manage customized
network infrastructure for corporate customers; and                                                                                                                                               
|
| |  |  | Voice over internet protocol. This technology transmits voice over
the internet or intranet. We offer corporate customers the integration
of real-time voice communications into corporate data networks
including PABX functionality (automatic call manager).

Corporate network customers pay a flat rate for services, such as network
management, depending on the level of service selected in the service level
agreement.

We expect that the demand for corporate network services will continue to
increase as businesses increase internal efficiency and knowledge management,
as well as to provide products and services to customers more quickly and
conveniently.

Leased lines and connected services

We are the principal provider of national and international leased lines
in Austria and operate a centrally managed national leased line network. Leased
lines are fixed point-to-point connections between locations and are mainly
used for high volume data transmission. Our leased lines are usually marketed
in combination with a service package such as security and network management.
These packages are used by customers to establish, operate and extend their own
networks.

Our leased line customers pay an initial installation charge and a
recurring fee based on the type, length and capacity of the leased line.
Capacity, measured by 64 kilobit equivalents, is the primary means of
generating revenue. The overall transmission capacity of our leased lines
measured in 64 kilobit equivalents has increased by more than 17% between
December 2001 and December 2002. The number of 64 kilobit equivalents increased
from 95,921 to 112,295 in the same period. However, in recent years, the
recurring fees have declined significantly. We expect that competition will
continue to pressure leased line prices. Nonetheless, we expect demand for
leased lines and connected services to continue to increase as
telecommunications and internet service providers lease additional capacity to
establish new, or extend existing, networks.

Switched data services

We offer a range of data services on our switched network, including
packet-switched or frame relay based on SDH services. SDH stands for
synchronous digital hierarchy and is the transport system for all switched and
non- switched services such as IP- data traffic, Corporate Networks,
asynchronous transfer mode services (ATM), leased line services and
international transit traffic. ATM is a high-performance, cell-oriented
switching and multiplexing technology that utilizes fixed-length packets to
carry different types of traffic. It offers guaranteed quality levels and
flexible bandwidth connections in order to accommodate varying application
requirements.

26



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Packet-switched services account for a significant but nevertheless
declining amount of our switched data services revenues. Packet-switched data
services are based on a mature technology. Frame relay and SDH-based services
account for a growing percentage of our switched data service revenues. This is
due primarily to the significant increase in the amount of internet and
corporate network traffic carried on our frame relay and SDH networks, and the
growing number of applications that require the speed and flexibility of these
more advanced technologies.

In January 1999, we introduced a new product called Datacash, a solution
for cashless payment systems to meet the increasing demand for electronic
payment. In 2001, we developed a product called Aircash which was introduced as
a wireless card-based payment system. Aircash enables credit card-based
transactions by means of a portable wireless payment system. Aircash is
provided by our mobile and data communications services segments.

Packet-switched services.We provide packet-switched services on our
public switched data network. These services allow data communications for a
range of applications, such as database searches, electronic funds transfers,
and e-mail. We use the X.25 protocol, which is a worldwide standard for
transmitting data using packet-switched networks. Although traffic has grown in
recent years, we expect that customers now using packet-switched services will
increasingly migrate to frame relay and SDH-based services.

The following table shows the number of service ports connected to our
packet-switched service at the dates indicated.

|                        |  |                         |        |      |  |      |        |  |  |  |        | 
|----------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                        |  | Year ended December 31,
|                        |  |                        
|                        |  | 2002                    |        | 2001 |  | 2000
|                        |  |                         |        |      |  |     
|Packet-switched service |  |                         | 61,881 |      |  |      | 58,260 |  |  |  | 40,200 | 

Frame relay services.Frame relay is a high speed open protocol that is
more efficient than X.25 packet-switching and is well suited to data-intensive
applications, such as connecting local area networks. Our frame relay service
is a cost-effective alternative to leased lines for some of our business
customers. Instead of leasing high capacity lines in order to accommodate
occasional or intermittent high data volumes, customers using frame relay pay
for sufficient capacity to satisfy their average requirements. This capacity
can be supplemented with a guaranteed additional bandwidth level to accommodate
periods of more intense usage.

Our frame relay service is integrated with the frame relay networks of,
and services provided by, other international carriers. This enables us to
provide integrated international services.

The following table shows the number of service ports connected to our
frame relay based service at the dates indicated. The number of ports on our
frame relay platform was reduced, since we started to move customers to our new
IP-based platform.

|                          |  |                         |       |      |  |      |       |  |  |  |       | 
|------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                          |  | Year ended December 31,
|                          |  |                        
|                          |  | 2002                    |       | 2001 |  | 2000
|                          |  |                         |       |      |  |     
|Frame relay service ports |  |                         | 4,275 |      |  |      | 4,870 |  |  |  | 3,616 | 

Data services based on SDH Technology.In 1996, we launched our
Datastream/SDH network which provides cost-effective broadband services for
business customers requiring higher and more flexible levels of bandwidth.
Datastream/SDH is an internationally recognized high speed digital transmission
and switching device that permits integrated voice, data and multimedia
communications.

Data value-added services

As data value-added services, we primarily offer electronic data
interchange services of legal documents (Elektronischer Rechtsverkehr). This is
a secure on-line system operated for the Austrian Ministry of Justice in
cooperation with Austrian bar associations which enables customers to file
legal documents electronically with the Austrian courts. We also provide a
service called the European Business Register (Europäisches Firmenbuch). This
service provides access to commercial register databases in 11 European
countries and allows companies to find information about other companies.

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In 2001, our service package DaMe became operational. DaMe is a special
network used for the transmission and management of patient data to and from
medical institutions. In 2002 we introduced DaMe Complete, a turn-key solution
package that provides the entire data management functionalities for medical
offices including DaMe network capabilities, hardware (PC, local area network ,
Printer) and software for easy and fast implementation.

Our Digitale Signaturproduct allows secure digital signatures to be used
on-line, thereby enabling the secure processing of transactions and payments
over the internet. The product is used in combination with our e-business
services.

As part of our e-business solutions, we introduced in 2002 several
products like sale.square (online distribution of products and services) or
convert.square (data conversion between different IT systems) in order to
provide our business clients the flexibility and cost reduction potential of
electronic data transfer in the internet.

Other services

Until 2002, we offered the TETRA Network product through our 49%-owned
subsidiary Walky Talky Telekom GmbH. TETRA stands for trans-European trunked
radio, which is the European standard for the generation of digital
communications designed to provide reliable radio networks. TETRA is able to
transmit voice, images and data. Together with Walky Talky Telekom GmbH,
Telekom Austria participated in the public tender by the Republic of Austria
for a TETRA-based radio system for government and emergency organisations
called ADONIS. In July 2002, the ADONIS contract was awarded to the competing
master-talk Austria Telekom Service GmbH. In July 2002, we sold our 49%-stake
in Walky Talky Telekom GmbH to Tetrafunk Beteiligungen GmbH.

Internet services

Revenues from our internet segment before intersegmental eliminations were
EUR 119.6 million in 2002, representing an increase of 20.2% compared to 2001.
Revenues are mainly generated from fees for internet dial-up, ADSL access and
portal business. On June 30, 2000, Telekom Austria AG transferred its entire
internet residential business to Jet2Web Internet Services GmbH. As part of our
re-organization into two operating segments (wireline, wireless), Jet2Web
Internet Services GmbH was re-integrated into Telekom Austria in 2002. We also
provide internet services in the Czech Republic through our 100% subsidiary,
Czech On Line.

Market position

With approximately 846,500 residential customers we are the biggest
internet service provider in Austria in terms of customers. We had a share of
approximately 38% of the residential internet market in the fourth quarter of
2002, including 3% contributed by mobilkom austrias mobile internet customers.
According to the AIM Austrian Internet Monitor survey, Austria had an internet
user penetration rate of 50% based on a population of 6.7 million persons age
14 and older which means that in total 3.35 million Austrians use the internet.
At the same time, the number of online-shoppers has been growing. In the fourth
quarter of 2002, 46% of all internet users were shopping online according to
the AIM Austria Internet Monitor survey.

Services

Our internet operations comprise the following services:



| |  |  | access; and                                                                                                
| | - |  | -----------------------------------------------------------------------------------------------------------
|
| |  |  | portal business with online media sales, e-commerce, paid services and multimedia services.                
|
| |  |  | The brand Aon combines all product and service offerings for private
internet access and internet services.

Access

We have offered fixed network internet access through dial-up service
since April 1995, and in November 1999 we were one of the first European
operators to introduce a high speed broadband internet access service, ADSL.

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|                    |       |  |                 |         |      |  |         |         |  |  |         |         | 
|------------------- | ----- |  | --------------- | ------- | ---- |  | ------- | ------- |  |  | ------- | ------- | 
|                    |       |  | At December 31,
|                    |       |  |                
|                    |       |  | 2002            |         | 2001 |  | 2000   
|                    |       |  |                 |         |      |  |        
|Dial-up subscribers |       |  | 703,400         |         |      |  | 580,000 |         |  |  | 258,800 |        
|ADSL subscribers    |       |  | 143,100         |         |      |  | 86,400  |         |  |  | 34,600  |        
|                    |       |  |                 |         |      |  |         |         |  |  |         |        
|                    | Total |  |                 | 846,500 |      |  |         | 666,400 |  |  |         | 293,400 | 
|                    |       |  |                 |         |      |  |         |         |  |  |         |        

The table shows the development of the number of our internet customers at
the dates shown. We have also excluded our approximately 31,000 ADSL wholesale
customers who are part of our fixed line segment.

We derive revenues for our access services primarily from subscriber fees
paid by customers for our dial-up and ADSL services.

In addition, we offer AonSuccess which is not a separate product but an
add-on product available to customers who use one of the other Internet
products described above. In addition to the web space for homepages included
in each of the other access products listed, AonSuccess provides 50 megabytes
of additional web space for large homepages.

We introduced free of charge internet dial-up access in 1999 with our
product AonPuls, which has neither a monthly rental fee for internet access nor
an additional fee based on internet traffic. We only charge our customers the
special dial-up internet tariffs for the connection via fixed line. In October
2001, we launched AonFlash, in five different service packages. One of these
packages, AonFlash easy, is designed like AonPuls, only charging customers the
special dial-up internet tariffs for the connection via fixed line. At December
31, 2002, 60.1% of our internet customers used AonPuls, AonFlash easy or one of
our other free access products, such as tirol Net.

In 2000, we also offered a special flat-rate internet product called
Complete. Although we stopped offering this flat rate internet product in 2000,
it is still used by our customers.

In 2002, the entire ADSL Portfolio was re-launched for residential
customers as well as business customers. The aim was to increase flexibility
for customers. The new ADSL product offer is designed based on customer needs.
There are two basic products, one based on time (30 hour) and one based on data
(500MB, 1GB or 4GB). Customers can choose between self installation or
installation by the technical customer service for all products (except ISDN).
Customers can also choose two additional packages which offer wireless
connectivity in connection with all base products and that allow for cordless
use of our ADSL products.

Portal business with online media sales, e-commerce, paid services and
multimedia services

A portal is defined as a network that aggregates, navigates and delivers a
wide range of internet commerce, community, communication, and content
services. Portals evolved from simple search engines, allowing users to search
the internet quickly, to become aggregators and distributors of commerce,
community, communication, and content services. Our main portal, Aon, offers a
wide range of services from communication to online shopping and tries to
satisfy various daily needs of Austrian users. Revenues are generated from paid
services, business-to-consumer multimedia services (Jet2web-tv), and sales of
online advertising.

With the launch of the paid service AonVideochat, an audio-visual
communications service, we positioned ourselves on the market as a multimedia
communications service provider. We also re-launched our online shopping area,
the AonShoppingzone. The shopping mall concept provides users with the
opportunity to choose from a wide range of products of various suppliers within
a single shopping area. Furthermore, love.at, Austrias leading dating
community was successfully transformed from a free service into a paid service
in November 2002.

We completed our content offering with new games and music services and a
new content channel, auto & motor.

In September 2002, we introduced Jet2web-tv as a multimedia services field
trial in cooperation with a European Commission-funded Information Society
Technologies (IST) project called A proxy infrastructure for internet
interactive TV. Jet2web-tv offers TV over ADSL within an IP-network. The
users hardware interface is either a PC or TV. The participants have access to
audio-visual contents of channels like Eurosport, EMI, MTV, MCM or ORF, the
national broadcasting service. The trial is currently offered as a paid
service.

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The Telekom Austria portals (excluding mobilkom austrias portal A1.net) lead
the Austrian portal market of internet service providers with 520 million page
impressions in 2002. Page impressions refer to the number of times a specific
website has been accessed or viewed by users.

Czech On Line

We are present in the Czech internet market through our Czech subsidiary,
Czech On Line a.s. (COL), the leading provider of internet services and the
first provider to introduce free dial-up internet access in the Czech Republic.
In 2002 Czech On Line generated revenues of EUR 10.9 million. It was founded in
1995 and fully acquired by Telekom Austria during the fiscal year 2000. In
2001, COL evolved from an internet service provider to a full communications
service provider and defended its leading position in an increasingly
competitive environment. At December 31, 2002, Czech On Line had approximately
275,300 active user accounts, up from approximately 238,200 at the end of 2001.

COL offers the following services:



| |  |  | free dial-up internet access through PSTN, ISDN and GSM;                                                                         
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | internet access for customers via frame relay, leased lines, and
wireless point-to-point and point-to-multipoint access services;
|
| |  |  | PSTN voice services for business customers for local, national and
international calls;                                          
|
| |  |  | value-added services (such as global internet roaming, web hosting,
domain registration and virtual mailboxes);                  
|
| |  |  | 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.                                                                         

After receiving a 3.5GHz license for microwave transmission, COL has
rolled out a basic access network in Prague and six regional cities in the
Czech Republic in 2002.

Sales, marketing and customer care

To enhance our competitive position, we plan to focus even further on
customer relation management (CRM). This includes the development of sales,
marketing and customer care activities to better meet the needs and
expectations of our customers.

Starting in 2000, we have worked extensively to improve our image among
consumers. We launched an extensive marketing campaign aimed at improving our
image as a service-oriented organization. An independent Austrian market
research company ranked us as having the best impression of overall advertising
and the best overall image, gave us the second place for our pricing image in
Austria and found a 98% awareness of our brand by the Austrian population.

The re-integration of our data and internet services businesses into
Telekom Austria will enable us to offer customers one-stop shop solutions for
the full range of integrated services.

Fixed line services

In the fixed line segment, we group our customer base as follows:



| |  |  | residential retail sales;                                                        
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | small offices/home offices (SOHOs), small and medium-sized enterprises (SME); and
|
| |  |  | key accounts.                                                                    

We served approximately 2.4 million residential customers and
approximately 370,000 small offices/home offices, small and medium-sized
enterprises and key accounts at December 31, 2002.

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Sales and marketing

We market and sell our products and services through many channels,
including direct marketing methods such as targeted mailings. Customers can
order products and services by telephone, fax or mail and through the online
shop on our website 24 hours a day. We also have customer-specific websites
which offer links to our homepage. Our call center hotline is another important
sales channel through which customers can obtain information and order fixed
line-related products and services.

At December 31, 2002, we had a network of 49 Telekom Austria Shops,
offering competent customer service and advice concerning our entire service
offerings for residential and business customers.

In addition, we have recently started direct customer solicitation by
professionals and by our employees on an avocational basis, and use retail
chains as sales points.

Customer care

Our customer care center is responsible for the systematic and
comprehensive life-cycle care of our customers. It aims to set up
organizational fundamentals and procedures related to ordering, billing, call
center, directory services, data base clearing, customer service and complaints
management. Our target is to achieve 100% customer satisfaction and durable
customer loyalty which outperforms that of our competitors. We believe that
customer service and relationship management are key distinguishing factors
among telecommunications operators.

The customer care center was re-organized from a technical-driven,
functional organization to a customer-process-oriented organization. Both the
hotlines and all service processes from product and service offerings by data
communications and internet services were integrated. Simultaneously, we
analyzed and improved the service level and the interactions with our
customers. Our new directory services line (118877) was launched in September
2002.

Mobile communications services

Sales and marketing

We market contract and prepaid mobile communications services through
various channels: including our own shops, shops-in-shops, post offices, retail
agents, internet, and a key account sales force.

At December 31, 2002, we operated 38 A1 shops in major metropolitan areas
in Austria. A1 SHOPs offer mobile products, services and accessories, technical
information and advice, and the opportunity to test mobile products. We have
also entered into distribution agreements with approximately 1,500 electronics
equipment outlets throughout Austria at December 31, 2002. The number of these
outlets was reduced in 2002, in order to reduce logistics expenses and improve
efficiency. Larger distribution partners took over the responsibility for
smaller outlets within their region. Our shop-in-shop concept comprises 173
branded information counters in large consumer electronics outlets. In
addition, our mobile communications products and services are also offered in
our 49 Telekom shops and in 1,710 post offices throughout Austria, which
provide high visibility for our products and services.

In order to satisfy the demand for prepaid mobile communications services,
we also sell our prepaid products through other retail agents, such as
supermarkets and gas stations, throughout Austria.

We operate one of the leading Austrian e-commerce websites for our mobile
products and services, offering prepaid and postpaid subscriptions, accessories
and re-loading of prepaid accounts via the internet. The majority of these
services may also be accessed via mobile handsets.

Our mobile sales and marketing strategy aims to enhance the breadth and
quality of our service and build long-term relationships with our customers,
thereby reducing churn and maintaining our strong position in an increasingly
competitive market. Our sales and marketing strategy includes:



| |  |  | increasing the sales through our own shops and developing them into
service points for our customers, e.g. for hardware replacement;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | strong focus on valuable business customers;                                                                                        
|
| |  |  | further improving customer service; and                                                                                             

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| |  |  | exploring additional distribution channels for internet retail.
| | - |  | ---------------------------------------------------------------

Customer service

We seek to provide a high quality customer service and to build our
relationship with mobile customers starting from the first contact. We plan to
continue investing in effective information systems to facilitate the interface
between operational support systems, administrative systems, billing,
distribution and customer service systems.

We believe that the new information systems will allow for the development
of improved service management processes. We are continuously upgrading our
billing systems in order to support the introduction of new products and
services, and to increase our ability to offer more flexible tariff structures.
These systems enable us to produce customized bills for our business and
residential customers as well as to offer electronic bills (ONLINE BILL).

Our contract customers receive itemized bills and are encouraged to pay by
direct debit transfer. We have a flexible billing system for corporate
customers, which allows us to carry out customer segmentation and to offer
multiple tariff rates and more tailored billing information. We monitor our
exposure to credit loss and customer fraud through a credit scoring system that
evaluates potential contract customers.

Our new prepaid customers receive a voucher when purchasing their mobile
telephone. The voucher authorizes a specified value of prepaid airtime. Prepaid
customers may purchase more airtime by buying additional vouchers at retail
outlets. Retail outlets which sell vouchers include A1 SHOPs as well as a wide
variety of sales channels, such as handset dealers, gas stations, tobacco
shops, and post offices. As prepaid customers pay in advance for their mobile
service, the risk of bad debt and fraud is substantially reduced.

At December 31, 2002, mobilkom austria employed about 900 people in
customer services. In 2001, our call center and inbound and outbound services
were certified by the ÖNORM Institute, the Austrian Standards Institute, and so
became the first certified call center in Europe. This certification confirms
qualitative measurements of services provided by mobilkom austria.

mobilkom austria offers under the brand name client24 call center services
including complete call center solutions that entail sale and installation of
call center equipment and customer service training to third parties. We also
provide the A1 Auskunftservice. This directory assistance offers address and
telephone number information. The information can be communicated by voice,
sent by e-mail, SMS or fax, or the customer can be directly connected to the
requested number.

Data communications services

We target business customers in this segment with our dedicated sales
force. In 2002, we focused on retention of our large business customers and
extension of our customer base by attracting medium and small-sized
enterprises.

As part of the integration of fixed-line, data communications and internet
services into a single Wireline segment, we will combine data communications
services with Telekom Austrias key account management and form a new unit
called Business Solutions. This will allow us to replace the existing
technology and product-oriented organization with a customer-focused approach
with a strong emphasis on all-in-one solutions.

Our promotion has focused on highlighting IT solutions and security
services on top of our large portfolio of products and services for a reliable
data communications infrastructure.

Internet services

We use focused advertising and sponsoring activities to enhance our
various internet brands. Our campaigns include TV advertising, on-line
advertising, public billboards, advertisements on public transportation
vehicles, radio and newspapers. Our advertising has focused on highlighting the
benefits customers can derive from internet usage, such as easily locating
useful information. We use direct group sales channels for our fixed and
wireless products. We intend to cross-sell, for example, by bundling fixed and
mobile internet access.

Indirect sales of our internet access products are generally made through
authorized sellers, including department stores and independent retailers. We
also sell our high-end products through shops-in-shops.

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Networks

Telekom Austria is the largest telecommunications operator for fixed and
wireless network services in Austria. All customer services are based on
advanced, high-quality technology networks with proven reliability.

Fixed networks

Switched network

We operate a fully digital voice switching network serving more than 2.66
million PSTN access lines, about 430,100 ISDN basic access lines, and 8,100
ISDN multi access lines at December 31, 2002. Our voice switching network is
100% digitalized.

Our network combines reliable technology with efficient network design.
Highly skilled technicians operate our network resulting in high performance
levels. Our voice switching network is operated by a fully redundant operation,
administration, and maintenance system. Our call success rate and exchange
availability for 1998 through 2002 was between 99% and 100%. The call success
rate is the percentage of originating calls resulting in successful connections
(ringing tone) with the intended destinations.

At December 31, 2002, more than 94% of the voice switches and remote units
were connected to our transmission network by fiber, the highest capacity
medium available.

We are in the process of optimizing the switching network. We expect this
program to reduce operational costs, lower capital expenditures, and accelerate
service rollout.

Through our intelligent network, or IN platform, we offer, among other
services, freephone, value-added services and number portability. The demand
for new IN services is driven by customer needs for communication within a
predetermined user group and from regulatory requirements, such as number
portability. By adopting the same IN technology in the fixed and mobile
networks, we will be able to offer convergent services such as using the same
handheld phone for fixed and mobile calls.

Data networks

Technological innovations and advances in standardization allow us to
provide a set of new telecommunications and multimedia services in connection
with our large established network infrastructure.

These innovations have occurred in three different areas: backbone network
infrastructure, access infrastructure, and advanced services.

Backbone network infrastructure.This infrastructure is based on optical
signal transmission. We predominantly use optical fiber as the transport medium
for high-speed digital transmission. Our core network was based on
approximately 17,642 kilometers of optical fiber cables at December 31, 2002.
In addition, we provide radio links in specific areas upon customer demand.

The primary transmission technology we deploy is a transmission standard
for fiber optic networks and allows for a simpler and more easily managed
network with enhanced reliability with different levels of multiplexing. By
using specific protection concepts such as multi-path section protection, we
achieve high network availability within this network infrastructure.

In 2000, we deployed Dense Wavelength Division Multiplexing, which allows
for multiplied transmission capacity of existing optical fibers through the
simultaneous use of different wavelengths, in point-to-point links of our core
network. This allows us to meet demand for new data and multimedia services.

We also use networking technologies like asynchronous transfer mode (ATM),
which permits the use of one network for different kinds of information such as
voice, data and video. Our internet protocol network, together with ATM, form
the basis for our broadband and multimedia businesses.

In response to increased demand for ADSL lines we expanded our ATM
backbone, which we expect to form the basis for our development of an all
internet protocol network, which we refer to as All IP Network. We believe the
All IP Network will provide cost reductions and other advantages over the
traditional voice telephony network. These other advantages include the more
efficient use of bandwidth.

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Telekom Austria has connected Austrias universities networks, through an
innovative Gigabit Ethernet network called ACONet. The ACONet is running on
Telekom Austrias state of the art dense wavelength division multiplexing
backbone called Jet2Web Stream.

Access infrastructure.Our access infrastructure is the means by which our
customers connect to our networks. The access network plays a key role in our
business as it supports the entire range of services. New broadband
technologies such as ADSL permit high-speed internet access and digital video
transmission on normal telephone lines. Across Austria we have installed 640
ADSL relay stations covering more than 80% of the Austrian households. We had
174,100 ADSL lines installed at the end of December 2002, up from 100,600 at
the end of the year 2001 and we continue our expansion.

In addition, we provide multimedia and other data services with high
capacity requirements using direct access via optical fiber for large business
customers. As the demand for broadband services increases, we anticipate a
deeper penetration of optical fiber in the access network and expect to
implement next generation solutions such as so-called very high speed digital
subscriber line (VDSL) on existing copper lines

Advanced services.These services are driven partly by the development of
technology and partly by the demand from customers for more sophisticated
services. New information and communication technologies such as digital mass
storage and techniques for video compression and software platforms enable us
to offer internet content services, unified messaging services, and commercial
services such as digital signatures.

International network

Our international voice traffic is routed through two international
gateways. We have connections to 244 destinations (including global satellite
networks) and direct links to about 110 international operators in 80
countries. We partially own or have rights to use undersea cables in addition
to satellite capacities of the corporations Intelsat and Eutelsat. We also take
part in projects for the installation of international optical fiber-backbones
such as Trans European Lines and Trans Asia European Lines. With the
installation of Jet2Web Stream we have expanded our broadband activities
abroad. The network now covers Prague, Frankfurt, Munich, Bratislava and
Budapest. All parts of this network can be expanded up to 320Gbits, which would
allow us to adjust capacity step-by-step to meet growing demand.

Mobile networks

Our mobile networks consist of:



| |  |  | a digital mobile network based on GSM/GPRS technology; and
| | - |  | ----------------------------------------------------------
|
| |  |  | a digital mobile network based on UMTS technology.        

We believe that the quality of our mobile networks ranks highly compared
to that of other European mobile operators. We regularly measure a number of
statistics to assess network quality, including dropped call and blocking
rates. The blocking rate is the proportion of calls that cannot be set up
because sufficient network capacity is not available at that specific time and
place. In 2002, our GSM network had on average a dropped call rate below 1% and
a blocking rate of less than 0.7%. We have had an ongoing program to increase
the redundancy of key mobile network elements, and further improve the
resilience of the mobile network to minimize the customer impact of any
individual node failure or congestion.

At December 31, 2002, mobilkom austrias GSM network consisted of 16
mobile switching centers, 4 home location registers and 4,957 base stations. An
intelligent network platform is installed for GPRS and value-added services.

We have substantially expanded our GSM network in recent years,
particularly in areas of high traffic such as Vienna. In 2002, 298 new base
stations were brought on-line, of which 210 were macrocell stations, which
assure broad coverage, and 88 were microcell stations, which assure additional
capacity in general in densely populated urban areas. mobilkom austria invested
an additional EUR 86 million in our GSM network during the financial year 2002
to meet increases in mobile traffic volumes and to further enhance coverage.

The following table shows the number of GSM microcell stations (which
assure in-door coverage and additional capacity), GSM macrocell stations and
total GSM transmitter stations in Austria that were operational at the end of
the periods indicated.

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|                   |  |                 |       |      |  |      |       |      |  |      |       |  |  |  |       |  |  |  |       | 
|------------------ |  | --------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- |  |  |  | ----- | 
|                   |  | At December 31,
|                   |  |                
|                   |  | 2002            |       | 2001 |  | 2000 |       | 1999 |  | 1998
|                   |  |                 |       |      |  |      |       |      |  |     
|Microcell stations |  |                 | 932   |      |  |      | 844   |      |  |      | 796   |  |  |  | 640   |  |  |  | 427   | 
|Macrocell stations |  |                 | 4,025 |      |  |      | 3,815 |      |  |      | 3,324 |  |  |  | 2,693 |  |  |  | 2,230 | 
|                   |  |                 |       |      |  |      |       |      |  |      |       |  |  |  |       |  |  |  |       | 
|Total (on air)     |  |                 | 4,957 |      |  |      | 4,659 |      |  |      | 4,120 |  |  |  | 3,333 |  |  |  | 2,657 | 
|                   |  |                 |       |      |  |      |       |      |  |      |       |  |  |  |       |  |  |  |       | 

We provide dual band services to accommodate our expanding customer base.
At December 31, 2002, we operated nationwide a 2x10.4MHz (52 channels) spectrum
in the 900MHz band and 2x15.0MHz (75 channels)spectrum in the 1800MHz band. We
further expand dual band service to areas with significant amounts of mobile
traffic like large and medium cities, technology parks, tourist sites, highways
and airports.

Our digital transmission network includes the standard components of a
mobile telecommunications network, such as digital cross-connects, microwave,
and radio links, and other transmission devices to connect different components
of its networks. We use our fixed line corporate network services for
transmission between mobile network elements and PSTN interconnect points, in
particular for high capacity and high availability transmission requirements.

General packet radio systems network (GPRS).GPRS enables high-speed
mobile data-transfers, particularly for data applications such as mobile
internet browsing and e-mail. We launched our GPRS services in August 2000.
GPRS is available in the entire network. Maximum data rates are achieved by
optimizing data compression. Based on this GPRS data transport capability MMS
was introduced in 2002.

Wireless application protocol (WAP).In December 1999 mobilkom austria
introduced WAP, a specification for a set of communication protocols to
standardize the way that wireless devices can be used for internet access,
including e-mail and newsgroups. Since March 2000, mobilkom austria has offered
a personalized WAP-portal with an integrated search engine.

Universal mobile telecommunication system (UMTS).mobilkom austria
successfully bid for UMTS licenses in Austria on November 3, 2000. UMTS allows
for packet-switching and would allow operators to transmit data rates exceeding
significantly those of the existing mobile systems. It also permits
implementation of multimedia applications that integrate voice, video, and data
communications. On September 25, 2002, the technical launch of UMTS was
demonstrated with a live video conference over mobilkom austrias UMTS network.
mobilkom austrias UMTS network, which is not in commercial use yet, covers
with nearly 1,000 integrated base stations 40% of the Austrian population.

Information technology/Operations support systems

The quality of our operations support systems is critical to the success
of our business. Our operations support systems store, manage and analyze
essential business information. These operations support systems enable us to
make timely business decisions and develop new products and services based on
the needs of our customers.

By increasing the automation of our business processes we improved the
productivity of our operational units and improved access to information. Our
operations support systems are mainly based on market-standard software, and we
expect to further replace legacy systems with standard software solutions.

We have implemented the following crucial improvements and enhancements to
our operations support systems:



| |  |  | added functionalities to our customer relationship management
systems like a workforce management system for field service;                                                                                                                                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | enhancement of the billing system to support new services;                                                                                                                                                                                                 
|
| |  |  | consolidation of Enterprise Resource Management Systems of our
newly integrated subsidiaries to support consolidated and streamlined
business processes in the areas of logistics, material management,
finance, investment, and procurement, among others;
|
| |  |  | enhancement of the Data Warehouse, a system to identify new
business opportunities and better understanding of customer needs; and                                                                                                                         

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| |  |  | optimized workflow system between order entry and productions systems to
better support customer-oriented order processes
| | - |  | -------------------------------------------------------------------------------------------------------------------------

The above mentioned systems are interdependent and designed to improve
customer service while reducing costs and increasing reliability through
centralization of customer data. In 2003, we will continue the implementation
of service support and sales support system functionalities as part of our
customer relationship management systems and further increase the number of
users. Furthermore, we aim to improve the integration of the order and
productions systems to increase the rate of automation and to introduce
web-enabled customer self service functionality.

Competition

We face intense competition in all market segments. Competition has
resulted in a reduction of tariffs and prices throughout the market and we
expect that it will continue to pressure tariffs downward. For further
information see - Fixed line services  Tariffs. We believe that market
liberalization has contributed to market growth in the mobile communications
and internet services segments and intensified competition in these segments as
well as in the other two segments, fixed line services and data communications
services. We expect that the market for mobile and data communications as well
as internet services will continue to grow moderately whereas the fixed-line
market will further stabilize. We expect that the growth in the mobile
communications segment will not be able to match the growth rates of prior
years. The Austrian telecommunications market was liberalized in three major
steps:



| |  |  | data communications in 1993;                                                                                                                       
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | mobile communications in 1996: the granting of the second license
to provide digital mobile communications services; and                           
|
| |  |  | voice telephony through fixed lines in 1998: the Austrian
telecommunications market was fully liberalized as required by European
Union directives.

Fixed line services

Between December 1997 and December 2002, the regulatory authority issued
89 licenses to other operators for the provision of voice telephony through
fixed lines, and 84 licenses for the provision of leased line services. We
believe that as of December 31, 2002, approximately 30 licensed operators were
actively providing services because we have interconnection agreements with
only 22 fixed line operators and 6 mobile network operators as of that date.

In early 1998, call-by-call operators launched services in the Austrian
market for voice telephony through fixed lines. Pre-selection of a carrier has
been available since early 2000 for long distance, international,
fixed-to-mobile calls, and calls to specific value-added service numbers. In
early 2000, some of our competitors became full service providers by offering
fixed line access. Carrier pre-selection for local calls has been made
available since the beginning of 2001.

Our primary competitors in the provision of voice telephony through fixed
lines are UTA, TELE 2, tele.ring, eTel and UPC Telekabel (former Priority
Telecom). Several smaller competitors have left the market including Carrier
One, European Telecom, TeraCom, KPNQwest, Red Telekom and Cybertron. Most of
our competitors are partly or even in majority owned by international,
experienced telecommunications operators, and some of them are incumbents in
their own home markets.

The population of Austria is concentrated primarily in a few urban areas.
Approximately 20% of the Austrian population lives in the Vienna area.
Competitors can therefore service a large percentage of the population of
Austria by focusing on a relatively limited geographic area. Under our
universal service obligation, we are required to provide voice telephony,
public payphones, directory inquiry services and other services throughout
Austria, including rural areas. Until the end of 2002, competition has
concentrated primarily on price. However, we believe that the decrease in
prices is slowing down and we are noticing a trend towards bundled products
such as fixed line services with online products.

We are limited to some extent in our pricing flexibility due to our
designation by the regulatory authority as having dominant market power in the
fixed telephony network and services market, leased line market and

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interconnection market. As a result, most of our pricing must remain
cost-based and significant changes are subject to prior approval by the
regulatory authority.

The procurement of goods and services by the Austrian federal government,
state governments, municipalities and the public sector in Austria is subject
to the Austrian public procurement law. Our tariffs and general terms of
condition towards our customers are subject to prior approval by the regulatory
authority, since we are viewed by the regulatory authority as having
significant market power in the market of voice telephony in fixed network
fixed lines. Under the approval procedure for our tariffs and general terms and
conditions we are limited in our ability to grant substantial price discounts
and alter terms and conditions. The public procurement law requires the public
sector to make its purchase decision on either the best price or quality among
the offers. Our competitors are free to fix their tariffs and general terms and
conditions and thus may have greater flexibility in the price discounts and
general terms and conditions they may offer.

Mobile communications services

The Austrian mobile communications market currently has four GSM operators
with UMTS licenses (mobilkom austria, T-Mobile Austria, Connect Austria, and
tele.ring) and two additional UMTS license holders. One of the latter,
Hutchison Whampoa (H3G), will probably commence operations in the first half of
2003 whereas the other one has suspended its operations in Austria. In
addition, one of our competitors in the fixed line business, TELE 2, entered
the market in February 2003 as a service provider using the network
infrastructure of our competitor, Connect Austria, reselling mobile
communications services under its own brand name but without an own access
number. TELE 2 intends to become a Mobile Virtual Network Operator (MVNO) after
the new amended Telecommunication Act which may become effective after July 24,
2003. As a MVNO, TELE 2 would be able to offer its own access number.

Our competitors in the mobile communications market are partly or wholly
owned by international, experienced telecommunications operators, and some of
these competitors are also incumbents in their own home markets. We compete in
all facets of the mobile communications business, including handset prices,
tariffs, corporate image, distribution network, product offerings, and network
quality and coverage.

In Croatia, VIPnet shares the market with the incumbent operator, a
subsidiary of Deutsche Telekom, who in addition offers an analog network. To
date, no UMTS license has been awarded in Croatia.

In Slovenia there are currently three GSM operators and one service
provider, whereas the incumbent was the only operator to have auctioned a UMTS
license in 2002. A service provider is a competitor who provides mobile
communications services using the infrastructure of an existing competitor. An
operator relies on its own network infrastructure.

Data communications services

Data communications services have been liberalized in Austria since 1993.
We face intense competition ranging from start-up companies to multinational
alliances, like AT&T GNS, Equant, T-Systems and UTA. We compete in all areas of
data communications services based primarily on a combination of price and
quality of service.

We are the overall leader among data communications providers in Austria.

Internet services

We face many competitors in the provision of internet services, ranging
from established global portal service providers to general telecommunications
operators like UTA/Netway, UPC Telekabel (chello), T-Online or EUNet.

Our main internet service provider competitors are partly or wholly owned
by international internet service providers. In the business market segment, we
compete primarily with full-service telecommunications operators that offer
internet access services, hosting services and voice telephony through fixed
lines. Some of the operators in these market segments have longer operating
histories abroad and greater name recognition in some European markets or in
the United States.

Our main competitor in the Austrian portal market for internet service
providers is t-online.at.

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Properties

Our consolidated financial statements (including mobilkom austria group)
show a net value for property, land and equipment of EUR 5,000.7 million in
2002 and EUR 4,591.8 million in 2001. The acquisition costs were EUR 10,650.5
million in 2002, and EUR 8,754.3 million in 2001. The acquisition costs
include, among others, communications network and other equipment totaling EUR
9,358.1 million, land totaling EUR 62.5 million and buildings totaling EUR
653.0 million at December 31, 2002. The item communications network and other
equipment includes primarily switching and transmission technology as well as
access and trunk cables.

The properties of Telekom Austria consist primarily of buildings with
integrated technical facilities, such as switching devices, transmission
towers, antennas and, to a relatively small extent, administrative buildings.
In addition to the buildings we own, we also lease space. At December 31, 2002,
we used about 2135 facilities, of which approximately 36% were leased. The land
and buildings comprise overwhelmingly the property owned by Post und Telekom
Austria AGallocated between Österreichische Post and us as a result of the
spin-offs described under History and Development of the Company.

Our headquarters are located in leased premises in Viennas first
district. In the course of 2003 we expect to relocate our headquarters to
Viennas second district. The majority of our information technology equipment
is located in our own premises of approximately 11,000 square meters in Vienna.
Our main switching and transmission equipment is based in our Arsenal facility,
which occupies approximately 90,000 square meters in Viennas third district.

We have contracted with Post & Telekom Immobiliengesellschaft mbH, a
wholly-owned subsidiary of Österreichische Post, for the planning, construction
and administration of the buildings we own and use, while we undertake the
strategic and executive management of the real estate ourselves. Because of
personnel reduction and concentration of offices we reduced the office space in
2002 and we expect additional small reductions in 2003. Our Supervisory Board
has authorized our management to evaluate the possibility of using portions of
our real estate for financing purposes as other telecommunications operators
have done in the past.

Capital expenditures

For information relating to our capital expenditures, see Operating and
Financial Review and Prospects  Liquidity and capital resources  Capital
expenditures.

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REGULATION AND LEGAL FRAMEWORK

Regulation

Liberalization

The Austrian Telecommunications Act, enacted on August 1, 1997 and most
recently amended on October 1, 2002, implemented European Union directives
requiring the complete liberalization of the Austrian telecommunications market
as of January 1, 1998. The Telecommunications Act empowers the Austrian Federal
Minister for Transportation, Innovation and Technology (the minister) to
issue ordinances containing detailed provisions relating to the Austrian
telecommunications market. Since the Telecommunications Act was enacted, the
minister has issued several ordinances including those relating to numbering,
interconnection and special network access, universal service and tariffs for
value-added services. Until 1994, the Austrian Postal and Telegraph
Administration (Österreichische Post- und Telegraphenverwaltung) operated a
state monopoly offering telecommunications networks and telecommunications
services in Austria except satellite services. Market liberalization in Austria
has taken place in stages. First, text and data transmission services and the
remaining monopoly segments of the terminal equipment sector were opened to
competition in 1993. The provision of voice services for corporate networks and
within predetermined user groups was liberalized in 1994. In 1996, the
operation of transmission paths for telecommunications services other than
public voice telephony via fixed network was fully opened to competition. The
mobile communications market was opened to competition in 1996.

Prior to 1998, we faced competition in international outgoing telephony
from foreign telecommunications providers, for example by using call-back
services. The liberalization of the Austrian telecommunications market was
completed on January 1, 1998, with the elimination of our last exclusive right,
which was to provide domestic and international voice telephony services to the
public by means of a self-operated fixed network in Austria.

Regulatory framework

The Telecommunications Act allows unrestricted market access to all
entrants who qualify under the Telecommunications Act. The principal objective
of the Telecommunications Act is the promotion of competition in the Austrian
telecommunications sector through regulatory measures that promote reliable,
high quality and innovative telecommunications services at a reasonable price.
The Telecommunications Act also aims to create a modern telecommunications
infrastructure that leads to high-quality services and sustainable competition.
Additional objectives are the equal opportunity to enter the Austrian
telecommunications markets, the provision of universal service throughout
Austria, the protection of customers and operators against the abuse of
significant market power and the efficient and interference-free use of
frequencies. Operators having significant market power in particular
telecommunications markets are subject to a special regulatory framework.

The Telecommunications Act aims to implement various European Union
telecommunications directives. As a result, the Telecommunications Act has
implemented the European Union concept of significant market power in
Austria. Nonetheless, the Telecommunications Act in its original German
language refers to companies with dominant market power. As a sector-specific
regulation, the significant market power concept as provided for in the
telecommunications directives is distinguishable from the concept of market
dominance as used in European Union and Austrian Competition Law. Thus, we
refer to significant market power throughout this document to mean the
telecommunications sectors regulatory regime as it is implemented throughout
the European Union, and therefore also in Austria, although the language of the
Telecommunications Act may differ.

The mandate of the regulatory authority overseeing the Austrian
telecommunications market is to ensure competition and telecommunications
services of high quality. Under the Telecommunications Act, the regulatory
authority is responsible for licensing, usage of frequencies, administration of
the numbering system, ensuring unrestricted market access for new entrants and
controlling the availability of universal service. The regulatory authority is
required to ensure that operators with significant market power provide access
to their networks, internally used services and facilities to all competitors
on a non-discriminatory basis, particularly in the areas of interconnection,
pre-selection of a carrier, number portability and opening of the access to
local subscriber lines, also called unbundling of the local loop. Access may
only be refused on objective grounds, for example based on

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reasons of network-security or interoperability of services. The
Telecommunications Act also includes general provisions for the protection of
data, technical infrastructure, numbering, rights of way and consumer
protection.

Since the enactment of the Telecommunications Act, the minister has issued
several important ordinances. The Interconnection Ordinance deals with
interconnection under the Telecommunications Act, special network access and
opening of the local access and joint use of facilities. It subjects operators
with significant market power to a cost accounting system based on the
methodology of forward-looking long-run average incremental costs. The
Ordinance on Tariffs for Value-Added Services (Entgeltverordnung) determines
the maximum prices for calls to personal numbers, shared cost services and
premium rate services. These rules apply to all network operators.

The Telecommunications Act contains provisions relating to the nation-wide
availability of certain basic telecommunications services, referred to as
universal service. Additional details concerning universal service requirements
are provided in the Universal Service Ordinance which came into effect in June
1999 and was amended during 2000.

Under the Telecommunications Act, the minister is responsible for
developing and administering a national telephone numbering system. The
regulatory authority must allocate numbers to public network operators;
specific application procedures exist for all number ranges. In the area of
service numbers which provide access to services (freephone, shared cost and
value-added services), service operators may also directly apply for numbers
and will receive them for implementation through a network operator. The
regulatory authority is responsible for all number ranges except for emergency
services and special numbers that are reserved for public use, such as mountain
rescue. The Numbering Ordinance describes the numbering plan, including the
national numbers regime, the proposed changes towards area codes, mobile
numbers, personal numbers, toll free numbers, shared cost and value-added
service numbers, and numbers for services in the public interest and the
structure of national and international numbers.

The Numbering Ordinance also puts into effect the obligations of
interoperability, pre-selection of a carrier and number portability. All
operators must ensure interoperability to all customers, independent of the
operator they use. Pre-selection of a carrier and call-by-call selection must
be offered by operators with significant market power. Additionally, customers
must have the option of overriding their pre-selected carrier on a
call-by-call. The carrier selected, whether on a call-by-call or a pre-selected
basis, is responsible for billing and collecting the fees for the call.

Under the Numbering Ordinance, Telekom Austria and other
telecommunications network operators have to provide number portability. This
permits customers to keep their assigned telephone numbers when they choose to
change their network operator, so long as they remain at the physical location
from which they access the network. Number portability currently applies to
geographic and service numbers but does not apply to emergency and special
numbers as described above. The Numbering Ordinance also requires operators to
offer geographic portability.

In addition to the foregoing, developments on the European level will have
an impact on national legislation. On April 25, 2002, the new
telecommunications directives package (see  The European Union) was
officially published by the European Commission.

In July 2002, the Austrian minister of infrastructure published for public
comment a proposed amendment to the Telecommunications Act designed to
implement the new regulatory framework of the European Union into national law
by July 25, 2003. See  Legal framework  The European Union. The proposal
includes a further liberalization of the licensing regime, which as it is
currently proposed requires that a potential entrant to the market only needs
to notify the relevant authority, and in addition includes consumer and data
protection measures. Since the amendments to the Telecommunications Act are not
yet final we cannot predict the outcome of the final rules. See Key
Information  Risk factors.

The regulatory authority

On April 1, 2001, the Communication Authority Act entered into force and
created harmonized authorities for regulation of the telecommunications and the
media (broadcasting) sector anticipating the expected convergence between these
two sectors. The Telecommunications Act and the Communications Authority Act
provide for regulatory bodies in the telecommunications
(Telekom-Control-Kommission) and the broadcasting media sector (Communications
Authority). The Rundfunk und Telekom Regulierungs-GmbH serves as the
administrative arm of both of these authorities.

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The Telekom-Control-Kommission keeps its original tasks (in addition, it
is now responsible for oversight of abuses by operators with significant market
power), while the former Telekom-Control GmbH was merged with the newly
established Rundfunk und Telekom Regulierungs-GmbH.

Rundfunk und Telekom Regulierungs-GmbH, a non-profit company with limited
liability, is responsible in the telecommunications sector for handling
complaints, especially billing disputes with customers or disputes about the
quality of service. Since the Austrian Electronic Signature Act went into
effect on January 1, 2000, the Rundfunk und Telekom Regulierungs-GmbH has been
responsible for supervisory activities under this law.

Although it is wholly owned by the Republic of Austria, it is financially
independent from the Austrian state. Its expenditures are covered by license
fees and annual payments from telecommunications service providers and
broadcasting companies in relation to the total revenue of the respective
markets. The minister supervises the Rundfunk und Telekom Regulierungs-GmbHs
activities. Rundfunk und Telekom Regulierungs-GmbH is required to publish a
yearly report about the activities of the regulatory authority.

Along with all Austrian broadcasting and telecommunications companies, we
must contribute a small portion of our revenues toward the financing of the new
Rundfunk und Telekom Regulierungs-GmbH.

Within this report the term regulatory authority refers to
Telekom-Control-Kommission and to Rundfunk und Telekom Regulierungs-GmbH.

Telekom-Control-Kommission

The Telecommunications Act also established the
Telekom-Control-Kommission, an independent three-member committee that meets
the requirements of a Tribunal under the European Convention on Human Rights.

The Telekom-Control-Kommission is responsible for decisions involving the following issues:



| |  |  | granting, withdrawing and revoking licenses;                                                                                                                                 
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | approving the transfer and amendment of licenses;                                                                                                                            
|
| |  |  | approving business conditions and tariffs;                                                                                                                                   
|
| |  |  | exercising the right to object to submitted business conditions and
tariffs for inconsistencies with the law;                                                                
|
| |  |  | setting financial compensation to be paid from and to the universal service fund;                                                                                            
|
| |  |  | deciding which service providers are classified as having significant market power;                                                                                          
|
| |  |  | defining the conditions for interconnection in the event of a
dispute about the granting of network access and the scope of
interconnection;                                 
|
| |  |  | determining conditions for co-usage of telecommunications equipment in case of disputes;                                                                                     
|
| |  |  | allocating frequencies for mobile telecommunications services;                                                                                                               
|
| |  |  | making decisions regarding failure to comply with the prohibition of cross-subsidization; and                                                                                
|
| |  |  | observance of abuses by operators with significant market power,
including the possibility to forbid or order certain courses of action
and to declare contracts ineffective.

The Telekom-Control-Kommission is entitled to file applications with the
Cartel Court according to the latest amendment of the Competition Act
(Wettbewerbsgesetz)which went into force on July 1, 2002.

Other regulatory bodies

The minister, the Telecommunications Offices and the Office for Radio
Installations and Telecommunications Facilities, which has replaced the former
Office for Authorization since November 2001, are administrative authorities
that may take all measures requiring the exercise of public power in the area
of telecommunications. The Telecommunications Advisory Board should advise the
minister and the regulatory authority regarding the telecommunications matters,
but the Telecommunications Advisory Board is still not set

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up. Decisions of the regulatory authority may be appealed to the Supreme
Administrative Court and in limited circumstances to the Constitutional Court.

Regulation of market entry  licensing and notification requirements

The Telecommunications Act differentiates between licenses (Konzession)
and notifications. Operators which offer either public voice telephony services
by means of a self-operated, fixed network or public leased lines must apply
for a license issued by the regulatory authority. The same applies to companies
that provide mobile voice telephony services and other public mobile services
via a self-operated mobile communications network. However, no license is
needed for mobile communications services offered via satellite radio or if the
minister determines that there are sufficient frequencies for current and
future use. So far, no such determination was made by the minister.

For all other telecommunications services, providers must notify the
regulatory authority in writing about the planned provision of the service,
changes in the operation or the termination of a service. Services consisting
of resale of telecommunications services do not need to be notified. At least
once a year the regulatory authority must publish a list of notified services
and the companies offering them.

Fixed network licensing

To acquire a license, an applicant must first file a written application
with the regulatory authority. Absent special circumstances, the regulatory
authority must decide on the application within six weeks. Special
circumstances include incomplete documentation provided by the applicant or
prior investigations. If special circumstances exist, the decision-taking
process must not exceed four months. There is no general limitation to the
number of licenses which can be granted to providers of public voice telephony
and leased lines. Licenses must be granted if the applicant proves the
necessary technical competence and if there is no reason to assume that the
applicant will not be able to provide the relevant service in accordance with
the terms of the license. The financial strength of the applicant and his
experience in the telecommunications market and related sectors must be taken
into consideration. Licenses may be limited to specific geographical areas,
specific services or be granted for a limited period of time.

Licensees pay a one time flat fee of EUR 5,087 to cover the administrative
costs arising from the licensing process. In addition, licensees must
contribute annually to the regulatory authority for costs relating to
administration, supervision and implementation of the license. The regulatory
authority determines these contributions based on the annual revenues generated
by each licensee and service provider in relation to the total revenue of the
market.

An operator may transfer his or her license in whole or in part with the
prior consent of the regulatory authority. The regulatory authority may also
modify individual provisions of the license prior to its expiration if the
modification is necessary to protect the public interest. If a licensee is in
material breach of the terms of the license, the regulatory authority may
either withdraw the license, change its terms or temporarily suspend it.

Mobile services licensing (GSM technology)

The total number of licenses issued for mobile services is limited by the
number of available frequencies. The existing licenses were granted under
different regulatory regimes. There are four operators offering mobile
telephony and other mobile services in Austria:



| |  |  | mobilkom austria                                                                   
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | T-Mobile Austria GmbH, the former max.mobil Gesellschaft für Telekommunikation GmbH
|
| |  |  | Connect Austria Gesellschaft für Telekommunikation GmbH and                        
|
| |  |  | tele.ring Telekom Service GmbH & Co KG.                                            

According to the Telecommunications Act, frequencies for mobile
communications services must be awarded by public auction. The regulatory
authority must allocate the frequencies to the applicant which fulfils the
criteria for licensing in the best possible way and which guarantees the most
efficient use of the frequencies. This is assumed to be the applicant that
offers the highest price for the frequencies. Mobile licenses are all granted
for a limited period, which is generally 20 years, and are renewable.

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UMTS

On November 3, 2000, six mobile operators, including mobilkom austria, the
three other operators in Austria and two new entrants (Hutchison 3G and
Telefonica), successfully bid for UMTS licenses. However, one of these new
entrants, Telefonica, has suspended its operations in Austria. mobilkom austria
bid for two paired 10MHz and one unpaired 10MHz frequency blocks as a result of
an auction held by the Austrian regulatory authority. Under the terms of the
license award, mobilkom austria is required to cover 25% of the Austrian
population by the end of 2003 and 50% by the end of 2005. By the end of 2002
our UMTS network covers 40% of the Austrian population.

The Telecommunications Act provides that UMTS licensees who, like mobilkom
austria, also hold digital GSM licenses, must grant national roaming services
to any UMTS licensees who do not operate a GSM network provided that there is
enough capacity. National roaming means that the customers of a UMTS operator
are able to make and receive phone calls in areas not covered by their UMTS
operator through the network of another GSM operator. National roaming has been
designed to allow UMTS operators which do not have an established GSM network,
nevertheless to offer GMS services, thereby enhancing competition. UMTS
licensees which have a geographic coverage of 20% of Austria with their UMTS
network are entitled to receive national roaming. This right can be enforced,
and fees regulated, in a proceeding before the national regulatory authority,
if no agreement can be reached. Mainly for that reason mobilkom austria
preferred to come to a commercial agreement with Hutchison 3G, with benefits
for both parties. Hutchison 3G receives voice and GPRS roaming services, as
soon as they fulfill the coverage requirements in their license. mobilkom
austria might be in the position to make significant additional revenues,
mainly because commercial terms were agreed, not regulated. National roaming
among UMTS operators is also permitted, although there is no legal obligation
to provide this service.

Regulation of operators with significant market power

A basic principle of the regulatory framework established by the
Telecommunications Act is the distinction between operators with significant
market power and other operators. An operator has significant market power if:



| |  |  | it faces little or no competition; or                                                                                                                                                                                                                                                                         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | compared to its competitors, it has an overwhelming position due to
its ability to influence market conditions, its revenues in comparison
to the size of the market, its control of the means of access to
customers, its access to financial resources or its experience in
providing products and services.

In addition, the regulatory authority presumes an operator to have
significant market power if it has a share of more than 25% of a particular
telecommunications market in a particular geographical area within which it is
authorized to operate. The regulatory authority may also determine that an
operator with less than 25% of the relevant market has significant market power
or that an operator with a share of more than 25% does not have significant
market power. In both cases, such decisions must be based on the criteria set
out above.

Operators with significant market power are subject to special rules and
obligations, including primarily:



| |  |  | operators must obtain prior approval for business terms and
conditions relating to the provision of voice telephony on fixed and
mobile networks and leased lines;                                                                                                                                                                                                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | operators must obtain prior approval for tariffs for voice
telephony through fixed lines and leased lines;                                                                                                                                                                                                                                                                                                          
|
| |  |  | operators are under a duty to adhere to the principle of
non-discrimination and to provide competitors with services and special
network access facilities under comparable circumstances, under
equivalent conditions and at the same level of quality that the
operator offers on the market and that is provided internally for
affiliated companies or for competitors. This is called Open Network
Provision;
|
| |  |  | operators must grant access to the telecommunications network or
unbundled parts thereof on a non-discriminatory basis to all
competitors and users;                                                                                                                                                                                                                                                                
|
| |  |  | operators must implement adequate, separate accounting systems for
their telecommunications activities and other businesses to ensure
transparency and prevent cross-subsidization; and                                                                                                                                                                                                                             

43



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| |  |  | operators must implement a cost accounting system in compliance
with the Open Network Provision Directives of the European Union that
assigns costs and cost elements to all the services and service
elements and permits subsequent auditing.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To date, the regulatory authority determines annually which operators are
deemed to have significant market power and in which markets. According to the
regulatory authoritys decision issued in 2001, no mobile operator was deemed
to have significant market power, neither in the market of mobile voice
telephony nor in the market of interconnection. Currently, according to the
latest decision of the regulatory authority in 2002, Telekom Austria is the
only operator considered to have significant market power, but only in the
markets of:



| |  |  | voice telephony over fixed network;
| | - |  | -----------------------------------
|
| |  |  | leased lines; and                  
|
| |  |  | national interconnection.          

By July 25, 2003, the new European regulatory framework must be
implemented in the Austrian Telecommunications Act. Significant market power
will from then on be determined in a more consistent way with general
competition law terms. Since the implementation process has just begun, we are
not in a position to give any further information about the final legislative
rules.

Pricing and price regulation

Tariffs and tariff-related business terms and conditions for the voice
telephony and leased lines services of operators with significant market power
are subject to special regulatory approval. In general, the regulatory
authority must approve the business terms and conditions and tariffs of these
operators in the fields of public voice telephony services and leased lines
prior to their introduction. Any permanent structural changes in tariffs and/or
terms must be submitted to the regulatory authority for approval.

The regulatory authority has the right to refuse the proposed conditions
within eight weeks. If the regulatory authority do not act within this time,
the terms and conditions or tariffs are deemed approved. With respect to
tariffs, the regulatory authority may require additional documentation within
the first three weeks after the initial filing. The eight week period for
approval is suspended and continues only when the applicant has delivered this
documentation. In addition, modified terms and conditions must be announced
eight weeks prior to their introduction in case of unfavorable modifications
for the customers.

Tariffs for other services are subject to a notification obligation only.
This applies, for example, to tariffs for on-line services. Special provisions
exist for tariffs for service numbers. The Price Ordinance for Value-Added
Services specifies maximum tariffs for the various services offered such as
shared cost services or premium rate services.

Prices for telecommunications services must be cost-oriented and based on
transparent and objective criteria ensuring equal treatment of customers. We
are required to maintain a cost accounting system that correctly allocates
costs among the services it provides.

Cost accounting system

The Telecommunications Act subjects operators with significant market
power to a cost accounting system. In 2001, the regulatory authority determined
for the first time that our cost accounting system for the year 2000 adheres to
the certification standards in conformity with the Open Network Provision
Directives of the European Union. The annual certification proceeding for 2002
was commenced by the regulatory authority in February 2003.

Major regulatory decisions affecting Telekom Austria

The following is a brief description of the most important decisions taken
by the regulatory authority since 1999.

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Current tariffs

On November 15, 2000, we filed an application for our pay-per-second
tariffs (so called TikTak tariffs). On January 29, 2001, the regulatory
authority approved four of these tariffs plans without setting termination date
for the tariffs. Since this decision we have been required to apply for
approval from the regulatory authority if we want to implement new tariffs or
change any of our tariffs even if those tariffs already had been approved. On
May 18, 2001 and on September 21, 2001, the regulatory authority approved
further pay-per-second tariff schemes including several flat rate schemes.
All of our tariffs had to be approved once again by the regulatory authority on
October, 2001, due to the introduction of the European unified currency. At the
same time, new and extensive reporting obligations were introduced by the
regulatory authority.

The regulatory authority has approved all of our end user tariffs we
applied for. In some instances it is not clear whether the regulatory authority
has the right to fix the tariffs for some of our servicing products, such as
rendering conference call services. Therefore we are in continuing negotiations
with the regulatory authority for some of these services.

Leased lines

On April 2, 2000, the regulatory authority approved our tariffs for
national leased lines, which became effective on May 1, 2000 and were valid
until June 30, 2001. On June 1, 2001, the regulatory authority approved our new
tariffs for leased lines. The new tariffs have been effective since September
1, 2001.

We did not file an application but only notified the regulatory authority
about our international leased lines tariffs which became effective on May
2001. In our opinion these tariffs were not subject to approval.

Fixed-to-mobile tariffs

When we changed our tariffs in September 1999, fixed-to-mobile tariffs
remained unchanged. Therefore, the regulatory authority requested that we
introduce lower fixed-to-mobile tariffs.

The regulatory authority set the amount which we may retain for each
minute originating from our fixed line network, known as the mobile turnover
retention, at EUR 0.06 per minute. We may retain this amount for each minute
originating from our fixed line network, notwithstanding the mobile operators
termination charge.

Also in case we increase the fixed-to-mobile tariff we are not allowed to
retain more than EUR 0.06 per minute but have to pass the increase on to the
mobile operator.

In November 2001, further decisions by the regulatory authority were taken
concerning the charges for termination in mobile networks regarding mobilkom
austria and UTA for the period until December 31, 2002. In addition, UTA took
legal steps demanding that the lower termination charges to mobilkom austrias
networks should be continued. However, to date the proceedings are still
pending.

Tariffs for special services

In December 2000, the Austrian government enacted an act relating to state
payments for the communications costs of certain people, including the
physically handicapped and poor. The Republic of Austria will pay
telecommunications providers EUR 13.81 per month for each applicable customer.
After the approval of our corresponding tariffs by the regulatory authority on
February 26, 2001, we signed a contract with the minister that regulates the
administration and payment concerning this subsidy. For further information,
see  Special service obligation.

Tariffs for public payphones

On August 31, 2000, we submitted an application to change the tariff
structure for payphones. The new structure was approved by the regulatory
authority in October 2000 until December 31, 2002 and came into effect as of
November 2000. The purpose of the new structure is to create a standard tariff
within Austria regardless of the distance or the time of day of the call. In
addition, as a result of the introduction of the Euro as the sole currency in
Austria, our payphones were reconfigured. In December 2002, the regulatory
authority approved the extension of these tariffs for an indefinite period of
time.

Interconnection and special network access

The subject of interconnection is of particular importance to the
development of a competitive market in telecommunications. The former European
Union Regulatory Framework for Interconnection and its amendment

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on number portability and pre-selection of a carrier is set out in
Directive 97/33/EC on Interconnection in Telecommunications. These provisions
were implemented into Austrian law by the Telecommunications Act, the
Interconnection Ordinance and the Numbering Ordinance.

The Telecommunications Act imposes specific obligations concerning network
access and interconnection. The Interconnection Ordinance provides detailed
regulations and specifies the manner in which interconnection and special
network access is to be carried out. The Numbering Ordinance also lays down the
principles of pre-selection of a carrier and number portability.

General principles

All operators of public telecommunications networks are obligated upon
request to offer network interconnection to other operators. If the parties
fail to reach an agreement within six weeks, one of the parties can refer the
matter to the regulatory authority, who will then decide on the conditions for
interconnection. The regulatory authority is also entitled to determine fees
for interconnection if providers with significant market power are involved.
The interconnection agreement must contain certain terms required by the
Interconnection Ordinance discussed below.

Provisions applicable to operators with significant market power

An operator of a telecommunications network which offers
telecommunications services to the public and has significant market power must
allow other operators access to its telecommunications network or unbundled
parts thereof. This access must be granted either via connections that are
generally available on the market, called general network access, or, if the
requesting party bears the costs, via special connections, called special
network access. Special network access must be granted only if technically
feasible.

Limitations on access must be based on the requirements of the Open
Network Provision Directives of the European Union, which includes the
preservation of the security of network operations, the maintenance of network
integrity, the interoperability of services and the protection of data.

A network operator with significant market power must also grant
competitors access to services it uses internally on the same conditions as
they are granted internally, unless different conditions can be objectively
justified. The operator is further required to unbundle its services and
therefore has to offer its services used internally, including transmission,
switching and operational interfaces in a way that competitors do not need to
purchase services they did not request.

An operator with significant market power is not, however, required to
unbundle if it can demonstrate that the request for unbundling is not
objectively justified. In addition, operators with significant market power are
obliged to grant physical collocation. This means the operator is obliged, if
technically feasible, to allow competitors to use transmission, switching and
operational interfaces to the competitors network on the operators premises
at the same conditions as applied internally.

An operator with significant market power must adhere to the harmonized
technical standards for interfaces and service features in conformity with the
Open Network Provision Directives of the European Union.

Operators with significant market power are obliged to issue reference
interconnection offers. The regulatory authority must publish reference
interconnection offers. They also have the power to impose amendments to those
reference interconnection offers at any time.

Operators must file agreements on interconnection and special network
access to the regulatory authority. The terms of such agreements must be based
on objective criteria and be comprehensible and interconnection and special
network access must be provided on a non discriminatory equal basis.

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Interconnection in Austria

In various decisions since March 1998, the regulatory authority has set
out additional principles for interconnection. With these decisions, the
regulatory authority set the tariffs for interconnection from fixed and
mobile-to-fixed line and also from fixed line to mobile networks. The
regulatory authority decides on the tariffs for carrier selection, the type and
scope of carrier selection to be implemented, local interconnection, mutual
access to freephone numbers, value-added services, shared cost services,
private networks, personal numbers and access to on-line services.

At December 31, 2002, we had entered into 34 interconnection agreements
with 22 fixed-line and 6 mobile (4 GSM, 1 Tetra, 1 UMTS) licensed operators in
Austria. Separate fixed and mobile agreements were entered into with all six
mobile operators. The most important services between operators are voice
interconnection services, such as call termination, carrier selection, call
origination to services (eg. value-added services), and number portability as
described below.

Call termination in Austria

Termination is the service which transports a telephone call from the
point of physical connection between two or more networks to the called party
of another network. Fees for call termination vary depending on the route taken
by the signal, more specifically the number of switching elements used.
Depending on the locations of the point of interconnection and the called
party, there may be a different number of switching stages and inter-exchange
links, which is the reason for a more complex tariff structure. The charge is
calculated on a per minute basis. Austrian practice distinguishes among three
situations:



| |  |  | Local exchange interconnection allows access to all customers
within a local area. At December 31, 2002, 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 7 long distance exchanges for
single transit interconnection; and
|
| |  |  | Double transit interconnection is interconnection via two transit
switches. In technical terms, this is known as double transit or double
tandem call termination.                                                                              

Carrier selection

Carrier selection is the feature that allows a customer to select another
network operator for voice telephony services. Carrier selection is identified
as an interconnection service in the Telecommunications Act. Two types of
carrier selection are currently regulated:



| |  |  | Pre-selection. The customer chooses the network operator for all
local, long distance, international, fixed-to-mobile calls, and calls
to special service numbers on a permanent basis with the opportunity
for call by call override;                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Call-by-call selection. The customer dials a prefix number or
Carrier Access Code and a network operator code, or Carrier
Identification Code, each time prior to dialing the called partys
number to identify the network operator to be used to route the call.

We are required under the Numbering Ordinance to offer pre-selection and
call-by-call selection. Other fixed line operators are not required to do so,
but are not restricted from doing so.

Number portability

According to European Union directives, the Austrian Telecommunications
Act, and the Numbering Ordinance,all fixed network providers are required to
provide number portability. This means that customers can change operators
while keeping their existing telephone number provided they do not change their
residence. In early 2000, the regulatory authority decided on the portability
of geographical numbers as well as service numbers.

The Numbering Ordinance requires the introduction of three types of number
portability to be implemented in two stages. The obligation to provide operator
portability and service number portability became effective on January 1, 1998.
The obligation to provide geographic number portability became effective on
January 1, 2000. The regulatory authority, in its latest decision dated 2002,
ruled that operator portability of geographic numbers

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and service number portability have to be offered at a one-off fee of EUR
21.79. To date, the Austrian Telecommunications Law does not include any
obligation for mobile operators to make number portability available to
customers. The new European Regulatory Framework does however specify such an
obligation. This obligation will have to be implemented in the Austrian
Telecommunications Law by July 25, 2003. However, the national legal framework
has not been provided yet. Nevertheless, a working group has been including all
GSM-operators, the new UMTS-licensees, and the fixed line operators, trying to
agree on the technical and commercial terms of a mobile number portability
solution.

Access to local subscriber lines

As described above, a network operator having significant market power in
a particular market must allow other providers to access its network or
unbundled parts of that network. Limitations on access may be based only on the
essential requirements as set forth in the European Union Open Network
Provision Directive, which include the preservation of the security of network
operations, the maintenance of network integrity, the interoperability of
services and the protection of data. Agreements on network access must be based
on objective criteria, must be comprehensible and must provide
non-discriminatory unbundled access with equal opportunity to the
telecommunications networks of an operator.

In the light of these obligations, since 1999 various competitors have
requested a reference unbundling offer which contains the conditions according
to which we provide them access to local subscriber lines, also called
unbundling of the local loop. Allowing competitors to connect to customer
access lines also gives them direct access to customers without having to
construct local networks on their own. Therefore, competitors may use our
customer access lines to offer directly a wide range of services. We receive a
flat monthly fee from the operators, irrespective of the bandwidth transmitted.
The regulatory authoritys decisions taken to date are not restricted to voice
telephony or a certain bandwidth. We have always adapted our reference
unbundling offer to these decisions.

With full unbundling, the copper telephone line is leased to a third party
for its exclusive use. The lessee has full control of the relationship with its
customer for the provision of a full range of telecommunications services,
including deployment of digital subscriber lines or DSL systems for high speed
data applications.

A related issue is collocation, whereby we must grant space to operators
requesting unbundling, which must be physically close to the telecommunications
lines. The regulatory authority has determined that such space must be leased
at market rates. We have filed appeals to the Supreme Administrative Court on
the basis that the imposed monthly and one-time fee per customer do not cover
our costs.

On March 12, 2001, the regulatory authority decided that, beginning
January 1, 2002, we must offer full unbundling for a monthly fee of EUR 10.90
and subloop unbundling (unbundling of a specific part, but not the entire local
loop) for a monthly fee of EUR 8.43 until December 31, 2004. We may not charge
our competitors for sub-loop unbundling from an in-house distribution point to
a network termination point.

Due to various decisions that were rendered in 2000, leased lines
providers and internet providers are also allowed to unbundle our subscriber
lines under a non-discriminatory regime. We appealed to the Supreme
Administrative Court, because we believe that this could endanger our networks
integrity and because we think that the monthly and one-off fees set by the
regulatory authority do not cover our costs and because penalties for not
following the procedures are excessive.

At December 31, 2002, we had entered into agreements with 18 competitors
concerning unbundling the local loop. About 10,000 subscriber lines have been
fully unbundled.

An alternative to full unbundling is high speed bit stream access. Here an
operator installs a high speed access link to the customers premises, for
example by installing its preferred DSL equipment and configuration in its
local access network. The access link must be made available to third parties
to enable them to provide high speed services to customers. This form of
unbundling is available on demand as a result of an agreement with ISPA, the
organization of Austrian Internet Service Providers, concluded in March 2000,
which again is a result of the EC-Recommendation of 2000 and due to the
particular demands of the regulatory authority. The agreement has been
frequently updated and adopted to recent technical standards.

With shared use of the copper subscriber line, one of the operators
provides telephone service, while the other delivers high speed data services
over the same subscriber line, using its own high-speed DSL modems. Telephone
traffic and data traffic are separated by means of a splitter before the
switch. The line remains connected to and part of the public switched telephone
network. In the light of the EC-Regulation on Unbundling of the Local Loop
which entered into force at the beginning of 2001, the regulatory authority
required us to offer

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shared use. We appealed against this decision. Nevertheless we will have
to offer shared use. However so far there has been no demand in the Austrian
market to offer such services.

Regulation of interconnection and access fees

Interconnection fees for the fixed network are regulated by element-based
costing. Element-based costing means that fees are charged according to the
number and the level of switching facilities used. This differentiates between
single and double tandem interconnection. There are local, single tandem and
double tandem tariffs. Interconnection fees vary according to the time of day.
Peak time is from 8:00 a.m. to 6:00 p.m. from Monday to Friday, off-peak time
is from 6:00 p.m. to 8:00 a.m. on weekdays and the entire weekend and public
holidays.

Origination and termination fees are usually identical except for
interconnection at the double tandem level where origination fees are higher
than termination fees. According to the regulatory authority, higher
origination fees on the double tandem level should avoid atypical traffic by
giving incentives to alternative network operators to expand their networks
into a larger number of point of interconnection locations. The regulatory
authority took this decision to avoid inefficient market entry from companies
with few switches or small networks.

The applicable interconnection fees valid until September 30, 2003, are
set forth in the following table.

|            |  |          |  |       |        |          |  |           |        |               |  |               |        |  |  | 
|----------- |  | -------- |  | ----- | ------ | -------- |  | --------- | ------ | ------------- |  | ------------- | ------ |  |  | 
|            |  |          |  |       |        |          |  |           |        | Single tandem |  | Double tandem
|            |  |          |  |       |        |          |  |           |        | (One main     |  | (Two main    
|            |  | Rates    |  | Local |        | switch)  |  | switches)
|            |  |          |  |       |        |          |  |          
|            |  |          |  |       |        | (EUR per |  | (EUR per  |        | (EUR per     
|            |  |          |  |       |        | minute)  |  | minute)   |        | minute)      
|Origination |  | Peak     |  |       | 0.0085 |          |  |           | 0.0130 |               |  |               | 0.0290 | 
|            |  | Off-peak |  |       | 0.0050 |          |  |           | 0.0072 |               |  |               | 0.0110 | 
|Termination |  | Peak     |  |       | 0.0085 |          |  |           | 0.0130 |               |  |               | 0.0225 | 
|            |  | Off-peak |  |       | 0.0050 |          |  |           | 0.0072 |               |  |               | 0.0087 | 
|Transit     |  | Peak     |  |       | n.a.   |          |  |           | 0.0029 |               |  |               | 0.0062 | 
|            |  | Off-peak |  |       | n.a.   |          |  |           | 0.0015 |               |  |               | 0.0032 | 

These interconnection fees apply to voice telephony services and other
services, including access to value-added services in the fixed network.

Interconnection fees for accessing on-line services are EUR 0.0085 per
minute (peak) and EUR 0.0050 per minute (off-peak) for the local level, and EUR
0.0130 per minute and EUR 0.0072 per minute for single tandem. Local transit is
not permitted. The regulatory authority decided that we must pay the
interconnection fee for regional call termination instead of a local
termination fee to one operator which is connected at the local level.

Mobile operators must pay the same fees as fixed network operators for
terminating their calls in the fixed network. For fixed-to-mobile termination,
the fees vary depending on which mobile network the call is actually
terminated.

According to the regulatory authority, indirect interconnection occurs,
for example, if a call originates on one network, is in transit over a second
network and terminates on a third network. In November 1999, the regulatory
authority decided that it has jurisdiction to regulate the indirect
interconnection relationship between the first and third operators in the
example above. In its decision Z 8/99 of November 11, 1999 the regulatory
authority ruled in favor of the fixed-network operator UTA, which was not
directly interconnected with mobilkom austria, but terminated its calls on
mobilkom austrias network in transit over the network of Telekom Austria.
mobilkom austrias interconnection fees were regulated.

mobilkom austria has filed an appeal against this decision with the
Supreme Administrative Court arguing that indirect interconnection is no
interconnection in the legal sense of the Telecommunications Act or the
Interconnection Ordinance, and therefore the regulatory authority had no power
under the existing legislation to decide on this issue. However, the decisions
of the regulatory authority are binding as long as the court has not ruled on
the issue, and the appeals are still pending. Due to the fact that mobilkom
austria had significant market power in the markets of voice telephony and
interconnection, these tariffs had to be offered to all fixed-line operators in
Austria. mobilkom austria took the view that interconnection tariffs between
mobile operators had to be applied reciprocally. Therefore mobilkom austria
initiated regulatory proceedings against the three other mobile operators in
Austria: T-Mobile Austria, the former max.mobil, Connect Austria, and
tele.ring.

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In the decisions Z 6/00, Z 7/00, and Z 8/00 on July 31, 2000, the
regulatory authority decided, although in stages, on reciprocal termination
rates between mobilkom austrias network and the networks of T-Mobile Austria,
the former max.mobil, and Connect Austria. The new rate for calls originating
on mobilkom austrias network and terminating on the network of T-Mobile
Austria or Connect were EUR 0.138 per minute (from August 1, 2000, in respect
to T-Mobile Austria and from January 1, 2001 in respect to Connect). However,
in the decisions Z 8/01 and Z 5,7/01 of November, 2001, the Telecom Control
Commission set new interconnection fees between the networks of mobilkom
austria and two fixed-line operators, MCI Worldcom and UTA. mobilkom austria
was required to lower its interconnection fees in stages to finally EUR 0.1125
from April 1, 2002 to December 31, 2002. Somewhat surprisingly, according to
the regulatory decision Z 14,15/01, issued at the same time, the
interconnection fee between the networks of the second-largest Austrian mobile
operator T-Mobile Austria and UTA remained unchanged at EUR 0.138 until
December 31, 2002. The regulatory authority argued, contrary to its decisions
one year previously, that T-Mobile Austria incurred higher used-capacity costs,
and should therefore be entitled to charge higher interconnection fees. Due to
the fact that since mid 2001 no mobile operator is considered to have
significant market power, the determination of the fees was made on the basis
of an appropriate fee comprising used-capacity costs and parts of other cost
factors. mobilkom austria has filed an appeal against the decision Z 5,7/01.

On May 6, 2002 the decision Z 31/01, 3/02 was issued. It stated
non-reciprocal interconnection charges between mobile networks, more specific a
termination fee for mobilkom austria of EUR 0.124 from December 28, 2001 to
March 31, 2002, and EUR 0.1125 from April 1, 2002 to December 31, 2002, whereas
the termination fee for T-Mobile Austria was set at EUR 0.138 starting on
December 28, 2001. mobilkom austria has filed an appeal against this decision.

Another very important decision for mobilkom austria was issued in October
2002. TELE 2 was denied the right to interconnect as a Mobile Virtual Network
Operator, because the national regulatory authority held the view, that TELE 2
needs a GSM-license to act as MVNO. As a consequence it could not enter the
mobile market in Austria as a mobile virtual network operator, which would have
entailed that it could have offered its own access number for providing mobile
communications services. TELE 2 entered the mobile market in Austria in
February 2003 as a service provider using the network infrastructure of our
competitor, Connect Austria, reselling mobile communications services under its
own brand name but without its own access number. TELE 2 intends to become a
Mobile Virtual Network Operator (MVNO), with its own access number, after
effectiveness of the new amended Telecommunication Act which is expected to
occur after July 24, 2003.

In December 2002 UTA and tele.ring Austria started regulatory proceedings
against mobilkom austria, the main issue being once again the interconnection
fees. Both proceedings are still pending.

Interconnection fees for access to value-added services differ according
to whether the originating operator determines the end user tariff or whether
the terminating operator determines the tariff. In the first case, the
terminating operator (the operator in whose network the service is provided)
receives a termination fee, just as for other calls terminating in a fixed
network; the originating operator makes his profit with the margin on the end
user tariff. In the second case (e.g. for toll-free, shared-cost or premium
rate services), the originating operator collects the end user tariff and
passes it on to the service network provider. However, the originating operator
may keep a specified amount for billing (EUR 0.0022 per minute) and for bad
debt risk (10% of the end user price for premium rate services), and charges an
origination fee which is supposed to cover the costs of his network usage. For
mobile operators the charge is about 4% lower than the termination fee, and was
also set in the regulatory decisions mentioned above. For fixed-line operators
the fee for origination and termination is the same. However, the commercial
importance of origination fees is much lower than of termination fees.

At January 1, 2002 we altered the invoicing system with alternative
telecommunications companies in accordance with the regulation of the
regulatory authority. This resulted in a reduction of revenues in 2002 as the
amounts were only invoiced net of the interconnection charged to us for
terminated calls from alternative telecommunications companies.

During the year of 2002, we standardized our contracts with all domestic
interconnection partners in the fixed and mobile sector, effective January 1,
2002. We have received approval for these contracts by the regulatory
authority. The standard contracts contain a requirement that all contracting
parties provide collateral for the obligations under the contract, which allows
us to minimize the risk of potential insolvency of interconnection partners.
Additionally, the standard interconnection contracts include, among other
conditions, the obligation for all operators to transmit the calling line
identification to allow us to trace the origin of the core. The contract also
provides for a renegotiation of the contract in case the contract is voided by
the Austrian courts.

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Numbering

Numbering is administered by the regulatory authority and the minister.
The regulatory authority allocate numbers for all applications (geographical,
non-geographical), except emergency services and special numbers, and the
minister is responsible for designing the numbering plan set out in the
Numbering Ordinance. This ordinance provides that the current system of 1,022
local area codes will be replaced by a closed numbering plan with 23 areas. The
numbering plan for geographic numbers has not yet been implemented. A working
group will be formed by the minister to investigate whether the change towards
a new numbering plan is necessary. We expect that the existing local area codes
will be kept.

Special regulations apply for numbers for value-added services, shared
cost services and premium rate services. These numbers are also allocated by
the regulatory authority and can be allocated to network operators as well as
to end users. The number allocated to an operator or an end user will be
implemented in a specific network at the request of an end user. Special fees
apply for the implementation of these numbers in other networks.

Universal service

The Telecommunications Act sets forth the framework for universal service
in Austria. Universal service is defined as the minimum public
telecommunications services that all users must have access to, at an
affordable price and at a specific quality level, independent of their places
of residence or business. The scope of universal service comprises access to
public voice telephony via fixed line including fax, modem and data
transmission, free and unrestricted access to emergency services, access to
directory enquiry services, access to telephone directories and the provision
of public payphones at accessible locations. The detailed technical quality
criteria are further defined by the Universal Service Ordinance.

The Universal Service Ordinance also provides criteria for the quality of
voice/speech transmission, the reaction time for operator services, the
percentage of public payphones in function and billing accuracy. The operator
responsible for the provision of universal service has to inform the regulatory
authority about the quality parameters once a year.

We are the only provider of voice telephony that is required to provide
universal service. In July 2002, the minister announced that he saw no reason
for a call for tender regarding universal service. The next verification of the
requirements for a call for tenders is expected under the regime of a new
Telecommunications Act.

We have so far not been reimbursed for any of our costs incurred for the
provision of universal services by the Universal Service Fund. The
Telecommunications Act states that the costs of universal service which cannot
be covered despite cost-efficient management are to be refunded to the provider
upon application. Costs must be calculated according to Annex III of the Open
Network Provision Directive. However, costs are only to be refunded if the
universal service provider has a market share of less than 80% in the market
for public voice telephony. In the case of a deficit, caused by the provision
of such an universal service, the regulatory authority will create and manage a
Universal Service Fund. All operators who generate revenues of more than EUR
18.2 million per year will contribute according to their revenues in relation
to the revenues of the other operators. The share of contribution will be fixed
by the regulatory authority on an annual basis.

Special service obligation

Both under the Postal Restructuring Act and the Telecommunications Act, we
are obliged to provide voice telephony services for certain disadvantaged
persons at special tariffs (social tariffs) for which we are entitled to an
appropriate compensation from the government on a contractual basis. At
December 31, 2002, we served about 259,000 entitled customers.

Based on a special act from 2000 (Fernsprechentgeltzuschussgesetz), the
legal framework specified a new procedure beginning in January 2001 in order to
allow alternative operators to provide these services. We signed a contract
with the minister on February 28, 2001, effective January 1, 2001. Until March
2004 this contract regulates the administration and payments from the minister
to us of EUR 13.81 per entitled customer per month. With this entitlement, the
eligible person is granted free access in addition to one hour of free calls
during peak times in their local zone.

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Others

In July 2002, the regulatory authority ordered us to submit a resale offer
covering access services to enable all our competitors to bill, among other
things, monthly line rental costs directly to the customers. We are negotiating
the concrete conditions, particularly the prices, with several competitors. We
cannot foresee when these negotiations will be finalized.

Also in April 2002, the regulatory authority commenced a proceeding to
determine whether the relationship between our end user tariffs and the
interconnection fees concerning key account customer contracts comply with
Austrian competition law as set forth in the Telecommunications Act. In July
2002, the regulatory authority dismissed the case.

Legal framework

Rights of way

Both the Telecommunications Act and the Telecommunications Rights of Way
Act regulate rights of way. Generally, all holders of telecommunications
licenses may use land for establishing, developing, operating, and maintaining
telecommunications lines, but must comply with certain principles for
protecting landowners rights.

The use of public land, including streets, sidewalks, public places and
the airspace above them, is free of charge. For the use of private land,
compensation must be paid to the landowner. There also exist special
obligations for the joint use of alternative operators telecommunications
lines.

Ordinance regulating surveillance systems (Überwachungsverordnung)

The ordinance regulating surveillance systems which became effective on
December 1, 2001 is based on a standardization recommendation by the European
Telecommunications Standards Institute and comprises detailed technical
descriptions of new technologies and interfaces which enable a harmonized
Europe-wide surveillance system for the sake of criminal prosecution. The
ordinance was voided on constitutional grounds by the Constitutional Court on
February 27, 2003. A new ordinance must be implemented by December 31, 2003.

Competition law and general legal framework

In addition to the Telecommunications Act, our operations are subject to
Austrian and European competition laws.

The main principles of the European Union competition rules are found in
Articles 81 and 82 of the EC Treaty (the former Articles 85 and 86), the
Competition Directive, and in the European Union merger control regulations.
Article 81 of the EC Treaty prohibits collusive behavior between competitors
which may affect trade between member states and which restricts, or is
intended to restrict, competition within the European Union. Article 82
prohibits any abuse of a dominant market position within a substantial part of
the European Union that may affect trade between member states. These rules are
enforced by the European Commission in co-operation with the national
competition authority. In addition, the national courts have jurisdiction over
alleged violations of European Union competition law.

The Austrian Antitrust Act prohibits the abuse of dominant market position
and the distortion of competition caused by horizontal and vertical agreements
or collusion of market participants. The Austrian Federal Competition Authority
(Bundeswettbewerbsbehörde)was founded by amendment of the Austrian Antitrust
Act on July 1, 2002. This amendment focused on improving EU-wide cooperation of
competition authorities and streamlining proceedings in order to make
competition law more effective.

According to the Austrian Antitrust Act, the Cartel Court must be notified
of any mergers, acquisitions and joint ventures if the turnover of the parties
involved reaches certain thresholds, but remains below the threshold applicable
to mergers which must be notified to the European Commission. These mergers are
prohibited if they create or strengthen a dominant market position. Parties to
a cooperation agreement may voluntarily ask the European Commission for
clearance that their cooperation does not violate the prohibition on collusive
practices established by the EC Treaty. The European Commission may also grant
an exemption from the prohibition if

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the parties show that the benefits of the cooperation for the consumer or
for research and development outweigh the supposed distortion of competition.

We expect there to be further inquiries and other measures of the European
Commission aimed at promoting competition in the European telecommunications
sector.

Procurement law and Telecommunications Act

Since we are viewed by the regulatory authority as having significant
market power in the market of voice telephony in fixed network fixed lines, our
terms and tariffs towards our customers are subject to prior approval by the
regulatory authority.

Our customers in the public sector are subject to the Austrian Procurement
law. The Austrian procurement law requires the public sector to make its
purchase decision on either the best price or quality among the offers. Under
the tariff approval procedure we may only offer limited price discounts. Our
competitors are free to fix the prices.

Customer protection and data protection

Customer protection

The Telecommunications Act defines the protection of the customer as one
of its major goals. Accordingly, various provisions regulating the rights of
the customers vis-à-vis the telecommunications services providers can be found
in the Telecommunications Act. The terms and conditions of operators with
significant market power such as Telekom Austria must ensure that the services
are available to everyone on the same terms and have to be approved by the
regulatory authority. Those terms include our obligation to eliminate or repair
malfunctions within a short period of time.

The Telecommunications Act creates a special dispute resolution mechanism
to resolve billing disputes. We are obliged to issue itemized bills upon
customers request to allow the customers to check the accuracy of the calls
listed. If a dispute cannot be amicably settled, the customer can appeal to an
Arbitration Board installed within the regulatory authority without prejudice
to the right to appeal to the courts.

We automatically inform every customer whose bill exceeds a certain
threshold value within one billing cycle (two months). The customers can be
informed on demand as soon as other smaller limits are reached.

In the Ordinance on Tariffs for Value-Added Services, maximum prices are
determined for specific premium rate services. Before a call to such a service
is connected, the customer has to be informed about the price per minute of
such a call.

Data protection

Both the Telecommunications Act and the Data Protection Act 2000 contain
provisions concerning data protection.

Tapping and other forms of surveillance of telephone calls by third
parties are prohibited. Exceptions exist only for authorities investigating
serious criminal offences. Special switches can be established to trace people
who stalk or harass others by telephone. Unsolicited telephone calls, faxes or
electronic mails for the purposes of direct marketing are permissible only if a
subscriber has given his prior consent.

Network operators are not allowed to store traffic data past the end of
the period during which the bill may lawfully be challenged or payment may be
pursued. Without the customers prior explicit consent, traffic data such as
billing data may only be processed in order to perform telecommunications
services.

After having obtained the customers consent, data for the direct
marketing of telecommunications services may be processed only to the extent
necessary for such services. Other data may be used only for any purpose the
customer has given its consent to. Customers have the right to request
information about the storing and processing of their data and to claim
correction or deletions of data that was not stored properly.

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The European Union

Austria is a member of the European Union and is required to implement
European Union law in its domestic law and to take European Union legislation
into account when applying its domestic law. European Union legislation
basically comes in two forms: regulations and directives. Regulations are
generally and directly applicable and binding in their entirety in all European
Union member states. Directives are binding, but national legislators choose
the form and method of their implementation into domestic law.

The European Commission used its powers under new Article 86 (3) (former
Article 90) of the EC-Treaty to open telecommunications markets in the European
Union member states by issuing directives providing for liberalization,
abolishing monopoly rights of the state-owned telecommunications operators. The
full competition directive, issued in March 1996, required the full
liberalization of the telecommunications markets in most European Union member
states after January 1, 1998. Under that directive, public voice telephony
service was liberalized in the majority of the European Union member states.
The operation of network infrastructure for the provision of liberalized
services has been liberalized since July 1, 1996.

The European Union has also adopted a number of directives and
recommendations regarding open and efficient access to and use of public
telecommunications networks and public telecommunications services, the Open
Network Provisions. These requirements are intended to harmonize technical
interfaces, usage conditions and tariff principles throughout the European
Union and to ensure objectivity, transparency and non discrimination in access
to and use of public telecommunications networks and public telecommunications
services.

In June 1997, the European Commission issued a directive on
interconnection in telecommunications, with regard to carrier selection and
number portability within the EU member states by mandating operators with
significant market power to offer these services by 2000. The licensing
directive 97/13/EC provides for a common framework for general authorizations
and individual licenses granted by Member States in the field of
telecommunications services. The revised telephony directive 98/10/EC concerns
the harmonization of conditions for open and efficient access to the use of
fixed public telephone networks and fixed public telephone services. It
regulates the availability of directory services, public payphones, deals with
specific measures for disabled users and users with special social needs, the
connection of terminal equipment, quality of service and, among other things,
cost accounting principles.

In January 1999, the European Commission issued a binding decision on the
harmonized Europe-wide introduction of the third generation of mobile systems,
UMTS. The decision provides for roaming, licensing and frequency allocation and
set January 1, 2002 as the target date for the technical realization of UMTS
networks and services.

At the end of December 2000, the European Union issued a regulation
regarding access to unbundled local loops which is directly applicable in the
member states without further implementation at the national level. Based on
this decision, the regulatory authority has requested that we extend our
unbundling offer by offering line sharing.

In February 2002 the European Union adopted a package of new directives,
which will require the EU-member states to implement a new regulatory framework
for the entire telecommunications sector by mid 2003. The new legal environment
will be based on the framework-directive, which defines new rules for the
market definition procedure and will be more and more harmonized with general
competition law which is the basis for any regulation of the telecommunications
markets. The 25% threshold for significant market power will no longer apply.
The national regulatory authorities will be required to consider more factors
than they currently do in determining whether a company has a dominant position
in that market. Under the framework directive the national regulatory
authorities will seek to harmonize their decisions on an EU-wide scale.
Therefore, the competences of the regulatory authorities to regulate the
telecommunications markets might be extended.

Another directive will be the Access- and Interconnection-directive, which
will provide for the legal instruments for regulating the telecommunications
wholesale markets (carrier to carrier relations) based on the principle of
technical neutrality, while the Universal Service directive will focus on the
provision of universal service and limited ways of regulating retail prices.
The licensing directive will establish a common ground for obtaining a national
telecommunications license. At April 25, 2002 this new directives package was
published by the European Commission and now has to be transformed into
national law by July 25, 2003.

By July 2002, the European Union adopted a new directive on processing of
personal data and the protection of privacy in the electronic communications
sector which contains provisions on the use of cookies, public directories and
the confidentiality of communication. The member states must transform the
directive into

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national law by October 31, 2003 at the latest and are allowed to impose
reasonable privacy restrictions, including data retention for a limited time
period for national security reasons. The directive also regulates unsolicited
commercial communication provided by automatic calling machines, fax and e-mail
which will be subject to the recipients prior consent (opt-in) unless the
recipient is given the opportunity for opting out. Finally, the directive on
competition in the markets for electronic communications networks and services,
also adopted in September 2002, will replace the former directive on full
competition (90/388/EC) by July 25, 2003.

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Item 5. Operating and Financial Review and Prospects

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).

Through 2002 we operated our business in four main segments:



| |  |  | fixed line services;             
| | - |  | ---------------------------------
|
| |  |  | mobile communications services;  
|
| |  |  | data communications services; and
|
| |  |  | internet services.               

On May 21, 2002, our Supervisory Board approved the reintegration and merger of
Datakom Austria GmbH, Datakom International Solutions GmbH, Jet2Web Internet
Services GmbH and Jet2Web Network Services GmbH into Telekom Austria AG. We
believe that these mergers will strengthen our market position by combining our
fixed line telephony, internet and data communications activities into one
customer-focused organization. On October 1, 2002 these companies have been
incorporated into Telekom Austria AG with effect as of December 31, 2001. As of
January 1, 2003 we finalized the reorganization of our operation into two
distinct operating segments, wireline, which will include fixed line, data
communications and internet services and wireless, consisting of the mobile
communications segment and a third segment others which includes primarily our treasury activities. We have started reporting according to the new segments
commencing with the first quarter of 2003.

Accuracy of forward-looking statements

In the normal course of business, and in an effort to help keep
shareholders and the public informed about our operations, we may from time to
time issue certain statements, either in writing or orally, that contain or may
contain forward-looking information such as statements made in this annual
report. Generally, these statements relate to business plans or strategies,
projected or anticipated benefits or other consequences of such plans or
strategies, or projections involving anticipated revenues, earnings or other
aspects of operating results. Such statements are subject to a number of
factors that may tend to influence the accuracy of the statements and the
projections upon which the statements are based. As noted elsewhere in this
annual report, our operations are subject to a number of uncertainties, risks
and other influences, many of which are beyond our control, and any one of
which, or a combination of which, could materially affect our results of
operations. See Forward Looking Statements, Key
Information  Risk factors,
Information on the Company  Regulation and legal
framework,   Critical
accounting policies and  Subsequent events.

Certain factors affecting our financial results

Our business has been affected in recent years by a number of important
trends including increased competition as a result of the liberalization of the
Austrian telecommunications market, the declining importance of fixed line
voice telephony and a rapidly increasing demand for mobile and internet
communications and technological changes. Therefore, investors should consider
our results of operations and future prospects in light of the fundamental
changes occurring in the structure of Telekom Austria and the environment in
which we operate.

Open competition

The Austrian fixed line market was opened to full competition on January
1, 1998. Since the Austrian market has been fully liberalized, a number of
competitors have commenced operations in various market segments. In the fixed
line services segment, our competitors include international telecommunications
carriers and domestic companies. In the mobile communications segment, several
additional national licenses have been granted to our competitors in both the
GSM and UMTS ranges. In 2003, we expect a fifth provider will enter the
Austrian mobile communications market. Another competitor has started
operations as a service provider in

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cooperation with an existing operator. mobilkom austria intensified its
market presence during the last months of the past year to counteract this
possible development. We expect competition to further intensify in the
foreseeable future as our current competitors expand their operations.

Because of increasing competition, the most important challenge facing us
is maintaining our leadership in the telecommunications market, and the extent
to which we are able to do so will have a major influence on our future revenue
and operating results. As the operator of a former state monopoly for public
telecommunications, we have lost market share in the fixed line segment as a
result of the full liberalization of the telecommunications market. However,
competition has also stimulated overall market demand for telecommunications
services, and we expect further growth in the internet and data communications
markets. In the mobile communications services market we expect growth through
our expansion in Croatia and Slovenia. We expect slower growth in Austria than
in recent years.

Technological change

Rapid technological changes in telecommunications and information
technology will continue to have a profound effect on the way we do business
and will give rise to new competitive challenges, as the traditional businesses
of telecommunications, information technology, media, entertainment and
security increasingly converge. Technological advances have increased the
capacity of telecommunications networks and led to the rise of a number of
alternatives to traditional network transmission and new access technologies.
Because we have the competitive advantage of being the leading
telecommunications service provider in Austria that offers fixed network,
mobile and data communications services and internet services, we believe we
have the opportunity to become a leading provider of multi-service networks and
advanced multimedia services.

In addition, we have begun to consolidate our networks with those of our
reintegrated former subsidiaries. We believe that this will enable us to reduce
costs and offer new services and products.

Regulatory environment

The regulatory authorities that oversee the Austrian telecommunications
industry consider Telekom Austria to have significant market power in the
markets for voice telephony over fixed networks, leased lines and
interconnection. Changes to our fixed-line tariff structure are generally
subject to prior approval by the regulatory authorities, which could reduce our
speed and flexibility in terms of pricing strategy to respond to market
developments. Furthermore, we must allow other fixed and mobile network service
providers to interconnect to our network and must provide fixed line telephone
customers the ability to select their preferred service provider on a
call-by-call or a pre-selection basis and to keep their telephone numbers when
changing service providers.

At December 31, 2002, we had interconnection agreements with 22 fixed-line
operators and 6 mobile operators.

In July 2002, the Austrian minister of infrastructure published for public
comment a proposed amendment to the Telecommunications Act designed to
implement the new regulatory framework of the European Union into national law
by July 25, 2003. See Information on the Company  Regulation and legal
framework  Legal Framework  The European Union. The proposal includes a
further liberalization of the licensing regime, which in its current proposal
requires that a potential entrant to the market only needs to notify the
relevant authority, and further includes consumer and data protection measures.
Since the amendments to the Telecommunications Act are not yet final we are not
able to predict the outcome of the final rules. For further information see
Key Information  Risk factors.

Tariff reductions

We carried out major tariff reforms in September 1999 and June 2000 in
order to meet ongoing competitive conditions. With the introduction of our
second-based tariff scheme in 2001, we managed to lessen the average decline of
our voice market share. From April 1, 2002 to December 31, 2002, mobilkom
austria was required to lower its interconnection fees in stages to a final
level of EUR 0.1125. We expect competition to lead to continued pressure on
tariffs. As interconnection fees are expected to decline, customer tariffs are
assumed to fall as a result.

Transformation program

A number of organizational and strategic changes were implemented prior to
full liberalization in order to prepare Telekom Austria for operating in a
fully competitive environment. In June 2000, we began a

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transformation program that aimed to reduce operating expenses, implement
new technologies, change our corporate culture and stabilize fixed line voice
revenues. We expect to finalize the operational measures of our transformation
program by the end of 2003. The financial impact of these measures, mainly in
the form of reduced costs, has already been visible in 2001 and 2002 and will
continue to be so in 2003. To reduce personnel, we successfully implemented
three voluntary retirement incentive programs in 1997, 1999 and 2000. These
resulted in approximately 3,500 employees accepting early retirement. At
December 31, 2002, 1,723 employees were covered by our respective provisions.
The other persons have already left the program and no longer have claims
representing any current or future liability to us. The reduction of our
headcount will continue in 2003, albeit, at a lower rate.

As a result of the transformation program, we also have employees who no
longer report to work but who are paid a salary by us due to their civil
servant status. We refer to these employees as our idle workforce. Costs
related to such personnel are included in our total consolidated EBITDA and
EBIT, but are excluded for purposes of segment reporting, since these costs are
not under the control of the executive officers of our segments and are not
allocated to any segment.

While we plan to increase our medium-term infrastructure investments in
growth areas such as internet, broadband transmission and access, and new
mobile communications services like UMTS, we intend to reduce our capital
expenditures in mature business areas such as fixed line voice telephony, and
to achieve a net decrease in our capital expenditures.

The change in our corporate culture and our efforts to stabilize fixed
line voice revenues resulted in the implementation of additional initiatives
such as campaigns to change consumer price perception of our products, welcome
calls for new customers, special tariff offers for a limited period, days on
which certain voice minutes are free of charge and other activities to improve
customer retention and to win back customers. In June 2002, we introduced a new
brand and logo meant to demonstrate our commitment to our customers and to
symbolize stability, confidence, security and competence.

Enhanced customer focus

To protect our market share, we will enhance even more our focus on
customer care. Therefore we restructured our fixed line business, together with
our data communications and internet business, into a new segment called
wireline. We completed the reorganization at the end of 2002 and will begin
reporting according to the new segments in 2003. We expect that over the
long-term, the new organization will help us to maintain or increase our market
share and increase customer loyalty.

Critical accounting policies

Reported financial conditions and results of our operations are sensitive
to accounting methods, assumptions and estimates that underlie the preparation
of financial statements. The profile of critical accounting policies, the
judgments and other uncertainties affecting the application of those policies,
and the sensitivity of reported results to changes in conditions and
assumptions are factors to be considered in conjunction with reviewing our
financial statements and the discussion below in   Results of operations.

Valuation of tax assets

At December 31, 2002, we had approximately EUR 639.8 million of operating
loss carry-forwards. Thereof, EUR 109.1 million relate to foreign subsidiaries
expiring between 2003 and 2009. The remaining amount of operating loss
carry-forwards are in Austria and do not expire. Their annual usage is limited
to 75.0% of the taxable income in Austria for that year.

In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that all the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. As of December 31, 2002 we
recognized a net deferred tax asset of EUR 184.7 million. In order to realize
this deferred tax asset we will need to generate future taxable income
exclusive of reversing taxable temporary differences of approximately EUR 672.2
million. Based on the level of historical taxable income and projections for
future taxable income and tax planning strategies over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not we will realize the benefits of these deductible differences, net of the
existing valuation allowance. The amount

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of deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income are reduced.

Valuation of long-lived assets, intangible assets and goodwill

Long-lived assets, intangible assets and goodwill comprise a significant
portion of our total assets. Changes in technology or changes in our intended
use of these assets may cause the estimated period of use or the value of these
assets to change. We perform annual assessments to confirm the appropriateness
of estimated economic useful lives for each category of current property, plant
and equipment. Additionally, long-lived assets and intangible assets with
definite useful lives are reviewed for impairment whenever events or changes in
circumstances have indicated that their carrying amounts may not be
recoverable. Goodwill and intangible assets with indefinite useful lives are
tested for impairment at least annually. Estimates and assumptions used in both
setting useful lives and testing for recoverability require both judgment and
estimation.

Long lived assets were EUR 5,000.7 million at December 31, 2002 and EUR
4,591.8 million at December 2001. Depending on the nature of the assets, they
are depreciated over useful lives between 3 and 50 years. Although we have
substantial historical evidence about estimated useful lives of long lived
assets, there is the inherent risk of a change in useful lives. For example a
10% reduction in the useful lives of all depreciable assets could have a
material impact on annual depreciation expense.

Total long-lived assets, intangible assets and goodwill were EUR 6,317.3
million and EUR 4,672.5 million at December 31, 2002 and December 31, 2001,
respectively. Total impairment charges were EUR 41.9 million and EUR 145.1
million for the period ended December 31, 2002 and December 31, 2001,
respectively.

Mobilkom purchase accounting assumptions

Prior to June 28, 2002, we held a 74.999% interest in mobilkom austria. On
June 28, 2002, we acquired 100% of Autel, which held a 25.001% equity interest
in mobilkom austria, from Telecom Italia Mobile International, an affiliate of
Telecom Italia, bringing our total interest in mobilkom austria to 100%. The
aggregate purchase price was EUR 693.1 million. The following table summarizes
the final fair value of the assets acquired and liabilities assumed at the date
of acquisition.

|                                        |  |                             |       |                 |       |  |        |   |       | 
|--------------------------------------- |  | --------------------------- | ----- | --------------- | ----- |  | ------ | - | ----- | 
|                                        |  |                             |       | in EUR millions
|                                        |  |                             |       |                
|Assets:                                 |  |                             |       |                 |       |  |        |  
|Current assets                          |  |                             |       |                 |       |  | 120.6  |  
|Tangible assets                         |  |                             |       |                 |       |  | 229.8  |  
|                                        |  | Wireless operating licenses |       |                 | 101.9 |  |        |   |       | 
|                                        |  | Subscriber base             |       |                 | 121.2 |  |        |   |       | 
|                                        |  | Brand name                  |       |                 | 159.2 |  |        |   |       | 
|                                        |  | Other                       |       |                 | 5.9   |  |        |   |       | 
|                                        |  |                             |       |                 |       |  |        |  
|Intangible assets                       |  |                             | 388.2 |                 |       |  | 388.2  |  
|                                        |  |                             |       |                 |       |  |        |  
|Goodwill                                |  |                             |       |                 |       |  | 431.3  |  
|Other long-term assets                  |  |                             |       |                 |       |  | 64.0   |  
|Liabilities:                            |  |                             |       |                 |       |  |        |  
|Current liabilities                     |  |                             |       |                 |       |  | (167.9 | )
|Long-term liabilities                   |  |                             |       |                 |       |  | (238.6 | )
|Deferred tax liability from
acquisition |  |                             |       |                 |       |  | (134.3 | )
|                                        |  |                             |       |                 |       |  |        |  
|                                        |  | Net assets acquired         |       |                 |       |  |        |   | 693.1 | 
|                                        |  |                             |       |                 |       |  |        |  

The tangible and intangible assets noted above were valued based on a
report by an independent third-party valuation expert using information
provided by us. The carrying values of current assets and liabilities acquired
generally approximated their carrying values in the historical books and
records of mobilkom austria group but certain adjustments were made to reflect
the fair value of deferred revenue. The fair value of long-term debt was
determined considering currently available interest rates.

The critical assumptions inherent in the estimated fair values noted above
are embedded in the third-party valuation of intangible assets.

The EUR 101.9 million estimated value of wireless operator licenses
acquired, including both GSM and UMTS licenses, was determined using the cost
approach. Since the licenses do not generate separate and distinct revenue
streams we believe their cost, net of accumulated amortization recorded by
mobilkom austria group, is

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the most reliable estimate of their fair value. The weighted
average useful life of the acquired operator licenses is 14.8 years.

The EUR 121.2 million estimated fair value of acquired subscriber base was
determined using a discounted cash flow analysis. Cash flows inherent in this
analysis were derived from approved business plans. The weighted average useful
life of the acquired subscriber base is 6.0 years.

The EUR 159.2 million estimated fair value of the acquired brand name was
determined using the relief from royalty method, a form of the income approach.
The key assumptions inherent in the calculation are estimates of future
revenues, which were derived from approved business plans.

Further, we have concluded that the acquired brand name has an indefinite
useful life and, therefore, will not be subject to amortization but will be
tested for impairment annually. The brand name has been established and is
recognized as the market leader which is critical in obtaining and retaining
customers. We believe that the brand name will continue to have value to us
irrespective of future technical developments in the mobile communications
industry. Furthermore, as there are no legal regulatory or contractual
provisions that limit the useful life of the brand name concerned, and the
brand is not directly linked to a specific technology that is currently in use,
we have concluded that the brand name has an indefinite useful life.

We believe the assumptions inherent in the estimates of fair value noted
above are reasonable. However, if estimates of future cash flows and revenues
differ significantly from our assumptions the value of the recognized
intangible assets may not be recoverable. In this event, resulting impairment
charges could have a material impact on our consolidated results of operations.

Voluntary retirement incentive programs

In order to reduce headcount and related operating expenses we have
offered several programs whereby selected employees who were approaching the
age of 55 were offered certain incentives to induce their voluntary retirement.
We refer to these incentives as Voluntary Retirement Incentive Programs (VRIPs)
or social plans. Generally, such plans target civil servants who can not be
terminated without cause. Employees who accept a VRIP offer agree to terminate
their employment with us when they reached the age of 55 in return for a
defined percentage of their salary. In aggregate 3,500 accepted one of our VRIP
offers.

At the time an employee accepts a VRIP offer we recognize an accrual for
the present value of the estimated future contractual obligations assuming an
annual salary increase of 2.5% for future years and a discount rate of 4.5%.

The EUR 132.3 million balance of our contractual termination benefit
accruals as of December 31, 2002 represents the present value of the
contractual benefits for which we have a present obligation under one of the
existing social plan programs. In aggregate, 656 of the civil servants who
originally accepted a VRIP have elected early retirement in response to a 2001
change in Austrian law and have released us from our obligations under the
original contract. As a result, during 2002 we reversed EUR 57.4 million of the
previously established accruals.

As illustrated by the reversal described above, the ultimate amount of our
obligation under VRIPs depends on the number of employees that elect early
retirement. While we expect the number of plan participants who elect early
retirement to increase, such an outcome is dependent on future legislative
developments and ultimately, the decision of each individual employee to apply
for early retirement.

New accounting pronouncements

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of a tangible long-lived asset. SFAS No. 143 also requires the
enterprise to record the contra to the initial obligation as an increase to the
carrying amount of the related long-lived asset and to depreciate that cost
over the remaining useful life of the asset. The liability is adjusted at the
end of each period to reflect the
passage of time (i.e., accretion expense) and changes in the estimated
future cash flows underlying the initial fair value measurement. Enterprises
are required to adopt SFAS 143 for fiscal years beginning after June 15, 2002.
We adopted SFAS No. 143 as of January 1, 2003 and are still evaluating the
impact of the adoption.

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In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces previous
accounting guidance provided by EITF 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring), and requires companies to
recognize costs associated with exit or disposal activities only when a
liability for these costs is incurred rather than at the date of a commitment
to an exit or disposal plan. Examples of costs covered by the Statement include
lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operations, plant closings, or
other exit or disposal activities. The provisions of SFAS 146 are to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
Although we believe the adoption of SFAS No 146 will not have a material impact
on our financial statements, adoption of the statement will result in
differences in the timing of recognition and measurement of expenses relating
to exit and disposal activities.

In November 2002, the FASB issued Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which adopts a characteristics
based approach to identify contracts that qualify as guarantees, clarifies that
a guarantor is required to recognize a liability for the non-contingent aspect
of most guarantees at inception of the guarantee, provides guidance regarding
measurement of any such liability and enhances the disclosure requirements of
guarantors. The provisions of FIN 45 applicable to initial recognition and
measurement of non-contingent liabilities associated with a guarantee are
applicable to guarantees issued or modified after December 31, 2002. Management
believes the adoption of these provisions will not have a material effect on
our financial statements. The disclosure requirements of FIN 45 are effective
for all interim and annual periods ending after December 15, 2002 and have been
fully incorporated in these financial statements.

In November 2002, the Emerging Issues Task Force reached consensus on EITF
issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables,
which addresses when and, if so, how an arrangement involving multiple
deliverables should be divided into separate units of accounting. The Issue
also provides guidance with respect to the effect of certain customer rights
due to vendor non-performance on the recognition of revenue allocated to
delivered units of accounting and addresses the impact on the measurement
and/or allocation of arrangement consideration of customer cancellation
provisions and consideration that varies as a result of future actions of the
customer or the vendor. Finally, this Issue provides guidance with respect to
the recognition of the cost of certain deliverables that are excluded from the
revenue accounting for an arrangement. The Issue is effective for annual
reporting periods beginning after June 15, 2003. We have not yet determined the
impact, if any, of the expected adoption of Issue 00-21.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable
Interest Entities, which provides guidance regarding the consolidation of
certain entities in which equity investors do not have the characteristics of
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 introduces the concept of variable interest
entities, explains how to identify a variable interest entity, and requires
that the primary beneficiary of any variable interest entity consolidate that
entity. FIN 46 also requires certain disclosures regarding variable interest
entities if the reporting entity is the primary beneficiary of the variable
interest entity or if that enterprise holds a significant variable interest in
a variable interest entity but is not the primary beneficiary. A transferor of
financial assets to a qualifying special-purpose entity (QSPE) subject to the
reporting requirements of SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, is not required to
consolidate that QSPE. The accounting provisions of FIN No. 46 are effective
immediately for all variable interest entities created after January 31, 2003
and no later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003 for variable interest entities created before
February 1, 2003. Certain disclosure provisions of this Interpretation are
effective for financial statements initially issued after January 31, 2003. We
do not believe the adoption of FIN No. 46 will have a material effect on our
financial statements.

Subsequent events

As of January 30, 2003, mobilkom austria acquired an additional 9% of
VIPnet for a total purchase price of EUR 20.9 million bringing its total
interest to 80%.

On January 7, 2003 mobilkom austria group signed a partnership agreement
with Vodafone to co-operate in the Austrian, Croatian and Slovenian market. The
co-operation will extend the range of existing products and services of
mobilkom austria group and improve the product portfolio in particular for
business customers. Both companies will collaborate in the field of roaming,
purchasing, development of new products and services, technical platforms,
global account management and joint marketing initiatives. With Eurocall, the
first joint

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product to be launched in the first quarter 2003, mobilkom austria group
will offer favorable and transparent roaming prices to users in 26 European
countries and will be receiving visitor roaming traffic as the preferred mobile
operator for Vodafone customers from 26 countries.

During the first quarter of 2003 we claimed a refund from the Austrian
Ministry of Finance for certain administrative expenses covered by us in prior
years. It is too early to tell whether we will be successful in our claim. It
is also uncertain how much, if any, might be refunded to us.

On
April 15, 2003 we entered into a share purchase agreement for
the sale of our 26% holding in Herold, the leading telephone
directory provider in Austria, to an investor group led by Veronis
Suhler Stevenson and 3i. The agreement is still subject to approval
by the Austrian Cartel Court and the ability of the majority
shareholder to sell its stake in Herold. After the sale Herold will
continue to publish our telephone directories.

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RESULTS OF OPERATIONS

2002 compared to 2001

OVERVIEW

On June 28, 2002 we acquired the remaining 25.001% of mobilkom austria
from Telecom Italia Mobile International, which also held certain blocking
rights. These blocking rights precluded us from consolidating mobilkom austria
group in prior years. Our consolidated financial statements now include
mobilkom austria groups results of operations for the period June 28, 2002
until December 31, 2002 and are therefore not directly comparable with previous
years.

Consolidated operating results

Operating revenues

The following table shows our operating revenues and percentage changes by
business segment for the periods indicated.

|                                       |                                 |  |                   |         |            |  |           |         |  |  |       |      |  
|-------------------------------------- | ------------------------------- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ---- | -
|                                       |                                 |  | 2002              |         | 2001       |  | 2002/2001
|                                       |                                 |  |                   |         |            |  |          
|                                       |                                 |  | (in EUR millions) |         | (% change)
|Fixed line services                    |                                 |  | 2,057.2           |         |            |  | 2,456.7   |         |  |  | (16.3 | )%  
|Data communications services           |                                 |  | 330.0             |         |            |  | 330.2     |         |  |  | (0.1  | )   
|Internet services                      |                                 |  | 119.6             |         |            |  | 99.5      |         |  |  | 20.2  |     
|Mobile communications services         |                                 |  | 1,002.5           |         |            |  |          |         |  |  | n.a.  |     
|Intersegmental eliminations and others |                                 |  | (391.2            | )       |            |  | (226.7    | )       |  |  | 72.6  |     
|                                       |                                 |  |                   |         |            |  |           |         |  |  |       |     
|                                       | Consolidated operating revenues |  |                   | 3,118.1 |            |  |           | 2,659.7 |  |  |       | 17.2 | %
|                                       |                                 |  |                   |         |            |  |           |         |  |  |       |     

Our consolidated operating revenues increased by EUR 458.4 million or
17.2% to EUR 3,118.1 million in 2002. The consolidation of mobilkom austria
group since June 28, 2002 increased the operating revenues by EUR 858.6 million
net of intersegmental eliminations. 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 fixed line services segment would have been reduced
by EUR 257.2 million. This change had no significant impact on operating income.
Taking into account these two above mentioned effects, the remaining change was
a reduction in operating revenues of EUR 143.0 million or 6.0%. This was due to
lower revenues in the fixed line services segment resulting from a drop in
traffic volume, lower average tariffs and a lower market share, which was only
partially offset by higher revenues in the internet segment due to the
increased subscriber base in Austria. Revenues in the data communications
segment remained stable. Year-on-year changes within the mobile segment are
discussed below under  Supplementary information
and
 Segment results 
Mobile communications services.

Material costs

|                                       |                        |  |                   |       |            |  |           |      |  |  |       |       |  
|-------------------------------------- | ---------------------- |  | ----------------- | ----- | ---------- |  | --------- | ---- |  |  | ----- | ----- | -
|                                       |                        |  | 2002              |       | 2001       |  | 2002/2001
|                                       |                        |  |                   |       |            |  |          
|                                       |                        |  | (in EUR millions) |       | (% change)
|Fixed line services                    |                        |  | 55.5              |       |            |  | 66.5      |      |  |  | (16.5 | )%   
|Data communications services           |                        |  | 12.0              |       |            |  | 11.4      |      |  |  | 5.3   |      
|Internet services                      |                        |  | 0.9               |       |            |  | 2.3       |      |  |  | (60.9 | )    
|Mobile communications services         |                        |  | 148.7             |       |            |  |          |      |  |  | n.a.  |      
|Intersegmental eliminations and others |                        |  | (20.7             | )     |            |  | (8.3      | )    |  |  | 149.4 |      
|                                       |                        |  |                   |       |            |  |           |      |  |  |       |      
|                                       | Consolidated materials |  |                   | 196.4 |            |  |           | 71.9 |  |  |       | 173.2 | %
|                                       |                        |  |                   |       |            |  |           |      |  |  |       |      

Our consolidated material costs increased by EUR 124.5 million or 173.2%
to EUR 196.4 million in 2002. The consolidation of mobilkom austria group since
June 28, 2002 increased the material expenses by EUR 137.4

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million net of intersegmental eliminations. Taking into account this
effect, the remaining change was a reduction in material expenses of EUR 12.9
million or 17.9%. This was due to lower material expenses in the fixed line
services and the internet services segments resulting from declining revenues
from the sales of equipment and lower numbers of initial connections. These
lower expenses were only partially offset by higher expenses in the data
communications services segment resulting primarily from a write-down of
inventory to market value in the amount of EUR 2 million.

Employee costs

|                                          |                             |  |                   |       |            |  |           |       |  |  |        |       |  
|----------------------------------------- | --------------------------- |  | ----------------- | ----- | ---------- |  | --------- | ----- |  |  | ------ | ----- | -
|                                          |                             |  | 2002              |       | 2001       |  | 2002/2001
|                                          |                             |  |                   |       |            |  |          
|                                          |                             |  | (in EUR millions) |       | (% change)
|Fixed line services                       |                             |  | 426.2             |       |            |  | 505.5     |       |  |  | (15.7) | %    
|Data communications services              |                             |  | 51.0              |       |            |  | 48.2      |       |  |  | 5.8    |      
|Internet services                         |                             |  | 16.8              |       |            |  | 14.1      |       |  |  | 19.1   |      
|Mobile communications services            |                             |  | 81.2              |       |            |  |          |       |  |  | n.a.   |      
|Intersegmental eliminations and others(1) |                             |  | 25.5              |       |            |  | 51.3      |       |  |  | (50.3  | )    
|                                          |                             |  |                   |       |            |  |           |       |  |  |        |      
|                                          | Consolidated employee costs |  |                   | 600.7 |            |  |           | 619.1 |  |  |        | (3.0) | %
|                                          |                             |  |                   |       |            |  |           |       |  |  |        |      



---

|(1) |  | Includes the cost of idle workforce. These costs are not controlled by
segment managers but are the responsibility of corporate management. Beginning
in 2002, employees who are on medical leave and have applied for early
retirement on medical reasons are included in idle workforce. Prior year
figures were reclassified for comparative purposes. Costs for idle workforce
amounted to EUR 29.4 million in 2002 and EUR 52.0 million in 2001 (up from
originally reported EUR 49.9 million in 2001).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our consolidated employee costs including benefits, taxes and costs for
idle workforce decreased by EUR 18.4 million or 3.0% to EUR 600.7 million in
2002. The consolidation of mobilkom austria group since June 28, 2002 increased
employee costs by EUR 77.5 million net of intersegmental eliminations. This was
more than offset by a reduction in the fixed line services segment by EUR 79.3
million or 15.7%, which reflected the successful reduction of headcount, as
well as a reversal of prior year accruals for voluntary retirement incentive
plans of civil servants in the amount of EUR 57.4 million. The reversal was the
result of 656 plan participants entering the government sponsored national
retirement plan earlier than expected primarily due to a change in Austrian
law. When participants enter the government retirement plan, we are released
from our contractual obligations and therefore reverse the related accrual.

Depreciation and amortization including impairment charges and net loss from retirement of long-lived assets

|                                       |                                                                                                                 |  |                   |         |            |  |           |         |  |  |       |     |  
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | --- | -
|                                       |                                                                                                                 |  | 2002              |         | 2001       |  | 2002/2001
|                                       |                                                                                                                 |  |                   |         |            |  |          
|                                       |                                                                                                                 |  | (in EUR millions) |         | (% change)
|Fixed line services                    |                                                                                                                 |  | 839.6             |         |            |  | 836.0     |         |  |  | 0.4   | %  
|Data communications services           |                                                                                                                 |  | 37.9              |         |            |  | 35.3      |         |  |  | 7.4   |    
|Internet services                      |                                                                                                                 |  | 53.0              |         |            |  | 129.8     |         |  |  | (59.2 | )  
|Mobile communications services         |                                                                                                                 |  | 144.6             |         |            |  |          |         |  |  | n.a.  |    
|Intersegmental eliminations and others |                                                                                                                 |  | 1.8               |         |            |  | 48.1      |         |  |  | (96.3 | )  
|                                       |                                                                                                                 |  |                   |         |            |  |           |         |  |  |       |    
|                                       | Consolidated depreciation, amortization,
impairment charges and net losses from
retirement of long-lived assets |  |                   | 1,076.9 |            |  |           | 1,049.2 |  |  |       | 2.6 | %
|                                       |                                                                                                                 |  |                   |         |            |  |           |         |  |  |       |    

Our consolidated depreciation and amortization expenses including
impairment charges and net losses from retirement of long-lived assets
increased by EUR 27.7 million or 2.6% to EUR 1,076.9 million in 2002. This
moderate change is the result of several effects that offset each other. The
consolidation of mobilkom austria group since June 28, 2002 resulted in an
increase of depreciation and amortization of EUR 135.5 million and an increase
in net losses from retirement of long-lived assets of EUR 9.1 million.

As a result of the adoption of SFAS No. 142 goodwill and intangible assets
with indefinite useful life are no longer amortized starting in 2002. In 2001
we reported amortization of goodwill of EUR 50.4 million, of which EUR 48.5
million were included in intersegmental eliminations and others for the
goodwill of Czech On Line

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(COL) relating to our internet services segment,
and additional EUR 27.0 million were included in equity in earnings of
affiliates.

Included in the internet segment are impairment charges for goodwill
originally recorded from the acquisition of COL in the amount of EUR 40.4
million in 2002 and EUR 120.0 million 2001. The acquisition was based on a
business plan assuming the full liberalization of the Czech market in the year
2001. As this was first postponed to the year 2002 and the liberalization of
the
Czech market still remains unsatisfactory overall with regard to
interconnection and limited wholesale offers to alternative operators, the
business of COL has not developed as originally expected. This resulted in
impairment charges in 2001 and 2002. The impairment loss was recorded in the
internet segment in 2002. In 2001 the impairment losses of goodwill were
originally classified in intersegmental eliminations and others, but were
reclassified in 2002 to the internet segment for comparability purposes.

In accordance with SFAS No. 144, as amended, the net loss from retirement
of long-lived assets of EUR 18.7 million is presented in 2002 in the operating
result. In 2001, the net loss from retirement of long-lived assets of EUR 39.0
million was included in other income, net. Taking into account these effects,
the remaining change was an increase in depreciation and amortization of EUR
21.4 million primarily related to the acceleration of depreciation due to a
change in useful lives of certain technical network software.

Other
operating expenses

|                                       |                                       |  |                   |         |            |  |           |         |  |  |       |     |  
|-------------------------------------- | ------------------------------------- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | --- | -
|                                       |                                       |  | 2002              |         | 2001       |  | 2002/2001
|                                       |                                       |  |                   |         |            |  |          
|                                       |                                       |  | (in EUR millions) |         | (% change)
|Fixed line services                    |                                       |  | 762.4             |         |            |  | 1,013.7   |         |  |  | (24.8 | )% 
|Data communications services           |                                       |  | 220.4             |         |            |  | 215.9     |         |  |  | 2.1   |    
|Internet services                      |                                       |  | 115.4             |         |            |  | 103.3     |         |  |  | 11.7  |    
|Mobile communications services         |                                       |  | 463.1             |         |            |  |          |         |  |  | n.a.  |    
|Intersegmental eliminations and others |                                       |  | (374.6            | )       |            |  | (218.0    | )       |  |  | 71.8  |    
|                                       |                                       |  |                   |         |            |  |           |         |  |  |       |    
|                                       | Consolidated other operating expenses |  |                   | 1,186.7 |            |  |           | 1,114.9 |  |  |       | 6.4 | %
|                                       |                                       |  |                   |         |            |  |           |         |  |  |       |    

Our consolidated other operating expenses increased by EUR 71.8 million or
6.4% to EUR 1,186.7 million in 2002. The consolidation of mobilkom austria
group since June 28, 2002 increased the other operating expenses by EUR 326.1
million, net of intersegmental eliminations. 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 fixed line services segment would have been lower
by EUR 257.2 million. This change had no significant impact on operating
income. Taking into account these two above mentioned effects, other operating
expenses remained rather stable with a slight increase of EUR 2.9 million or
0.3%.

Operating
income (loss)

|                                       |                                      |  |                   |      |            |  |           |        |   |  |       |      |  
|-------------------------------------- | ------------------------------------ |  | ----------------- | ---- | ---------- |  | --------- | ------ | - |  | ----- | ---- | -
|                                       |                                      |  | 2002              |      | 2001       |  | 2002/2001
|                                       |                                      |  |                   |      |            |  |          
|                                       |                                      |  | (in EUR millions) |      | (% change)
|Fixed line services                    |                                      |  | (26.4             | )    |            |  | 35.0      |        |   |  | n.a.  | %   
|Data communications services           |                                      |  | 8.6               |      |            |  | 19.4      |        |   |  | (55.7 | )   
|Internet services                      |                                      |  | (66.4             | )    |            |  | (150.0    | )      |   |  | (55.7 | )   
|Mobile communications services         |                                      |  | 164.9             |      |            |  |          |        |   |  | n.a.  |     
|Intersegmental eliminations and others |                                      |  | (23.3             | )    |            |  | (99.8     | )      |   |  | n.a.  |     
|                                       |                                      |  |                   |      |            |  |           |        |   |  |       |     
|                                       | Consolidated operating income (loss) |  |                   | 57.4 |            |  |           | (195.4 | ) |  |       | n.a. | %
|                                       |                                      |  |                   |      |            |  |           |        |   |  |       |     

Operating income improved from a loss of EUR 195.4 million in 2001 to an
income of EUR 57.4 million in 2002. The consolidation of mobilkom austria group
since June 28, 2002 contributed EUR 171.3 million net of intersegmental
eliminations to this improvement. The factors described above contributed to
the improvement in operating income.

65



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Other income, taxation, and minority interests

|                             |                                                      |  |                   |       |            |  |           |       |   |  |      |       |  
|---------------------------- | ---------------------------------------------------- |  | ----------------- | ----- | ---------- |  | --------- | ----- | - |  | ---- | ----- | -
|                             |                                                      |  | 2002              |       | 2001       |  | 2002/2001
|                             |                                                      |  |                   |       |            |  |          
|                             |                                                      |  | (in EUR millions) |       | (% change)
|Other income (expense)       |                                                      |  |                   |       |            |  |           |       |   |  |      |      
|                             | Net interest                                         |  | (156.5            | )     |            |  | (158.3    | )     |   |  | (1.1 | )%   
|                             | Equity in earnings of affiliates and dividend income |  |                   | 141.0 |            |  |           | 197.7 |   |  |      | (28.7 | )
|                             | Other, net                                           |  |                   | 1.9   |            |  |           | (44.0 | ) |  |      | n.a.  |  
|Income tax (expense) benefit |                                                      |  | (26.1             | )     |            |  | 94.9      |       |   |  | n.a. |      
|Minority interest            |                                                      |  | (4.9              | )     |            |  | 0.5       |       |   |  | n.a. |      
|                             |                                                      |  |                   |       |            |  |           |       |   |  |      |      
|                             | Total                                                |  |                   | (44.6 | )          |  |           | 90.8  |   |  |      | n.a.  | %
|                             |                                                      |  |                   |       |            |  |           |       |   |  |      |      

Net
interest

Net interest expense decreased by 1.1% to EUR 156.5 million in 2002. A
decrease in net debt during the first six months and favorable financing of the
purchase price for the June 28, 2002 acquisition of mobilkom austria led to a
reduction in total consolidated net interest expense. For further details see
 Liquidity and capital resources.

Equity
in earnings of affiliates and dividend income

Equity in earnings of affiliates includes primarily the equity income from
the 74.999% participation held in mobilkom austria. As a consequence of the
consolidation of mobilkom austria group beginning June 28, 2002 mobilkom
austrias operations are included in the financial statements of Telekom
Austria and are no longer reported as equity in earnings of affiliates. This
results in a decrease of equity in earnings of affiliates to EUR 140.5 million
in 2002 from EUR 195.5 million in 2001.

Dividend income decreased to EUR 0.4 million in 2002 compared to EUR 2.2
million in 2001.

Other,
net

This item improved from an expense of EUR 44.0 million to an income of EUR
1.9 million in 2002. SFAS No. 144, as amended, requires classification of a net
loss from retirement of long-lived assets as operating expenses in 2002. For
2001 a net loss from retirement of long-lived assets of EUR 39.0 million is
included in other, net.

Income
tax (expense) benefit

Austrian stock corporations are generally subject to corporate income tax
of 34% of their taxable income. Our effective tax rate in 2002 was 59.6%
primarily due to non-deductible goodwill impairment charges and an increase in
the deferred tax valuation allowance, partially offset by certain tax credits
and incentives and lower tax rate differentials on equity in earnings of
affiliates. Our effective tax rate in 2001 was 47.4% primarily due to a tax
benefit recorded for prior year goodwill amortization and impairment, partially
offset by an increase in the deferred tax valuation allowances.

In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that all the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
strategies in making this assessment. Based on the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not that we will realize all the benefits of these deductible differences, net
of the existing valuation allowance.

In 2001, mobilkom austria AG & Co KG (formerly mobilkom austria AG), in
which our equity investment at the time amounted to 74.999%, recorded a tax
expense of EUR 134.4 million due to a change in tax status of mobilkom austria
AG from a taxable entity to a non-taxable limited liability partnership. The
change occurred in the first quarter of 2001 and was, for tax purposes,
effective retroactively to July 1, 2000. Correspondingly, we recorded our
74.999% proportional share of these tax charges of mobilkom austria and,
accordingly, recognized a deferred tax benefit during the three months ended
March 31, 2001. Thus, the direct income tax effects on us from the change in
tax status of mobilkom austria and the proportional pickup from the income tax
expense reported by mobilkom austria itself essentially offset each other in
the income tax expense reported by us for the three months ended March 31,
2001.

66



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Minority interests

Due to the consolidation of mobilkom austria group effective June 28,
2002, minority shareholders earnings in some of mobilkom austrias
subsidiaries are presented as minority interests. Overall these companies
contributed positively to mobilkom austria groups result, the portion of the
subsidiaries earnings attributable to the minority interests are deducted in
arriving at consolidated net income.

Consolidated net income (loss)

|      |  |                   |      |            |  |           |        |   |  |  |      | 
|----- |  | ----------------- | ---- | ---------- |  | --------- | ------ | - |  |  | ---- | 
|      |  | 2002              |      | 2001       |  | 2002/2001
|      |  |                   |      |            |  |          
|      |  | (in EUR millions) |      | (% change)
|Total |  |                   | 12.8 |            |  |           | (104.6 | ) |  |  | n.a. | 

Telekom Austria shows a positive consolidated net income for the first
time since 1999. Net income improved to EUR 12.8 million in 2002 compared to a
loss of EUR 104.6 million in 2002. The positive development was supported by
continuing growth in the mobile communications segment combined with the
consolidation of mobilkom austria group from June 28, 2002 through December 31,
2002.

This development was also a result of the adoption of SFAS No. 142 in that
goodwill and indefinite-lived intangible assets are no longer amortized. In
2001 we reported amortization of goodwill of EUR 50.4 million and additional
EUR 27.0 million were included in equity in earnings of affiliates. We
recognized impairment charges of EUR 41.9 million and EUR 145.1 million in 2002
and 2001 respectively. These charges are primarily related to the impairment of
goodwill in Czech On Line, which decreased from EUR 120.0 million in 2001 to
40.4 million in 2002.

The improvement of the consolidated net income was also due to the release
of provisions for contractual termination benefits in the amount of EUR 57.4
million in 2002 compared to EUR 2.4 million in 2001. Further, a decline in
revenue in the fixed line services segment was partially offset by successful
cost reductions.

67



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SUPPLEMENTARY INFORMATION

Although Austrian GAAP permitted us to consolidate mobilkom austria group,
we did not consolidate mobilkom austria group under U.S. GAAP through June 28,
2002. This was because through that date mobilkom austrias minority
shareholder, a subsidiary of Telecom Italia Mobile S.p.A. (TIM) held
substantive contractual rights in connection with its investment. Consequently
we presented separately consolidated financial information for mobilkom austria
group.

Since our privatization in November 2000 we have, however, shown total
managed results of operations for the entire Telekom Austria group, in order to
present a complete picture of the enterprise. The managed data include all
revenues and operating income from all business segments including the mobile
communications segment under the management of our Management Board.

On June 28, 2002 we acquired TIMs stake in mobilkom austria. As a result
of the acquisition, we gained full strategic and operating control of our
mobile communications services business. Thus, our consolidated statement of
operations for the fiscal year ending 2002 reflects our equity in earnings of
mobilkom austria group through June 28, 2002, and consolidated mobilkom austria
groups results of operations for the period from June 28, 2002 until December
31, 2002.

These consolidated statements of operations, however, exclude the
operations of mobilkom austria group through June 28, 2002 and are thus not
directly comparable to the total managed data we presented in 2001. Thus, in
order to provide investors with a more complete picture of the development of
our business, we are presenting supplementary to our consolidated statement of
operations a comparison between the total managed data for the entire fiscal
year of 2002 with the fiscal year 2001 together with a reconciliation between
the total managed data for the year ended December 31, 2002 and our
consolidated statements for the same period.

Percentage changes related to the mobile communications services segment
before and after the acquisition of mobilkom austria are not meaningful and
therefore, are not presented in the tables below.

|                    |                                                         |                                  |  |                   |         |            |  |           |         |  |  |       |      |   
|------------------- | ------------------------------------------------------- | -------------------------------- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ---- | --
|                    |                                                         |                                  |  | 2002              |         | 2001       |  | 2002/2001
|                    |                                                         |                                  |  |                   |         |            |  |          
|                    |                                                         |                                  |  | (in EUR millions) |         | (% change)
|Operating revenues: |                                                         |                                  |  |                   |         |            |  |           |         |  |  |      
|                    | Fixed line services                                     |                                  |  | 2,057.2           |         |            |  | 2,456.7   |         |  |  | (16.3 | )%  
|                    | Data communications services                            |                                  |  | 330.0             |         |            |  | 330.2     |         |  |  | (0.1  | )   
|                    | Internet services                                       |                                  |  | 119.6             |         |            |  | 99.5      |         |  |  | 20.2  |     
|                    | Mobile communications services                          |                                  |  | 1,002.5           |         |            |  |          |         |  |  | n.a.  |     
|                    | Intersegmental eliminations and others                  |                                  |  | (391.2            | )       |            |  | (226.7    | )       |  |  | n.a.  |     
|                    |                                                         |                                  |  |                   |         |            |  |           |         |  |  |       |     
|                    |                                                         | Consolidated operating revenues  |  |                   | 3,118.1 |            |  |           | 2,659.7 |  |  |       | 17.2 | % 
|                    |                                                         |                                  |  |                   |         |            |  |           |         |  |  |       |     
|                    | Mobile communications services  prior to consolidation |                                  |  | 906.9             |         |            |  | 1,713.2   |         |  |  | n.a.  |     
|                    | Intersegmental eliminations                             |                                  |  | (116.8            | )       |            |  | (429.4    | )       |  |  | n.a.  |     
|                    |                                                         |                                  |  |                   |         |            |  |           |         |  |  |       |     
|                    |                                                         | Total managed operating revenues |  |                   | 3,908.2 |            |  |           | 3,943.5 |  |  |       | (0.9 | )%
|                    |                                                         |                                  |  |                   |         |            |  |           |         |  |  |       |     

Whereas our consolidated operating revenues increased by 17.2% to EUR 3,118.1 million in 2002 from EUR 2,659.7 million in 2001 mainly due to the
consolidation of mobilkom austria group as of June 28, 2002, our total managed
operating revenues decreased by 0.9% in 2002 to EUR 3,908.2 million from EUR 3,943.5 million in 2001. The reduction in total managed operating revenues was
caused by a change in the way interconnection charges between Austrian
alternative service providers are billed and collected. As a result of this
changes Telekom Austria is no longer a party to such transactions. Had the
change been in place during 2001, total managed operating revenues would have
been lower by EUR 84.2 million. Taking into account this effect, our total
managed operating revenues would have increased by 1.3% from EUR 3,859.3
million in 2001. The increase is driven primarily by growth in revenues from
our mobile communications services segment which were up by 11.5% to EUR 1,909.4 million in total in 2002 from EUR 1,713.2 million in 2001. The rise was
achieved through an increase in the number of mobile customers and a higher
average usage per subscriber which reflects our focus on high value mobile
customers. The increase came both from Austria and, above all, foreign
operations. Revenue growth in this segment together with growth from our
internet services segment more than offsets the decrease in revenues from our
fixed line and data communications services segment.

68



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We evaluate the performance of our segments based on operating income
before depreciation, amortization, impairment charges, net losses from
retirement of long-lived assets and costs of idle workforce (EBITDA). EBITDA is
used to measure the performance of segments because we believe it is a widely
accepted indicator of our ability to incur and service debt. EBITDA does not
give effect to cash used for debt service requirements and does not reflect
funds available for dividends, reinvestment or other discretionary uses.

EBITDA is also used in the telecommunications industry as a comparative
measure of financial performance by excluding certain variables that affect net
income but may not relate to all financial aspects of telecommunications
operation of a company. In addition, because we have adjusted EBITDA as
presented herein, this may not be comparable to similarly titled measures
reported by other companies.

Costs of idle workforce are not controlled by the segment managers but are
the responsibility of corporate management, since idle workforce is no longer
employed by our operating segments. Therefore, fixed-line EBITDA and EBIT
exclude the costs of idle workforce. Before 2002 these costs included direct
expenses for civil servants who had been released or transferred from the
workforce and lump sum payments for civil servants who had agreed to leave with
severance packages. In 2002, costs for employees who were on medical leave and
had applied for early retirement as a result of medical disability are included
in the costs for idle workforce. This change in the definition of idle
workforce resulted in the reclassification of prior-year costs of idle
workforce from EUR 49.9 million to EUR 52.0 million after reclassification.
Prior-year fixed line EBITDA was adjusted from EUR 869.0 million, as previously
reported, to EUR 871.0 million and EBIT from EUR 33.0 million to EUR 35.0
million.

Following a change in U.S. GAAP reporting, a net loss from retirement of
long-lived assets of EUR 18.7 million is presented as a component of operating
income in 2002. In 2001 a similar loss of EUR 39.0 million was reported as
non-operating expense in the ,,other income, net section. To enhance
comparability with prior periods the tables below present consolidated EBITDA
and EBIT excluding such losses, also titled EBITDA (as adjusted) and EBIT (as
adjusted). The tables also present consolidated EBITDA and EBIT including the
net loss from retirement of long lived assets in 2002. We have not adjusted
2001 EBITDA or EBIT for this reporting change.

|        |                                                                                                             |                                                                                                              |  |                   |         |            |  |           |         |  |  |       |      |  
|------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ---- | -
|        |                                                                                                             |                                                                                                              |  | 2002              |         | 2001       |  | 2002/2001
|        |                                                                                                             |                                                                                                              |  |                   |         |            |  |          
|        |                                                                                                             |                                                                                                              |  | (in EUR millions) |         | (% change)
|EBITDA: |                                                                                                             |                                                                                                              |  |                   |         |            |  |           |         |  |  |      
|        | Fixed line services                                                                                         |                                                                                                              |  | 813.2             |         |            |  | 871.0     |         |  |  | (6.6) | %   
|        | Data communication services                                                                                 |                                                                                                              |  | 46.6              |         |            |  | 54.7      |         |  |  | (14.8 | )   
|        | Internet services                                                                                           |                                                                                                              |  | (13.4             | )       |            |  | (20.1     | )       |  |  | (33.3 | )   
|        | Mobile communications services                                                                              |                                                                                                              |  | 309.5             |         |            |  |          |         |  |  | n.a.  |     
|        | Intersegmental eliminations and Others                                                                      |                                                                                                              |  | 7.8               |         |            |  | 0.1       |         |  |  | n.a.  |     
|        |                                                                                                             |                                                                                                              |  |                   |         |            |  |           |         |  |  |       |     
|        |                                                                                                             | Consolidated EBITDA (excluding losses for the
retirement of long-lived assets and costs for idle workforce)  |  |                   | 1,163.7 |            |  |           | 905.7   |  |  |       | 28.5 | %
|        | Mobile communications services  prior to consolidation                                                     |                                                                                                              |  | 351.4             |         |            |  | 571.3     |         |  |  | n.a.  |     
|        | Intersegmental eliminations                                                                                 |                                                                                                              |  | (0.3              | )       |            |  | (2.2      | )       |  |  | n.a.  |     
|        |                                                                                                             |                                                                                                              |  |                   |         |            |  |           |         |  |  |       |     
|        |                                                                                                             | Total managed EBITDA (excluding losses for the
retirement of long-lived assets and costs for idle workforce) |  |                   | 1,514.8 |            |  |           | 1,474.8 |  |  |       | 2.7  | %
|        |                                                                                                             |                                                                                                              |  |                   |         |            |  |           |         |  |  |       |     
|        | Consolidated EBITDA (excluding losses for the
retirement of long-lived assets and costs for idle workforce) |                                                                                                              |  | 1,163.7           |         |            |  | 905.7     |         |  |  | 28.5  | %   
|        | Idle workforce                                                                                              |                                                                                                              |  | (29.4             | )       |            |  | (52.0     | )       |  |  | (43.5 | )   
|        | Net losses from retirement of long-lived assets                                                             |                                                                                                              |  | (18.7             | )       |            |  |          |         |  |  | n.a.  |     
|        |                                                                                                             |                                                                                                              |  |                   |         |            |  |           |         |  |  |       |     
|        | Consolidated EBITDA                                                                                         |                                                                                                              |  | 1,115.6           |         |            |  | 853.7     |         |  |  | 30.7  | %   
|        |                                                                                                             |                                                                                                              |  |                   |         |            |  |           |         |  |  |       |     

Our consolidated EBITDA increased by 30.7% in 2002 to EUR
1,115.6 million from EUR 853.7 million in 2001. As shown in the table above
this increase is primarily a result of the consolidation of mobilkom austria
groups result of operations effective June 28, 2002. In the fixed line
services segment lower revenues led to a decline in EBITDA (as adjusted) by
6.6% in 2002 to EUR 813.2 million from EUR 871.0 million in 2001. The data
communications segment was negatively affected by bad debt expenses, which led
to a 14.8% decline in EBITDA (as adjusted) to EUR 46.6 million. Negative EBITDA
(as adjusted) reported by the internet segment improved by 33.3% to EUR (13.4)
million in 2002 resulting from an increase in the subscriber base leading to
higher revenues.

Our mobile communications services segment contributed EUR 309.5 million
to our consolidated EBITDA (as adjusted) in 2002 and additional EUR 351.4
million for the first half of 2002 which is included in our total

69



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managed EBITDA (as adjusted). The mobile communications segment showed higher
profitability in all markets, with EBITDA (as adjusted) rising by 15.7% to EUR 660.9 million in 2002.

The increase in the results of our mobile communications services segment
more than offsets the decline in our other segments and leads to the rise of
total managed EBITDA (as adjusted) by 2.7% to EUR 1,514.8 million in 2002
compared to EUR 1,474.8 million in the previous year.

The following table shows our operating income, which we refer to as
earnings before interests and taxes (EBIT), and percentage changes by business
segment for the periods indicated.

|      |                                                         |                                                                                                            |  |                   |       |            |  |           |        |   |  |       |       |  
|----- | ------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- |  | ----------------- | ----- | ---------- |  | --------- | ------ | - |  | ----- | ----- | -
|      |                                                         |                                                                                                            |  | 2002              |       | 2001       |  | 2002/2001
|      |                                                         |                                                                                                            |  |                   |       |            |  |          
|      |                                                         |                                                                                                            |  | (in EUR millions) |       | (% change)
|EBIT: |                                                         |                                                                                                            |  |                   |       |            |  |           |        |   |  |      
|      | Fixed line services                                     |                                                                                                            |  | (21.4             | )     |            |  | 35.0      |        |   |  | n.a.  | %    
|      | Data communication services                             |                                                                                                            |  | 10.5              |       |            |  | 19.4      |        |   |  | (45.9 | )    
|      | Internet services (1)                                   |                                                                                                            |  | (65.7             | )     |            |  | (150.0    | )      |   |  | (56.2 | )    
|      | Mobile communications services                          |                                                                                                            |  | 173.9             |       |            |  |          |        |   |  | n.a.  |      
|      | Intersegmental eliminations and Others                  |                                                                                                            |  | 8.2               |       |            |  | (47.9     | )      |   |  | n.a.  |      
|      |                                                         |                                                                                                            |  |                   |       |            |  |           |        |   |  |       |      
|      |                                                         | Consolidated EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce)  |  |                   | 105.5 |            |  |           | (143.5 | ) |  |       | n.a.  |  
|      |                                                         |                                                                                                            |  |                   |       |            |  |           |        |   |  |       |      
|      | Mobile communications services  prior to consolidation |                                                                                                            |  | 218.2             |       |            |  | 303.5     |        |   |  | n.a.  |      
|      | Intersegmental eliminations                             |                                                                                                            |  | (0.2              | )     |            |  | (2.0      | )      |   |  | n.a.  |      
|      |                                                         |                                                                                                            |  |                   |       |            |  |           |        |   |  |       |      
|      |                                                         | Total managed EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce) |  |                   | 323.5 |            |  |           | 158.0  |   |  |       | 104.7 | %
|      |                                                         |                                                                                                            |  |                   |       |            |  |           |        |   |  |       |      
|      |                                                         | Consolidated EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce)  |  |                   | 105.5 |            |  |           | (143.5 | ) |  |       | n.a.  |  
|      | Idle workforce                                          |                                                                                                            |  | (29.4             | )     |            |  | (51.9     | )      |   |  | (43.4 | )%   
|      | Net losses from retirement of long-lived assets         |                                                                                                            |  | (18.7             | )     |            |  |          |        |   |  | n.a.  |      
|      |                                                         |                                                                                                            |  |                   |       |            |  |           |        |   |  |       |      
|      | Consolidated EBIT                                       |                                                                                                            |  | 57.4              |       |            |  | (195.4    | )      |   |  | n.a.  |      
|      |                                                         |                                                                                                            |  |                   |       |            |  |           |        |   |  |       |      



---

|(1) |  | The impairment charge for our Czech On Line goodwill of EUR 120.0 million
in 2001 was excluded from intersegmental eliminations and reclassified to
our internet segment.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As described above, in order to facilitate the comparability of the EBIT
data for 2001 and 2002 on a segment level we have excluded costs for the
retirement of long lived assets in the amount of EUR 5.1 million in the fixed
line segment, EUR 1.9 million in the data communications segment, EUR 0.7
million in the internet segment and EUR 11.4 million in the mobile
communications segment. All costs of idle workforce are attributable to and
subtracted from the fixed line services segment.

We achieved a total managed EBIT (as adjusted) of EUR 323.5 million in
2002, compared to EUR 158.0 million in 2001. Our boost in total managed EBIT
(as adjusted) in 2002 compared to last year was partially due to the
performance of our mobile communications services segment which is up by 29.2%
to EUR 392.1 million in 2002. Further, a decline in revenue in the fixed line
services segment was partially offset by successful cost reductions. In
addition this increase was due to the release of provisions for contractual
termination benefits in the amount of EUR 57.4 million in 2002 compared to EUR 2.4 million in 2001.

As a result of the adoption of SFAS No. 142 goodwill and intangible assets
with indefinite useful life are no longer amortized. In 2001 we reported
amortization of goodwill of EUR 50.4 million and additional EUR 27.0 million
were included in equity in earnings of affiliates. We recognized impairment
charges of EUR 41.9 million and EUR 145.1 million in 2002 and 2001
respectively. These charges are primarily related to the impairment of goodwill
in Czech On Line, our foreign subsidiary in the internet services segment,
which decreased from EUR 120.0 million in 2001 to 40.4 million in 2002.

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##### 



The following table reconciles EBITDA and EBIT to cash generated from
operations for the periods indicated.

|                                                                                                             |                                                                        |                                                                                                             |         |                   |         |      |         |          |        |  
|------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------- | ----------------- | ------- | ---- | ------- | -------- | ------ | -
|                                                                                                             |                                                                        |                                                                                                             |         | 2002              |         | 2001
|                                                                                                             |                                                                        |                                                                                                             |         |                   |         |     
|                                                                                                             |                                                                        |                                                                                                             |         | (in EUR millions)
|Total managed EBITDA (excluding losses for the
retirement of long-lived assets and costs for idle workforce) |                                                                        |                                                                                                             | 1,514.8 |                   |         |      | 1,474.8 |         
|                                                                                                             | Intersegmental eliminations                                            |                                                                                                             |         | 0.3               |         |      |         | 2.2      |       
|                                                                                                             | EBITDA mobile communications services segment  prior to consolidation |                                                                                                             |         | (351.4            | )       |      |         | (571.3   | )     
|                                                                                                             |                                                                        |                                                                                                             |         |                   |         |      |         |         
|                                                                                                             |                                                                        | Consolidated EBITDA (excluding losses for the
retirement of long-lived assets and costs for idle workforce) |         |                   | 1,163.7 |      |         |          | 905.7  |  
|                                                                                                             |                                                                        |                                                                                                             |         |                   |         |      |         |         
|                                                                                                             | Depreciation, amortization and impairment charges                      |                                                                                                             |         | (1,058.2          | )       |      |         | (1,049.2 | )     
|                                                                                                             |                                                                        |                                                                                                             |         |                   |         |      |         |         
|                                                                                                             |                                                                        | Consolidated EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce)   |         |                   | 105.5   |      |         |          | (143.5 | )
|                                                                                                             |                                                                        |                                                                                                             |         |                   |         |      |         |         
|                                                                                                             | Depreciation, amortization and impairment charges                      |                                                                                                             |         | 1,058.2           |         |      |         | 1,049.2  |       
|                                                                                                             | Net loss from retirement of long-lived assets                          |                                                                                                             |         | (18.7             | )       |      |         |         |       
|                                                                                                             | Other income net                                                       |                                                                                                             |         | 1.9               |         |      |         | (44.0    | )     
|                                                                                                             | Idle workforce                                                         |                                                                                                             |         | (29.4             | )       |      |         | (52.0    | )     
|                                                                                                             | Net interest                                                           |                                                                                                             |         | (156.5            | )       |      |         | (158.3   | )     
|                                                                                                             | Income from investments                                                |                                                                                                             |         | 141.0             |         |      |         | 197.7    |       
|                                                                                                             | Income taxes                                                           |                                                                                                             |         | (26.1             | )       |      |         | 94.9     |       
|                                                                                                             | Minority interests                                                     |                                                                                                             |         | (4.9              | )       |      |         | 0.5      |       
|                                                                                                             | Employee benefit obligation  non cash                                 |                                                                                                             |         | (49.8             | )       |      |         | 3.1      |       
|                                                                                                             | Allowance for doubtful accounts                                        |                                                                                                             |         | 39.2              |         |      |         | 14.8     |       
|                                                                                                             | Change in deferred taxes                                               |                                                                                                             |         | 33.5              |         |      |         | (95.0    | )     
|                                                                                                             | Dividends from affiliates, less than equity in income                  |                                                                                                             |         | (45.9             | )       |      |         | (80.7    | )     
|                                                                                                             | Loss on sales of investments and disposal of equipment                 |                                                                                                             |         | 17.5              |         |      |         | 38.9     |       
|                                                                                                             | Changes in assets and liabilities, net of effect of business acquired  |                                                                                                             |         | 105.9             |         |      |         | 16.8     |       
|                                                                                                             |                                                                        |                                                                                                             |         |                   |         |      |         |         
|                                                                                                             |                                                                        | Cash generated from operations                                                                              |         |                   | 1,171.4 |      |         |          | 842.4  |  
|                                                                                                             |                                                                        |                                                                                                             |         |                   |         |      |         |         

For a breakdown of the differences between total managed EBITDA and
consolidated EBITDA please refer to the explanation given above.

Whereas consolidated EBITDA (as adjusted) increased by EUR 258.0 million
or 28.5% to EUR 1,163.7 million in 2002, cash generated from operations
increased by EUR 329.0 million or 39.1% to EUR 1,171.4 million. The differences
are presented above.

When doing the reconciliation we first deduct depreciation, amortization,
impairment charges and net loss from retirement of long lived assets thereby
arriving at consolidated EBIT. The same amount is added back thereafter as it
is one of several non-cash adjustments necessary to reconcile EBIT to Cash
generated from operations. All other differences for the reconciliation to cash
generated from operations are applicable for EBIT the same way as they are for
EBITDA.

71



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The following table shows a reconciliation of EBIT to net income (loss)
from operations for the periods indicated.

|                                                                                                           |                                                                          |                                                                                                           |       |                   |       |      |       |        |        |  
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------- | ----- | ----------------- | ----- | ---- | ----- | ------ | ------ | -
|                                                                                                           |                                                                          |                                                                                                           |       | 2002              |       | 2001
|                                                                                                           |                                                                          |                                                                                                           |       |                   |       |     
|                                                                                                           |                                                                          |                                                                                                           |       | (in EUR millions)
|Total managed EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce) |                                                                          |                                                                                                           | 323.5 |                   |       |      | 158.0 |       
|                                                                                                           | Intersegmental eliminations                                              |                                                                                                           |       | 0.2               |       |      |       | 2.0    |       
|                                                                                                           | EBIT mobile communications services segment  prior to consolidation     |                                                                                                           |       | (218.2            | )     |      |       | (303.5 | )     
|                                                                                                           |                                                                          |                                                                                                           |       |                   |       |      |       |       
|                                                                                                           |                                                                          | Consolidated EBIT (excluding losses for the
retirement of long-lived assets and costs for idle workforce) |       |                   | 105.5 |      |       |        | (143.5 | )
|                                                                                                           |                                                                          |                                                                                                           |       |                   |       |      |       |       
|                                                                                                           | Net interest                                                             |                                                                                                           |       | (156.5            | )     |      |       | (158.3 | )     
|                                                                                                           | Idle workforce                                                           |                                                                                                           |       | (29.4             | )     |      |       | (52.0  | )     
|                                                                                                           | Net losses from retirement of long-lived assets                          |                                                                                                           |       | (18.7             | )     |      |       |       |       
|                                                                                                           | Equity in earnings of affiliates  mobilkom austria prior to acquisition |                                                                                                           |       | 142.9             |       |      |       | 197.9  |       
|                                                                                                           | Equity in earnings of affiliates  other                                 |                                                                                                           |       | (2.3              | )     |      |       | (2.5   | )     
|                                                                                                           | Other                                                                    |                                                                                                           |       | 2.3               |       |      |       | (41.6  | )     
|                                                                                                           | Income tax (expense) benefit                                             |                                                                                                           |       | (26.1             | )     |      |       | 94.9   |       
|                                                                                                           | Minority interests                                                       |                                                                                                           |       | (4.9              | )     |      |       | 0.5    |       
|                                                                                                           |                                                                          |                                                                                                           |       |                   |       |      |       |       
|                                                                                                           |                                                                          | Net income (loss)                                                                                         |       |                   | 12.8  |      |       |        | (104.6 | )
|                                                                                                           |                                                                          |                                                                                                           |       |                   |       |      |       |       

72



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SEGMENT RESULTS

Fixed line services

Fixed line services is our largest business segment and includes mainly
the operating activities of Telekom Austria AG and Telekom Austria
Personalmanagement GmbH, including voice telephony on fixed networks, services
for other carriers, equipment sales, certain leased lines and other services.

The Austrian fixed line voice market, measured in terms of minutes,
experienced another slight decrease during 2002 especially in local voice
minutes. The ongoing increase in competition in the fixed line market resulted
in a slight decline of our market share based on minutes, including internet
dial-up minutes, to 55.3% at December 31, 2002 down from 56.2% by year-end
2001. However, the promotion of our second-based TikTak tariff packages which
were introduced in the course of 2001 led to an increase in the number of
TikTak lines to 840,300 at December 31, 2002 compared to approximately 212,000
by year-end 2001.

With the growing use of pre-selection of a carrier and unbundling of the
local loop, we began to face increasing competition on the local network level.
Due to the introduction of our new tariffs, we managed to lessen the average
decline of our market share, but could not manage to stop the decline in
revenues.

On the basis of interconnection rates fixed by the regulatory authorities,
numerous competitors are able to compete with us with minimal or modest
investments in network infrastructure. Our tariff reforms contributed
significantly to reductions in our traffic-related revenues. We succeeded in
partially offsetting the reduction in traffic related revenues by increasing
revenues from monthly rental. In addition, we aim to reinforce our current
market position through a new customer-focused organization. We expect to keep
our market share above 50% in 2003.

Revenues

Revenues from our fixed line services segment are derived primarily from the following sources:



| |  |  | traffic and access related charges for:
| | - |  | ---------------------------------------
|

|
|
|



| |  |  | carrier services including interconnection fees paid by other
carriers to access our fixed line network and related carrier services;  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | fees paid for leased lines;                                                                                                            
|
| |  |  | sales of equipment; and                                                                                                                
|
| |  |  | fees from other services, including value-added services, public
payphone services, call center services, directory services and other.

The following table shows revenues from our fixed line services segment
and percentage changes for the periods indicated.

73



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##### 



|                               |                                     |                                     |  |                   |         |            |  |           |         |  |  |       |       |   
|------------------------------ | ----------------------------------- | ----------------------------------- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ----- | --
|                               |                                     |                                     |  | 2002              |         | 2001       |  | 2002/2001
|                               |                                     |                                     |  |                   |         |            |  |          
|                               |                                     |                                     |  | (in EUR millions) |         | (% change)
|Fixed line operating revenues: |                                     |                                     |  |                   |         |            |  |           |         |  |  |      
|                               | Traffic and access related services |                                     |  | 1,118.5           |         |            |  | 1,234.6   |         |  |  | (9.4  | )%   
|                               | Carrier services(1)                 |                                     |  | 366.4             |         |            |  | 637.0     |         |  |  | (42.5 | )    
|                               | Leased lines                        |                                     |  | 246.1             |         |            |  | 256.6     |         |  |  | (4.1  | )    
|                               | Equipment                           |                                     |  | 94.5              |         |            |  | 97.7      |         |  |  | (3.3  | )    
|                               | Other                               |                                     |  | 231.7             |         |            |  | 230.8     |         |  |  | 0.4   |      
|                               |                                     |                                     |  |                   |         |            |  |           |         |  |  |       |      
|                               |                                     | Total fixed line operating revenues |  |                   | 2,057.2 |            |  |           | 2,456.7 |  |  |       | (16.3 | )%
|                               |                                     |                                     |  |                   |         |            |  |           |         |  |  |       |      



---

|(1) |  | The change of the invoicing system with alternative telecommunications
operators resulted in a reduction of revenues in 2002. If in effect, the
change would have reduced fixed line revenues by EUR 257.2 million in
2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Traffic
and access related services

The following table shows revenues from traffic and access related
services and percentage changes for the periods indicated.

|                                     |                                                                                     |       |  |                   |         |            |  |           |         |  |  |       |       |  
|------------------------------------ | ----------------------------------------------------------------------------------- | ----- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ----- | -
|                                     |                                                                                     |       |  | 2002              |         | 2001       |  | 2002/2001
|                                     |                                                                                     |       |  |                   |         |            |  |          
|                                     |                                                                                     |       |  | (in EUR millions) |         | (% change)
|Traffic and access related services: |                                                                                     |       |  |                   |         |            |  |           |         |  |  |      
|                                     | Traffic revenues                                                                    |       |  | 499.4             |         |            |  | 599.1     |         |  |  | (16.6 | )%   
|                                     | Initial connection and installation fees, monthly
rental and other network services |       |  | 619.1             |         |            |  | 635.5     |         |  |  | (2.6  | )    
|                                     |                                                                                     |       |  |                   |         |            |  |           |         |  |  |       |      
|                                     |                                                                                     | Total |  |                   | 1,118.5 |            |  |           | 1,234.6 |  |  |       | (9.4) | %
|                                     |                                                                                     |       |  |                   |         |            |  |           |         |  |  |       |      

Traffic revenues decreased by 16.6% to EUR 499.4 million in 2002 from EUR
599.1 million in 2001. In 2001 we introduced lower priced pay-per-second
tariff schemes called TikTak tariffs. As of December 31, 2002, 840,300
customers already opted for our TikTak tariffs compared to 212,000 at the end
of 2001, an increase of 296.4%. As a result, our average tariffs fell 8.9%
which accounted for approximately 50% of the decline in sales revenues.

The remaining decline in revenues was attributable to a further drop in
traffic volume in 2002 of 6.9% compared to 2001, as illustrated in the table
below. Strong competition for fixed network services and the possibility of
carrier pre-selection for local calls since January 1, 2001 have put pressure
on our revenues and have caused our market share to decline from 56.2% in 2001
to 55.3% in 2002. In addition, local traffic declined due to a shift from fixed
line traffic to mobile communications traffic. Internet dial-up minutes
declined by 4.4% partially due to migration from internet dial-up to ADSL,
especially from regular users of the internet. ADSL is a technology that
permits the transmission of data at very high speeds using a standard copper
access line. The number of ADSL access lines went up by 73.1% compared to 2001.

The decline in local and internet dial-up traffic was partially offset by
an increase of national long distance traffic, as the following table shows:

|                    |                                                                                       |  |                              |  |            |  |           |        |  |  |  |        |  |  |  |       |   
|------------------- | ------------------------------------------------------------------------------------- |  | ---------------------------- |  | ---------- |  | --------- | ------ |  |  |  | ------ |  |  |  | ----- | --
|                    |                                                                                       |  | Year ended December 31,     
|                    |                                                                                       |  |                             
|                    |                                                                                       |  | 2002                         |  | 2001       |  | 2002/2001
|                    |                                                                                       |  |                              |  |            |  |          
|                    |                                                                                       |  | (in millions of minutes) (1) |  | (% change)
|Fixed line traffic: |                                                                                       |  |                              |  |            |  |           |        |  |  |  |        |  |  |  |      
|                    | Local traffic                                                                         |  |                              |  |            |  |           | 3,765  |  |  |  | 4,335  |  |  |  | (13.1 | )%
|                    | National long distance traffic                                                        |  |                              |  |            |  |           | 842    |  |  |  | 823    |  |  |  | 2.3   |   
|                    | Fixed-to-mobile traffic                                                               |  |                              |  |            |  |           | 826    |  |  |  | 830    |  |  |  | (0.5  | ) 
|                    | International traffic                                                                 |  |                              |  |            |  |           | 472    |  |  |  | 476    |  |  |  | (0.8  | ) 
|                    | Internet dial-up traffic                                                              |  |                              |  |            |  |           | 4,305  |  |  |  | 4,505  |  |  |  | (4.4  | ) 
|                    |                                                                                       |  |                              |  |            |  |           |        |  |  |  |        |  |  |  |       |   
|                    | Total fixed line traffic (excluding value-added
services, emergency calls, payphones) |  |                              |  |            |  |           | 10,210 |  |  |  | 10,969 |  |  |  | (6.9  | )%
|                    |                                                                                       |  |                              |  |            |  |           |        |  |  |  |        |  |  |  |       |   



---

|(1) |  | All amounts exclude interconnection traffic, products offered under flat
fee, and payphone traffic.
|--- |  | ---------------------------------------------------------------------------------------------------

74



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##### 



Revenues from our initial connection and installations fees, monthly
rentals and other network services decreased by 2.6% to EUR 619.1 million in
2002 from EUR 635.5 million in 2001. These revenues are primarily a function of
the number and mix of standard PSTN telephone, ISDN and ADSL access lines and
the corresponding initial connection fees and monthly rental charges. Each of
our traditional telephone lines, called PSTN lines, provides one access
channel. We also offer lines on new networks that provide up to 30 lines and
can be used simultaneously for voice and data transmissions at higher speed
than over normal access lines. These networks are called integrated digital
service networks, or ISDN. There are two kinds of ISDN lines. Basic ISDN lines
provide two access channels each and multi ISDN lines provide 30 access
channels each.

The following table shows the number of our access lines and channels and
percentage changes for the periods indicated. The figures exclude payphones,
but include ADSL, our internal lines and approximately
259,100 lines for qualifying low income persons at December 31, 2002. The
service for low income persons, which we have provided for many years, includes
free monthly rental and one hour of free local traffic per month. We receive a
reimbursement from the federal government for these services.

|                       |                         |                       |  |                         |         |            |  |           |         |  |  |      |      |   
|---------------------- | ----------------------- | --------------------- |  | ----------------------- | ------- | ---------- |  | --------- | ------- |  |  | ---- | ---- | --
|                       |                         |                       |  | Year ended December 31,
|                       |                         |                       |  |                        
|                       |                         |                       |  | 2002                    |         | 2001       |  | 2002/2001
|                       |                         |                       |  |                         |         |            |  |          
|                       |                         |                       |  | (in thousands)          |         | (% change)
|Number of fixed lines: |                         |                       |  |                         |         |            |  |           |         |  |  |     
|                       | PSTN access lines       |                       |  | 2,659.1                 |         |            |  | 2,759.8   |         |  |  | (3.6 | )%  
|                       | Basic ISDN access lines |                       |  | 430.1                   |         |            |  | 398.7     |         |  |  | 7.9  |     
|                       | Multi ISDN access lines |                       |  | 8.1                     |         |            |  | 8.3       |         |  |  | (2.4 | )   
|                       |                         | Total access lines    |  |                         | 3,097.3 |            |  |           | 3,166.9 |  |  |      | (2.2 | ) 
|                       |                         |                       |  |                         |         |            |  |           |         |  |  |     
|                       |                         | of which ADSL         |  |                         | 174.1   |            |  |           | 100.6   |  |  |      | 73.1 |   
|                       |                         | Total access channels |  |                         | 3,762.3 |            |  |           | 3,806.2 |  |  |      | (1.2 | )%

The total number of access lines decreased by 2.2% in 2002, primarily due
to a shift to alternative providers such as cable television operators and to a
lesser extent to the growth in the mobile communications market. The decrease
in the number of PSTN lines was partially offset by a migration of our
customers to our basic ISDN lines. Our ADSL access lines increased by 73.1% in
2002 to 174.1 from 100.6 in 2001. The number of total access channels in the
fixed network declined by approximately 1.2% in 2002 compared to 2001.

The decrease in access lines and channels resulted in a decrease in
initial connection and installations fees, monthly rental and other network
services revenues. The decrease was only partially offset by the migration to
higher priced basic ISDN lines.

Carrier
Services

Our carrier service business area generates revenues by providing network
services to domestic and international carriers. These carrier services consist
of termination, origination (or carrier selection) and transit of national
traffic and international termination in Austria and abroad, international
bandwidth services and internet access.

Revenues from carrier services declined to EUR 366.4 million in 2002 from
EUR 637.0 million in 2001. 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
regulatory been in place during 2001, operating revenues would have been lower
by EUR 257.2 million.

In 2002, after the change in interconnection between alternative service
providers, revenues from carrier service decreased by 3.5% to EUR 366.4 million
from EUR 379.8 million in 2001. This downturn was caused by lower incoming
mobile traffic. Many multinational carriers have set up subsidiaries in Austria
and are therefore in the position to directly route their traffic. In addition,
in September 2002, the regulatory authority decided on new interconnection
rates which were reduced by 4.8% on average.

Leased
lines

Our leased lines business area generates revenues by leasing fixed lines
to customers for their exclusive and dedicated use. Revenues from leased lines
decreased by 4.1% in 2002 to EUR 246.1 million from EUR 256.6 million in 2001.
This decline is attributable to the decrease in our international business area
as a result of strong competition. In addition, within Austria our domestic
competitors were in a position to benefit from lower costs

75



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##### 



pursuant to the
optimization of their networks resulting in lower revenues to us. Furthermore,
the reduction of leased lines rates which took effect since September 1, 2001
also contributed to this negative development. The average price reduction was
3.6% for all leased lines. This decline was, however, partially offset by the
increased demand for higher capacities or bandwidths.

Equipment

We generate revenues from sales of telecommunications equipment including
residential, as well as mobile telephone equipment and systems for business
customers, and by providing related post-sale maintenance and services.
Revenues from equipment sales decreased by 3.3% in 2002 to EUR 94.5 million
from EUR 97.7 million in 2001. This decline was primarily attributable to
reduced sales quantities of equipment as well as declining demand for
maintenance and services. As we de-emphasized sales efforts on lower margin
products,
sales of Private Automatic Branch Exchange (PABX) installations and
telecommunications infrastructure declined by approximately 14% in 2002.

Other revenues

This category primarily includes value-added services, public payphone
services, call center services, directory services and some other services.
Revenues increased slightly by 0.4% to EUR 231.7 million in 2002 from EUR 230.8
million in 2001. This increase resulted from an increase in inquiry service
tariffs that more than compensated declining revenues from public payphones,
which have become less popular due to the increasing use of mobile phones.

Operating
expenses

The following table shows operating expenses of our fixed line services
segment and percentage changes for the periods indicated.

|                               |                                              |                                     |  |                   |         |            |  |           |         |  |  |       |       |   
|------------------------------ | -------------------------------------------- | ----------------------------------- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ----- | --
|                               |                                              |                                     |  | 2002              |         | 2001       |  | 2002/2001
|                               |                                              |                                     |  |                   |         |            |  |          
|                               |                                              |                                     |  | (in EUR millions) |         | (% change)
|Fixed line operating expenses: |                                              |                                     |  |                   |         |            |  |           |         |  |  |      
|                               | Materials                                    |                                     |  | 55.5              |         |            |  | 66.5      |         |  |  | (16.5 | )%   
|                               | Employee costs, including benefits and taxes |                                     |  | 426.2             |         |            |  | 505.5     |         |  |  | (15.7 | )    
|                               | Depreciation and amortization                |                                     |  | 834.5             |         |            |  | 836.0     |         |  |  | (0.2  | )    
|                               | Loss from retirement of long-lived assets    |                                     |  | 5.1               |         |            |  |          |         |  |  | n.a.  |      
|                               | Carrier services                             |                                     |  | 310.5             |         |            |  | 568.1     |         |  |  | (45.3 | )    
|                               | Repairs                                      |                                     |  | 123.8             |         |            |  | 129.7     |         |  |  | (4.5  | )    
|                               | Services received                            |                                     |  | 13.1              |         |            |  | 24.3      |         |  |  | (46.1 | )    
|                               | Other operating expenses                     |                                     |  | 314.9             |         |            |  | 291.6     |         |  |  | 8.0   |      
|                               |                                              |                                     |  |                   |         |            |  |           |         |  |  |       |      
|                               |                                              | Total fixed line operating expenses |  |                   | 2,083.6 |            |  |           | 2,421.7 |  |  |       | (14.0 | )%
|                               |                                              |                                     |  |                   |         |            |  |           |         |  |  |       |      

Materials

Materials consist mainly of expenses for spare parts, cables and supplies
for our network and merchandise we sell to our customers. Materials in the
fixed network business segment decreased by 16.5% in 2002 to EUR 55.5 million
from EUR 66.5 million in 2001. The decrease in material expenses is primarily
due to the declining sales of equipment especially for PABX installations and
lower numbers of initial connections.

Employee costs, including benefits
and taxes

Employee costs including benefits and taxes in our fixed line services
segment decreased by 15.7% in 2002 to EUR 426.2 million from EUR 505.5 million
in 2001. Our personnel expenses in 2000, 2001 and 2002 reflect the accruals for
our voluntary retirement incentive programs described in the following
paragraph.

From 1997 to 2000, we offered voluntary retirement incentive programs
(VRIP) to eligible employees. We made provisions for expenses related to these
programs of EUR 253.2 million in 2000. At December 31, 2000, 2,976 employees
were covered by the social plan provisions reflected in our balance sheet as of
that date. In 2001 there was a release of accruals of EUR 2.4 million. On
January 1, 2002 a new law was enacted that allows civil servants to move from
Telekom Austrias VRIP into government funded early retirement at the age of
55. Because a number of employees either elected early

76



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##### 



retirement as the result of medical disability,
EUR 57.4 million of these provisions were reversed during 2002. Consequently,
our obligation under the VRIP was reduced as pension payments to these former
employees are being covered by the government funded retirement plan. For more
information, see  Critical accounting policies  Voluntary retirement
incentive programs and note 15 to our consolidated financial statements
included elsewhere in this report.

At December 31, 2002, 1,723 employees were covered by our VRIP provisions.
The following table sets forth our provisions for these programs for the
periods indicated.

|                |                              |  |                      |       |  
|--------------- | ---------------------------- |  | -------------------- | ----- | -
|                |                              |  | Voluntary retirement
|                |                              |  | incentive programs  
|                |                              |  |                     
|                |                              |  | (in EUR millions)   
|VRIP provisions |                              |  |                      |      
|                | Balance at December 31, 2000 |  |                      | 358.1 |  
|                | Release of provision         |  |                      | (2.4  | )
|                | Cash payments                |  |                      | (68.5 | )
|                |                              |  |                      |      
|                | Balance at December 31, 2001 |  |                      | 287.3 |  
|                | Release of provision         |  |                      | (57.4 | )
|                | Cash payments                |  |                      | (95.3 | )
|                | Other                        |  |                      | (2.3  | )
|                |                              |  |                      |      
|                | Balance at December 31, 2002 |  |                      | 132.3 |  

We recognize an obligation for voluntary termination benefits when the
eligible employee accepts the offer. The present value of the obligation is
determined based on current compensation levels and the law. An annual increase
of 2.5% for future
years and a discount rate of 4.5% are used. We estimate future new charges
to employee costs and future cash payments based on actuarial assumptions,
including assumptions for the discount rate, rate of compensation increase and
rate of increase of pensions. If our actuarial assumptions and retirements are
incorrect, our actual new charges to employee costs and cash payments may be
different.

Apart from future interest expense related to our early retirement
programs, we expect to incur additional costs due to our retraining programs
and voluntary severance payments, such as golden handshakes, as part of our
headcount reduction plan which is a component of our transformation program.
Total costs for severance payments amounted to EUR 26.0 million and EUR 29.0
million in 2002 and 2001, respectively.

The average number of employees in the fixed line services segment
decreased by 20.6% or 2,143 employees in 2002 as a result of the improved
efficiency due to our transformation program. In 2002, we reduced total group
headcount by 1,620 full time equivalent employees, considering increases in the
mobile communications services segment. In the new wireline segment we expect
to reduce our headcount by approximately 600 in 2003 and approximately 250 in
2004. We expect savings in our employee costs in the mid-term as a result of
the reduction in our personnel. Our estimated savings may vary, however, with
the number of personnel who actually take part in our plans.

For more information about our relationship with employees, see
Directors, Senior Management and Employees  Relationship with employees.

Depreciation and amortization

Depreciation, amortization and impairment charges in our fixed line
services segment decreased by 0.2% to EUR 834.5 million in 2002 from EUR 836.0
million in 2001 as a result of our efforts to cut capital expenditures relating
to our fixed line network.

As part of our transformation program, we are concentrating our offices in
fewer locations. Over time, we expect this to lead to cost savings. However, as
a result of our location consolidation program, we recorded an impairment
charge for buildings totaling EUR 17.4 million in 2001 and EUR 1.0 million in
2002 included in depreciation and amortization, as we will no longer use these
buildings and we are in the process of selling them.

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Loss from retirement of long-lived assets

In accordance with SFAS No. 144, as amended, the net loss from retirement
of long-lived assets is presented in operating income in 2002. In prior years
such losses were included in other, net in the other income section.

Carrier services

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 change been in place during
2001, interconnection fees would have been lower by EUR 257.2 million. Taking
into account this effect, our operating expenses remained rather stable at EUR
310.5 million compared to EUR 310.9 million in 2001.

Repairs

Repairs decreased slightly by 4.5% to EUR 123.8 million in 2002 from EUR
129.7 million in 2001. The decrease was due to lower expenses for maintenance
of communications network equipment and buildings.

Services received

Services received decreased by 46.1% to EUR 13.1 million in 2002 from EUR
24.3 million in 2001. The decrease in services received is primarily a result
of an increasing reliance on internal expertise to develop and maintain network
software, resulting in lower levels of purchased services.

Other operating expenses

Other operating expenses include expenses such as energy, rental,
marketing, consulting, training and advertising expenses. Other operating
expenses in the fixed network business segment increased by 8.0% in 2002 to EUR
314.9 million from EUR 291.6 million in 2001. This was mainly due to increased
marketing, advertising and travel expenses, as well as commission fees that
were only partially off-set by lower rental, consulting and legal fees.

Mobile communications services

The total number of subscribers in the mobile business segment as of
December 31, 2002 grew by 11.9% compared to December 31, 2001. At the end of
2002 we had approximately 4.5 million subscribers in our mobile business
segment. Due to a high penetration rate of 83.1% in the Austrian market at the
end of year 2002, the majority of subscriber growth came from our foreign
subsidiaries which contributed 33% of the subscriber base as of December 31,
2002, up from 28% as of December 31, 2001.

We were still able to increase the total number of our mobile customers in
Austria by 5.3% or approximately 151,500 during 2002. This resulted in an
increase of our market share to 44.4% at December 31, 2002, up from 42.9% at
the end of 2001, despite strong competition and the shut down of our analog
network at the end of February 2002. Due to focused marketing activities, a
high share of these analog customers had already migrated to the digital
network during the preceding months. As a result of our successful retention
programs the GSM churn rate decreased from 23.8% at year-end 2001 to 17.0% at
year-end 2002. The introduction of our new tariffs at the beginning of 2002 and
our hardware replacement program have contributed to the success of our
retention programs. Nevertheless, we expect to lose market share in the future
due to the entry of new service providers and one further operator into the
Austrian market during 2003. A service provider is a competitor who provides
mobile communications services using the infrastructure of an existing
competitor. An operator relies on its own network infrastructure.

During 2002 the number of contract customers of mobilkom austria increased
by 9.4% and the number of prepaid subscribers increased by 1.1%. The growth in
prepaid segment was rather low primarily as a result of the deactivation of
inactive subscribers and deactivation of our analog network. This is a direct
result of our continuing focus to increase the shares of high value contract
subscribers. At December 31, 2002, contract customers account for 52% of the
total customer base of mobilkom austria compared to 50% at December 31, 2001.

mobilkom austrias subsidiary, VIPnet, a digital mobile operator in
Croatia, added approximately 242,100 customers in the year 2002. The
penetration rate in Croatia amounted to 51.9% at the end of 2002, with VIPnet

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holding a total market share of 48.2%. mobilkom austrias subsidiary Si.mobil,
a digital mobile operator in Slovenia added approximately 80,400 customers in
the year 2002. Penetration in Slovenia reached a level of 74.7% at the end of
2002 with Si.mobil holding a total market share of 23.4%.

Revenues

Our mobile communications services segment generates revenues from
operations of our mobile networks. In Austria we disconnected our analog mobile
network in February 2002 and phased out paging services on September 30, 2002.
The revenues mainly include traffic charges, monthly rental charges, equipment
sales and roaming and interconnection fees. Due to the fact that Si.mobil was
acquired at the end of February 2001, only
ten months of Si.mobils financial results were consolidated in the
financial statements of mobilkom austria group in 2001.

We expect revenues from our mobile communications services segment to
continue to grow due to increased revenues from our subsidiaries, primarily
from the potential of market growth in Croatia and Slovenia. In spite of a
slow-down of the overall subscriber growth, we expect to increase the
profitability of the mobile business segment as a result of our focus on
improving the quality of the subscriber base. During 2002, we stopped our
market share losses and were able to increase our market share to 44.4% in 2002
from 42.9% in 2001.

We expect roaming revenues to decline in the long-term due to increasing
pressure on roaming tariffs. Our partnership-agreement with Vodafone should
allow us to attract additional customers and roaming visitors, which would lead
to higher roaming traffic and offset, at least partially, the decline in
roaming revenues.

The following table shows revenues from our mobile communications services
segment and percentage changes for the periods indicated.

|                                               |                  |  |                   |         |            |  |           |       |   |  |      |       |  
|---------------------------------------------- | ---------------- |  | ----------------- | ------- | ---------- |  | --------- | ----- | - |  | ---- | ----- | -
|                                               |                  |  | 2002              |         | 2001       |  | 2002/2001
|                                               |                  |  |                   |         |            |  |          
|                                               |                  |  | (in EUR millions) |         | (% change)
|Mobile communications operating revenues:      |                  |  |                   |         |            |  |           |       |   |  |      |      
|                                               | Traffic revenues |  |                   | 1,000.6 |            |  |           | 853.3 |   |  |      | 17.3  | %
|                                               | Monthly rental   |  |                   | 283.5   |            |  |           | 252.1 |   |  |      | 12.5  |  
|                                               | Interconnection  |  |                   | 275.9   |            |  |           | 274.3 |   |  |      | 0.6   |  
|                                               | Equipment        |  |                   | 175.2   |            |  |           | 181.0 |   |  |      | (3.2  | )
|                                               | Roaming          |  |                   | 155.9   |            |  |           | 147.8 |   |  |      | 5.5   |  
|                                               | Other            |  |                   | 27.7    |            |  |           | 26.9  |   |  |      | 3.0   |  
|                                               | Discounts        |  |                   | (9.4    | )          |  |           | (22.2 | ) |  |      | (57.7 | )
|                                               |                  |  |                   |         |            |  |           |       |   |  |      |       |  
|Total mobile communications operating revenues |                  |  | 1,909.4           |         |            |  | 1,713.2   |       |   |  | 11.5 | %    
|                                               |                  |  |                   |         |            |  |           |       |   |  |      |       |  

Our operating revenues from our mobile communications services segment
increased by 11.5% in 2002 to EUR 1,909.4 million from EUR 1,713.2 million in
2001, with 80% of operating revenues generated in the Austrian market.

Traffic revenues

Traffic revenues depend on the total number of customers, traffic volume,
mix of prepaid and contract customers and tariffs. Traffic revenues increased
by 17.3% in 2002 to EUR 1,000.6 million from EUR 853.3 million in 2001. This
growth was primarily a result of the increase in the subscriber bases which
increased by 28.3% at VIPnet, 29.8% at Si.mobil and 5.3% at mobilkom austria.
In addition to the higher subscriber base, the average usage per subscriber
rose by approximately 5% for the mobile communications segment, resulting in
17.8% higher charged minutes of use in 2002. This was partially offset by a
slight decrease in price due to the highly competitive markets in Austria,
Croatia, Slovenia and Liechtenstein. The following table shows the number of
customers of our mobile communications services segment and percentage changes
for the periods indicated.

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|                                 |               |                 |  |                |         |            |  |           |         |  |  |      |      |  
|-------------------------------- | ------------- | --------------- |  | -------------- | ------- | ---------- |  | --------- | ------- |  |  | ---- | ---- | -
|                                 |               |                 |  | 2002           |         | 2001       |  | 2002/2001
|                                 |               |                 |  |                |         |            |  |          
|                                 |               |                 |  | (in thousands) |         | (% change)
|Mobile communications customers: |               |                 |  |                |         |            |  |           |         |  |  |     
|                                 | Austria       |                 |  | 3,001.4        |         |            |  | 2,849.9   |         |  |  | 5.3  |     
|                                 | Croatia       |                 |  | 1,097.8        |         |            |  | 855.7     |         |  |  | 28.3 |     
|                                 | Slovenia      |                 |  | 350.0          |         |            |  | 269.6     |         |  |  | 29.8 |     
|                                 | Liechtenstein |                 |  | 2.0            |         |            |  | 1.3       |         |  |  | 51.6 |     
|                                 |               |                 |  |                |         |            |  |           |         |  |  |      |     
|                                 |               | Total customers |  |                | 4,451.2 |            |  |           | 3,976.5 |  |  |      | 11.9 | %
|                                 |               |                 |  |                |         |            |  |           |         |  |  |      |     

The growth in our mobile communications customer base is mainly driven by
VIPnet and Si.mobil and partially by mobilkom austria.

Most of the increase in traffic revenues for 2002 compared to 2001 was a
result of an increase in revenues from our contract customers. In Austria the
number of our contract customers increased by 9.4% in 2002. The growth in the
number of contract customers was primarily in response to newly introduced
tariffs. In addition, our mobile tariffs targeted at business customers have
also contributed positively to this development. The rising
number of contract customers resulted in an increase in the average
revenue per user which rose from EUR 34.1 in 2001 to EUR 35.8 in 2002. In
Austria, the data traffic percentages share of airtime revenues increased from
9.7% at year-end 2001 to 10.2% at year-end 2002. The majority of data revenues
is derived from SMS (Short Message Service) and to a lesser extent from GPRS
(General Packet Radio Service). The number of SMS charged to our subscribers
rose by 15.3% from EUR 426.6 million in 2001 to EUR 491.7 million in 2002.

In our international mobile business both prepaid and contract subscribers
showed a significant growth. Specifically, the contract segment performed very
successfully. The share of contract customers increased at VIPnet from 13.9% to
16.0% and at Si.mobil from 36.2% to 44.1% at year end 2002 in comparison to
year-end 2001.

Monthly rental

We generate revenues from monthly rental fees paid by our contract
customers for access to our mobile communications network. Revenues from
monthly rentals increased by 12.5% in 2002 to EUR 283.5 million from EUR 252.1
million in 2001. The rise in revenues from monthly rental is primarily
attributable to the increase in our contract customers base as a result of the
introduction and the acceptance of low monthly rental tariffs in Austria and
due to the growth of our international mobile communications business.

Interconnection

Our mobile communications segment generates interconnection revenues
primarily from interconnection fees from our fixed line segment as well as from
other fixed and mobile operators for calls terminating in our mobile networks.
In addition, we receive revenues from service numbers such as toll free
numbers. Our interconnection revenues increased slightly by 0.6% in 2002 to EUR 275.9 million from EUR 274.3 million in 2001 as a result of a decrease in
Austria, more than offset by an increase internationally. The decrease in
interconnection revenues in Austria was a result of the decision of the
regulatory authority, which lowered mobile-to-mobile rates from EUR 0.1240 to
EUR 0.1125 beginning April 1, 2002. This, however, was more than offset by the
positive development in Croatia and Slovenia which was mainly driven by an
increase in incoming minutes.

Equipment

We generate revenues from customer equipment primarily from sales of
handsets to our customers. Revenues from equipment decreased by 3.2% in 2002 to
EUR 175.2 million from EUR 181.0 million in 2001, primarily due to a decline in
the number of gross customer additions. This effect was partially offset by
increased sales of higher priced handsets with more functionalities like MMS or
GPRS.

Roaming

Roaming fees are generated when our mobile network carries a call made by
a customer of another international mobile operator. Revenues from roaming fees
increased by 5.5% in 2002 to EUR 155.9 million from EUR 147.8 million in 2001.
This growth is primarily attributable to rising roaming revenues in Croatia and
Slovenia mainly as a result of the strong summer tourism. However, it was
partially offset by a 4.0% decline in roaming revenues at mobilkom austria due
to direct links established between competitors.

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Other

This category includes revenues from one-time charges like initial
connection fees and collection services such as fees for transfer payments as
well as fees for call center services, and revenues from real estate. Revenues
increased by 3.0% in 2002 to EUR 27.7 million from EUR 26.9 million in 2001 in
part as a result from higher collection revenues. In addition, the rise in
other revenues was driven by higher revenues from fees for call center services
and increased revenues from site-sharing with other mobile operators. These
increases were partially offset by higher incentives for business customers.

Discounts

Discounts showed a decrease of 57.7% in 2002 to EUR 9.4 million compared to EUR
22.2 million in 2001. These discounts include provisions for customer loyalty
programs at mobilkom austria and VIPnet. mobilkom austria and VIPnet both show
a decreasing trend regarding these discounts. The decrease results from a
revaluation of the value of customer loyalty programs at mobilkom austria,
which reflects a similar decrease in the average value of customer redemptions
over the last twelve months.

Operating expenses

The following table shows operating expenses from our mobile
communications segment and percentage changes for the periods indicated.

|                                               |                                                  |  |                   |       |            |  |           |       |  |  |     |      |  
|---------------------------------------------- | ------------------------------------------------ |  | ----------------- | ----- | ---------- |  | --------- | ----- |  |  | --- | ---- | -
|                                               |                                                  |  | 2002              |       | 2001       |  | 2002/2001
|                                               |                                                  |  |                   |       |            |  |          
|                                               |                                                  |  | (in EUR millions) |       | (% change)
|Mobile communications operating expenses:      |                                                  |  |                   |       |            |  |           |       |  |  |     |     
|                                               | Materials                                        |  |                   | 252.3 |            |  |           | 250.7 |  |  |     | 0.6  | %
|                                               | Employee costs, including benefits and taxes     |  |                   | 158.6 |            |  |           | 134.5 |  |  |     | 17.9 |  
|                                               | Depreciation and amortization                    |  |                   | 268.8 |            |  |           | 267.8 |  |  |     | 0.4  |  
|                                               | Income/loss from retirement of long-lived assets |  |                   | 11.4  |            |  |           |      |  |  |     | n.a. |  
|                                               | Interconnection                                  |  |                   | 192.6 |            |  |           | 169.2 |  |  |     | 13.8 |  
|                                               | Repairs                                          |  |                   | 59.3  |            |  |           | 39.9  |  |  |     | 48.6 |  
|                                               | Services received                                |  |                   | 231.2 |            |  |           | 210.2 |  |  |     | 10.0 |  
|                                               | Other operating expenses                         |  |                   | 354.5 |            |  |           | 337.3 |  |  |     | 5.1  |  
|                                               |                                                  |  |                   |       |            |  |           |       |  |  |     |      |  
|Total mobile communications operating expenses |                                                  |  | 1,528.7           |       |            |  | 1,409.6   |       |  |  | 8.4 | %   
|                                               |                                                  |  |                   |       |            |  |           |       |  |  |     |      |  

Materials

Materials in the mobile communications services segment increased slightly
by 0.6% in 2002 to EUR 252.3 million from EUR 250.7 million in 2001. The higher
costs were caused by the rising demand for high quality products and partially
offset by the decline in the number of gross customer additions. Furthermore
the costs of spare parts for radio communications systems increased.

Employee costs, including benefits and taxes

Employee costs, including benefits and taxes increased by 17.9% in 2002 to
EUR 158.6 million from EUR 134.5 million in 2001 due to headcount growth to
support the higher number of our mobile customers. The headcount increased by
4.5% for the entire mobile segment. In addition, in Austria, we had a general
salary increase for employees of 2.5%, combined with a minimum payment of EUR 43.6 for low level salaries and higher provisions for vacation time not taken.

Depreciation and amortization

Depreciation and amortization expenses increased by 0.4% in 2002 to EUR
268.8 million from EUR 267.8 million in 2001. This increase was due to growing
network-related capital expenditures in the past. In Austria, the main reason
for the increase are capital expenditures to increase capacity and maintain the
quality of mobile transmissions. In Croatia and Slovenia capital expenditures
increased to support the larger customer base in those countries. However,
capital expenditures for property, plant and equipment in the mobile
communications segment have been reduced by 11.4% in 2002 to EUR 321.7 million
from EUR 363.2 million in 2001.

In addition, the acquisition of the 25.001% stake in mobilkom austria led
to an increase in amortizable intangible assets of EUR 121.0 million. Therefore
amortization expense increased by EUR 10.1 million.

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This increase of depreciation and amortization at mobilkom austria group
is almost offset by the application of SFAS No. 142, which no longer permits
amortization of goodwill, but rather requires annual impairment testing. In
2001 we reported amortization of goodwill of EUR 33.8 million.

We expect depreciation and amortization expenses to increase in 2003 and
2004 mainly as a result of the start of operation of a new UMTS network, for
which we acquired licenses in November 2000. Additionally, we will continue to
invest in our network abroad in 2003. For further information regarding our
capital expenditures, see  Liquidity and capital resources  Capital
expenditures.

Net loss from retirement of long-lived assets

In accordance with SFAS No. 144, as amended, the net loss from retirement
of long-lived assets is presented in operating income in 2002. In prior years
such losses were included in other, net in the other income section.

Interconnection

Interconnection fees increased by 13.8% in 2002 to EUR 192.6 million from
EUR 169.2 million in 2001. The growth was in line with the higher
interconnection volume, mostly to other local mobile networks and higher
international traffic. Rising interconnection traffic at VIPnet and Si.mobil
also contributed to this development.

Repairs

Repairs increased by 48.6% in 2002 to EUR 59.3 million from EUR 39.9
million in 2001 primarily due to service agreements for software, maintenance
of data processing equipment and software adaptations mainly at mobilkom
austria and to a lesser extent at VIPnet and Si.mobil.

Services received

Services received increased by 10.0% in 2002 to EUR 231.2 million from EUR
210.2 million in 2001 mainly due to an increase in roaming fees paid to
international mobile operators, leased lines expenses and postage fees.

Other operating expenses

Other operating expenses in the mobile communications business segment
increased by 5.1% in 2002 to EUR 354.5 million from EUR 337.3 million in 2001.
Higher marketing and sales costs at VIPnet and Si.mobil with the goal of
increasing customer base, and increased consulting fees at mobilkom austria
contributed significantly to the increase in operating expenses.

Data communications services

We are the market leader for data communications, notably in the core
services areas of leased lines and switched data networks, as well as the other
areas such as corporate network services and data value-added services.
Although the general weak economic environment impacted negatively the Austrian
data communications market, we stabilized our revenues and increase our market
share by providing a broad portfolio of high quality services and tailored
systems solutions.

We are transforming our data communications services segment into Telekom
Austrias business solution provider. We believe this will secure more
profitable business in the future by expanding the services we offer.

Revenues

The main sources of revenues from our data communications services segment
are fees for leased lines, enhanced data transfer services and corporate
networks products. In 2002, approximately 27% of the revenues were for
corporate network services provided to mobilkom austria for its own use.

Despite the negative business climate, revenues from our data
communications segment stabilized at EUR 330.0 million in 2002. The slight
decrease from EUR 330.2 million was caused by the general stagnation in

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the
data communications market and the later than expected introduction of new
products. The weak data communications market puts pressure on prices and leads
to restrained investment activity by corporate customers. In response to this
trend, sales efforts have been intensified to provide even better service to
top customers and the time to market newly developed products has been
shortened. The general decrease in revenues was partially offset by a strong
increase in revenues from our corporate networks services and our Datacash
product, a solution for cashless payment.

The rise in corporate networks revenues was mainly driven by the
enlargement of our service portfolio and the acquisition of new customers which
resulted in a 60% increase in the subscriber base.

We expect additional revenues from new products and services, including
Application Service Providing (ASP) enabling and strategic partnerships in the
IT solution business.

Operating
expenses

The following table shows operating expenses from our data communications
services segment and percentage changes for the periods indicated.

|                                             |                                              |  |                   |       |            |  |           |       |  |  |     |      |  
|-------------------------------------------- | -------------------------------------------- |  | ----------------- | ----- | ---------- |  | --------- | ----- |  |  | --- | ---- | -
|                                             |                                              |  | 2002              |       | 2001       |  | 2002/2001
|                                             |                                              |  |                   |       |            |  |          
|                                             |                                              |  | (in EUR millions) |       | (% change)
|Data communications operating expenses:      |                                              |  |                   |       |            |  |           |       |  |  |     |     
|                                             | Materials                                    |  |                   | 12.0  |            |  |           | 11.4  |  |  |     | 5.3  | %
|                                             | Employee costs, including benefits and taxes |  |                   | 51.0  |            |  |           | 48.2  |  |  |     | 5.8  |  
|                                             | Depreciation and amortization                |  |                   | 36.0  |            |  |           | 35.3  |  |  |     | 2.0  |  
|                                             | Loss from retirement of long-lived assets    |  |                   | 1.9   |            |  |           |      |  |  |     | n.a. |  
|                                             | Other operating expenses                     |  |                   | 220.5 |            |  |           | 215.9 |  |  |     | 2.1  |  
|                                             |                                              |  |                   |       |            |  |           |       |  |  |     |      |  
|Total data communications operating expenses |                                              |  | 321.4             |       |            |  | 310.8     |       |  |  | 3.4 | %   
|                                             |                                              |  |                   |       |            |  |           |       |  |  |     |      |  

Materials

Materials in the data communications business segment increased by 5.3% to
EUR 12.0 million in 2002 from EUR 11.4 million in 2001. The increase is mainly
the result of a write-down of inventories to market value in the amount of EUR
2 million in 2002.

Employee costs, including benefits and taxes

As a result of the reduction in headcount from 908 to 841, which caused an
increase in severance payments, employee costs increased by 5.8% to EUR 51.0
million in 2002 from EUR 48.2 million in 2001.

Depreciation and amortization

Depreciation and amortization increased slightly by 2.0% in 2002 to EUR
36.0 million from EUR 35.3 million in 2001 as a result of impairment charges of
EUR 1.6 million in 2002 related to data communications facilities.

Net loss from retirement of long-lived assets

In accordance with SFAS No. 144, as amended, the net loss from retirement
of long-lived assets is presented in operating income in 2002. In prior years
such losses were included in other, net in the other income section.

Other operating expenses

Other operating expenses in the data communications business segment
increased by 2.1% in 2002 to EUR 220.5 million from EUR 215.9 million in 2001,
primarily due to bad debt expenses that increased by approximately EUR 10
million compared
to last year. This rise was partly offset by decreased legal and
consulting fees as well as lower expenses for advertising and marketing.

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Internet services

We are the leading internet service provider in Austria with approximately
846,500 residential customers. We had a share of approximately 35% of the
residential internet market in the fourth quarter of 2002. Our Internet
Services segment provides access services to the Internet and runs a portal
business with online media sales, e-commerce and multimedia services.

Revenues

Operating revenues of this segment increased by 20.2% to EUR 119.6 million
in 2002 from EUR 99.5 million in 2001. This growth was in line with the
increase in the subscriber base in Austria by 27.0% from 666,400 at the
beginning of 2002 to 846,500 at the end of 2002 in Austria. ADSL-subscribers,
also included in these figures, increased by 73.1% in the same period. The
increase in revenues did not follow the increase in the subscriber base due to
lower average usage and revenues per user. About 9% of the revenues in 2002
were derived from Czech On Line, an internet service provider in the Czech
Republic, which we acquired in 2000.

Operating expenses

Operating expenses decreased by 25.5% to EUR 186.0 million in 2002 from EUR
249.5 million in 2001. Included in the internet segment are impairment charges
for goodwill originally recorded from the acquisition of COL in the amount of
EUR 40.4 million in 2002 and EUR 120.0 million 2001. The acquisition was based
on a business plan assuming the full liberalization of the Czech market in the
year 2001. As this was first postponed to the year 2002 and the liberalization
of the Czech market still remains unsatisfactory overall with regard to
interconnection and limited wholesale offers to alternative operators, the
business of COL has not developed as originally expected. This resulted in an
impairment charge in 2001 and 2002. The impairment loss was recorded in the
internet segment in 2002. In 2001 the impairment losses of goodwill were
originally classified in intersegmental eliminations and others, but were
reclassified in 2002 to the internet segment for comparability purposes.

Excluding the decrease in impairment charges operating expenses would have
increased by 12.4% to EUR 145.6 million in 2002 from EUR 129.5 million in 2001,
primarily as a result of costs incurred in connection with the expansion of our
internet activities. The costs include network usage costs and marketing and
advertising expenses. Network usage costs increased in line with traffic
volume. The higher marketing and advertising activities resulted in higher
marketing related costs. In addition we launched new portals and e-business
solutions. Depreciation and amortization increased as a result of higher
capital expenditures for server, portal and ISP infrastructure. The higher
costs were partially offset by lower material expenses in 2002 due to fewer
hardware bundles.

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2001 compared to 2000

Overview

The following table shows our operating revenues and percentage changes by
business segment for the periods indicated.

|                                       |  |                                  |         |                   |         |            |         |           |         |  |      |    |      |   
|-------------------------------------- |  | -------------------------------- | ------- | ----------------- | ------- | ---------- | ------- | --------- | ------- |  | ---- | -- | ---- | --
|                                       |  |                                  |         | 2001              |         | 2000       |         | 2001/2000
|                                       |  |                                  |         |                   |         |            |         |          
|                                       |  |                                  |         | (in EUR millions) |         | (% change)
|Operating revenues:                    |  |                                  |         |                   |         |            |         |           |         |  |      |   
|Fixed line services                    |  |                                  | 2,456.7 |                   |         |            | 2,654.8 |           |         |  | (7.5 | )%
|Data communications services           |  |                                  | 330.2   |                   |         |            | 312.8   |           |         |  | 5.6  |   
|Internet services                      |  |                                  | 99.5    |                   |         |            | 61.1    |           |         |  | 62.8 |   
|Intersegmental eliminations and others |  |                                  | (226.7  | )                 |         |            | (214.4  | )         |         |  | 5.7  |   
|                                       |  |                                  |         |                   |         |            |         |           |         |  |      |   
|                                       |  | Consolidated operating revenues  |         |                   | 2,659.7 |            |         |           | 2,814.4 |  |      |    | (5.5 | )%
|                                       |  |                                  |         |                   |         |            |         |           |         |  |      |   
|Mobile communications services         |  |                                  | 1,713.2 |                   |         |            | 1,501.0 |           |         |  | 14.1 |   
|Intersegmental eliminations            |  |                                  | (429.4  | )                 |         |            | (418.3  | )         |         |  | 2.7  |   
|                                       |  |                                  |         |                   |         |            |         |           |         |  |      |   
|                                       |  | Total
managed operating revenues |         |                   | 3,943.5 |            |         |           | 3,897.2 |  |      |    | 1.2  | % 
|                                       |  |                                  |         |                   |         |            |         |           |         |  |      |   

Our consolidated operating revenues decreased by 5.5% to EUR 2,659.7
million in 2001 from EUR 2,814.4 million in 2000 as a result of increased
competition in the fixed line market, the decline of our market share and to a
lesser extent to the migration of customers from fixed line to mobile
communications. The decrease in fixed line services revenues was partially
offset by an increase in operating revenues from our internet and data
communications services segment. Our total managed operating revenues
increased by 1.2% in 2001 to EUR 3,943.5 million from EUR 3,897.2 million in 2000. The
growth in total managed operating revenues was driven primarily by growth in
revenues from our mobile communications segment due to an increase in the
number of mobile customers. Revenue growth in this segment together with growth
from our data communications and internet segment offset the decrease in
revenues from our fixed line business segment.

The item intersegmental eliminations and others among our fixed line,
data communications and internet segments increased by 5.7% in 2001 to EUR
226.7 million from EUR 214.4 million in 2000. The increase was in line with the
growth in revenues in our internet segment. Intersegmental eliminations between
our mobile communications segment and all our other segments increased by 2.7%
to EUR 429.4 million in 2001 from EUR 418.3 million in 2000.

We discuss the development in revenues, together with operating expenses,
in each of our business segments in more detail below.

Beginning in 2001 management has fully implemented U.S. GAAP reporting for
internal purposes and, therefore evaluates performance based on operating
income before depreciation and amortization and idle workforce (EBITDA). The
following table shows our EBITDA for the periods indicated. EBITDA is not
presented as an alternative measure of operating results or cash flow from
operations, as determined in accordance with generally accepted accounting
principles, but because we believe it is a widely accepted indicator of our own
ability to incur and service debt. EBITDA does not give effect to cash used for
debt service requirements and does not reflect funds available for dividends,
reinvestment or other discretionary uses.

85



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##### 



|        |                                        |                                                 |  |                   |         |            |  |           |         |  |  |       |      |  
|------- | -------------------------------------- | ----------------------------------------------- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ---- | -
|        |                                        |                                                 |  | 2001              |         | 2000       |  | 2001/2000
|        |                                        |                                                 |  |                   |         |            |  |          
|        |                                        |                                                 |  | (in EUR millions) |         | (% change)
|EBITDA: |                                        |                                                 |  |                   |         |            |  |           |         |  |  |      
|        | Fixed
line services(1)                 |                                                 |  | 871.0             |         |            |  | 573.5     |         |  |  | 51.9  | %   
|        | Data communications services           |                                                 |  | 54.7              |         |            |  | 57.4      |         |  |  | (4.7  | )   
|        | Internet services                      |                                                 |  | (20.1             | )       |            |  | (5.4      | )       |  |  | 272.2 |     
|        | Intersegmental eliminations and Others |                                                 |  | 0.1               |         |            |  | 0.1       |         |  |  | 0.0   |     
|        |                                        |                                                 |  |                   |         |            |  |           |         |  |  |      
|        |                                        | Consolidated EBITDA (excluding idle workforce)  |  |                   | 905.7   |            |  |           | 625.6   |  |  |       | 44.8 | %
|        |                                        |                                                 |  |                   |         |            |  |           |         |  |  |      
|        | Mobile communications services         |                                                 |  | 571.3             |         |            |  | 436.5     |         |  |  | 30.9  |     
|        | Intersegmental eliminations            |                                                 |  | (2.2              | )       |            |  | (0.7      | )(2)    |  |  | n.a.  |     
|        |                                        |                                                 |  |                   |         |            |  |           |         |  |  |       |      |  
|        |                                        | Total managed EBITDA (excluding idle workforce) |  |                   | 1,474.8 |            |  |           | 1,061.4 |  |  |       | 38.9 | %
|        |                                        |                                                 |  |                   |         |            |  |           |         |  |  |      
|        |                                        |                                                 |  |                   |         |            |  |           |         |  |  |      
|        |                                        | Consolidated
EBITDA (excluding idle workforce)  |  |                   | 905.7   |            |  |           | 625.6   |  |  |       | 44.8 |  
|        | Idle workforce                         |                                                 |  | (52.0             | )       |            |  | (8.9      | )       |  |  | 484.3 |     
|        |                                        |                                                 |  |                   |         |            |  |           |         |  | 
|        | Total
Consolidated EBITDA              |                                                 |  | 853.7             |         |            |  | 616.7     |         |  |  | 38.4  | %   
|        |                                        |                                                 |  |                   |         |            |  |           |         |  |  |       |      |  



---

|(1) |  | Excludes the costs of idle workforce                                          
|--- |  | ------------------------------------------------------------------------------
|   
|(2) |  | Includes an adjustment to intersegmental eliminations and rounding
differences

Our idle employees were removed from our fixed line workforce during our
transformation process. As these idle employees are no longer part of the
segmental workforce, costs related to this personnel are no longer included in
the segmental EBITDA, but are included in our total consolidated EBITDA. Before
2002 costs for idle workforce included direct expenses for civil servants who
had been released or transferred from the workforce and lump sum payments for
civil servants who had agreed to leave with severance packages. In 2002, costs
for employees who were on medical leave and had applied for early retirement as
a result of medical disability are included in the costs for idle workforce.
This change in the definition of idle workforce resulted in the
reclassification of prior-year costs of idle workforce from EUR 49.9 million to
EUR 52.0 million and from EUR 7.6 million to EUR 8.9 million after
reclassification in 2001 and 2000, respectively. Fixed line EBITDA was adjusted
from EUR 869.0 million to EUR 871.0 million and from EUR 572.2 million to EUR
573.5 million in 2001 and 2000, respectively. Fixed line EBIT was adjusted from
EUR 33.0 million to EUR 35.0 million and from EUR (284.5) million to EUR
(283.2) million in 2001 and 2000, respectively.

Our consolidated EBITDA (excluding idle workforce) increased by 44.8% in
2001 to EUR 905.7 million from EUR 625.6 million in 2000. This increase was
mainly due to our transformation process during which we implemented voluntary
retirement incentive programs in 2000. Costs related to these voluntary
retirement incentive programs were EUR 253.2 million in 2000 and primarily
related to our fixed line segment and to a lesser extent our data
communications segment. In 2001, mainly due to an amendment to statutory
provision laws and since about 30 employees retired due to health reasons, we
released accruals for our voluntary retirement incentive programs. These 30
employees are then covered by the governmental retirement plan and we are
released from our obligation. Primarily due to these reasons we recorded a
release of accrual totaling EUR 2.4 million. The EBITDA of our fixed line
services segment increased 51.9% in 2001 to EUR 871.0 million from EUR 573.5
million in 2000. This increase was the result of lower costs of our
transformation program and to a lesser extent to the exclusion of idle
employees from the employee costs of this segment and decreases in operating
expenses. The increase in EBITDA was partially offset by reduced revenues
resulting from our decline in market share and tariff reductions.

The EBITDA of our data communications services segment decreased 4.7% in
2001 to EUR 54.7 million from EUR 57.4 million in 2000. This decrease was due
to lower discounts for the utilization of leased lines charged by the fixed
line services segment and the reduced prices we charged our customers to use
these lines. However the decrease in EBITDA was partially offset by growth in
sales.

The EBITDA of our internet services segment decreased to EUR (20.1)

million in 2001 from EUR (5.4) million in 2000. The internet segment continued
to show negative EBITDA during 2001 as a result of increased marketing and
distribution expenses in connection with the expansion of our internet
activities, although our internet operations in the Czech Republic contributed
with a slightly positive EBITDA.

Our total managed EBITDA (excluding idle workforce) increased by 38.9% in
2001 to EUR 1,474.8 million from EUR 1,061.4 million in 2000, reflecting a
30.9% increase in the EBITDA of our mobile communications

86



---



##### 



services segment. This increase was a result of the rapid growth in the
number of our mobile customers in Croatia and the increase in the percentage of
our contract customers in Austria compared to less profitable prepaid
customers. However, Si.mobil, which we have consolidated for the first time in
2001, contributed negatively to this result in 2001.

We have taken and continue to take measures to reduce our costs and
improve our consolidated and total managed EBITDA. We have carried out a number
of personnel restructuring measures and cost savings plans in the fixed line
segment, including social plans to reduce headcount and are considering other
alternatives in order to decrease our operating expenses in the future. Further
growth in EBITDA will depend on the positive results of our personnel
restructuring measures and cost savings plans.

The following table shows our earnings before interests and taxes, which
we refer to as EBIT, and percentage changes by business segment for the periods
indicated.

|      |                                        |                                               |  |                   |        |            |  |           |        |   |  |       |       |   
|----- | -------------------------------------- | --------------------------------------------- |  | ----------------- | ------ | ---------- |  | --------- | ------ | - |  | ----- | ----- | --
|      |                                        |                                               |  | 2001              |        | 2000       |  | 2001/2000
|      |                                        |                                               |  |                   |        |            |  |          
|      |                                        |                                               |  | (in EUR millions) |        | (% change)
|EBIT: |                                        |                                               |  |                   |        |            |  |           |        |   |  |      
|      | Fixed
line services(1)                 |                                               |  | 35.0              |        |            |  | (283.2    | )      |   |  | n.a.  |      
|      | Data communication services            |                                               |  | 19.4              |        |            |  | 24.4      |        |   |  | (20.5 | )%   
|      | Internet services                      |                                               |  | (30.0             | )      |            |  | (7.3      | )      |   |  | 311.0 |      
|      | Intersegmental eliminations and Others |                                               |  | (167.9            | )      |            |  | (24.3     | )      |   |  | 590.5 |      
|      |                                        |                                               |  |                   |        |            |  |           |        |   |  |      
|      |                                        | Consolidated EBIT (excluding idle workforce)  |  |                   | (143.5 | )          |  |           | (290.3 | ) |  |       | (50.6 | )%
|      |                                        |                                               |  |                   |        |            |  |           |        |   |  |      
|      | Mobile communications services         |                                               |  | 303.5             |        |            |  | 262.1     |        |   |  | 15.8  |      
|      | Intersegmental eliminations            |                                               |  | (2.0              | )      |            |  | (0.8      | )(2)   |   |  | n.a.  |      
|      |                                        |                                               |  |                   |        |            |  |           |        |   |  |      
|      |                                        | Total managed EBIT (excluding idle workforce) |  |                   | 158.0  |            |  |           | (29.0  | ) |  |       | n.a.  |   
|      |                                        |                                               |  |                   |        |            |  |           |        |   |  |      
|      |                                        |                                               |  |                   |        |            |  |           |        |   |  |      
|      |                                        | Consolidated
EBIT (excluding idle workforce)  |  |                   | (143.5 | )          |  |           | (290.3 | ) |  |       | (50.6 | ) 
|      | Idle workforce                         |                                               |  | (51.9             | )      |            |  | (8.9      | )      |   |  | 483.1 |      
|      | Total consolidated EBIT                |                                               |  | (195.4            | )      |            |  | (299.2    | )      |   |  | (34.7 | )%   
|      |                                        |                                               |  |                   |        |            |  |           |        |   |  |      



---

|(1) |  | Excludes the costs of idle workforce                 
|--- |  | -----------------------------------------------------
|   
|(2) |  | Includes an adjustment to intersegmental eliminations

We had a consolidated EBIT (excluding idle workforce) of EUR (143.5)
million in 2001 compared to consolidated EBIT (excluding idle workforce) of EUR
(290.3) million in 2000. We had a total managed EBIT (excluding idle workforce)
of EUR 158.0 million in 2001, compared to EUR (29.0) million in 2000. Our
improved total consolidated EBIT (excluding idle workforce) in 2001 was
primarily due to our transformation programs and reflects the increase in our
total consolidated EBITDA. Intersegmental eliminations and others were EUR
(167.9) million in 2001 and reflect an impairment charge of EUR 120.0 million
and an amortization of EUR 48.5 million for our Czech On Line goodwill. Even
though we managed to reduce market share decline in the fixed line segment, the
decline continued to impact on the EBIT of 2001.

The increase in total managed EBIT (excluding idle workforce) was
partially offset by a 15.8% increase in the EBIT of our mobile communications
segment.

Net loss

We had a net loss of EUR 104.6 million in 2001 compared to a net loss of
EUR 285.6 million in 2000. The net loss of 2000 was affected by the large non
recurring expenses related to our transformation program and the write off of
our investment in Libro. The improvement of our net loss in 2001 was a result
of our reduction in operating expenses, especially in our employee costs and
carrier service expenses, and the positive development of our mobile segment
which led to higher earnings in affiliates. The positive development was
however offset by reduced revenues in the fixed line segment and the negative
effect from the impairment as well as amortization of our goodwill in the
investment in Czech On Line. In addition, our net income in 2001 included an
amount of EUR 51.9 million (up from previously reported
EUR 49.9 million) for idle workforce.

87



---



##### 



Fixed line services

Fixed line services is our largest business segment and includes mainly
the operating activities of Telekom Austria AG and Telekom Austria
Personalmanagement GmbH and partly Jet2Web Network Services GmbH, including
voice telephony on fixed networks, services for other carriers, equipment
sales, certain leased lines and other services.

The Austrian fixed line voice market, measured in terms of minutes,
experienced another slight decrease during 2001 due to migration from fixed
line to mobile calls. The ongoing increase in competition in the fixed line
market resulted in a loss of our market share in each of the local, national long-distance, fixed-to-mobile
and international fixed line markets. In addition, with the increased use of
pre-selection of a carrier and unbundling of the local loop, we began to face
increasing competition on the local network level. Due to the introduction of
our new tariffs, we managed to lessen the average decline of our market share.

Revenues

Revenues from our fixed line services segment are derived primarily from the following sources:



| |  |  | traffic and access related charges for:
| | - |  | ---------------------------------------



| |  |  | local, national long-distance, fixed-to-mobile, international calls and internet dial-up; and
| | - |  | ---------------------------------------------------------------------------------------------
|
| |  |  | initial connection fees, installation fees, monthly rental and other charges;                



| |  |  | carrier services including interconnection fees paid by other
carriers to access our fixed line network and related carrier services;  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | fees paid for leased lines;                                                                                                            
|
| |  |  | sales of equipment; and                                                                                                                
|
| |  |  | fees from other services, including value-added services, public
payphone services, call center services, directory services and other.

The following table shows revenues from our fixed line services segment
and percentage changes for the periods indicated.

|                               |                                     |                                     |  |                   |         |            |  |           |         |  |  |       |      |   
|------------------------------ | ----------------------------------- | ----------------------------------- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ---- | --
|                               |                                     |                                     |  | 2001              |         | 2000       |  | 2001/2000
|                               |                                     |                                     |  |                   |         |            |  |          
|                               |                                     |                                     |  | (in EUR millions) |         | (% change)
|Fixed line operating revenues: |                                     |                                     |  |                   |         |            |  |           |         |  |  |      
|                               | Traffic and access related services |                                     |  | 1,234.6           |         |            |  | 1,461.6   |         |  |  | (15.5 | )%  
|                               | Carrier services                    |                                     |  | 637.0             |         |            |  | 618.8     |         |  |  | 2.9   |     
|                               | Leased lines                        |                                     |  | 256.6             |         |            |  | 227.7     |         |  |  | 12.7  |     
|                               | Equipment                           |                                     |  | 97.7              |         |            |  | 105.7     |         |  |  | (7.5  | )   
|                               | Other                               |                                     |  | 230.8             |         |            |  | 241.1     |         |  |  | (4.3  | )   
|                               |                                     |                                     |  |                   |         |            |  |           |         |  |  |      
|                               |                                     | Total fixed line operating revenues |  |                   | 2,456.7 |            |  |           | 2,654.8 |  |  |       | (7.5 | )%
|                               |                                     |                                     |  |                   |         |            |  |           |         |  |  |      

Total fixed line operating revenues decreased by 7.5% in 2001 compared to
2000. This decrease was almost entirely due to increased competition which
resulted in market share loss. Competition was accompanied by tariff reductions
for traffic related services. The decrease in revenues from traffic and access
related services was partially offset by increased revenues from carrier
services and leased lines.

Traffic and access related services

The following table shows revenues from traffic and access related
services and percentage changes for the periods indicated.

88



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##### 



|                                     |                                                                                      |       |  |                   |         |            |  |           |         |  |  |       |       |   
|------------------------------------ | ------------------------------------------------------------------------------------ | ----- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ----- | --
|                                     |                                                                                      |       |  | 2001              |         | 2000       |  | 2001/2000
|                                     |                                                                                      |       |  |                   |         |            |  |          
|                                     |                                                                                      |       |  | (in EUR millions) |         | (% change)
|Traffic and access related services: |                                                                                      |       |  |                   |         |            |  |           |         |  |  |      
|                                     | Traffic revenues                                                                     |       |  | 599.1             |         |            |  | 806.2     |         |  |  | (25.7 | )%   
|                                     | Initial connection and
installations fees,
monthly rental and other
network services |       |  | 635.5             |         |            |  | 655.4     |         |  |  | (3.0  | )    
|                                     |                                                                                      |       |  |                   |         |            |  |           |         |  |  |      
|                                     |                                                                                      | Total |  |                   | 1,234.6 |            |  |           | 1,461.6 |  |  |       | (15.5 | )%
|                                     |                                                                                      |       |  |                   |         |            |  |           |         |  |  |      

Traffic revenues decreased by 25.7% to EUR 599.1 million in 2001 from EUR
806.2 million in 2000. About 40% of the decrease was due to tariff reductions,
the remainder was due to a decrease in traffic volume and a decline of market
share as a result of the ongoing strong competition for fixed network services
and to a lesser extent to migration of customers from fixed line to mobile
communications in Austria. The possibility of carrier pre-selection for local
calls, first made available in 2001, led to further intensified competition.
The decrease in traffic revenues was partially offset by an increase in
revenues derived from internet dial-up traffic.

In 2000, we lowered our tariffs for national and international calls. The
tariff reductions had primarily an effect on our results in 2001. In addition,
in the first half of 2001, we introduced our second-based tariff schemes,
TikTak tariffs. The average cost saving for a TikTak customer amounts to about 30% for residential and 35%
for business customers. At the end of 2001, the TikTak tariff scheme accounted
for 7% of our traffic volume. Through continued acceptance by customers, it
will continue to impact future periods. We also reduced rates by about 10% for
calls placed to the ConnectOne mobile network, effective March 1, 2001, which
contributed to a lesser extent to the decrease in our traffic revenues.

Total minutes declined by 12.6% in fixed line traffic. The decline was
offset by an increase of traffic volume in dial-up internet minutes, as the
following table shows:

|                   |                                |                                                                                      |  |                          |        |            |  |           |        |  |  |       |       |   
|------------------ | ------------------------------ | ------------------------------------------------------------------------------------ |  | ------------------------ | ------ | ---------- |  | --------- | ------ |  |  | ----- | ----- | --
|                   |                                |                                                                                      |  | Year ended December 31, 
|                   |                                |                                                                                      |  |                         
|                   |                                |                                                                                      |  | 2001                     |        | 2000       |  | 2001/2000
|                   |                                |                                                                                      |  |                          |        |            |  |          
|                   |                                |                                                                                      |  | (in millions of minutes) |        | (% change)
|Fixed line traffic |                                |                                                                                      |  |                          |        |            |  |           |        |  |  |      
|                   | Local traffic                  |                                                                                      |  | 4,335                    |        |            |  | 6,227     |        |  |  | (30.1 | )%   
|                   | National long distance traffic |                                                                                      |  | 823                      |        |            |  | 1,008     |        |  |  | (18.3 | )    
|                   | Fixed-to-mobile traffic        |                                                                                      |  | 830                      |        |            |  | 941       |        |  |  | (11.8 | )    
|                   | International traffic          |                                                                                      |  | 476                      |        |            |  | 507       |        |  |  | (6.1  | )    
|                   | Internet dial-up traffic       |                                                                                      |  | 4,505                    |        |            |  | 3,872     |        |  |  | 16.3  |      
|                   |                                |                                                                                      |  |                          |        |            |  |           |        |  |  |      
|                   |                                | Total fixed line traffic
(excluding value-added
services emergency calls,
payphones) |  |                          | 10,969 |            |  |           | 12,555 |  |  |       | (12.6 | )%
|                   |                                |                                                                                      |  |                          |        |            |  |           |        |  |  |      

Revenues from our initial connection and installations fees, monthly
rental and other network services decreased by 3.0% to EUR 635.5 million in
2001 from EUR 655.4 million in 2000. Revenues from our initial connection and
installations fees, monthly rental and other network services are primarily a
function of the number and mix of standard PSTN telephone, ISDN and partly from
ADSL access lines and the corresponding initial connection fees and monthly
rental charges.

The following table shows the number of our access lines and channels and
percentage changes for the periods indicated. The figures exclude payphones,
but include our internal lines and approximately 255,000 lines for qualifying
low income persons at December 31, 2001. The service for low income persons,
which we have provided for many years, includes free monthly rental and one
hour of free local traffic per month. We receive a reimbursement from the
federal government for these services. Each of our traditional telephone lines,
called PSTN lines, provides one access channel. We also offer lines on new
networks that provide up to 30 lines and can be used simultaneously for voice
and data transmissions at higher speed than over normal access lines. These
networks are called integrated digital service networks, or ISDN. There are two
kinds of ISDN lines. Basic ISDN lines provide two access channels each and
multi ISDN lines provide 30 access channels each. ADSL lines are included in
the figures.

|                       |                         |                       |  |                |         |            |  |           |         |  |  |      |       |   
|---------------------- | ----------------------- | --------------------- |  | -------------- | ------- | ---------- |  | --------- | ------- |  |  | ---- | ----- | --
|                       |                         |                       |  | 2001           |         | 2000       |  | 2001/2000
|                       |                         |                       |  |                |         |            |  |          
|                       |                         |                       |  | (in thousands) |         | (% change)
|Number of fixed lines: |                         |                       |  |                |         |            |  |           |         |  |  |     
|                       | PSTN access lines       |                       |  | 2,759.8        |         |            |  | 2,929.1   |         |  |  | (5.8 | )%   
|                       | Basic ISDN access lines |                       |  | 398.7          |         |            |  | 331.9     |         |  |  | 20.1 |      
|                       | Multi ISDN access lines |                       |  | 8.3            |         |            |  | 8.0       |         |  |  | 3.8  |      
|                       |                         | Total access lines    |  |                | 3,166.9 |            |  |           | 3,269.0 |  |  |      | (3.1  | ) 
|                       |                         |                       |  |                |         |            |  |           |         |  |  |     
|                       |                         | of which ADSL         |  |                | 100.6   |            |  |           | 38.5    |  |  |      | 161.3 |   
|                       |                         |                       |  |                |         |            |  |           |         |  |  |     
|                       |                         | Total access channels |  |                | 3,806.2 |            |  |           | 3,832.9 |  |  |      | (0.7  | )%
|                       |                         |                       |  |                |         |            |  |           |         |  |  |     

89



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##### 



The total number of access lines decreased by 3.1% in 2001, primarily due
to the growth in the mobile communications market and shift to alternative
providers such as cable television operators. The decrease in the number of
PSTN lines was partially offset by a migration of our customers to our basic
ISDN and multi ISDN lines. The number of total access channels in the fixed
network declined by about 0.7% in 2001 compared to 2000.

The decrease in access lines and channels resulted in a decrease in
initial connection and installations fees, monthly rental and other network
services revenues. However, the decrease was partially offset by the migration
to higher priced basic ISDN, multi ISDN lines and to a lesser extent to our new
TikTak packages, which offer lower voice tariffs for a slightly higher monthly
rental.

We are required by law to provide initial connection, or installation
services, for which we receive revenues. The expenses related to these services
exceed revenues, which resulted in a net loss of EUR 0.3 million in 2001 and
EUR 11.0 million in 2000 for these services.

On the basis of interconnection rates fixed by the regulatory authorities,
numerous competitors are able to compete with us with minimal or modest
investments in network infrastructure. We carried out major tariff reforms in
September 1999, June 2000 and throughout 2001 with the introduction of our
second-based tariffs in order to meet the ongoing competitive challenge in this
market. These tariff reforms contributed significantly to reductions in our
traffic-related revenues. We succeeded in partially offsetting the reduction in
traffic related revenues by increasing revenues from monthly rental. However,
we expect revenues from traffic and access related services to decrease in
2002, but we aim to reinforce our current market position through a new
customer-focused structure of our organization. In the first quarter of 2002,
our market share for fixed line services based on voice minutes, including internet dial-up declined by approximately 1.1% to
55.1% at March 31, 2002. We expect to keep our market share above 50% in 2002.

Carrier Services

Our carrier service business area generates revenues by providing network
services to domestic and international carriers. These carrier services consist
of termination, origination (or carrier selection) and transit of national
traffic and international termination in Austria and abroad, international
bandwidth services and internet access.

In 2001, revenues from carrier service increased slightly by 2.9% to EUR
637.0 million from EUR 618.8 million in 2000. Interconnection revenues rose due
to increased activities of our competitors which resulted in a growth in
traffic volume. This increase is primarily due to national calls originating
and terminating on or in transit over our fixed network. The growth in volume
amounted to more than 50%. However, this rising trend was partially offset by
further price reductions mandated by the regulatory authorities. The regulatory
authority issued a decision, effective April 1, 2001, according to which peak
tariffs for access to the local exchange area (regional network level) and the
transit level were reduced. Additionally our competitors are using more local
exchange areas compared to previous years, which are lower priced. The average
revenues per minute therefore fell by about 25%.

In April 2001, alternative operators started to install direct links among
their networks. As a result of these direct links, some calls are no longer
routed through our network. In general, there is an increasing trend towards
installing more direct links both nationally and internationally. The general
rise in interconnection revenues was therefore partly offset by decreasing
revenues especially from international calls.

Included in our revenues from interconnection are fees paid to us by
mobilkom austria which decreased by 1.3% in 2001 to EUR 117 million from EUR
119 million in 2000. An increase in revenues due to the rise in the volume of
mobile to fixed line calls was offset by a reduction of the above mentioned
interconnection fees.

In 2002, we expect a decrease in our interconnection revenues and costs
due to the introduction of direct billing methods by other operators mandated
by a decision of the regulatory authority which takes effect in 2002.
Previously, if a call originated on the network of an operator went in transit
over our network and terminated on the network of another operator, the network
operator where the call terminated billed us for terminating the call. We
billed the operator where the call originated mainly for the amount charged by
the operator where the call terminated.

As a result of the decision, we expect revenues as well as costs to
decline by EUR 100 million in 2002. Furthermore, we believe transit traffic
volume will decline as well as a result of increased direct interconnection
between other operators. This could have an additional effect of reducing our
revenues and costs from

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interconnection. However, we expect the overall effect these developments
will have on our revenues will be offset by reduced costs and will therefore
not affect materially our EBITDA or net income.

Leased lines

Our leased lines business area generates revenues by leasing fixed lines
to customers for their exclusive and dedicated use. Revenues from leased lines
increased by 12.7% in 2001 to EUR 256.6 million from EUR 227.7 million in 2000.
This growth was partially due to increased demand for higher capacities or
bandwidths. In order to keep our market share, leased lines rates were lowered
on September 1, 2001. Price changes primarily affect inner  city areas and
transmission speeds of 2Mbit/s, 34Mbit/s and 155Mbit/s and mean reductions of
up to 43%. The average price reduction was 3.6% for all leased lines. Due to
reductions in discounts with our subsidiary Datakom the fixed line services
segment realized about EUR 26 million additional revenues in 2001.

Equipment

We generate revenues from sales of telecommunications equipment, including
residential and mobile telephone equipment and systems for business customers,
and by providing related post-sale maintenance and services. Revenues from
equipment sales decreased by 7.5% in 2001 to EUR 97.7 million from EUR 105.7
million in 2000. Reduced sales quantities of equipment as well as declining
demand for maintenance and services resulted in a decrease in revenues. The
decline was partly offset by revenues from sales of our equipment for use on
customer premises, such as for private branch exchanges.

Other

This category primarily includes value-added services, public payphone
services, call center services, directory services and some other services.
Revenues decreased 4.3% to EUR 230.8 million in 2001 from EUR 241.1 million in
2000. The decrease was mainly due to reduced revenues from public payphones,
which have become less popular due to the increasing use of mobile phones. The decrease was offset by revenues from directory services.
Directory service revenues increased due to new pricing introduced on September
1, 2000 and impacted all of 2001.

Operating expenses

The following table shows operating expenses of our fixed line services
segment and percentage changes for the periods indicated.

|                               |                                              |                                     |  |                   |         |            |  |           |         |  |  |       |       |   
|------------------------------ | -------------------------------------------- | ----------------------------------- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ----- | --
|                               |                                              |                                     |  | 2001              |         | 2000       |  | 2001/2000
|                               |                                              |                                     |  |                   |         |            |  |          
|                               |                                              |                                     |  | (in EUR millions) |         | (% change)
|Fixed line operating expenses: |                                              |                                     |  |                   |         |            |  |           |         |  |  |      
|                               | Materials                                    |                                     |  | 66.5              |         |            |  | 87.9      |         |  |  | (24.3 | )%   
|                               | Employee costs, including benefits and taxes |                                     |  | 505.5             |         |            |  | 799.1     |         |  |  | (36.7 | )    
|                               | Depreciation and amortization                |                                     |  | 836.0             |         |            |  | 856.7     |         |  |  | (2.4  | )    
|                               | Carrier services                             |                                     |  | 568.1             |         |            |  | 654.3     |         |  |  | (13.2 | )    
|                               | Repairs                                      |                                     |  | 129.7             |         |            |  | 126.0     |         |  |  | 2.9   |      
|                               | Services received                            |                                     |  | 24.3              |         |            |  | 24.0      |         |  |  | 1.4   |      
|                               | Other operating expenses                     |                                     |  | 291.6             |         |            |  | 390.0     |         |  |  | (25.2 | )    
|                               |                                              |                                     |  |                   |         |            |  |           |         |  |  |      
|                               |                                              | Total fixed line operating expenses |  |                   | 2,421.7 |            |  |           | 2,938.0 |  |  |       | (17.6 | )%
|                               |                                              |                                     |  |                   |         |            |  |           |         |  |  |      

Materials

Materials consist mainly of expenses for spare parts, cables and supplies
for our network and merchandise we sell to our customers. Materials in the
fixed network business segment decreased by 24.3% in 2001 to EUR 66.5 million
from EUR 87.9 million in 2000. About half of this decrease was due to reduced
expenses for spare parts, cables and supplies which was supported by the
centralization of the logistic centers. The remainder can be attributed to
lower expenses for merchandise.

Employee costs, including benefits and taxes

Employee costs including benefits and taxes in our fixed line services
segment decreased by 36.8% in 2001 to EUR 505.5 million from EUR 800.4 million
in 2000. Our personnel expenses in 2000 reflect the accruals for our voluntary
retirement incentive programs described in the following paragraph. For the
fixed line segment,

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costs related to the voluntary retirement incentive programs were EUR
248.4 million in 2000 compared to a release of accruals of EUR 2.2 million in
2001. The shift in 2001 was mainly due to an amendment to statutory provisions
late in the year that clarified the components included in the base salaries of
employees who accept voluntary retirement incentive programs that changed the
basis of our assumptions for making accruals for payments under the programs.
As a result, we reversed a portion of the accruals established in 2000. In
addition, a number of employees who had previously accepted voluntary
retirement instead retired for health reasons. The retirement benefits for
these individuals are covered by governmental retirement plans and we are
released from our obligation. As these amounts were lower than estimated last
year by management, this also resulted in a partial release of the accrual. For
more information, see note 15 to our consolidated financial statements included
elsewhere in this report.

From 1997 to 2000, we offered voluntary retirement incentive programs to
eligible employees. We establish provisions for expenses related to these
programs, which are reflected on our balance sheet. At December 31, 2001, 2,527
employees were covered by our social plan provisions. The following table sets
forth our provisions for these programs for the periods indicated.

|                       |                               |  |                      |       |  
|---------------------- | ----------------------------- |  | -------------------- | ----- | -
|                       |                               |  | Voluntary retirement
|                       |                               |  | incentive programs  
|                       |                               |  |                      |      
|                       |                               |  | (in EUR millions)   
|Social plan provisions |                               |  |                      |      
|                       | Balance at December 31, 1998  |  |                      | 132.9 |  
|                       | New charges to employee costs |  |                      | 85.4  |  
|                       | Cash payments                 |  |                      | (51.4 | )
|                       |                               |  |                      |      
|                       | Balance at December 31, 1999  |  |                      | 166.9 |  
|                       | New charges to employee costs |  |                      | 253.2 |  
|                       | Cash payments                 |  |                      | (62.0 | )
|                       |                               |  |                      |      
|                       | Balance at December 31, 2000  |  |                      | 358.1 |  
|                       | New charges to employee costs |  |                      | (2.4  | )
|                       | Cash payments                 |  |                      | (68.5 | )
|                       |                               |  |                      |      
|                       | Balance at December 31, 2001  |  |                      | 287.3 |  

We recognize an obligation for voluntary termination benefits when the
eligible employee accepts the offer. We estimate future new charges to employee
costs and future cash payments based on actuarial assumptions, including
assumptions for the discount rate, rate of compensation increase and rate of
increase of pensions. For future periods, we estimate an annual increase of
compensation and pensions of 2.5% and we use a 4.5% discount rate. We based our
actuarial assumptions on current compensation levels and on the level of wage
increases for civil servants as set by law. If our actuarial assumptions are
incorrect, our actual new charges to employee costs and cash payments may be
different.

Apart from interest expenses related to our early retirement programs, we
expect to incur additional costs due to our retraining programs and voluntary
severance payments such as golden handshakes as part of our headcount reduction
plan which is included in our transformation program. In 2001 the total costs
for severance payments amounted to EUR 29 million and in 2000 to about EUR 8
million. We expect costs for voluntary severance in connection with our
transformation programs of EUR 38 million in 2002 and EUR 23 million in 2003.

In 2001, approximately 95% of the costs for voluntary severance payments
were part of idle workforce related expenses. These expenses include salaries
from idle employees and are excluded from the fixed line segments expenses,
EBITDA or EBIT. Since these costs cannot be controlled by segment heads they
are not allocated to the fixed line segment or any other segment. In 2002,
costs for employees who were on medical leave and had applied for early
retirement as a result of medical disability are included in the costs for idle
workforce. This change in the definition of idle workforce resulted in the
reclassification of prior-year costs of idle workforce from EUR 49.9 million to
EUR 52.0 million and from EUR 7.6 million to EUR 8.9 million after
reclassification in 2001 and 2000, respectively.

The average number of employees in the fixed segment decreased by 15.8% or
2,358 employees in 2001 as a result of the improved efficiency due to our
transformation program. In 2001 we reduced the headcount by 2,746 full time
equivalent employees. In January 2002, we reduced our headcount by an
additional 224 full time equivalent employees. Including these reductions, we
expect to reduce our headcount by about 1,400 in 2002 and about 600 in 2003. We
expect savings in our employee costs in the mid-term as a result of the
reduction in our

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personnel. Our estimated savings may vary, however, with the number of
personnel who actually take part in one of our plans.

For more information about our relationship with employees, see
Directors, Senior Management and Employees  Relationship with employees.

Depreciation and amortization

Depreciation and amortization in our fixed line services segment decreased
by 2.4% to EUR 836.0 million in 2001 from EUR 856.7 million in 2000 as a result
of our efforts to cut capital expenditures relating to our fixed line network.
In 2000, depreciation and amortization expenses reached a high due to the
previous completion of the digitalization of our switched network.

As part of our transformation program, we are concentrating our offices in
fewer locations. Over time, we expect this to lead to cost savings. However, as
a result of our locations concentration program, we recorded a depreciation of
buildings totaling EUR 17.4 million in 2001 as we will no longer use these
buildings and we are in the process of selling them.

Carrier services

Interconnection fees paid by our fixed line segment decreased by 13.2% in
2001 to EUR 568.1 from EUR 654.3 in 2000. The decrease was mainly a result of a
reduction in the outgoing international fixed and mobile traffic and the
corresponding prices. The costs for international outgoing traffic amounted to 25% of the total
costs. Although national terminating traffic increased due to market share
gains by our competitors, the costs remained stable due to lower prices set by
the regulatory authority.

For calls between our fixed line network and mobilkom austrias network,
interconnection fees to mobilkom austria decreased by 4.8% in 2001 to EUR 188.3
million from EUR 197.7 million in 2000, mainly due to tariff changes, set by
the regulatory authorities. Effective from August 1, 2001, fees for calls
terminating on the mobilkom austria network were reduced by about 10% to EUR
0.124 whereas fees for calls terminating on other mobile operators networks
remained unchanged, ranging from EUR 0.139 to EUR 0.196.

Repairs

Repairs increased slightly by 2.9% to EUR 129.7 million in 2001 from EUR
126.0 million in 2000. The increase was due to higher repair and maintenance
charges especially for telecom equipment and data processing equipment.

Other operating expenses

Other operating expenses include expenses such as energy, rental,
marketing, consulting, training and advertising expenses. Other operating
expenses in the fixed network business segment decreased by 25.2% in 2001 to
EUR 291.6 million from EUR 390.0 million in 2000. This was mainly due to lower
consulting and legal fees and to a lesser extent due to decreasing travel,
training, marketing and advertising expenses.

Mobile communications services

The total number of subscribers in the mobile business segment grew by
19.2% until the end of 2001, compared to year-end 2000. At the end of 2001 we
had about 4 million subscribers in our mobile business segment. Due to a high
penetration rate of 82.2% in the Austrian market at the end of the year 2001,
subscriber growth is coming almost exclusively from the international business
which contributed 28% of the subscriber base as of December 31, 2001, up from
16% as of December 31, 2000.

Although the total number of our mobile customers in Austria increased by
1.6% or about 45,600 during 2001, our market share decreased from 44.8% at the
end of 2000 to 42.9% at December 31, 2001. The decrease in market share was due
primarily to strong competition in the mobile communications market in Austria.
We expect to lose market share in the future due to the entering of a fifth
operator in the Austrian market in the second half of 2002 and due to a
deactivation of inactive prepaid subscribers.

During 2001 the number of contract customers of mobilkom austria increased
by 7.7%, whereas the number of prepaid subscribers declined by 3.9% primarily
as a result of the deactivation of inactive subscribers.

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mobilkom austrias subsidiary VIPnet, a digital mobile operator in Croatia
added about 324,400 customers in the year 2001. Penetration rate in Croatia
amounted to 38.9% at the end of 2001, with VIPnet holding the market leadership
with a total market share of 48.7%. mobilkom austrias subsidiary Si.mobil, a
digital mobile operator in Slovenia added about 139,600 customers in the year
2001. Si.mobil was acquired in February 2001, and contributed for the first
time revenues to our mobile segment. Penetration in Slovenia reached a level of
64.9% at the end of 2001 with Si.mobil holding a total market share of 20.8%.

Revenues

Our mobile
communications services segment generates revenues through
mobilkom austria and its subsidiaries from operations of our digital and analog
mobile networks and our paging network. We disconnected our analog mobile
network in February 2002. The revenues mainly include traffic charges, monthly
rental charges, equipment sales and roaming and interconnection fees. We expect
revenues from our mobile communications services segment to continue to grow
due to increased revenues from our subsidiaries, primarily from the potential
of market growth in Croatia and Slovenia. In spite of a slow-down of the
overall subscriber growth, we expect to increase the profitability of the
mobile business segment as a result of our focus on improving the quality of
the subscriber base. During 2001, we managed to slow-down the decline of our
market-share.

The following
table shows revenues from our mobile communications services
segment and percentage changes for the periods indicated.

|                                               |                  |  |                   |       |            |  |           |       |   |  |      |      |  
|---------------------------------------------- | ---------------- |  | ----------------- | ----- | ---------- |  | --------- | ----- | - |  | ---- | ---- | -
|                                               |                  |  | 2001              |       | 2000       |  | 2001/2000
|                                               |                  |  |                   |       |            |  |          
|                                               |                  |  | (in EUR millions) |       | (% change)
|Mobile communications operating revenues:      |                  |  |                   |       |            |  |           |       |   |  |      |     
|                                               | Traffic revenues |  |                   | 853.3 |            |  |           | 721.3 |   |  |      | 18.3 | %
|                                               | Monthly rental   |  |                   | 252.1 |            |  |           | 245.8 |   |  |      | 2.6  |  
|                                               | Interconnection  |  |                   | 274.3 |            |  |           | 234.7 |   |  |      | 16.9 |  
|                                               | Equipment        |  |                   | 181.0 |            |  |           | 187.5 |   |  |      | (3.5 | )
|                                               | Roaming          |  |                   | 147.8 |            |  |           | 113.7 |   |  |      | 30.0 |  
|                                               | Other            |  |                   | 26.9  |            |  |           | 21.3  |   |  |      | 26.1 |  
|                                               | Discounts        |  |                   | (22.2 | )          |  |           | (23.3 | ) |  |      | (4.2 | )
|                                               |                  |  |                   |       |            |  |           |       |   |  |      |     
|Total mobile communications operating revenues |                  |  | 1,713.2           |       |            |  | 1,501.0   |       |   |  | 14.1 | %   
|                                               |                  |  |                   |       |            |  |           |       |   |  |      |     

Our operating revenues from our mobile communications services segment
increased by 14.1% in 2001 to EUR 1,713.2 million from EUR 1,501.0 million in
2000, with 84% generated by the Austrian business.

Traffic revenues

Traffic revenues depend on the total number of customers, traffic volume,
mix of prepaid and contract customers and tariffs. Traffic revenues increased
by 18.3% in 2001 to EUR 853.3 million from EUR 721.3 million in 2000. This
growth was primarily a result of the 61.0% increase in the subscriber base of
VIPnet and the 1.6% increase in the subscriber base of mobilkom austria. The
acquisition of Si.mobil also contributed to the increase in the total
subscriber base. Compared to 2000, prices did not change significantly. The
increase in revenues reflects the growth in the subscriber base. The following
table shows the number of customers of our mobile communications services
segment and percentage changes for the periods indicated.

|                                 |                                       |                 |  |                |         |            |  |           |         |  |  |       |      |  
|-------------------------------- | ------------------------------------- | --------------- |  | -------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ---- | -
|                                 |                                       |                 |  | 2001           |         | 2000       |  | 2001/2000
|                                 |                                       |                 |  |                |         |            |  |          
|                                 |                                       |                 |  | (in thousands) |         | (% change)
|Mobile communications customers: |                                       |                 |  |                |         |            |  |           |         |  |  |      
|                                 | Austrian analog mobile network D    |                 |  | 73.3           |         |            |  | 163.5     |         |  |  | (55.2 | )%  
|                                 | Austrian digital mobile network A1  |                 |  | 2,776.7        |         |            |  | 2,640.8   |         |  |  | 5.1   |     
|                                 | Croatian digital mobile network VIP |                 |  | 855.7          |         |            |  | 531.4     |         |  |  | 61.0  |     
|                                 | Slovenian digital network Si.mobil  |                 |  | 269.6          |         |            |  |          |         |  |  | n.a.  |     
|                                 | Liechtenstein digital network FL1   |                 |  | 1.3            |         |            |  | 0.2       |         |  |  | 550.0 |     
|                                 |                                       |                 |  |                |         |            |  |           |         |  |  |      
|                                 |                                       | Total customers |  |                | 3,976.5 |            |  |           | 3,335.9 |  |  |       | 19.2 | %
|                                 |                                       |                 |  |                |         |            |  |           |         |  |  |      

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The growth in our mobile communications customer base resulted primarily
from the increase in the number of customers for our digital services, mainly
driven by VIPnet and partially by mobilkom austria and Si.mobil. When we
acquired Si.mobil in February 2001, Si.mobil had about 150.000 customers.

Most of the increase in traffic revenues for 2001 compared to 2000 was a
result of an increase in revenues from our contract customers. In Austria the
number of our contract customers increased by 7.7% in 2001. The rise in the
number of contract customers was mainly due to the acceptance of the Start 99
and Xcite 99 tariffs. The number of our prepaid customers decreased by 3.9%,
partly due to the deactivation of inactive prepaid subscribers. Growth in the
number of contract customers resulted in an increase in the average revenue per
customer.

In our international mobile business both prepaid and contract subscribers
showed a significant growth, primarily due to the acquisition of Si.mobil in
February 2001 and due to the strong growth in the number of VIPnet customers.

Monthly rental

We generate revenues from monthly rental fees paid by our contract
customers for access to our mobile communications network. Revenues from
monthly rentals increased by 2.6% in 2001 to EUR 252.1 million from EUR 245.8 million in 2000. Revenues from monthly rental did not increase as much as the
subscriber base grew due to the decline of the average monthly rental fee per
customer as a result of the acceptance of our low monthly rental tariffs such
as Start 99 and Xcite 99.

Interconnection

Interconnection fees are generated when a call originating from a fixed
line or other mobile operator terminates or originates on one of our mobile
networks or if a call to e.g. service numbers  such as toll free  originates
from one of our networks. Our mobile communications segment generates
interconnection revenues primarily from interconnection fees from our fixed
line segment as well as from other fixed and mobile operators for calls
terminating on our mobile networks. Our interconnection revenues increased by
16.9% in 2001 to EUR 274.3 million from EUR 234.7 million in 2000.
Interconnection revenues rose in line with traffic revenues. This increase was
due to a rise in calls from other networks terminating on our mobile networks
and rising traffic volumes in Croatia. The recent decision by the regulatory
authority issued on November 5, 2001, to decrease fixed-to-mobile rates from
EUR 0.125 to EUR 0.1125 beginning April 1, 2002 will have an impact on
interconnection revenues from that date on.

Equipment

We generate revenues from customer equipment primarily from sales of
mobile phones to our customers. Revenues from equipment decreased by 3.5% in
2001 to EUR 181.0 million from EUR 187.5 million in 2000, primarily due to
lower sales in Austria as a result of market saturation.

Roaming

Roaming fees are generated when our mobile network carries a call made by
a customer of another international mobile operator. Revenues from roaming fees
increased by 30.0% in 2001 to EUR 147.8 million from EUR 113.7 million in 2000.
The growth in roaming revenues was not only a result of the tariff-changes in
Austria, but also due to the strong summer tourism in Croatia and Slovenia.
VIPnet increased its revenues by about 18% compared to the prior year and the
first consolidation of Si.mobil contributed roaming revenues of approximately
4%.

Other

This category includes revenues from one-time charges like initial
connection fees and collection services such as fees for transfer payments.
Revenues increased by 26.1% in 2001 to EUR 26.9 million from EUR 21.3 million
in 2000 in part as a result from higher collection revenues and increasing
revenues from sharing of our antennae masts with other mobile operators.

Discounts

Discounts showed a decrease of 4.2% in 2001 to EUR 22.2 million compared
to EUR 23.3 million in 2000. These discounts include provisions for customer
loyalty programs at mobilkom austria, VIPnet and Si.mobil.

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Even though we observed a decreasing trend in Austria, the start of the
loyalty program in VIPnet offset this trend.

Operating expenses

The following table shows operating expenses from our mobile
communications segment and percentage changes for the periods indicated.

|                                          |                                              |                                                |  |                   |         |            |  |           |         |  |  |       |      |  
|----------------------------------------- | -------------------------------------------- | ---------------------------------------------- |  | ----------------- | ------- | ---------- |  | --------- | ------- |  |  | ----- | ---- | -
|                                          |                                              |                                                |  | 2001              |         | 2000       |  | 2001/2000
|                                          |                                              |                                                |  |                   |         |            |  |          
|                                          |                                              |                                                |  | (in EUR millions) |         | (% change)
|Mobile communications operating expenses: |                                              |                                                |  |                   |         |            |  |           |         |  |  |      
|                                          | Materials                                    |                                                |  | 250.7             |         |            |  | 302.9     |         |  |  | (17.2 | )%  
|                                          | Employee costs, including benefits and taxes |                                                |  | 134.5             |         |            |  | 98.1      |         |  |  | 37.1  |     
|                                          | Depreciation and amortization                |                                                |  | 267.8             |         |            |  | 174.4     |         |  |  | 53.5  |     
|                                          | Interconnection                              |                                                |  | 169.2             |         |            |  | 148.4     |         |  |  | 14.0  |     
|                                          | Repairs                                      |                                                |  | 39.9              |         |            |  | 27.6      |         |  |  | 44.6  |     
|                                          | Services received                            |                                                |  | 210.2             |         |            |  | 181.6     |         |  |  | 15.7  |     
|                                          | Other operating expenses                     |                                                |  | 337.3             |         |            |  | 305.8     |         |  |  | 10.3  |     
|                                          |                                              |                                                |  |                   |         |            |  |           |         |  |  |      
|                                          |                                              | Total
mobile communications operating expenses |  |                   | 1,409.6 |            |  |           | 1,238.9 |  |  |       | 13.8 | %
|                                          |                                              |                                                |  |                   |         |            |  |           |         |  |  |      

Materials

Materials in the mobile communications services segment decreased by 17.2%
in 2001 to EUR 250.7 million from EUR 302.9 million in 2000. This decrease fell
in line with a decline in equipment revenues in this business segment over the
same time period considering lower subsidies for handsets in the prepaid
segment compared to the previous year. The overall decrease was partially
offset by an increase of materials in our international business through sales
of prepaid packages and handsets.

Employee costs, including benefits and taxes

Employee costs, including benefits and taxes increased by 37.1% in 2001 to
EUR 134.5 million from EUR 98.1 million in 2000 due to headcount growth to
support the higher number of our mobile customers. The average headcount
increased by 29.0% for the entire mobile segment, including for the first time
Si.mobil with 271 employees. In addition, in Austria, we had a general salary
increase for employees of 2.4%, combined with a minimum payment of EUR 43.6 for
low level salaries and higher provisions for not consumed vacation.

Depreciation and amortization

Depreciation and amortization expenses increased by 53.5% in 2001 to EUR
267.8 million from EUR 174.4 million in 2000. This increase was due to growing
network-related capital expenditure in the past. In Austria, the main reason
for the increase is capital expenditure to improve quality of mobile transmissions. Due to the
disconnection of our analog network on February 28, 2002 an additional
write-off for the analog network equipment was made, which amounted to
EUR 10.7 million in 2001. In Croatia and Slovenia capital expenditure increased to
support the larger customer base in those countries. Depreciation and
amortization expenses also include EUR 30.8 million of goodwill amortization of
Si.mobil.

We expect depreciation and amortization expenses to increase in 2003 and
2004 mainly as a result of the usage of a new UMTS network, for which we
acquired licenses in November 2000. Additionally we will invest more in our
network abroad in 2002 which will bring about higher depreciation and
amortization expenses as a consequence. However, as a result of the new
accounting pronouncements goodwill and intangible assets with indefinite useful
lives are no longer amortized, but instead tested for impairment. For further
information regarding our capital expenditures, see  Liquidity and capital
resources  Capital expenditures.

Interconnection

Interconnection fees increased by 14.0% in 2001 to EUR 169.2 million from
EUR 148.4 million in 2000. The increase was a result of more value-added
services calls and a higher interconnection volume, mostly to other mobile
networks. The increase in interconnection traffic from mobilkom austria was
offset by a reduction of the termination fees mandated by the regulatory
authority and due to our lowering of the price of international traffic. The
increase was also supported by the rise in interconnection traffic in VIPnet
and by taking Si.mobil into account.

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Repairs

Repairs increased by 44.6% in 2001 to EUR 39.9 million from EUR 27.6 million in 2000 primarily due to service agreements for software, maintenance
of data processing equipment and software adaptations mainly at mobilkom
austria and to a lesser extent at VIPnet and Si.mobil.

Services received

Services received increased by 15.7% in 2001 to EUR 210.2 million from EUR
181.6 million in 2000 partly due to an increase in roaming fees paid to
international mobile operators, leased lines expenses and postage fees.

Other operating expenses

Other operating expenses in the mobile communications business segment
increased by 10.3% in 2001 to EUR 337.3 million from EUR 305.8 million in 2000.
This increase was mostly due to marketing costs in order to defend our market
share and, to a lesser extent to an increase in rental expenses.

Data communications services

The market for data communications in Austria has been open to competition
for several years and has experienced strong growth and intense price
competition in that time. We have increased our sales in the data
communications services segment with a broad portfolio of high quality services
and tailored systems solutions. The data communications segment maintains a
dominant position in the Austrian market for data services.

We are transforming our data communications services segment into our
groups solution provider. We believe this will secure more profitable business
in the future by expanding the services we offer.

Our fixed line services segment leases lines to the data communications
services segment. The data communications segment receives cash discounts from
the fixed line segment for the usage of these lines. Due to a change in our
groups cost allocation strategy, these cash discounts were reduced beginning
in 2001. This increased the data communications services segments costs and
reduced its EBITDA by about EUR 26 million in 2001.

Revenues

The main sources of revenues from our data communications services segment
are fees for the leasing of lines, enhanced data transfer services and
corporate networks products. In 2001, about 20% of the revenues were for
corporate network services provided to mobilkom austria for its own use.

Revenues from our data communications segment increased by 5.6% to EUR
330.2 million in 2001 from EUR 312.8 million in 2000. The growth was primarily
due to increased revenues from our corporate networks services and, to a lesser
extent, due to an increase in revenues from our Datacash product, a solution for cashless
payment. The rise in corporate networks revenues was mainly driven by the
enlargement of our service portfolio and the acquisition of new customers which
resulted in a 60% increase in the subscriber base. These increases more than
compensated for generally strong price competition for data services in
Austria.

We expect additional revenues from new products and services, including
Application Service Providing (ASP) enabling and strategic partnerships in the
IT solution business.

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Operating expenses

The following table shows operating expenses from our data communications
services segment and percentage changes for the periods indicated.

|                                        |                                              |                                              |  |                   |       |            |  |           |       |  |  |       |     |  
|--------------------------------------- | -------------------------------------------- | -------------------------------------------- |  | ----------------- | ----- | ---------- |  | --------- | ----- |  |  | ----- | --- | -
|                                        |                                              |                                              |  | 2001              |       | 2000       |  | 2001/2000
|                                        |                                              |                                              |  |                   |       |            |  |          
|                                        |                                              |                                              |  | (in EUR millions) |       | (% change)
|Data communications operating expenses: |                                              |                                              |  |                   |       |            |  |           |       |  |  |      
|                                        | Materials                                    |                                              |  | 11.4              |       |            |  | 15.5      |       |  |  | (26.5 | )% 
|                                        | Employee costs, including benefits and taxes |                                              |  | 48.2              |       |            |  | 52.3      |       |  |  | (7.9  | )  
|                                        | Depreciation and amortization                |                                              |  | 35.3              |       |            |  | 33.0      |       |  |  | 7.0   |    
|                                        | Other operating expenses                     |                                              |  | 215.9             |       |            |  | 187.5     |       |  |  | 15.1  |    
|                                        |                                              |                                              |  |                   |       |            |  |           |       |  |  |      
|                                        |                                              | Total data communications operating expenses |  |                   | 310.8 |            |  |           | 288.4 |  |  |       | 7.8 | %
|                                        |                                              |                                              |  |                   |       |            |  |           |       |  |  |      

Materials

Materials in the data communications business segment decreased by 26.5%
to EUR 11.4 million in 2001 from EUR 15.5 million in 2000. The decrease was
almost entirely due to decreased sales of customer premises equipment and
resulting in lower material usage.

Employee costs, including benefits and taxes

Employee costs decreased by 7.9% to EUR 48.2 million in 2001 from EUR 52.3 million in 2000 as a result of headcount reduction. This decrease was partly
offset by a general salary increase for employees of 2.4% at year end 2000.
Required social security contributions and bonus, welfare and pension payments
rose in line with wages.

Depreciation and amortization

Depreciation and amortization increased slightly by 7.0% in 2001 to EUR
35.3 million from EUR 33.0 million in 2000 as a result of higher capital
expenditure in previous years for routing equipment for corporate networks.

Other operating expenses

Other operating expenses in the data communications business segment
increased by 15.1% in 2001 to EUR 215.9 million from EUR 187.5 million in 2000,
primarily due to increased costs of services received and maintenance. The data
communications segment receives cash discounts from the fixed line segment for
the usage of these lines. Due to a change in our groups cost allocation
strategy, these cash discounts were reduced beginning in 2001. This resulted in
the increase in costs for services received. Though our data communications
segment receives some services from third parties, most of the fees comprising
services received are payable to Telekom Austria and are eliminated upon
consolidation.

Internet

Operating revenues of this segment increased by 62.8% to EUR 99.5 million
in 2001 from EUR 61.1 million in 2000. This increase is due to the increase in
the subscriber base mainly in Austria. The subscriber base in Austria increased
from 293,400 at the beginning of 2001 to 666,400 at the end of 2001.
ADSL-subscribers, also included in these figures, nearly tripled in the same period.
Additionally, we acquired about 70,000 customers from Libros subsidiary,
Lion.cc, an Austrian internet provider and additional 31,000 customers from
other Austrian service providers. The increase in revenues did not follow the
increase in the subscriber base due to lower average revenues per user. About
10% of the revenues in 2001 derived from Czech On Line, an internet service
provider in the Czech Republic, which we acquired in 2000. As the acquisition
was made in mid 2000, last years results only include the period from July to
December.

Operating expenses increased by 89.4% to EUR 129.5 million in 2001 from
EUR 68.4 million in 2000, primarily as a result of costs incurred in connection
with the expansion of our internet activities. The costs include network usage
costs and marketing and advertising expenses. Network usage costs increased in
line with traffic volume. The strong growth of the internet segment was also
supported by higher marketing and advertising activities and resulted in higher
marketing related costs. In addition we launched new portals and e-business
solutions which, in combination with subscriber growth, required us to increase
our headcount to 302 in 2001 from 145 in 2000. Depreciation and amortization
increased as a result of higher capital expenditure for server, portal and ISP
infrastructure.

98



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Other income (expense)

Other income (expense) consists mainly of interest income and expense,
gains and losses from foreign currency exchanges and income and losses from
retirement of assets. Other expenses increased to EUR 199.6 million in 2001
from EUR 198.0 million in 2000, primarily due to the retirement of assets.

Taxation, equity in earnings of affiliates and extraordinary items

Income tax benefit (expense)

Austrian stock corporations are generally subject to corporate income tax
of 34% of their taxable income. Our tax position showed in 2001 a tax benefit
of EUR 94.9 million resulting mainly from a loss incurred. In 2000 the tax
position showed also a tax benefit mainly resulting from the loss in our fixed
line business segment.

In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that all the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities and projected future taxable income in
making this assessment. Based on the level of historical taxable income and
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not we
will realize all the benefits of these deductible differences.

As a consequence of becoming a non-taxable entity, mobilkom austria wrote
off the net deferred tax assets relating to mobilkom austria by charging income
tax expense in 2001. The Companys share of this write-off is recorded by a
charge to income tax expense. This charge has been effectively offset by us now
recording the net deferred tax assets relating to mobilkom austria, resulting
in an equal credit in income tax expense.

Equity in earnings of affiliates

Equity in earnings of affiliates increased in 2001 to EUR 195.5 million
from EUR 36.3 million in 2000. The increase in 2001 relates to an increase in
mobilkom austria groups net income and therefore in an increase in equity in
earnings of affiliates. Additionally the change in tax status of mobilkom
austria resulted in reporting our share in mobilkom austria groups income on a
pretax basis.

In 2000, we wrote off our investment in Libro of EUR 90.5 million. In July 2001, we sold our share in Libro for a symbolic purchase price of one Austrian
schilling.

Extraordinary loss, net of tax

Our extraordinary loss was EUR 3.5 million in 2000 and related to our
contribution of EUR 5.2 million to the Austrian fund set up by the Federal
Republic of Austria to compensate forced laborers between 1938 and 1945.

In 2001, no extraordinary item was reported.

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LIQUIDITY AND CAPITAL RESOURCES

Because we manage the liquidity for all our business segments on a total
group basis and allocate the capital resources of all our business segments, we
discuss our total group liquidity and capital resources. In addition, one of
our consolidated subsidiaries, Telekom Finanzmanagement GmbH, provides treasury
services for us and, until December 29, 2000, for subsidiaries of ÖIAG.

Over the past years, we have principally met our financing needs out of
cash flow from operating activities. In particular, we have met our working
capital needs and most capital expenditure requirements through the use of
internally generated funds.

The following table shows information regarding our consolidated cash
flows for the periods indicated. The figures do not include cash flows
generated in mobilkom austria group prior to consolidation except for dividends
received in the first half of 2002, in 2001 and 2000 of EUR 90.7 million, EUR
199.3 million and EUR 65.9 million, respectively. The figures for 2002 reflect
the consolidation of mobilkom austria group beginning June 28, 2002, and are
therefore not directly comparable with previous years.

|           |                                                          |                                                      |  |                   |     |      |  |        |     |  |  |         |        |  
|---------- | -------------------------------------------------------- | ---------------------------------------------------- |  | ----------------- | --- | ---- |  | ------ | --- |  |  | ------- | ------ | -
|           |                                                          |                                                      |  | 2002              |     | 2001 |  | 2000  
|           |                                                          |                                                      |  |                   |     |      |  |       
|           |                                                          |                                                      |  | (in EUR millions)
|Cash flow: |                                                          |                                                      |  |                   |     |      |  |        |     |  |  |        
|           | Cash generated from operations                           |                                                      |  | 1,171.4           |     |      |  | 842.4  |     |  |  | 1,007.7 |       
|           | Cash used in investing activities                        |                                                      |  | (1,176.0          | )   |      |  | (453.2 | )   |  |  | (893.7  | )     
|           | Cash generated (used) in financing activities            |                                                      |  | 1.8               |     |      |  | (380.7 | )   |  |  | (476.5  | )     
|           | Effect of exchange rate changes                          |                                                      |  | 3.7               |     |      |  | 0.1    |     |  |  | 0.2     |       
|           |                                                          |                                                      |  |                   |     |      |  |        |     |  |  |        
|           |                                                          | Net increase (decrease) in cash and cash
equivalents |  |                   | 0.9 |      |  |        | 8.7 |  |  |         | (362.4 | )
|           |                                                          |                                                      |  |                   |     |      |  |        |     |  |  |        
|           | Cash and cash equivalents at the beginning of
the period |                                                      |  | 26.4              |     |      |  | 17.7   |     |  |  | 380.1   |       
|           | Cash and cash equivalents at the end of the period       |                                                      |  | 27.3              |     |      |  | 26.4   |     |  |  | 17.7    |       

Our primary source of liquidity is cash generated from operations which
increased by EUR 329.0 million to EUR 1,171.4 million in 2002 compared to EUR
842.4 million in 2001. In the second half of 2002 cash generated from
operations of mobilkom austria group in the amount of EUR 360.0 million is
included in the cash generated from operations of Telekom Austria due to the
consolidation of mobilkom austria group beginning June 28, 2002. A reduction of
accounts receivable by EUR 175.5 million in 2002, primarily due to an
asset-backed securitization program implemented on January 16, 2002,
contributed positively to our cash generated from operations. For further
details see off-balance sheet transactions. Accounts payable and accrued
liabilities increased by EUR 14.9 million in 2002 compared to 2001 and led to a
lower outflow of cash. These positive effects were, however, partially offset
by cash payments for voluntary retirement incentive programs and golden
handshakes of EUR 102.6 million. We expect further measures related to the
reduction of headcount to result in additional payments for retirement of
employees as well as payments for re-training. These payments will be made
through 2009 and will reduce our cash generated from operations.

Cash used in investing activities increased by EUR 722.8 million to EUR
1,176.0 million in 2002 from EUR 453.2 million in 2001. The increase in cash
used in investing activities in 2002 is primarily a result of the purchase
price of EUR 693.1 million for the 25.001% stake in mobilkom austria. In
addition, cash used in investing activities of mobilkom austria group in the
amount of EUR 213.3 million for the second half of 2002, comprising mainly
capital expenditures, is included in the cash flow of Telekom Austria. These
effects were, however, partially offset by a further reduction of capital
expenditures of EUR 108.3 million to EUR 340.7 million in 2002 compared to EUR
449.0 million in 2001 in our fixed line, data communications and internet
services segments. For information regarding our capital expenditures, see 
Capital expenditures.

Cash generated from financing activities was EUR 1.8 million in 2002,
compared with cash used in financing activities of EUR 380.7 million and EUR 476.5 million in 2001 and 2000, respectively. In the first half of 2002 we
received cash of EUR 114.9 million from mobilkom austria group, EUR 80.1
million thereof resulting from deposits of mobilkom austria at Telekom
Finanzmanagement GmbH. The remaining EUR 34.9 million result from redemption of
loans granted to mobilkom austria by Telekom Austria. We incurred long-term and
short-term debt of EUR 365.8 million, mainly to finance the purchase price for
the 25.001% stake in mobilkom austria. In addition to the effects described
above we were able to pay back long-term debt of EUR 479.0 million, primarily
in the second half of 2002. To a lesser extent, the shift in financing
activities in the years 2002 and 2001 was due to the absence of dividend
payments, which totaled EUR 140.5 million in 2000.

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As supplementary information we also present the cash flows of mobilkom
austria group that are, as described above, partially included in the cash
flows from our total group due to the consolidation beginning June 28, 2002.

|                                     |                                   |                                                      |  |                   |       |          |  |            |       |      |  |        |      |  |  |        |       |   |  |        |       |  
|------------------------------------ | --------------------------------- | ---------------------------------------------------- |  | ----------------- | ----- | -------- |  | ---------- | ----- | ---- |  | ------ | ---- |  |  | ------ | ----- | - |  | ------ | ----- | -
|                                     |                                   |                                                      |  | Six months ended  |       |          |  |            |       |      |  |        |      |  |  |       
|                                     |                                   |                                                      |  |                   |       |          |  |            |       |      |  |        |      |  |  |       
|                                     |                                   |                                                      |  | December 31,      |       | June 30, |  |            |       |      |  |        |      |  |  |        |       |  
|                                     |                                   |                                                      |  | 2002              |       | 2002     |  | 2002 total |       | 2001 |  | 2000  
|                                     |                                   |                                                      |  |                   |       |          |  |            |       |      |  |       
|                                     |                                   |                                                      |  | (in EUR millions)
|Cash flow of mobilkom austria group: |                                   |                                                      |  |                   |       |          |  |            |       |      |  |        |      |  |  |        |       |   |  |       
|                                     | Cash generated from operations    |                                                      |  | 360.0             |       |          |  | 360.7      |       |      |  | 720.7  |      |  |  | 683.0  |       |   |  | 388.0  |      
|                                     | Cash used in investing activities |                                                      |  | (213.3            | )     |          |  | (152.1     | )     |      |  | (365.4 | )    |  |  | (574.0 | )     |   |  | (529.8 | )    
|                                     | Cash used in financing activities |                                                      |  | (160.5            | )     |          |  | (110.4     | )     |      |  | (270.9 | )    |  |  | (134.8 | )     |   |  | 107.2  |      
|                                     | Effect of exchange rate changes   |                                                      |  | 3.8               |       |          |  | 2.4        |       |      |  | 6.2    |      |  |  | (2.3   | )     |   |  | (0.9   | )    
|                                     |                                   |                                                      |  |                   |       |          |  |            |       |      |  |        |      |  |  |        |       |   |  |       
|                                     |                                   | Net increase (decrease) in cash and cash
equivalents |  |                   | (10.0 | )        |  |            | 100.6 |      |  |        | 90.6 |  |  |        | (28.1 | ) |  |        | (35.5 | )
|                                     |                                   |                                                      |  |                   |       |          |  |            |       |      |  |        |      |  |  |        |       |   |  |       

Mainly as a result of an increase in net income of EUR 181.1 million to
EUR 312.9 million in 2002, cash generated from operations of mobilkom austria
group increased to EUR 720.7 in 2002 compared with EUR 683.0 million in 2001.
The primary drivers of the increase in cash generated from operations were
increased revenues. The reduction of other assets and the increase of accrued
liabilities in 2002 compared to 2001 led to a lower outflow of cash. In
addition, a reduction of accounts receivable, due to an asset-backed
securitization program implemented on January 16, 2002, contributed EUR 10.1
million to cash generated from operations.

In 2002 the total amount of capital expenditures of mobilkom austria group
has been reduced. The high amount of cash used in investing activities in 2001
was primarily due to the extension of the network and to the acquisition of
Si.mobil and in 2000 mainly caused by the purchase of UMTS licenses in Austria.

Cash used in financing activities of mobilkom austria group is mainly
driven by dividends paid. In 2002 mobilkom austria group reported dividends
paid to Telekom Austria of EUR 240.2 million. EUR 149.5 million thereof
correspond to the second half of 2002 and are eliminated as a result of the
consolidation of mobilkom austria group beginning June 28, 2002.

In the first half of 2002 mobilkom austria deposited EUR 80.1 million at
Telekom Finanzmanagement GmbH, a company fully consolidated within Telekom
Austria group. The deposit is reported as cash and cash equivalents in the cash
flow of mobilkom austria group, but is also included in cash generated from
financing activities of Telekom Austria.

Funding sources

Our principal sources of external funding are borrowing directly from the
Austrian and international money and debt markets. As of December 31, 2002, we
had a committed line of credit of EUR 200 million, of which EUR 100 million
were drawn. To enhance our access to liquidity we increased our committed lines
to EUR 650 million in the first quarter of 2003, of which none were drawn at
the end of the first quarter 2003. The purchase price of EUR 693.1 million for
the 25.001% stake in mobilkom austria was initially financed through short-term
money market facilities provided by our banks.

Furthermore we intend to finalize a rating review by international rating
agencies. In order to increase our flexibility and give us access to
international debt capital markets we contemplate the establishment of an Euro
Medium Term Note Program, an instrument that allows for easy and repeated bond
issuance with standard documentation.

In December 2001 we entered into a USD 250 million U.S. cross-border lease
over digital switching equipment. The cash benefit of this transaction totaled
EUR 14.5 million.

In order to diversify our short-term funding sources we implemented an
asset-backed securitization program in January 2002. Under the terms of the
program Telekom Austria and mobilkom austria are entitled to fund up to EUR 290
million. For more information, see  Off-balance sheet transactions.

In March 2001 VIPnet increased its senior debt facility to EUR 170 million, up
from previously EUR 120 million. In December 2002 this senior debt facility was
restructured to improve terms and conditions of the

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financing. VIPnet entered into a syndicated loan of EUR 150.0 million of
which EUR 96.2 million were drawn as of December 31, 2002. The loan was used
for the refinancing of the loans to VIPnet and becomes due between 2003 and
2008. It incurred interest of three month EURIBOR plus margin, depending on
operating performance and indebtedness and 0.375% commitment fees.

As it is common with telecommunications companies, we typically carry
current liabilities in excess of current assets. Total current liabilities
exceeded total current assets by EUR 1,665.7 million in 2002 compared to EUR
840.9 million in 2001 primarily due to short-term financing activities,
including repayment of debt.

As of December 31, 2002, we had EUR 3,281.8 million in outstanding debt.
Our debt incurred prior to May 1996 is guaranteed by the Federal Republic of
Austria. Debt incurred thereafter is not guaranteed by the Federal Republic of
Austria. At December 31, 2002, EUR 1,751.3 million of our EUR 2,538.9 million
total long-term debt was covered by such guarantees. In 2002, in line with the general downward trend of interest rates our
borrowing cost decreased slightly. We believe that our cash flow from
operations, together with the liquidity available to us on the capital markets,
will be sufficient to cover our capital expenditure needs in the future. We
expect to finance our planned investments and headcount reduction costs from
cash flow from operations and through third party indebtedness.

As an additional source of liquidity, we are currently evaluating the
possibility of disposing of portions of our real estate.

Capital expenditures

The following table shows the investments in property, plant and
equipment, excluding interest capitalized, on a total group basis by segment
for the periods indicated.

|                      |                                |                            |  |                   |       |      |  |       |       |  |  |       |       | 
|--------------------- | ------------------------------ | -------------------------- |  | ----------------- | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                      |                                |                            |  | 2002              |       | 2001 |  | 2000 
|                      |                                |                            |  |                   |       |      |  |      
|                      |                                |                            |  | (in EUR millions)
|Capital expenditures: |                                |                            |  |                   |       |      |  |       |       |  |  |      
|                      | Fixed line services            |                            |  | 307.5             |       |      |  | 397.5 |       |  |  | 545.5 |      
|                      | Data communications services   |                            |  | 19.9              |       |      |  | 31.5  |       |  |  | 34.6  |      
|                      | Internet Services              |                            |  | 13.3              |       |      |  | 20.0  |       |  |  | 14.6  |      
|                      | Mobile communications services |                            |  | 321.7             |       |      |  | 363.2 |       |  |  | 323.1 |      
|                      |                                |                            |  |                   |       |      |  |       |       |  |  |      
|                      |                                | Total capital expenditures |  |                   | 662.4 |      |  |       | 812.2 |  |  |       | 917.7 | 
|                      |                                |                            |  |                   |       |      |  |       |       |  |  |      

Our total investments in property, plant and equipment decreased by 18.4%
in 2002 to EUR 662.4 million from EUR 812.2 million in 2001 after having
decreased by 11.5% in 2001 from EUR 917.7 million in 2000. In the business
segments fixed line, data communications and internet we reduced our capital
expenditures by a combined 24.1% to EUR 340.7 million in 2002 compared to EUR
449.0 million in 2001. The decrease was mainly driven by the fixed line
segment, with reduced levels of spending on access voice telephony equipment
and operating systems. We focused our fixed line investment activity on
broadband technology (ADSL) and demand-related capacity adjustments in the main
communications networks. The network for data communications was extended to
provide leased line and packet switched services.

Capital expenditures in our mobile communications services segment fell by
11.4% to EUR 321.7 million in 2002 compared to EUR 363.2 million in 2001 but
still account for 49% of fixed asset additions in 2002. Spending was triggered
by further expansion of capacity in Austria and growth in Slovenia and Croatia.
By the end of 2002 we spent a total of EUR 70 million on infrastructure and
network planning. We expect that the costs of the build out will amount up to
EUR 640 million in total by the end of 2010.

We anticipate our capital expenditures in property, plant and equipment
and intangible assets to be EUR 660 million in the financial year 2003.

We believe that investments for property, plant and equipment for the
financial years 2003 and 2004 will principally be used to:



| |  |  | develop a UMTS infrastructure and assure sufficient capacity for mobile networks;
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | extend the broadband access and broadband backbone network infrastructure;       

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| |  |  | establish the multi-service-data-network; and   
| | - |  | ------------------------------------------------
|
| |  |  | improve our information technology capabilities.

Net debt

The following table shows the development of net debt. Lower capital
expenditures led to a further reduction of net debt to EUR 3,204.2 million in
2002.

|                                |  |                   |         |      |  |      |         |  |  |  |         | 
|------------------------------- |  | ----------------- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                                |  | 2002              |         | 2001 |  | 2000
|                                |  |                   |         |      |  |     
|                                |  | (in EUR millions)
|Net debt of Telekom Austria (1) |  |                   | 3,204.2 |      |  |      | 3,282.1 |  |  |  | 3,420.3 | 



---

|(1) |  | Net debt includes long-term debt, capital lease obligations and
short-term debt net of current portion of lease obligations reduced by
cash and cash equivalents, short-term investments as well as financial
instruments, included in other assets in the amount of EUR 38.7 million as
of December 31, 2002. Net debt is shown without cross-border lease
obligations as these are covered by other assets.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We were able to slightly reduce our total net debt to EUR 3,204.2 million
as of December 31, 2002 from EUR 3,282.1 million in 2001. This positive
development was achieved in spite of the incurrence of short-term debt to
finance the purchase price of EUR 693.1 million for the 25.001% stake in
mobilkom austria. Without these liabilities, net debt would have fallen to EUR
2,511.1 million at year-end 2002.

The development of net debt includes the impact of the sale of receivables
to a Qualifying Special Purpose Entity which is not related to Telekom Austria.
In 2002 cash inflows from the QSPE totaled EUR 268.4 million. For more
information, see  Off-balance sheet transactions.

Contractual obligations and commercial commitments

The following table shows our contractual obligations.

|                         |                           |                   |  |                   |         |        |  |           |       |           |  |               |         |  |  |       |         |  |  |         |         | 
|------------------------ | ------------------------- | ----------------- |  | ----------------- | ------- | ------ |  | --------- | ----- | --------- |  | ------------- | ------- |  |  | ----- | ------- |  |  | ------- | ------- | 
|                         |                           |                   |  |                   |         |        |  | Less than |       |           |  |               |         |  |  |       |         |  |  |        
|                         |                           |                   |  | Total             |         | 1 year |  | 1-3 years |       | 4-5 years |  | After 5 years
|                         |                           |                   |  |                   |         |        |  |           |       |           |  |              
|                         |                           |                   |  | (in EUR millions)
|Contractual Obligations: |                           |                   |  |                   |         |        |  |           |       |           |  |               |         |  |  |       |         |  |  |        
|                         | Long-term debt            |                   |  | 2,538.9           |         |        |  | 459.0     |       |           |  | 1,020.4       |         |  |  | 694.0 |         |  |  | 365.5   |        
|                         | Capital lease obligations |                   |  | 7.6               |         |        |  | 5.3       |       |           |  | 2.3           |         |  |  |       |         |  |  |         |        
|                         | Operating lease           |                   |  | 307.9             |         |        |  | 69.1      |       |           |  | 120.2         |         |  |  | 105.8 |         |  |  | 12.8    |        
|                         | Cross border lease        |                   |  | 1,688.3           |         |        |  | 102.7     |       |           |  | 235.2         |         |  |  | 301.0 |         |  |  | 1,049.4 |        
|                         |                           |                   |  |                   |         |        |  |           |       |           |  |               |         |  |  |       |         |  |  |        
|                         |                           | Total obligations |  |                   | 4,542.7 |        |  |           | 636.1 |           |  |               | 1,378.1 |  |  |       | 1,100.8 |  |  |         | 1,427.7 | 
|                         |                           |                   |  |                   |         |        |  |           |       |           |  |               |         |  |  |       |         |  |  |        

At December 31, 2002, we have a carrying value of EUR 7.3 million in
assets related to our right to use telephone lines owned by Global Crossing.
Though Global Crossing is under bankruptcy protection, we continue to utilize
the leased lines with uninterrupted service. Therefore we are unable to
ascertain if there will be any impairment associated with these assets.

Off-balance sheet transactions

On January 16, 2002, in order to diversify our short-term funding sources, we
entered into a revolving period securitization program. Under the program we
sell receivables to a qualifying special purpose entity (QSPE) incorporated in
Dublin, Ireland, which is neither affiliated with us nor under our control. We
retain servicing responsibilities relating to the sold receivables. Solely for the
purpose of credit enhancement from the perspective of the QSPE, we retain
interest in the sold receivables in the amount of EUR 7.9 million as of
December 31, 2002. These retained interests are initially measured at estimated
fair values, which we believe

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approximate historical carrying values, and are subsequently measured based on
a periodic evaluation of collections and delinquencies.

Telekom Austria may sell freely to the QSPE receivables up to an amount of
EUR 250 million. Although mobilkom austria has an EUR 80 million contract with
a different trust the total amount is limited to EUR 290 million for Telekom
Austria and mobilkom austria together. The QSPE has the right to terminate the
facility in the event that the default ratio of our receivables and of mobilkom
austrias receivables exceeds a certain percentage. During the year ended
December 31, 2002 net cash received from QSPE totaled EUR 187 million.

Research and development

We believe that research and development (R&D) is important to our
continuing success and to retain technological innovation leadership. We hold a
variety of patents and licenses. No single patent or license is material to our
business.

We seek to stay ahead in promising areas of new research and scientific
advances without extensively investing in research. Our research and
development activities are based primarily on application-oriented research,
new technologies and services. We concentrate largely on our customers present
and foreseeable medium-term needs, which is why monitoring technological
development trends constitutes an important part of our activities.

The
establishment of two operating segments, wireline and wireless, as
part of the reorganization of Telekom Austria will lead to the targeted bundling of forces. Through
enhanced coordination of the activities based on an integrated research and
development strategy, initiatives in R&D will be optimized.

To assure technological leadership in the future, Telekom Austria
considers the further study of changing user patterns as an integrated
component of its innovation management. Within the past years there was a
considerable shift in R&D to consumer-oriented topics. The social and cultural
area has changed considerably through new technologies and vice versa. Thus we
opened our studies in topics of cultural, media & communications. As a result
of the development of the internet from an information-source to an interactive
multimedia-platform, audio and video content is expected to be delivered on
mouse click. Telekom Austria looked into the challenges of broadband portals
in terms of customer acceptance, service bundling and content delivery network
infrastructure.

In 2002, Partnerships of Excellence with well established industrial
partners, research institutes and universities allowed a clearer focus on
product-driven research and shorter time-to-market cycles.

We focus our research activities on trend-setting technologies
particularly in the field of broadband communications, transmission
technologies, service platforms, all optical core technology, network security
and support systems within our fixed line and mobile telecommunications
networks. We consider these research areas indispensable for the creation of
new services and for the build-up of efficient and reliable multi-service
network structures. Related issues are being dealt with through participation
in national and international initiatives (Research Center for
Telecommunications, Vienna; European Institute for Research and Strategic
Studies in Telecommunications  EURESCOM). Our focus in mobile communications
is application-oriented. Numerous of our research activities in cooperation
with industry, research institutes and universities have dealt with mobile data
applications, integration of advanced service platforms based on 3GPP(3rd
Generation Partnership Project)s Open Service Architecture, multi-modal speech
applications and concepts for prototyping new services. Within these
co-operations we have developed a Location Based Tourist Guide (LoL@). In
addition we developed and filed a patent for a Service Interaction Gateway.
Together with the Technical University of Vienna we are working on several
topics including 3G (3rd Generation) network planning, optimization and
security aspects in the mobile environment.

We are also participating in European Union-funded projects, with the
objective to show how multiple wireless standards and services they offer can
be converged in a flexible manner within one mobile consumer terminal. The
result of these activities and the progress of research activities was shown
with the technical launch of Europes first national UMTS network on September
25th, 2002. In cooperation with our partners we demonstrated a live network
with mobile multi media services, live Video Calls, video streaming with
real-time top information in UMTS-compatible form and Live traffic cams.

Our consolidated research and development expenses amounted to EUR 30.3
million, EUR 21.8 million and EUR 28.2 million for the years ended December 31,
2002, 2001 and 2000, respectively. Additionally mobilkom

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austria incurred research and development expenses of EUR 5.1
million in the first half year of 2002, adding to a total of EUR 35.4 million
for Telekom Austria and mobilkom austria for the entire year of 2002.

Foreign exchange rate risk

With effect from January 1, 1999, the Euro was adopted by Austria and
eleven other members of the European Union as their common legal currency. On
the same day, these member states, including Austria, established fixed
conversion rates between their existing sovereign currencies and the Euro. The
conversion rate fixed between the Austrian Schilling and the Euro since January
1, 1999 has been EUR 1.00 = 13.7603 Austrian Schilling. On March 1, 2002, the
Euro became the sole legal tender for Austria and the Austrian Schilling was
withdrawn from circulation.

We raise funds in the domestic and international money and debt markets.
We hedged a high proportion of foreign exchange rate risks on our debt
portfolio to Austrian Schilling/Euro using currency swap contracts.

We conduct our business primarily in Austria and, therefore, our operating
and investing cash flows were substantially denominated in Austrian Schilling
and since beginning 2002 are denominated in Euro. We are exposed to foreign
exchange risks related to debt, payables and anticipated foreign exchange
payments denominated in currencies other than those of Euro-participant
countries. Anticipated foreign exchange payments relate primarily to expense
payments, principally to international third party telecommunications carriers
and capital expenditures. We evaluate the volume and value of these
transactions on an
ongoing basis to identify the level of foreign exchange rate risk
associated with these transactions. Most of our debt, payables and expenses are
denominated in Euro.

For a detailed discussion of our foreign exchange rate risk, see
Quantitative and Qualitative Disclosure About Market Risk  Currency risk.

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Item 6. Directors, Senior Management and Employees

As a consequence of the purchase by Telekom Austria of Telecom Italia
Mobile International N.Vs indirect stake in mobilkom austria, Mr. Boris
Nemsic, the Chief Executive Officer of mobilkom austria, has joined the
Management Board of Telekom Austria. On November 8, 2002, after the sale of 75
million shares of Telekom Austria by Telecom Italia International, two Telecom
Italia representatives of the Supervisory Board resigned.

Management Board members

The current members of our Management Board are:

|                |  |     |    |                     |  |                                   |  |                                                |  |                                             |  | 
|--------------- |  | --- | -- | ------------------- |  | --------------------------------- |  | ---------------------------------------------- |  | ------------------------------------------- |  | 
|Name            |  | Age |    | Term of appointment |  | Area of responsibility           
|                |  |     |    |                     |  |                                  
|Heinz Sundt     |  |     | 55 |                     |  | April 11, 2000 - April 11, 2005   |  | Chairman of the Board, Chief Executive Officer
|Stefano Colombo |  |     | 42 |                     |  | April 11, 2000 - April 11, 2005   |  | Vice Chairman, Chief Financial Officer        
|Rudolf Fischer  |  |     | 49 |                     |  | November 1, 1998 - April 11, 2005 |  | Chief Operating Officer Wireline              
|Boris Nemsic    |  |     | 45 |                     |  | July 1, 2002 - April 11, 2005     |  | Chief Operating Officer Wireless,             
|                |  |     |    |                     |  |                                   |  |                                                |  | Chief Executive Officer of mobilkom austria

Heinz Sundtwas born in 1947 and attended the School of International
Trade in Vienna (Hochschule für Welthandel). He started his career at the
Länderbank in 1967. From 1969 through 1986, he held several management
positions in the marketing and sales departments at IBM Austria and from 1986
through 1989 was the head of the Telecom and Network Divisions. In 1989, Mr.
Sundt became head of marketing and sales at Neupack GmbH, a subsidiary of Mayr
Melnhof. In January 1996, Mr. Sundt became the head of mobilkom austria and led
the development of the mobile communications division within Telekom Austria.
Mr. Sundt became Chief Executive Officer (CEO) and Chairman of the Management
Board of Telekom Austria in April 2000.

Stefano Colombowas born in 1961 and graduated from the Luigi Bocconi
University in Milan. He began his career in the corporate finance department of
Mediobanca. In 1990, he became the assistant to the Chief Financial Officer of
Enimont. In 1994, he became the Chief Financial Officer of Olivetti Telemedia.
From 1996 to 1999 he was the head of Carrera Optyl in Linz, Austria, a
sub-division of the Italian eyeglass producer Safilo. He became the Chief
Financial Officer of the eyeglass company Marcolin, the producer of Dolce &
Gabbana and Chloe eyeglasses, in 1999, and coordinated Marcolins initial
public offering. Mr. Colombo became Chief Financial Officer and Vice-Chairman
of the Management Board of Telekom Austria in April 2000.

Rudolf Fischerwas born in 1953. After completing his studies at the
Vienna University of Economics and Business Administration, Mr. Fischer began
his career in 1974 in the technical department of ITT Austria. In 1983, he
became the head of Accounting and Taxes at Alcatel Austria and in 1988 he also
became the head of Controlling. From 1989 through 1993, Mr. Fischer was head of
AOSA, a joint venture between Siemens and Alcatel, and was involved in the
expansion of the Austrian telecommunications infrastructure. In 1994, he became
the Chairman of the board at United Telecom Investment B.V., where he headed
the largest local network operator in Hungary. In 1996, he was appointed
President of the association of local telecommunications operators. Mr. Fischer
has been Chief Technical Officer and a member of the Management Board at
Telekom Austria since November 1998 and Chief Operating Officer Wireline since
November 2001.

Boris Nemsicwas born in 1957 in Sarajevo. In 1980 he graduated from the
Technical University of Sarajevo and in 1990 obtained his PhD from the
Technical University of Vienna. He began his professional career in 1980 in
radio broadcasting and started working in 1983 at Sarajevo Technical
University. From 1988 to 1990 he was employed as an Assistant Lecturer at the
Institute for Telecommunications and Radio Frequency Engineering, Vienna. From
1990 to 1997 he managed the Department for Mobile Communications Development at
ASCOM in Vienna and Solothurn (Switzerland), and headed the hardware and
software development at BOSCH Telecom in Vienna and Berlin. Starting in 1997,
Boris Nemsic was director of network planning at mobilkom austria. In November
1998, he became Chief Executive Officer of VIPnet, the first private mobile
communications operator in Croatia. In May 2000, Mr. Nemsic was appointed Chief
Executive Officer of mobilkom austria. Boris Nemsic was member of GSM and UMTS
core preparatory groups and is an expert of the European Commission in the
field of telecommunications. Mr. Nemsic joined the Management Board of Telekom
Austria on July 1, 2002 as Chief Operating Officer Wireless.

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The remuneration expenses for the members of the Managing Board amounted
to EUR 1.8 million, of which were bonuses of EUR 0.6 million in 2002 to be paid
in 2003. The bonuses will only be paid out in case of a 100% achievement of
performance goals. In 2001, the amount of remuneration was EUR 1.3 million and
in addition bonuses of EUR 0.3 million were paid. In 2001, there were three
members of the Management Board; since Mr. Nemsic has joined the Management
Board in summer 2002, it again consists of four members. In the event ÖIAG
reduces its shareholding in us below 20%, ceases to hold more shares than any
remaining strategic shareholders in us or ceases to be entitled to appoint
our CEO and the majority of our Supervisory Board, Mr. Sundt is entitled to
resign from the board and to receive his current compensation until April 10,
2005, without being entitled to an annual bonus for the period after his
resignation. In connection with our initial public offering, we instituted a
stock option program for members of the Management Board and the senior
management of Telekom Austria, mobilkom austria, Datakom and Jet2Web Internet
and other controlled subsidiaries described below under  Stock option plan.
No Management Board member owns more than 1% of our outstanding share volume.

Supervisory Board members

The current members of our Supervisory Board are presented in the table
below:

|                                 |  |                    |  |                                                         |  |  |  | 
|-------------------------------- |  | ------------------ |  | ------------------------------------------------------- |  |  |  | 
|Name                             |  | Member since       |  | Principal occupation                                   
|                                 |  |                    |  |                                                        
|Peter Michaelis (Chairman)       |  | June 28, 2001      |  | Speaker of the Management Board of ÖIAG                
|Edith Hlawati (Vice Chairperson) |  | June 28, 2001      |  | Attorney                                               
|Stephan Koren                    |  | September 17, 1999 |  | Chief Executive
OfficerÖsterreichische Postsparkasse AG
|Rainer Wieltsch                  |  | June 12, 2002      |  | Member of Management Board of ÖIAG                     
|Gerhard Zeiler                   |  | July 23,1998       |  | Chief Executive Officer RTL Group                      
|Otto G. Zich                     |  | September 17, 1999 |  | General Director Sony Europe                           
|Erich Huhndorf                   |  | June 7, 2001       |  | Employee representative                                
|Michael Kolek                    |  | March 20, 2002     |  | Employee representative                                
|Karl-Heinz Muik                  |  | July 23, 1998      |  | Employee representative                                
|Willhelm Eidenberger             |  | April 30, 2001     |  | Employee representative                                

The members of our Supervisory Board receive annual compensation and
attendance fees determined by the shareholders meeting. In 2002, the members
of the Supervisory Board received an aggregate compensation including
attendance fees of EUR 0.11 million. The compensation for the Supervisory Board
members concerning 2002 will be determined at the annual shareholders meeting
on June 4, 2003. No Supervisory Board member owns more than 1% of our
outstanding shares. Edith Hlawati is a member of the law firm Cerha, Hempel &
Spiegelfeld. In 2002 and 2001, respectively, Cerha, Hempel & Spiegelfeld
rendered services to us. For further information see note (6) of the
accompanying financial statements.

The members of the Supervisory Board, who are not employee
representatives, are appointed to a limited term until the annual shareholders
meeting in 2003. At this meeting, shareholders will vote on whether to extend
the term of the Supervisory Board members. However, employee representatives
are appointed for an unlimited term, as long as they hold their function as
employee representative.

The members of the Supervisory Board can be contacted at the business
address of Telekom Austria.

Stock option plan

On October 4, 2000, Telekom Austrias shareholders approved a stock option
plan. Based on this approval mobilkom austria formed a separate stock option
plan with the same terms and conditions. The following figures include mobilkom
austria. Under this plan, we may grant a total of 4,686,881 options. Each
option entitles its grantee to receive, at the grantees choice, either cash
equal to the difference between the average quoted price of our shares during
the five trading days preceding the options exercise and the initial public
offering price of EUR 9 or shares at an exercise price of EUR 9. One option is
exercisable for one share. The options may be exercised on specific dates
between May 31, 2002 and February 27, 2004 as long as the average share price
during the five days prior to exercise exceeds the initial public offering
price by 30% or more.

To be eligible to receive options, plan members must have purchased shares
in our initial public offering. Members of the Management Boards of Telekom
Austria or its subsidiaries are eligible to receive 12 options for

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each share so purchased, non-civil servant senior managers eight options
for each share so purchased, up to a maximum investment of EUR 109,000 per plan
member. Plan members may not sell any shares purchased in the initial public
offering during the life of the option.

On November 21, 2000, we granted 4,686,881 options. As of December 31,
2002, 1,253,954 options were forfeited, therefore 3,432,927 options are
outstanding with an aggregate value of EUR 30.9 million. As of December 31,
2002, the number of stock option plan beneficiaries is 108.

On November 21, 2000, in order to limit our exposure under the stock
option plan, we purchased 4,686,881 American call options for a premium of EUR
15.3 million. These amounts include mobilkom austrias call options, which were
eliminated in the process of consolidation following the acquisition of the remaining
25.001% interest of mobilkom austria in 2002. In January 2003 500,000 American
call options were sold, which decreased the number of American call options
from 3,936,881 as of December 31, 2002, to 3,436,881 as of January 24, 2003.
The expiration date of these call options is February 27, 2004. The underlying
shares of the call options are the shares of Telekom Austria. The strike and
execution price of each call option is EUR 9 and settlement is either physical
delivery of the shares or, at our request, cash. For further information see
note (20) of the accompanying financial statements.

Employees

The following table shows the yearly average number of our employees for
the last three years excluding personnel representatives, civil servants who
opted for early retirement, employees on parental and other leave, trainees,
and employees on military duty. We have idle employees who no longer report to
work as a result of our transformation program but who are still paid by us
because of their civil servant status. These idle employees were previously
allocated to the fixed line services. They are shown separately in the
following table.

|                           |             |  |        |        |      |  |        |        |  |  |        |        | 
|-------------------------- | ----------- |  | ------ | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ | 
|                           |             |  | 2002   |        | 2001 |  | 2000  
|                           |             |  |        |        |      |  |       
|Number of Employees        |             |  |        |        |      |  |        |        |  |  |        |       
|Fixed line services(1)     |             |  | 10,973 |        |      |  | 13,088 |        |  |  | 14,939 |       
|Mobile communications      |             |  | 3,530  |        |      |  | 3,251  |        |  |  | 2,520  |       
|Data communications        |             |  | 841    |        |      |  | 908    |        |  |  | 956    |       
|Internet Service           |             |  | 370    |        |      |  | 302    |        |  |  | 145    |       
|                           |             |  |        |        |      |  |        |        |  |  |        |       
|                           | Group total |  |        | 15,714 |      |  |        | 17,549 |  |  |        | 18,560 | 
|(1) thereof idle workforce |             |  | 592    |        |      |  | 565    |        |  |  | n.a.   |       

Civil servants

At December 31, 2002, approximately 57% of all employees of Telekom
Austria were civil servants and 43% were private law employees. The employment
of civil servants is regulated by the Post Restructuring Act and related laws.
Our employees were taken over from the Republic of Austrias civil
administration upon the formation of Post- und Telekom Austria AGon May 1,
1996. After May 1, 1996, employees newly hired by us were no longer given civil
servant status but are instead private law employees. In Austria, civil
servants employment cannot be terminated without their consent unless this
termination is made for gross breach of their civil servant duties as defined
in the Civil Servants Employment Act. Employment, compensation and pension
provisions that relate generally to federal civil servants remain in effect for
the approximately 57% of our workforce that has civil servant status.

The Post Restructuring Act transferred the function of disciplinary
authority, which used to lie with the Republic of Austrias civil service, to
the Management Board of Telekom Austria in May 1996. The chief executive
officer of Telekom Austria in his function as head of disciplinary authority is
not bound by the instructions of any authority of the Republic of Austria and
there is only a limited right of appeal for these civil servants to the courts.
The chief executive officer of Telekom Austria is empowered to issue decrees
under the Civil Servants Employment Act to adjust the civil servants
compensation, provided these measures comply with the collective bargaining
agreement that governs the salary increases of our private sector employees.

Pension provisions for our civil servants employed are the responsibility of
the Republic of Austria in accordance with the provisions of the Pensions Act
1965. We are relieved from direct payment to retired civil servants but must
make monthly compensation contributions to the Republic of Austria towards
expenses

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incurred with respect to pension payments. In 2002, this contribution
amounted to 29.6% of the cost of salaries of our active civil servants. In return, we withhold a pension
contribution of about 12.6% from the gross salaries of our civil servants.
Beginning October 2005 the contribution will be reduced to 28.3%.

The pension provisions described above also apply to civil servants
working for subsidiaries and affiliates of Telekom Austria.

Private law employees

At December 31, 2002, approximately 43% of all our employees were private
law employees. This group consists of employees who were privately employed by
the Republic of Austria and those employees who since May 1, 1996 have been
employed on the basis of private law employment contracts. The Employment Act
and our collective bargaining agreement apply to these employees. We have full
autonomy to conduct all relevant negotiations with the employees trade unions.
Under the Post Restructuring Act the rights of employees who were formerly
privately employed by the Republic of Austria, such as protection against
termination, have not been limited.

The collective bargaining agreement currently in force determines
primarily salaries and wages, working hours, overtime pay, holidays, parental
leave and termination. The agreement provides for special termination
provisions for employees who have been employed with Telekom Austria for more
than 10 years. The agreement applies to our subsidiaries and affiliates.

The collective bargaining agreement includes an increase of 2.0% in annual
salary for all employees in 2003. This compares with an increase of 2.4% in
2001 and 2.5% in 2002.

In 2000 and 1999, we sponsored a defined contribution plan, which was
offered in 2001 to all our employees of Telekom Austria and all its other
Austrian subsidiaries. The contributions to this plan are based on a percentage
of the compensation not exceeding 5% of the salaries. The annual cost of this
plan amounted to approximately EUR 7.0 million in 2002.

Inter-company representation of interests

Based on the Postal Works Constitution Act, Telekom Austria has introduced
personnel committees and central committees to represent the interests of
employees, in addition to on-site employee representatives. Their rights of
co-determination, in particular rights of consent, are similar to the
provisions of the Labor Constitution Act which applies to all business
enterprises in Austria. Personnel representatives have a better protection
against termination of employment than regular employees.

Adjustment measures with regard to personnel

Under special framework legislation for civil servants out-sourced to
state-owned companies, we are offering our civil servant employees who have
reached the age of 55 an early retirement option pursuant to a social
compensation plan. At December 31, 2002, 1,723 employees were covered by the
provisions made for our voluntary retirement incentive program. Approximately
3,500 have entered one of these programs since 1997, and thereof approximately
1750 have already left the plan, for whom we are not required to recognize any
current liabilities nor face any future liabilities.

Transfer of employees

We transferred all our personnel including all civil servants and private
law employees except the Management Board members to a wholly owned subsidiary
named Telekom Austria Personalmanagement GmbH by way of a spin-off as of June
30, 2000. Our management is analyzing the number of employees who are needed at
Telekom Austria and who are, therefore, being transferred back to Telekom
Austria. The re-transfer started on August 1, 2001 and was nearly finished in
2002. The number of idle employees amounted to 262 on December 31, 2002. The
proportion of civil servants amounted to 60% in 2001 and decreased to 57% in
2002. Department heads are now merely private law employees.

Should Telekom Austria temporarily require additional personnel, this need
will be covered primarily by purchasing personnel resources from Telekom
Austria Personalmanagement GmbH, as long as this procedure is reasonable from a
business standpoint. In the future Telekom Austria Personalmanagement will
lease their personnel to other companies.

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Relationship with employees

As a necessary result of our transformation program, we are significantly
reducing the number of our employees. Our goal is to reduce our headcount in
the fixed line, data communications and internet segment by about 600 in 2003.
Although we generally consider our relationship with our employees to be good,
many of our employees have expressed dissatisfaction with speed and depth of
our personnel reduction. We are in continuing discussions with labor unions
regarding our transformation program and ways to ease the impact on our
employees  see Financial Information  Other information  Litigation.

Relationship with auditors

Our independent auditor is KPMG Alpen-Treuhand GmbH, Wirtschafts- und
Steuerberatungsgesellschaft (KPMG). We paid our auditor about EUR 1.7 million
for consulting and tax services and about EUR 0.5 million for auditing services
in 2002.

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Item 7.  Major Shareholders and Related Party Transactions

We have two major shareholders. ÖIAG, an industrial holding company wholly
owned by the Republic of Austria, owns 47.2% of our share capital. Telecom
Italia International (renamed from STET International Netherlands in May 2002),
a joint subsidiary of STET International and Telecom Italia, owns 14.8% of our
share capital after its sale of 75,000,000 of our shares in November 2002. On
Dec 31, 2002, Capital Research & Management Company based in Los Angeles, USA,
held 28,499,800 shares which represent 5.7% of our shares.

Relationship with the Republic of Austria and ÖIAG

The Republic of Austria exercises its ownership rights in ÖIAG through the
Federal Minister of Finance. The business of ÖIAG is managed by its Management
Board. This board is subject to supervision by ÖIAGs Supervisory Board but is
independent from and not subject to instructions from the Supervisory Board or
the Republic of Austria as shareholder, though it is subject to their approval
for some major transactions. The Supervisory Board of ÖIAG consists of 15
members. Ten members are managers or business experts whose successors are
elected by the Supervisory Board members themselves to assure their
independence. Five members, chosen from the workers council of major
subsidiaries of ÖIAG, are nominated by the Austrian Chamber of Labor and
appointed by the shareholders meeting.

According to the ÖIAG Act, ÖIAG is entitled to establish guidelines and
authorized to instruct the Management Board members to create favorable
conditions for privatization. By law, ÖIAG and Telekom Austria may not form a
controlled group.

The Austrian government announced in its stated policy in March 2002 that
the guidelines of ÖIAGs privatization mandate should pay due regard to (1)
protecting jobs in Austria, (2) ensuring that the decision making process for
the privatized companies remains in Austria and (3) considering the interests
of the Austrian capital markets. The stated policy also expresses a desire to
insure the existence of an Austrian core share ownership through shareholder
agreements among Austrian companies as shareholders to ensure that the decision
making process of the privatized company remains in Austria.

Pension contributions for civil servants

The Republic of Austria administers the pension and salary payments for
civil servants. Civil servants employed by Telekom Austria are entitled to
pension benefits provided by the Republic. We in turn are required to make
payments to the Republic as a contribution to these pension costs.

The Republic of Austria as regulator

The Republics role of supervising the telecommunications market in
Austria through the regulatory authority is independent of its role as an
indirect shareholder of Telekom Austria.

As a telecommunications operator with a significant market share in
Austria, we are required to provide certain telephone services for qualifying
low-income customers free of charge. We receive reimbursements from the
Republic for these services.

The Republic of Austria as customer

The Republic is our largest customer and purchases products and services
based on our standard pricing and tariff policies. Nevertheless, the provision
of services to the Austrian Government does not constitute a material part of
our revenues. Thus our internal reporting systems are not set up to
specifically track business with the various departments and agencies. However,
we estimate that in 2002 our overall revenues from this business amounted to
less than 3% of our total revenues.

We have entered into a framework agreement with the Republic which was
renewed on December 31, 2002. Under this agreement, federal ministries are
entitled to enter into this agreement at their own discretion. As of January 1,
2002, this agreement was transferred to the Federal Procurement Limited
Liability Company (Bundesbeschaffung GmbH). This company, which was founded in
May 2001 and started its business activities on June 1, 2001, is responsible
for a professional provision of services and products to the Republic of
Austria. In the result of tender procedures carried out in the second half of
the year 2002 concerning the new provision of voice telephony services to the
government agencies, the Republic of Austria, represented by the
Federal Procurement Limited Liability Company, in March 2003 awarded the contract
to us. The existing framework

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agreement therefore will be terminated by June 30, 2003 and substituted by the new agreement. The agreement has been entered
for a minimum period of 30 months.

Federal guarantees for Telekom Austria and mobilkom austria loans

All our long-term loans incurred under the Telecommunications Investment
Act that existed and were transferred to Post und Telekom Austria AGat the
time of Post und Telekom Austria AGs creation as a private law stock
corporation on May 1, 1996, were guaranteed by the Republic. Part of Post und
Telekom Austria AGs loans were transferred to mobilkom austria in October
1996.

As of December 31, 2002, EUR 1,751.3 million of our total EUR 2,538.9
million long-term debt benefited from these guarantees. None of our debt
incurred since May 1, 1996 is subject to such guarantees.

Relationship with Österreichische Post

In May 1998, Telekom Austria and Österreichische Post entered into a
framework agreement determining the services that both parties render to each
other, whereby Österreichische Post provides us mainly with distribution and
sales of our products and services through post offices, postal services, and
rented buildings. We provide Österreichische Post primarily with information
technology support services, voice telephony services, and technical services.
The contractual relationship with Österreichische Post was amended and updated
several times. The prices of services are based on market prices or comparable
service offers from third parties, if available. In 2002, we charged
Österreichische Post EUR 56.7 million for services under the agreement. In late
2002 Österreichische Post published its intent to call for a public tender for
IT services that we provide to Österreichische Post to date.

Relationship with Telecom Italia

In April 1997, Post und Telekom Austria AGsold 25% plus one share of
mobilkom austria AG to STET Mobile Holding (succeeded by Telecom Italia Mobile
International  TIMI, in December 2001), a subsidiary of Telecom Italia S.p.A.
On April 22, 1997, Post und Telekom Austria AGand STET Mobile Holding
(subsequently TIMI) entered into a shareholders agreement, and mobilkom
austria AG, Post und Telekom Austria AG, and Telecom Italias mobile
communications subsidiary, Telecom Italia Mobile, entered into a technical
services agreement. The rights and obligations of Post und Telekom Austria AG
under these agreements became Telekom Austrias rights.

On October 28, 1998, as part of the acquisition of 25.00007% of our share
capital by Telecom Italia, Post und Telekom Austria AGand a subsidiary of
Telecom Italia, STET International Netherlands (renamed to Telecom Italia
International  TII, in May 2002), entered into a shareholders agreement, and
Telekom Austria, Telecom Italia and Post und Telekom Austria AGalso entered
into a cooperation agreement. ÖIAG succeeded by merger to the rights and
obligations of Post und Telekom Austria AGunder these agreements as well as to
Post und Telekom Austria AGs shares in Telekom Austria.

In March 2001, we reorganized mobilkom austria AG into a limited liability
partnership called mobilkom austria AG & Co KG. A newly formed mobilkom austria
AG was created to act as general partner of mobilkom austria AG & Co KG. As
part of this conversion, AUTEL Beteiligungs GmbH, a 100% subsidary of STET
Mobile Holding (subsequently TIMI) was created to hold STET Mobile Holdings
interest.

On June 28, 2002, we acquired 100% of AUTEL Beteiligungs GmbH, which held
a 25% plus 1 share of common stock interest in mobilkom austria AG and a
25.001% interest in mobilkom austria AG & Co KG from TIMI bringing our total
interest in mobilkom austria to 100%.

Legal Framework for the exit of ÖIAG and Telecom Italia

On June 6, 2002, Telekom Austria, various affiliates of Telecom Italia
(TII and TIMI) and ÖIAG signed a series of agreements which set out the
framework for the withdrawal by Telecom Italia from its investment in us and
mobilkom austria and further privatization steps by ÖIAG. The first step was
our repurchase of mobilkom austrias shares indirectly owned by TIMI on June
28, 2002, for a price of EUR 690 million. As a result, mobilkom austria is once
again a 100% owned subsidiary of Telekom Austria, the mobilkom austria shareholders agreement has been terminated. In addition, TII and ÖIAG
have amended the existing

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shareholders agreement to allow for coordinated
exits of both shareholders. The parties have entered into four agreements to
accomplish these goals. These agreements are:



| |  |  | a share purchase agreement covering the repurchase of the mobilkom
austria shares (the mobilkom austria Share Purchase Agreement),                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an amendment to the shareholders agreement of October 28, 1998
concerning Telekom Austria (the Amendment),                                                        
|
| |  |  | a share transfer restriction agreement which regulates the timing of
sales by our shareholders of their shares in us (the Share Transfer
Restriction Agreement) and
|
| |  |  | another agreement providing for our cooperation in these sales (the
Cooperation Agreement).                                                                        

The mobilkom austria Share Purchase Agreement

In the mobilkom austria Share Purchase Agreement among TIMI, TIM and us,
we agreed to buy back the 25% plus one share in mobilkom austria, indirectly
held by TIMI for EUR 690 million through the acquisition of the entire share
capital in AUTEL, an intermediate holding company which held 25% plus one share
in the nominal share capital of mobilkom austria AG and a limited partnership
interest in the amount of 25.001% in mobilkom austria AG & Co. KG.

The closing of the mobilkom austria share purchase took place on June 28,
2002. On the closing date of the transaction, the mobilkom austria
shareholders agreement terminated and the technical services agreement with
respect to mobilkom austria terminated on June 30, 2002. However, the
restrictions on the ability of TIM and its affiliates to engage in mobile
telecommunications activities in mobilkom austrias existing markets will
survive the closing date for a period of two years. On June 30, 2002, also the
cooperation agreement entered into between Telekom Austria, Telecom Italia and
Post und Telekom Austria AGin 1998, terminated.

The mobilkom austria Share Purchase Agreement also contains usual
provisions covering representations, warranties and indemnities, subject to
certain limitations.

The Amendment

The Amendment entered into between TII and ÖIAG immediately terminated a
number of the rights of TII which were given to TII under the shareholders
agreement. The remaining rights terminated as a result of TII selling
75,000,000 shares in November 2002. Accordingly, the two Supervisory Board
members who were nominated by TII resigned with immediate effect. ÖIAG has
agreed to vote in favor of the election of two Supervisory Board members of
Telekom Austria independent from ÖIAG at the next shareholders meeting.

The prohibition against TII acquiring a direct or indirect participation
in any other enterprise active in the telecommunications sector in Austria will
survive until the earlier of two years after termination of the shareholders
agreement or one year after another telecommunications operator acquires more
than 25% of our share capital. As to mobile communications, the prohibition has
been conformed with the provisions of the mobilkom austria Share Purchase
Agreement.

All other provisions of the shareholders agreement other than the
non-competition clauses outlined above, including all other supermajority
matters and the agreement as to the payment of dividends, have expired.

Share Transfer Restriction Agreement

The Share Transfer Restriction Agreement entered into between ÖIAG and TII
provides a framework which allows for the coordinated sale of Telekom Austria
shares held by the parties and seeks to ensure that share sales by TII and ÖIAG
will have a minimum impact on the share price in the interest of all
shareholders.

Both ÖIAG and TII may sell their shares in either public market or private
transactions. A public market transaction includes fully marketed public
offers, accelerated book buildings, block trades or placements in accordance
with Rule 144A under the Securities Act. A private transaction includes any
other transaction including a sale in a public tender offer.

In the case of public market transactions, TII and ÖIAG have agreed to sell
their shares either alone or jointly in a concerted manner.

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| |  |  | During the period from July 1, 2002 to December 31, 2002, TII had the
right to sell up to 75 million shares and ÖIAG has agreed not to sell
any shares in a public market transaction.                                                                                                                                                                                                                                                                                                                                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | From January 1, 2003 until September 30, 2003, ÖIAG has the right to
sell up to 25 million shares in a public market transaction. and, if
ÖIAG initiates such transaction, TII may sell in it any of the 75
million shares it was entitled to sell but did not sell in 2002.                                                                                                                                                                                                                                                                                                  
|
| |  |  | Thereafter, both parties may initiate a public market transaction to
sell any unsold portion of the shares they were entitled to sell in 2002
and 2003 with ÖIAG having a priority right to sell its 25 million
portion in 2003.                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Until the end of the third quarter of 2003, each party initiating a
public market transaction is free to set the timing, price and size of
the offering within the foregoing parameters. Starting in the fourth
quarter of 2003 both parties must agree on price and size of the
offering.                                                                                                                                                                                                                                                                                    
|
| |  |  | If on December 31, 2003, TII holds less than 100 million shares, for
any shares sold thereafter in a public market transaction, TII and ÖIAG
have the right to sell an equal number of shares. If on December 31,
2003, TII holds more than 100 million shares, TII may not transfer any
shares in excess of 100 million shares or announce such transfer until
December 31, 2005. From any remaining non-blocked shares, TII may sell
up to 30% of the aggregate number of shares to be sold in a public
market transaction irrespective of whether initiated by ÖIAG or TII.
|
| |  |  | Any sale of shares initiated by TII in 2002 and 2003 is furthermore
subject to consent of ÖIAG if the offer price per share is more than 15%
below the volume-weighted average share price on the 30 trading days on
the Vienna Stock Exchange prior to the day of pricing.                                                                                                                                                                                                                                                                                                   
|
| |  |  | The parties have agreed to provide customary lock-up periods
regarding our shares in connection with these transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                      

In addition to any public market transactions, ÖIAG and TII retain the
right to sell shares in private transactions. In TIIs case, such sales are
subject to the consent of ÖIAG. ÖIAG and TII have granted each other reciprocal
tag-along rights.

TII has agreed to vote its shares in our shareholders meetings together
with ÖIAG in respect of election proposals and the composition of the
Supervisory Board and in favor of any proportionate spin-off of assets to our
shareholders or similar measure. In addition, ÖIAG has agreed with TII that
until TIIs shareholdings in us falls below 50 million shares or December 31,
2005, it will vote against future capital increases in us, unless:



| |  |  | the capital increase is required to obtain or maintain a rating of
BBB by Standard & Poors or Baa2 by Moodys Investor Service, unless the
loss of the rating is a direct result of an acquisition or merger;                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the capital increase results from a contribution in kind, a merger or
similar measures and the controlling shareholder of the contributed
assets enters into a lock-up agreement with respect to our shares it
receives until December 31, 2005; or
|
| |  |  | the capital increase is required for existing or new stock option
plans and does not exceed 2%.                                                                                                                                                    

Finally, TII and ÖIAG have agreed not to vote their shares in a
shareholders meeting or in the Supervisory Board in favor of a stock exchange
listing of mobilkom austria until September 30, 2004, unless such transaction
is effected through a proportionate spin-off of mobilkom austria shares to our
existing shareholders.

In November 2002, TII sold 75,000,000 shares in us in a private placement
to institutional investors in the United States of America (qualified
institutional buyers) as well as to professional investors in Austria and
outside the United States under Regulation S of the U.S. Securities Act of
1933. The interest of Telecom Italia decreased to 14.8%.

Cooperation Agreement

The Cooperation Agreement among ÖIAG, TII and us provides that we will
furnish specified support for public market and private transactions initiated
by ÖIAG or TII against reimbursement of our costs incurred in, and
indemnifications for certain liabilities arising out of, such transactions. We
have also agreed not to sell any shares in mobilkom austria or to list the
shares of mobilkom austria until December 31, 2003, unless such transaction is
effected through a proportionate spin-off of mobilkom austria shares to our
existing shareholders.

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Business relationship with Telecom Italia

We provide to each other standard international telecommunications
services on an arms-length basis. In addition, we have entered into a mutual,
long-term dark fiber swap, which allows us to expand our Jet2Web Stream to
Italy. For further information see Information on the Company  Business
overview  Fixed line services. Also see note (2) of the accompanying
financial statements.

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Item 8. Financial Information

CONSOLIDATED FINANCIAL STATEMENTS

See Item 18. Financial Statements and pages F-1 through F-55.

OTHER INFORMATION

Litigation

Telekom Austria and its subsidiaries are involved in a number of legal
proceedings in the ordinary course of their businesses. The following is a
summary of litigation matters outside the ordinary course of our business.

Telekom Austria

On September 11, 2000, we received a complaint filed by United Telekom
Austria with the European Commission, General Directorate for Competition
against us and the Republic of Austria concerning our tariff and discount
system, alleging that we abuse our dominant market position. We replied to this
complaint on October 9, 2000, denying the allegations. To date, we have not
received a further response.

We and Telekom Austria Personalmanagement GmbH have filed several claims
against the chairmen of the seven Employee Representation Committees. Under
Austrian law, employees do not have to accept a relocation if the relocation
would put the employee in a worse position and the Employee Representation
Committee does not accept the transfer. The Labor and Social Court has the
right to order the relocation of an employee even if the Employee
Representation Committee is opposed to the relocation following a complaint by
the employer to the Court. The legal proceedings are still ongoing.

An ordinance for the regulation of surveillance systems
(Überwachungsverordnung) became effective on December 1, 2001, which sets forth
a harmonized European wide surveillance system for the search of persons
alleged to be involved in criminal activities. The ordinance was voided on
constitutional grounds by the Constitutional Court on February 27, 2003. A new
ordinance must be implemented by December 31, 2003.

One of our former competitors now in bankruptcy has brought four claims
for damages against us relating to alleged default in providing hardware and
services. We reached a settlement in September 2002 with the insolvency
administrator who filed two of these claims with an amount in controversy
totaling EUR 5.2 million. In the meantime, one of these claims has been
withdrawn by the debtor. The remaining case for a claim of EUR 58.1 million is
still pending and we do not expect a decision before summer 2003. Management
believes that this claim has a low likelihood of success.

We have filed a claim against a former competitor in the amount of EUR 1.2
million which we have since reduced to about EUR 1.0 million. This competitor
has served on us a notice of claim in the amount of EUR 5.7 million for damages
alleged to have been caused by an abuse of dominant position. Management
believes that this claim has a low likelihood of success.

The insolvency administrator in the bankruptcy of one of our competitors
has filed a claim in the amount of EUR 7.5 million which we had received as
payment for our services before the insolvency proceedings had been opened.

The Vienna public prosecutors office is investigating whether legal
proceedings should be opened against our management in connection with
allegations published in the Austrian press to the effect that our civil
servants and of other present or formerly state-owned Austrian enterprises have
been granted early retirement on medical grounds based upon fraudulent medical
certificates in contravention of applicable law. We have publicly stated that
in managements view we have fully complied with applicable law in the
application of our retirement policies and we are fully cooperating with the
investigation.

In addition, the auditing arm of the Republic of Austria, the
Rechnungshof, has started an investigation into the early retirement practices
of several current and prior state owned enterprises, including us, to
determine whether there has been any abuse of the current legal framework for
early retirement. As the authority of the Rechnungshof to review our retirement
policy is not clear we denied any access to our files; the Rechnungshof may
seek a ruling on this point from the Austrian Constitutional Court.

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mobilkom austria

Six claims have been brought against our subsidiary mobilkom austria
relating to alleged health problems caused by the emission of radiation through
mobile communications transmitting and receiving stations. Some of these claims
also seek damages for the alleged decrease in the value of the plaintiffs real
estate.

In the first of the six proceedings, an initial ruling has been made, only
pertaining to the gathering of expert reports through the appellate court, and
a later date was set for the new proceedings. mobilkom austria has won the new
proceedings. The decision is not yet effective.

In three proceedings, the parties agreed to suspend the case until a
decision had been reached in the first proceedings. In the other two
proceedings, the claimant failed to gain a provisional injunction. The
claimants have appealed.

A successful claim for damages against mobilkom austria may have a
negative impact on our results of operations.

mobilkom austria is involved in a number of proceedings before the Supreme
Administrative Court where breaches of environmental or building laws by
mobilkom austria are alleged. In one of these cases, a decision was rendered
obliging mobilkom austria to remove a mobile communications transmitting and
receiving station. mobilkom austria has appealed against this decision.

A competitor in the bidding process for the license granted to our
subsidiary Si.mobil by the Slovenian government filed a claim to nullify the
license decision and the Concession Agreement entered into between Si.mobil and
the Slovenian government in 1998. The Supreme Court nullified the license
decision for failure to comply with form requirements, whereupon the government
issued a new license decision complying with the procedural instructions of the
Supreme Court. The former competitor in the bidding process thereupon appealed
the new license decision. This appeal has been pending since 1999. Management
believes that this claim has a low likelihood of success.

A labor union group (Vertrauenspersonenausschuss Wien) has filed a claim
against mobilkom austria regarding the extent of additional vacation time for
night shift heavy workers pursuant to the Night Shift Heavy Workers Act
(Nachtschwerarbeitergesetz). We believe we are not required to provide
additional vacation time based on a provision of the Postal Restructuring Act
which excludes our employees from the application of the Night Shift Heavy
Workers Act.

Regulatory matters regarding Telekom Austria and mobilkom austria

mobilkom austria has filed a number of appeals against decisions of the
regulatory authority on interconnection, the determination of significant
market power until 2001, and tariff approval for its A1-Total product which
concerns the provision of voice telephony through fixed lines. These appeals
were pending at the Supreme Administrative Court and the Constitutional Court
on December 31, 2002. In 2002, the regulatory authority did not consider
mobilkom austria to have significant market power. In spite of this decision,
mobilkom austria was required by the regulatory authority to offer lower
interconnection fees.

Telekom Austria appealed against a number of the regulatory authoritys
decisions on interconnection, unbundling of access to local subscriber lines,
also called unbundling of the local loop, number portability, pre-selection,
the non-granting of approvals for tariffs and the determination that we have
been determined as provider with significant market power. In the appeals we
filed with either the Constitutional Court or the Supreme Administrative Court
against more than 30 decisions of the regulatory authority about
interconnection at December 2002, we primarily targeted the interconnection
tariffs set by the regulatory authority. Our appeals of these decisions are
based on the argument that the tariffs for call termination, call origination,
transit, access to specific services (such as freephone, on-line services,
special services) have not been set in accordance with the requirements of the
Telecommunications Act and the Interconnection Ordinance. We have generally
taken the position in these appeals that these tariffs have been set below our
actual costs and therefore adversely affect our profitability.

In our five appeals (some of them against identical decisions of the
regulatory authority), that we had filed prior to December 31, 2002, we argued
that the monthly fee to be paid to us by our competitors for an unbundled
subscriber line had been set too low by the regulatory authority, and that this
adversely affected our profitability. In three of these appeals, we also argued
that neither the Telecommunications Act nor the Interconnection Ordinance
provide that internet services providers or leased line providers are entitled
to have unbundled access

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to the local subscriber lines. In two appeals we opposed the obligation to
sub-loop unbundling and grant access to our in-house lines free of charge. We
also argued against excessive penalties.

In the six appeals we have made against the regulatory authoritys
decisions on number portability, we argued that the regulatory authority had no
power under the existing legislation to decide on this issue within the
interconnection framework. We also argued that the tariffs set by the
regulatory authority do not reflect our actual costs and are therefore not in
line with the Telecommunications Act or the Interconnection Ordinance. Since
September 2001, some of these decisions taken by the regulatory authority were
reversed by the Supreme Administrative Court. In these decisions, the
regulatory authority raised the price for portability of non-geographic
numbers to EUR 20.11.

In the three appeals we made against the regulatory authoritys decisions
on pre-selection of a carrier, we argued that, under the Numbering Ordinance,
alternative operators must also provide pre-selection of a carrier.

We also argued that the fees set by the regulatory authority are not in
line with the requirements of the Telecommunications Act or the Interconnection
Ordinance.

All current tariffs subject to regulatory approval, including second-based
tariff schemes and several flat rate schemes, have been approved by the
regulatory authority. Nevertheless, some of our competitors filed claims at the
Commercial Court arguing a lack of regulatory approval and intending us not to
apply these tariffs for some of our customers.

We have filed appeals against the regulatory authoritys decisions,
especially regarding interconnection fees, with the Supreme Administrative
Court and partially also with the Constitutional Court. The Constitutional
Court, based on the principle of direct applicability of European Union
directives, decided that the Supreme Administrative Court has jurisdiction for
the appeals and referred the case to it, at the time when the Supreme
Administrative Court had no jurisdiction according to the Telecommunications
Act (i.e. before June 1, 2000). This court did not agree with the
Constitutional Courts ruling and referred the case to the European Court of
Justice for a preliminary ruling. In a similar case, the advocate general
proposed that the European Court of Justice should deny the direct
applicability of the same European Union Directive (Directive 90/387/EC). It
cannot be predicted when the European Court of Justice will decide.

In other cases originating before June 1, 2000, the Administrative Court
suspended its proceedings in January and February 2003 to wait for the final
decisions of the European Court of Justice.

Since June 2000, we have filed a number of appeals with the Supreme
Administrative Court, when an amendment to the Telecommunications Act
explicitly declared the Supreme Administrative Court competent for the matters
described above. We believe that we have a reasonable prospect of success in
our appeals. However, as of today, the Supreme Administrative Court has decided
on only two of the matters that we have appealed to date. If the Supreme
Administrative Court agrees with our position that the tariffs are too low, the
courts decision would be favorable to us. If the Supreme Administrative Court
refers the appeals back to the regulatory authority on formal grounds only, the
regulatory authority has discretion to take a decision that may not be
substantially different from what their position has been to date. The Supreme
Administrative Court may also refer the appeals to the regulatory authorities
on the grounds that the tariffs that we appeal are too high, which would be
unfavorable to us. We believe this outcome to be possible, but highly unlikely.

Dividends

Declaration of dividends

A dividend payment requires the adoption of a resolution by the
shareholders meeting on the distribution of profits. The holders of our
ordinary shares are entitled to dividends in proportion to their participation
in our share capital.

Our fiscal year corresponds to the calendar year. Austrian law provides
that within the first five months of each fiscal year, the Management Board
must prepare financial statements, including a balance sheet, income statement
and the notes thereto, consolidated financial statements, and a management
report for the previous fiscal year and, after completion of the audit, submit
them to the Supervisory Board together with a proposal for the payment of
dividends. The Supervisory Board is required to examine the financial
statements, the proposal for the payment of dividends and the management
report, and to present its findings to the shareholders meeting.

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If the Supervisory Board approves the financial statements, they are
adopted unless the Management Board and the Supervisory Board decide to have
them approved by the shareholders meeting. Unless that is the case, the
shareholders meeting is bound by the adopted annual financial statements
approved by the Management Board and the Supervisory Board.

The shareholders meeting decides the payment of dividends. According to
our Articles of Association, shareholders at the annual shareholders meeting
may also resolve that all or part of the net income be retained. The amendments
to the financial statements required by a retention are made by the Management
Board. Under Austrian law, we may pay dividends only from net income as shown
in the annual financial statements prepared according to Austrian GAAP by
Telekom Austria AG. The shareholders meeting is not obligated to follow the
Management Boards proposal on dividends and is not bound by the findings and
recommendations of the Supervisory Board.

You may receive final or interim dividends. The Management Board may
authorize the payment of interim dividends with the approval of the Supervisory
Board but does not require the shareholders approval to do so.

Payment of dividends

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

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Item 9. The Offer and Listing

MARKETS

Our shares are listed on the Vienna Stock Exchange and the New York Stock
Exchange. The shares are also traded on the German stock exchanges in Berlin,
Düsseldorf, Frankfurt, Munich and Stuttgart. Options on the shares are traded
on the Austrian options exchange (ÖTOP). In November 2000, the total number of
shares sold in the initial public offering amounted to 112,000,000, or 22.4% of
the total outstanding shares. The offer price was EUR 9 per share and U.S.
dollar 15.2874 per American Depositary Shares, or ADS. Each ADS represents two
shares of common stock and trade under the symbol TKA on the New York Stock
Exchange (NYSE). The depositary for the ADSs is the Bank of New York.

Telekom Austrias shares are traded on Xetra (electronic exchange trading
platform) in addition to being traded on the auction market. Xetra is an
electronic exchange trading platform operated by rules and regulations. Xetra
is available daily between 9:00 a.m. and 8:00 p.m. to brokers and banks that
have been admitted to Xetra. Private investors can trade on Xetra through their
banks or brokers.

The stock exchange trading in Austria was regulated by the stock exchange
law of 1989 (BGBl. Nr. 555/1989), amended by the federal law BGBl. I Nr.
2/2001. The Federal Supervisory Authority for Securities Trading
(Bundes-Wertpapieraufsichtsbehörde) monitors trading activities on the Austrian
stock exchange.

In 2002, Telekom Austria ADSs reached a high of USD 20.04 and a low of
USD 14.46 on the New York Stock Exchange. On the Vienna Stock Exchange Telekom
Austria Shares reached a high of EUR 9.95 and a low of EUR 7.24 in 2002.

From January through April 2003, our ADSs reached a high of USD 21.95 and
a low of USD 18.90 on the New York Stock Exchange. On the Vienna Stock Exchange
Telekom Austria Shares reached a high of EUR 10.25 and a low of EUR 8.60 in
2003.

The table below indicates the price range of the high and low prices for
our shares on the Vienna and for the ADS on the New York Stock
Exchanges(1).

|     |                     |                               |  |          |       |        |  |       |       |     |  |       |       |  |  |      |      | 
|---- | ------------------- | ----------------------------- |  | -------- | ----- | ------ |  | ----- | ----- | --- |  | ----- | ----- |  |  | ---- | ---- | 
|     |                     |                               |  | New York |       | Vienna
|     |                     |                               |  |          |       |       
|     |                     |                               |  | High     |       | Low    |  | High  |       | Low
|     |                     |                               |  |          |       |        |  |       |       |    
|     |                     |                               |  | USD      |       | EUR   
|2001 |                     |                               |  |          |       |        |  |       |       |     |  |       |       |  |  |     
|     | Fourth Quarter 2001 |                               |  | 16.70    |       |        |  | 12.40 |       |     |  | 9.48  |       |  |  | 6.75 |     
|2002 |                     |                               |  |          |       |        |  |       |       |     |  |       |       |  |  |     
|     | First Quarter 2002  |                               |  | 17.20    |       |        |  | 15.75 |       |     |  | 9.95  |       |  |  | 9.06 |     
|     | Second Quarter 2002 |                               |  | 17.38    |       |        |  | 14.59 |       |     |  | 9.80  |       |  |  | 7.71 |     
|     | Third Quarter 2002  |                               |  | 17.75    |       |        |  | 15.17 |       |     |  | 9.03  |       |  |  | 7.60 |     
|     | Fourth Quarter 2002 |                               |  | 20.04    |       |        |  | 14.46 |       |     |  | 9.72  |       |  |  | 7.24 |     
|     |                     | October 2002                  |  |          | 16.10 |        |  |       | 14.46 |     |  |       | 8.29  |  |  |      | 7.24 | 
|     |                     | November 2002                 |  |          | 16.81 |        |  |       | 14.85 |     |  |       | 9.52  |  |  |      | 7.41 | 
|     |                     | December 2002                 |  |          | 20.04 |        |  |       | 18.20 |     |  |       | 9.72  |  |  |      | 8.80 | 
|2003 |                     |                               |  |          |       |        |  |       |       |     |  |       |       |  |  |     
|     | First Quarter 2003  |                               |  | 21.95    |       |        |  | 18.90 |       |     |  | 10.25 |       |  |  | 8.79 |     
|     |                     | January 2003                  |  |          | 21.95 |        |  |       | 19.00 |     |  |       | 10.25 |  |  |      | 9.05 | 
|     |                     | February 2003                 |  |          | 21.80 |        |  |       | 20.10 |     |  |       | 10.14 |  |  |      | 9.15 | 
|     |                     | March 2003                    |  |          | 21.50 |        |  |       | 18.90 |     |  |       | 9.94  |  |  |      | 8.79 | 
|     |                     | April 2003 (through April 10) |  |          | 20.76 |        |  |       | 20.18 |     |  |       | 9.94  |  |  |      | 8.60 | 



---

|(1) |  | Intraday high and low; Source: Reuters, Bank of New York
|--- |  | --------------------------------------------------------

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Item 10. Additional Information

MEMORANDUM AND ARTICLES OF ASSOCIATION

Overview

Telekom Austria is registered under the number FN 144.477t in the
companies register of the commercial court of Vienna with its seat in Vienna,
Austria.

Our Articles of Association state that our object is the provision of
telecommunications services and the creation of conditions which will promote
the development of telecommunications services in Austria. These services
include the provision of telephone voice services, automatic data processing
and information technology, the planning, construction, maintenance and
operation of infrastructure facilities and networks and the installation of
communications facilities and terminals. We may also conduct activities
associated with these services. The articles authorize us to take all actions
necessary to achieve our object, except that we are not permitted to carry out
banking activities.

Shares and share capital

Our share capital amounts to EUR 1,090,500,000 and is divided into
500,000,000 no par value shares (Stückaktien) each representing a pro rata
amount of EUR 2.181 of the share capital. Pursuant to the amendment to our
Articles of Association voted on at our ordinary shareholders meeting held on
June 12, 2002, all of our shares, are bearer shares.

We do not currently hold any of our own shares. At December 31, 2002, we
held 3,936,881 call options to buy our shares in order to limit our exposure
under our stock option plans. For further information see Directors, Senior
Management and Employees  Stock option plan. As a result of adjustments to
the number of beneficiaries, 500,000 of these call options were sold on January
24, 2003. On April 4, 2002, the shareholders resolution expired which
authorized us to repurchase up to 5,800,000 of our own shares.

Our original share capital was raised pursuant to § 10 Austrian Post
Restructuring Act by way of a contribution in kind and amounted to 15 billion
Austrian Schilling divided into 1,500,000 registered shares with a nominal
value of 10,000 Austrian Schilling. On October 4, 2000 our shareholders
resolved to convert our share capital into Euro and to split our share capital
into 500,000,000 non-par value shares.

Under our Articles of Association, our shareholders do not have a right to
receive individual share certificates. We may, however, issue global
certificates and interim certificates.

We do not have any unissued authorized share capital nor any conditional

share capital. Our bearer shares are freely transferable. Shares held by ÖIAG
and Telecom Italia International (TII) are subject to contractual restrictions.
All shares have been admitted to trading on the Vienna Stock Exchange and will
be represented by one or more global certificates deposited with
Oesterreichische Kontrollbank AG, the Austrian central depositary. The shares
can only be transferred in book-entry form. Other than the global certificates,
no separate share certificates in bearer form will be issued.

Corporate governance

As required under the Austrian Stock Corporation Act, Telekom Austria has
a two-tier board system comprising the Management Board (Vorstand) and the
Supervisory Board (Aufsichtsrat). The functions of management and supervision
are strictly separated and no individual may simultaneously be a member of both
boards. The Management Board represents the company in day-to-day business
matters, and is not subject to instructions from the Supervisory Board or the
shareholders. The Supervisory Board appoints and removes the members of the
Management Board and oversees the Management Boards activities. The general
meeting of shareholders has the power to elect and remove Supervisory Board
members.

Our Supervisory Board presently consists of 6 members nominated by ÖIAG
and four employee-representatives. The two members nominated by Telecom Italia
in accordance with the shareholders agreement terminated at the sale of
75,000,000 shares by Telecom Italia in November 2002, have resigned. ÖIAG has
agreed to vote in favor of the election of two Supervisory Board members of
Telekom Austria independent from

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ÖIAG at the next shareholders meeting. ÖIAG owns about 47.2% of our
outstanding shares and is in a position to control us.

In addition, we hold a general meeting of shareholders once a year. At
this meeting, the shareholders vote on the distribution of net profits, the
compensation of the members of the Supervisory Board, the appointment of our
independent auditor and on other significant corporate transactions.

In 2002, an Austrian working committee on corporate governance completed
preparation of the Austrian corporate governance code, which calls for
voluntary compliance with its provisions. We have decided not to adopt the
Austrian corporate governance code since we want to await the final rules
adopted in connection with the adoption of the Sarbanes-Oxley Act. We intend to
develop our own corporate governance code which will be compliant with the
Sarbanes-Oxley Act and reflect the provisions of the Austrian corporate
governance code as far as these provisions do no violate the rules and
regulations adopted by the Sarbanes-Oxley Act.

Management Board (Vorstand)

Since our Articles of Association were amended at the ordinary
shareholders meeting on June 28, 2001, our Management Board may consist of two
to four members nominated by the Supervisory Board. The Supervisory Board can
appoint a member to be chairman of the board and another to be vice chairman.

We are represented by and act through the members of our Management Board.
Under the Articles of Association, any two members of the Management Board, one
member of the Management Board and one holder of a general power-of-attorney
(Prokuristen), or any two holders of a general power-of-attorney can legally
bind the company to the extent permitted by law.

The members of the Management Board are appointed, and may be
re-appointed, for a term of up to five years each. Under certain circumstances,
such as a serious breach of duty or a vote of no confidence by the
shareholders meeting, a member of the Management Board may be removed by the
Supervisory Board prior to the expiration of the term. The Supervisory Board
appoints the chairman of the Management Board and a deputy chairman.

Decisions are made by a simple majority of the votes cast. At least half
of all members of the Management Board including the chairman or the deputy
chairman must be present in order to constitute a quorum. The chairman has the
deciding vote in case of a tie.

The Management Board manages the company on a day-to-day basis within the
limitations set forth by law, the Articles of Association, the Supervisory
Board, the rules of procedure or specific resolutions of the shareholders
meeting. The Management Board must act in the best interests of the company,
while also taking into account the interests of its shareholders, employees,
and the public. In carrying out these duties, the members of the Management
Board must exercise the standard of care of a diligent and prudent business
person.

In addition to exercising management functions, the Management Board is
responsible for the financial books and records of the company. The Management
Board must report to the Supervisory Board on a regular basis, at least every
quarter, and outline the course of business and the situation of the group. The
Management Board also reports to the chairman of the Supervisory Board when
necessary on an important matter. The Management Board must provide a report at
the request of at least two members of the Supervisory Board.

Without the approval of the Supervisory Board, members of the Management
Board are not allowed to engage in commercial activities or any business
transaction in Telekom Austrias lines of business for their own or a third
partys account. If a member of the Management Board violates these principles,
the company is entitled to claim damages or to demand that the business
transaction made by the board member in his own name be transferred to the
company.

Supervisory Board (Aufsichtsrat)

Our Supervisory Board consists of up to eight members elected by the
shareholders meeting and four members appointed by our workers council under
mandatory provisions of the Austrian Labor Constitution Act.

One-third of the share capital present at the shareholders meeting has
the statutory right to elect the third new member of the Supervisory Board if
at least three members of the Supervisory Board are to be elected. No

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member of the Supervisory Board may be appointed for a longer period than
four years, until the shareholders meeting deciding on the discharge of the
board members for the fourth year following their appointment.

The Supervisory Board elects one chairman and one or more deputy chairmen.
The Supervisory Board has a financial sub-committee that prepares the
resolutions of the Supervisory Board regarding the annual financial statements,
and may create other subcommittees for special tasks. Our Articles of

Association require that at least half of the members of the Supervisory Board,
including the chairman or one of his deputies must be present at a meeting in
order to constitute a quorum. Resolutions of the Supervisory Board are passed
by a simple majority of the votes cast. The chairman has the casting vote in
case of a tie.

The Supervisory Board supervises the management of Telekom Austria. The
Supervisory Board may at any time request a report by the Management Board
concerning company matters. The Supervisory Board may inspect and review all
books and documents of the company as well as assets, cash accounts and stock
in trade. According to Austrian law, the following transactions and matters may
be decided by the Management Board only with the approval of the Supervisory
Board:



| |  |  | acquisition and sale of participating interests as well as the
acquisition, sale and termination of businesses and establishments;                                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | acquisition, sale and encumbrance of real estate;                                                                                                                                                       
|
| |  |  | establishing and closing down of branches;                                                                                                                                                              
|
| |  |  | material investments;                                                                                                                                                                                   
|
| |  |  | taking and granting material loans and credits;                                                                                                                                                         
|
| |  |  | commencement and termination of lines of business and types of production;                                                                                                                              
|
| |  |  | determination of general principles of business policy;                                                                                                                                                 
|
| |  |  | determination of principles for granting of profit shares or
commissions on turnover and pension commitments to managers and senior
employees;                                                          
|
| |  |  | stock options for employees and key employees of the company or
affiliated companies as well as for members of the Management Board and
the Supervisory Board of the company or affiliated companies and
|
| |  |  | granting of general powers-of-attorney                                                                                                                                                                  

The rules of procedure of our Management Board may provide for additional
situations where a Supervisory Board approval is required.

Failure of the Management Board to obtain the prior approval of the
Supervisory Board does not affect the enforceability of transactions towards
third parties but may render the Management Board liable for any damages
resulting therefrom.

Shareholders meeting

The shareholders meetings must decide on major corporate matters such as
the distribution of net profits, the discharge of the members of the Management
and Supervisory Boards and the appointment of independent auditors. Our
Management Board is required to convene an ordinary shareholders meeting
within the first eight months of our fiscal year. A resolution of the
shareholders meeting is required for approval of matters such as amendments to
the Articles of Association, modification of shareholders rights, approval of
mergers, increases or decreases in share capital, the creation of a new class
of shares and the authorization of the issuance of convertible bonds and
similar securities.

Shareholders meetings are held at Telekom Austrias registered seat in
Vienna, Austria, or at a place of business within Austria or at the capital of
an Austrian Federal District. The time and place must be provided in the
invitation notice to the shareholders meeting.

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Shareholders meetings are called by the Management Board or the
Supervisory Board. The notice must be published and must state the name of the
company as well as the time and place of the shareholders meeting. At least 14
days must elapse between the day of the last publication of the invitation
notice and the day of the shareholders meeting. Attendance and exercise of
voting rights at ordinary and extraordinary shareholders meetings are subject
to certain conditions. In order to attend a shareholders meeting and vote
shares, shareholders must register at least three days prior to the meeting and
deposit a certificate (Hinterlegungsbescheinigung) evidencing their shares
until the end of the shareholders meeting with an Austrian notary public, with
the main office of an Austrian credit institution, with any other Austrian or
foreign credit institution specified in the invitation notice, or with Telekom
Austria. The shares can also be deposited with a depository bank designated by
us, in a blocked account until the end of the shareholders meeting. Our
Articles of Association provide that shareholders must have at least 14 days
after the publication date of the invitation notice to the shareholders
meeting to effect the deposit. If the last day of this period is a Sunday or
public holiday, the deposit may be made on the next business day. The
certificate must be deposited to allow at least three business days between the
day of deposit and the day of the shareholders meeting. Saturdays, Good Friday
and December 24 are not deemed to be business days for purposes of this
provision.

Shareholders meetings are chaired by the chairman of the Supervisory
Board or, in his absence, by one of the deputy chairmen. In their absence, the
notary public present at the shareholders meeting to draft and authenticate
the minutes of the meeting has to hold an election for the chairman of the
meeting. The chairman leads the proceedings and determines the form of voting.
The order of the agenda items follows the order set out in the notice. The
chairman, however, may deviate from that order and may conduct the discussion
and voting accordingly.

The Stock Corporation Act and our Articles of Association do not require
that a specific percentage of our share capital be present to form a quorum.
Resolutions of the shareholders meeting are passed by simple majority of the
votes cast, if not otherwise provided for by law or the Articles of
Association. Whenever permitted by law, our Articles of Association have
reduced all qualified majorities to simple majority. The following matters
require a vote of 75% of the votes represented, which cannot be decreased by
the Articles of Association:



| |  |  | amendment of the business purpose;                                               
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | increase of the share capital with a simultaneous exclusion of preemptive rights;
|
| |  |  | authorized capital/conditional capital;                                          
|
| |  |  | 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.                                         

No consent of the general meeting is required in case of a merger with a
90% shareholder.

Committees

In addition to the activities listed above, the Supervisory Board has
several committees, including a financial committee (Finanzausschuß) and a
chairing committee (Präsidium). The members of the financial committee are
Rainer Wieltsch, Stephan Koren and Michael Kolek. This committee is responsible
for recommending independent auditors and yearly financial statements to the
Supervisory Board. The chairing committee, whose members are Peter Michaelis
and Edith Hlawati, determines the bonus of the Management Board.

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Shareholders rights

Our bearer shares are freely tradable. We know of no existing limitations
that limit the rights of non-Austrians to own our bearer shares or to exercise
voting rights in accordance with the procedures described above.

In the ordinary shareholders meeting of June 12, 2002, our shareholders
passed a resolution which provided for the conversion of all outstanding
registered shares into bearer shares, by amendment of Sec. 4 of our Articles of
Association. The amendment to our Articles of Association was submitted to the
Commercial Register of Vienna for registration and duly registered on June 20,
2002. All of the converted shares are admitted for trading on the Vienna Stock
Exchange, effective November 6, 2002.

Provided the shareholders shares have previously been deposited as
described above, each shareholder has the right to attend the shareholders
meetings, to ask questions in connection with any matter on the agenda set out
in the invitation notice and to vote upon any resolution. Each shareholder is
entitled to one vote per share. Each shareholder entitled to vote may exercise
his voting rights by written proxy. The proxies must be deposited with and
remain in the custody of the company.

A shareholder or group of shareholders whose shares in the aggregate
represent at least 1/5 of our nominal share capital, is entitled to request the
enforcement of claims for damages by the company against members of the
Management Board, the Supervisory Board, or third parties if it is determined that these persons
have engaged in illegal conduct. A minority shareholder or group of
shareholders whose shares in aggregate represent at least 1/10 of our nominal
share capital is entitled to:



| |  |  | request a special audit of transactions in connection with the
creation of Telekom Austria or with the management thereof, if the
transaction was carried out within the last two years and, if such
request has been rejected by a shareholders resolution, to apply to a
court to request the appointment of special auditors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | veto the appointment of auditors and petition the court to request
the appointment of other auditors for a special audit;                                                                                                                                                                                                        
|
| |  |  | request the adjournment of the shareholders meeting if certain items
of the annual financial statements are objected to by minority
shareholders;                                                                                                                                                                               
|
| |  |  | veto the appointment of auditors for cause. This veto right may also
be exercised by any shareholder or group of shareholders holding shares
with a total nominal value of at least EUR 700,000;                                                                                                                                 
|
| |  |  | petition the court to request the revocation for cause of members of
the Supervisory Board nominated by the shareholders; and                                                                                                                                                                                                    
|
| |  |  | request separate consolidated financial statements for companies
within our group prepared according to Austrian or foreign accounting
principles. This right may also be exercised by any shareholder or group
of shareholders holding shares with an aggregate nominal value of at
least EUR 1,400,000.                        

A minority shareholder or group of shareholders whose shares in aggregate
represent at least 1/20 of
our nominal share capital is entitled to:



| |  |  | request that a shareholders meeting 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 shareholders
meeting;                                                                                                                                                                                                                                                                                                                      
|
| |  |  | 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;

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| |  |  | appeal against a shareholders resolution if by this resolution the
depreciation adjustments and reserves have been affected to an extent
exceeding the maximum amounts permissible under the Stock Corporation
Act or our Articles of Association; and                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | request separate consolidated financial statements for companies
within our group prepared according to Austrian or foreign accounting
principles. This right may also be exercised by any shareholder or group
of shareholders holding shares with an aggregate nominal value of at
least EUR 700,000.

To be valid, every resolution adopted at a shareholders meeting must be
recorded in the minutes prepared by an Austrian notary public who must be
present at the meeting and authenticates the minutes after they have been
signed by the chairman of the meeting.

Important rules regarding acquisitions

Each domestic or foreign shareholder of a company listed on the Vienna
Stock Exchange must notify the Exchange, the Austrian Federal Securities
Authority and Telekom Austria itself within seven days of any acquisition or
disposition of direct or indirect interests that results in that shareholders
voting rights exceeding, equaling, or falling below the following thresholds:
5, 10, 15, 20, 25, 30, 35, 40, 45, 50, 75 or 90% of the voting rights of
Telekom Austria. The Company is required to publish any such event or a
reference to where that information can be found in the Austrian newspaper,
Wiener Zeitung, within nine days of notification. The same applies to shares
that are subject to option and trust arrangements and to banks that exercise
voting rights on behalf of beneficial owners.

Under certain circumstances, the acquisition of shares may be subject to
approval by the Austrian Cartel Court or the European Commission.

Preemptive rights

According to the Stock Corporation Act, shareholders generally have
statutory rights to subscribe for additional shares issued by the company for
cash on a pro ratabasis. These preemptive rights must be exercisable during a
period of at least two weeks. The Management Board is required to publish a
notice of the commencement and duration of this period in the Austrian
newspaper Wiener Zeitung. Preemptive rights not exercised within this period
lapse.

In case of an increase of share capital, the shareholders exercise their
preemptive rights by notifying Telekom Austria and delivering a duly executed
subscription application in the form required by the Stock Corporation Act. We
may also issue new shares to a bank who undertakes to offer the new shares to
the shareholders who would otherwise have direct preemptive rights. In this
case the shareholders will have the same rights against the bank. Preemptive
rights may be transferred and, if applicable, by delivery of a coupon
evidencing the transferred rights. If the shares to which the preemptive rights
relate are held in a clearing system, the rights may be transferred in
accordance with the rules of that clearing system.

Statutory preemptive rights may be excluded by a resolution of the
shareholders meeting when deciding on a capital increase only or the
shareholders may authorize the Management Board, with the consent of the
Supervisory Board, to exclude these rights when issuing new shares out of
authorized capital. If the shareholders authorize the Management Board to
effect capital increases by means of authorized capital with exclusion of
preemptive rights, the shareholders cannot later prevent such exclusion in the
context of any individual use of authorized capital. If preemptive rights are
to be excluded, the Management Board is required to report the reason for the
exclusion of preemptive rights to the shareholders. Stock options are
considered an adequate reason for the exclusion of the shareholders preemptive
rights according to the Stock Corporation Act. The exclusion of the
shareholders preemptive rights requires a majority of at least 75% of the
votes represented at the shareholders meeting. The intention to exclude the
preemptive rights has to be notified to the shareholders together with the
invitation notice at least 14 days before the shareholders meeting.

Repurchase of shares

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

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| |  |  | 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 shareholders meeting; 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 buy-back 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.                                                                

On October 4, 2000 our shareholders authorized our Management Board to
re-purchase up to 5,800,000 of our shares until April 4, 2002. No shares were
re-repurchased and the authorization was not extended.

Liquidation

In the event of the liquidation of Telekom Austria, the assets remaining
after the payment of all outstanding debts will be distributed among the
shareholders. The distribution will be made in proportion to the shareholdings
of each shareholder, unless there are multiple classes of shares with different
rights to participate in the liquidation proceeds. If the capital contributions
have not been made in the same proportion for all shares, the capital
contributions will first be repaid to the shareholders and then the remainder
of the proceeds, if any, will be distributed in proportion to shareholdings.

If our assets are not sufficient to repay the amount of capital paid in,
the shareholders will bear the loss in proportion to their participation in the
share capital. Outstanding payments or contributions will be collected by
Telekom Austria.

Takeover rules

Public offers for a part or all of the shares of Austrian companies listed
on the Vienna Stock Exchange are subject to the rules of the Austrian Takeover
Act. The law differentiates between voluntary offers and compulsory offers.

A compulsory offer must be made when a shareholder or a group of
shareholders or any third person or persons acting in concert have gained a
direct or indirect controlling interest over a listed company. According to the
Takeover Act a direct or indirect controlling interest is established by:



| |  |  | ownership of the majority of the target companys voting rights;                                            
| | - |  | ------------------------------------------------------------------------------------------------------------
|
| |  |  | the right to appoint or dismiss the majority of the members of the Management Board or Supervisory Board; or
|
| |  |  | the ability to exert a controlling influence over the business of the target company.                       

The Takeover Commission has issued an ordinance giving additional guidance
as to other situations in which a rebuttable presumption of controlling
interest exists. According to this ordinance, the rebuttable presumption of
controlling interest means the acquisition of:



| |  |  | 30% of the voting rights of a company; or                                                                                                                                      
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | between 20% and 30% of the voting rights of a company if this amount
would have comprised a majority of the votes present at the last three
consecutive shareholders meetings.

The Takeover Commission has also issued an ordinance according to which a
bidder with a controlling interest without a majority of votes is required to
make a compulsory offer each time it acquires at least a further 2% of the
targets shares within a period of 12 months.

The offer price for a compulsory offer must be at least equal to the
average stock price during the last six months and must be at least equal to
the highest share price paid by the bidder during the last 12 months less a

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discount of no more than 15%. A compulsory offer must comprise a cash payment
for the shares, although other shares may also be offered as consideration. However, it is in the sole
discretion of the shareholder to accept other than cash consideration.

The Takeover Act requires that the bidder prepare offer documents which
must be examined by an independent expert before being filed with the Takeover
Commission and the target company. The management of the target company has to
issue a statement on the offer. Any higher bid or other competitive bids have
to follow the same rules. From the time of the publication by a bidder of its
intention to submit a public offer, a target company, may not generally
undertake measures to jeopardize the offer. The bidder must refrain from
selling any shares in the target company. The violation of any material legal
provisions may result in the suspension of voting rights and fines imposed by
the Takeover Commission.

Material contracts

For a summary of our agreements with our major shareholders, see
Relationship with Major Shareholders.

Exchange controls

We know of no Austrian laws, decrees, regulations or other legislation that
limits the import or export of capital or the payment of dividends to
shareholders or ADS holders who do not reside in Austria.

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TAXATION

Austrian taxation

The following description of the material Austrian tax consequences of
ownership of Telekom Austrias shares or ADSs is based on current law and
practice as to matters of Austrian taxation. It does not purport to be a
complete analysis of all potential tax effects relevant to a decision to invest
in the shares or ADSs and makes no claim to fully present all of the
tax-related considerations related to the acquisition and disposition of the
shares or ADSs. Potential purchasers of shares or ADSs should consult their own
lawyers or tax advisors to receive information about the tax consequences of
the purchase, the ownership and the disposition, in a sale or as a gift, of the
shares or ADSs and regarding the procedures required for a potential refund of
Austrian withholding tax. Only the investors own advisors are in a position to
appropriately consider the particular tax situation of that person.

All individuals resident in Austria are subject to Austrian income tax on
their worldwide income (unlimited tax liability). Non-residents are taxed on
income from certain sources in Austria only (limited tax liability).

Corporations resident in Austria (domestic corporations) are subject to
corporate income tax on their worldwide income whether or not remitted to
Austria. Non-resident corporations (foreign corporations) engaged in a trade or
business in Austria are taxed on certain Austrian source investment and other
passive income and on income that is effectively connected with the conduct of
a trade or business in Austria. Non-resident corporations not engaged in an
Austrian trade or business are taxed only on certain Austrian source investment
and other passive income.

For Austrian tax purposes and for purposes of the Austria-United States
treaty, holders of ADRs evidencing ADSs will be treated as owners of the shares
represented by those ADSs.

Corporate income tax

Austrian stock corporations are subject to a corporate income tax rate of
34% of their taxable income. The corporate income tax amounts to a minimum of
5% of a quarter of the minimum share capital of an Austrian stock corporation
for each quarter of the fiscal year. This amounts to  3,500 annually for
Telekom Austria, irrespectively whether any taxable earnings are generated. Any
portion of this minimum tax exceeding the actual corporate income tax payable
can be carried forward indefinitely and can be offset against corporate income
tax becoming due in later periods.

Taxation of dividends

Residents of Austria

Dividends distributed by an Austrian stock corporation to its shareholders
are subject to withholding tax (Kapitalertragsteuer) to be withheld by the
company at a rate of 25% of the paid-out dividends. The company or the bank
paying the dividend on behalf of the company must give each shareholder a
receipt indicating the amounts of the dividend income and of the withholding
tax, the payment date and the period for which the dividends have been paid and
information about which tax office the withholding tax amount was transferred
to.

For natural persons subject to unlimited tax liability in Austria, the
withholding tax is in principle treated as a final payment of income tax. If
the natural persons income tax to be levied on dividends according to the
income tax schedule is lower than the withholding tax, it will be deducted
against the income tax liability and any excess amount will be refunded to the
shareholder. In such cases, reduced rates of income tax amounting to one half
of the average income tax rate apply.

For corporations subject to unlimited tax liability in Austria, dividend
income is tax exempt and any withholding tax withheld will be set off against
corporate income tax under the Austrian Corporate Income Tax Act. If the
corporate income tax payable is lower than the sum of all amounts to be set
off, the difference is to be credited to the corporation. Withholding tax does
not have to be withheld if a corporation subject to unlimited tax liability in
Austria directly owns at least 25% of the share capital of the corporation
paying out the dividend.

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Non-residents of Austria

The standard rate of dividend withholding tax under Austrian law amounts
to 25% of the distributed dividend.

Austria currently has double taxation treaties with more than 50 countries
including the United Kingdom, the United States, France, Germany, Japan, The
Netherlands and Switzerland. These treaties basically follow the scheme of the
model convention of the Organization of Economic Co-operation and Development (OECD). As a
general rule, the withholding tax in many of these treaties is reduced to 15%.
Most Austrian treaties provide for a tax credit system with regard to the
double taxation of dividends so that Austrian tax payable in accordance with
the relevant treaty will be treated as a credit against tax payable on the
dividend in the country of residence of the recipient.

Relief at source may be available if the Austrian ministry of finance has
not issued any special decree prohibiting its application under the relevant
tax treaty. If available, the shareholder will have to provide a certificate of
residence to prove that he is a resident in the state with which the applicable
tax treaty was concluded. Special decrees have been issued with respect to some
tax treaties concluded by Austria, under which the full amount of withholding
tax must initially be deducted. The shareholder is then entitled, under Section
240 of the Federal Administrative Code, to claim a refund of the tax withheld
in excess of the rate provided for in the applicable tax treaty.

Special tax rules for U.S. shareholders

For purposes of the following discussion, the U.S. treaty refers to the
current income tax treaty between Austria and the United States. A U.S.
investor described below under United States federal income taxation will be
an eligible U.S. shareholder or ADS holder if the U.S. investor:



| |  |  | is a resident of the United States, for purposes of the U.S. treaty;                                                                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | does not hold the ordinary shares or ADSs in connection with the
conduct of business through a permanent establishment, or the
performance of services through a fixed base in Austria; and
|
| |  |  | is otherwise eligible for benefits under the U.S. treaty with respect
to income and gain from the ordinary shares or ADSs.                                                                 

Dividends paid by an Austrian corporation to a U.S. investor are subject
to Austrian dividend withholding tax (Kapitalertragsteuer) to be withheld by
us. The standard dividend withholding tax under Austrian law amounts to 25% of
the amount of the dividend. If you are an eligible U.S. shareholder or ADS
holder and are the beneficial owner of the dividends received, the U.S. treaty
limits the rate of Austrian tax to 15% of the gross amount of the dividends.
The U.S. treaty limits the rate of Austrian income tax further to 5% of the
gross amount of the dividends if the beneficial owner is a company (not a
partnership) that directly owns at least 10% of our voting stock.

Withholding tax relief at the source is not available under the U.S.
treaty. In order to obtain a reduced tax rate of withholding taxes under the
U.S. double taxation treaty, a U.S. shareholder will generally have to file an
application with the Austrian tax authority requesting the reduced tax rate of
withholding taxes together with a certification by the U.S. tax authority that
the shareholder is a U.S. resident under the treaty. The Austrian Federal
Ministry of Finance has established a simplified system for the refund of
Austrian withholding taxes under the regime of double taxation treaties
(including the U.S. treaty) according to which a new tax form is to be used for
applications requesting the reduced tax rate. This form is also available in a
German and English language download-version from the website of the Federal
Ministry of Finance (http://www.bmf.gv.at).

There are currently no explicit procedures for ADR holders to obtain the
U.S. treaty rate either at source or by refund. We together with the Bank of
New York as Depositary, will use reasonable efforts to develop a procedure for
ADR holders to obtain the U.S. treaty rate either at source or by refund.
However, we currently cannot guarantee that ADR holders will be able to obtain
the U.S. treaty rate at source or by refund.

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Taxation of capital gains

Residents of Austria

Capital gains from the sale of shares or ADSs by resident individuals are taxable as income if:



| |  |  | a shareholder sells shares or ADSs within 12 months of purchase (deemed speculative by tax legislation);                                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | in the absence of speculative transactions, a shareholder held a
substantial shareholding of at least 1% of the share capital at any time
during a five year period prior to the sale of the shares or ADSs.
|
| |  |  | the shares or ADSs are part of a domestic business property.                                                                                                                                                

For natural persons speculative gains are subject to taxation as income at
regular rates if such gains exceed EUR 440 in one year. All other capital gains
mentioned above that are achieved by natural persons are subject to reduced
rates of income tax amounting to one-half of the average income tax rate. All capital gains
generated from shares or ADSs that are business-connected property are
generally subject to taxation as income at regular rates. Reduced rates of
income tax amounting to one half of the average income tax rate are applicable
only when the shares are sold after a 12-month period from purchase has
elapsed.

Corporations subject to unlimited tax liability in Austria are subject to
corporate income tax on any capital gains realized from any sale of shares or
ADSs.

If an Austrian resident shareholder changes his permanent residence to a
foreign country, Austria loses its right of taxation according to treaty rules
although domestic legislation in principle provides for Austrias right of
taxation if the shareholder owned at least 1% of the share capital at any time
during a five year period prior to the sale of the shares. A change of
residence of this type is therefore considered a sale under Austrian income tax
law, and shareholders risk incurring taxable income in case of the change of
residence.

Non-residents of Austria

Under current Austrian law, any capital gains resulting from the disposal
of shares or ADSs by a non-resident shareholder are not subject to taxation in
Austria. If, however, within the last five years prior to the disposal, a
non-resident shareholders shareholding has at any time equaled or exceeded 1%
of the companys issued share capital, the non-resident will be subject to tax
on those capital gains unless an applicable double taxation treaty provides
relief. Dividends paid in the assessment period of the year of disposal which
were subject to withholding tax are not taxable as capital gains. Under the
U.S. treaty, gains from the disposal of shares or ADSs by an eligible U.S.
shareholder are explicitly exempt from tax in Austria.

Taxation of other income

Residents of Austria

Discounts on the issue price of the shares or ADSs are generally not
treated as capital income. If, however, the discount is granted in exchange for
consideration from the shareholder, such as renouncement of certain uses or
rights, according to a recently published opinion issued by the ministry of
finance such discount will be taxable as other income at the standard tax rate
unless the income does not exceed EUR 220 per year. Loyalty bonuses granted
to the shareholder for not selling the shares for a certain period of time are
also not generally treated as capital income subject to withholding tax.
However, these bonuses are also treated as other income and subject to tax at
the standard tax rate unless the income does not exceed EUR 220. Please consult
your tax advisor regarding the application of these rules.

Non-residents of Austria

The above mentioned tax consequences of discounts on the issue price are
not applicable.

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Inheritance and gift tax

Residents of Austria

Inheritance and gift tax is levied on inheritances, gifts and special
purpose donations, as defined in the Inheritance and Gift Tax Act. The rate of
gift tax varies from 2% to 60% depending upon the value of the donated shares
and upon the relationship of the beneficiary to the deceased or the donor. The
tax is imposed on total market value transferred. Various tax exemptions apply
for family members and relatives. Beginning with the year 2001, no tax is
levied upon inherited shares if the testators shareholding was below 1% of the
companys issued share capital.

Non-residents of Austria

Shares or ADSs held by non-resident shareholders are not subject to
Austrian inheritance and gift tax on a transfer to another non-resident of
Austria by reason of death or donation. Non-resident shareholders include
Austrian citizens who have not resided in Austria for at least two years. In
all other cases, the transfer of shares or ADSs due to death or as a gift by
shareholders is subject to inheritance and gift tax.

Special rules may apply under any applicable double taxation treaty. If no
such treaty applies, foreign inheritance and gift taxes can be credited against
the Austrian inheritance and gift tax by the Austrian ministry of finance if
reciprocal treatment is available. Reciprocity exists if the foreign country
does not levy inheritance or gift tax on assets located in Austria or if the
foreign country allows Austrian inheritance and gift tax as a credit against
its own inheritance and gift tax. Applications for such credit must be filed
with the Austrian ministry of finance.

Under the current Estate and Gift Tax Treaty between Austria and the
United States, transfers of shares or ADSs by eligible U.S. shareholders are
not subject to Austrian tax.

For more detailed information, reference is made to the double taxation
treaty, if any, concluded with the non-resident shareholders country of
residence.

United States federal income taxation

Overview

The following discussion describes the material U.S. federal income tax
consequences of the acquisition, ownership and sale of Telekom Austrias
shares, including shares represented by ADSs evidenced by ADRs that are
generally applicable to the U.S. holders described below. For these purposes,
you are considered a U.S. holder if you are a beneficial owner of the shares or
ADS and one of the following:



| |  |  | a citizen or resident of the United States for U.S. federal income
tax purposes;                                                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a corporation, or other entity taxable as a corporation, organized
under the laws of the United States or of any political subdivision of
the United States; or
|
| |  |  | an estate or trust the income of which is includible in gross income
for U.S. federal income tax purposes regardless of its source.                            

This discussion only applies to shares or ADSs held by a U.S. holder as
capital assets.

This discussion is based on the tax laws of the United States currently in
effect, including the Internal Revenue Code of 1986, as amended, Treasury
Regulations, administrative announcements, and judicial decisions, as well as
the U.S. treaty. These laws may change, possibly with retroactive effect. This
discussion does not address U.S. state, local or non-U.S. tax consequences.
This discussion is based in part upon representations of the Depositary and
assumes that each obligation provided for in, or otherwise contemplated by, the
Deposit Agreement and any related agreement will be performed in accordance
with its respective terms. The U.S. Treasury has expressed concerns that
parties to whom ADRs are pre-released may be taking actions that are
inconsistent with the claiming, by U.S. holders of ADRs, of foreign tax credits
for United States federal income tax purposes. Accordingly, the analysis of the
creditability of Austrian taxes described below could be affected by future
actions that may be taken by the U.S. Treasury.

132



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Please note that this discussion does not discuss all of the tax
consequences that may be relevant in light of your particular circumstances. In
particular, it does not address purchasers subject to special rules, including:



| |  |  | persons subject to the alternative minimum tax;                                                                                                                                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | insurance companies;                                                                                                                                                                                             
|
| |  |  | tax-exempt entities;                                                                                                                                                                                             
|
| |  |  | dealers in securities;                                                                                                                                                                                           
|
| |  |  | financial institutions;                                                                                                                                                                                          
|
| |  |  | persons who own the shares or ADSs as part of an integrated
investment, including a straddle, hedging or conversion transaction,
comprised of the share or ADSs and one or more other positions for tax
purposes;
|
| |  |  | persons whose functional currency is not the U.S. dollar; or                                                                                                                                                     
|
| |  |  | persons who actually or constructively own 10% or more of our voting stock.                                                                                                                                      

U.S. holders should consult their tax advisers with regard to the
application of U.S. federal income tax laws to the shares or ADSs, whether they
are eligible for benefits under the U.S. treaty and any tax consequences
arising under the laws of any state, local or non-U.S. taxing jurisdictions.
For U.S. federal income tax purposes, holders of ADRs evidencing ADSs will be
treated as owners of the shares represented by those ADSs and the discussion of
U.S. federal income tax consequences to holders of ADSs applies as well to
holders of shares.

Taxation of dividends

Distributions received on the shares or ADSs, including the amount of any
Austrian tax withheld, other than certain pro rata distributions of shares or
rights to acquire shares or ADSs, will generally constitute foreign source
dividend income for U.S. federal income tax purposes to the extent such
distributions are made from our current or accumulated earnings and profits, as
determined in accordance with U.S. federal income tax principles. U.S. holders
will not be entitled to claim a dividends received deduction for dividends paid
on the shares or ADSs. The amount of any cash distribution paid in Euro,
including the amount of any Austrian tax withheld, will be equal to the U.S.
Dollar value of such Euro on the date the dividend distribution is received by
the U.S. holder regardless of whether the payment is in fact converted into
U.S. Dollars. Gain or loss, if any, recognized on the sale or other disposition
of such Euro will be U.S. source ordinary income or loss. The amount of any
distribution of property other than cash will be the fair market value of such
property on the date of distribution. Distributions in excess of current and
accumulated earnings and profits will be treated as a return on capital to the
extent of your basis in the shares or ADSs and thereafter as capital gain.

Subject to certain limitations and restrictions, Austrian taxes withheld
from distributions will be eligible for credit against a U.S. holders U.S.
federal income tax liability. To the extent a refund of the tax withheld is
available to you under Austrian law or under the U.S. treaty, the amount of tax
withheld that is refundable will not be eligible for credit against your United
States federal income tax liability. Furthermore, you will not be allowed a
foreign tax credit for foreign taxes withheld on distributions if you:



| |  |  | have held the shares or ADSs in a capacity in which you are not
protected from risk of loss for less than a specified minimum period;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | are under an obligation to make related payments with respect to
positions in substantially similar or related property; or        
|
| |  |  | hold the shares or ADSs in arrangements in which your expected
economic profit, after non-United States taxes, is not substantial.   

The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose,
dividends we distribute with respect to the shares or ADSs will generally
constitute passive income or, in the case of certain U.S. holders, financial
services income. Prospective purchasers

133



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should consult their tax advisers concerning the foreign tax credit implications of the payment of these
withholding taxes.

Taxation of capital gains

You will recognize a capital gain or loss for U.S. federal income tax
purposes on the sale or exchange of shares or ADSs in the same manner as you
would on the sale or exchange of any other shares held as capital assets. As a
result, you will generally recognize a capital gain or loss for U.S. federal
income tax purposes equal to the difference between the amount realized and
your adjusted basis in the shares or ADSs. The gain or loss will generally be
U.S. source income or loss. You should consult your own tax adviser about the
treatment of capital gains, which may be taxed at lower rates than ordinary
income for non-corporate taxpayers, and capital losses, the deductibility of
which may be limited.

Information reporting and backup withholding

Payment of dividends and sales proceeds that are made within the United
States or through certain U.S.-related financial intermediaries generally are
subject to information reporting and to backup withholding unless (i) the
holder is a corporation or other exempt recipient or (ii) the holder provides a
correct taxpayer identification number and certifies that no loss of exemption
from backup withholding has occurred.

The amount of any backup withholding from a payment to a holder will be
allowed as a credit against your United States federal income tax liability and
may entitle the holder to a refund, provided that the required information is
furnished to the Internal Revenue Service.

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DOCUMENTS ON DISPLAY

We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and file periodic
reports and other information with SEC. We filed a registration statement on
Form F-1 under the Securities and Exchange Act which includes documents
described in this Annual Report. We have filed and will continue to file our
annual reports on Form 20-F and have furnished our interim reports and other
material information on Form 6-K.

A copy of our United States public filings, including the exhibits and
schedules thereto, may be read and copied at the SECs Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549, United States. Information on
the operation of the Public Reference Room may be obtained by calling the SEC
at 1-800-SEC-0330. Our previous filings are also available for reading and
copying at our offices and the offices of the New York Stock Exchange at 20
Broad Street, New York, New York 10005, United States. In November 2002, we
started to be an electronic filer. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.
The annual reports of Telekom Austria may be obtained, and are available for
inspection, during regular business hours at Telekom Austrias registered
office, Schwarzenbergplatz 3, A-1010 Vienna, Austria. In the course of 2003, we
expect to relocate our corporate headquarters and registered office to
Lassallestraße 9, A-1020 Vienna, Austria. We also maintain an internet site at
http://www.telekom.at. Our website and the information contained therein or
connected thereto shall not be deemed to be part of this document.

Our shares have been admitted to listing with the Vienna Stock Exchange
(Austria). As a result of the Vienna Stock Exchange listing of our ordinary
shares, we are subject to the informational reporting requirements of the
Austrian Exchange Act of 1989, as amended. In accordance with this law, we are
required to file three quarterly reports, our annual business reports, our
approved financial statements, notice of our shareholders meeting and of
dividend distributions, issuance of new shares and exercise of subscription or
conversion rights, modification of shareholders rights, substantial
modifications in stake holdings formerly published if known to the corporation,
the Austrian paying agent, buy-back programs relating to the listed shares and
any new facts likely to have a significant influence on the share price. Most
of these filing requirements comprise an additional communication to the
Austrian Financial Market Authority. All the information mentioned above is
publicly available and may be inspected and copies thereof may be obtained at
the Vienna Stock Exchange, Wallnerstraße 8, A-1014 Vienna, Austria. Information
relating to quarterly reports, annual reports, shareholders meetings and
notices of new price sensitive facts can also be found on the Vienna Stock
Exchanges website http://www.wienerboerse.at under the icons Investor
center, Investor relations and Corporate calendar.

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Item 11.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, including interest rate and foreign
currency exchange rate risk associated with underlying assets, liabilities and
anticipated transactions. We selectively enter into derivative financial
instruments to manage the related risk exposures pursuant to our policies in
areas such as counterparty exposure and hedging practices. These policies have
been approved by our senior management. We do not hold or issue derivative
financial instruments for trading or speculative purposes.

We invest excess liquidity in instruments with counterparties approved by
our Debt Management Committee which in the case of all long-term instruments
and derivatives are counterparties with a rating of A- or higher from
Standard & Poors Ratings Group or an equivalent rating from another globally
recognized rating agency.

The following discussion and tables, which constitute forward-looking
statements that involve risk and uncertainties, summarize our market-sensitive
financial instruments including their fair value, maturity and contract terms.
These tables address market risk only and do not present other risks which we
face in the normal course of business, including country risk, credit risk and
legal risk.

Interest rate risk

We regard changing interest rates as our major market risk exposure. A
high proportion of our long-term debt has fixed rates of interest, mitigating
our exposure to fluctuating interest rates. However, the fair value of our
fixed rate debt increases when market rates are below the rates fixed on these
loans. We achieve fixed rates on our borrowings either directly through the use
of fixed rate debt or indirectly through the use of interest rate swaps. Under
interest rate swaps, we agree with other parties to exchange, at specified
intervals, the difference between fixed-rate and floating-rate amounts
calculated by reference to an agreed notional principal amount.

The following tables summarize the nominal and fair values, maturity and
contract terms of our interest rate sensitive financial instruments at December
31, 2002 for Telekom Austria on a consolidated basis including mobilkom austria
group. In the tables that follow, average pay rate represents the weighted
average interest rate applicable as at December 31, 2002. This interest rate is
applied to the notional principal amount under the relevant interest rate swap
contract to determine the amount of interest that we must pay. Average receive
rate represents the weighted average interest rate applicable at December 31,
2002. Again, this interest rate is applied to the notional principal amount
under the relevant interest rate swap contract to determine the amount of
interest that we receive. The notional principal amounts under the relevant
contracts are the amounts used notionally to calculate the amount of interest
to be paid or received as appropriate and are not actually received by either
party and are not, therefore, repayable under the terms of the contract.

|                                                      |  |                                                            |        |      |  |      |   |      |  |      |   |            |  |       |   |       |  |  |   |  |  |          |   |  |  |  |        |      |  |  |        | 
|----------------------------------------------------- |  | ---------------------------------------------------------- | ------ | ---- |  | ---- | - | ---- |  | ---- | - | ---------- |  | ----- | - | ----- |  |  | - |  |  | -------- | - |  |  |  | ------ | ---- |  |  | ------ | 
|                                                      |  | Amounts subject to interest rate risk at December 31, 2002
|                                                      |  | Maturities, year ended December 31,                       
|                                                      |  |                                                           
|                                                      |  |                                                            |        |      |  |      |   |      |  |      |   |            |  |       |   |       |  |  |   |  |  | 2008 and |   |  |  |  |        | Fair
|                                                      |  | 2003                                                       |        | 2004 |  | 2005 |   | 2006 |  | 2007 |   | thereafter |  | Total |   | Value
|                                                      |  |                                                            |        |      |  |      |   |      |  |      |   |            |  |       |   |      
|                                                      |  | (in EUR thousands, except percentages)                    
|ASSETS:                                               |  |                                                            |        |      |  |      |   |      |  |      |   |            |  |       |   |       |  |  |   |  |  |          |   |  |  |  |        |      |  |  |        | 
|Cash at bank and in hand:                             |  |                                                            |        |      |  |      |   |      |  |      |   |            |  |       |   |       |  |  |   |  |  |          |   |  |  |  |        |      |  |  |        | 
|Fixed rate                                            |  |                                                            | 27,337 |      |  |      |  |      |  |      |  |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 27,337 |      |  |  | 27,337 | 
|Average interest rate (%)(1)                          |  |                                                            | 2.53   | %    |  |      |  |      |  |      |  |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 2.53   | %    |  |  |        | 
|Short-term investments:                               |  |                                                            |        |      |  |      |   |      |  |      |   |            |  |       |   |       |  |  |   |  |  |          |   |  |  |  |        |      |  |  |        | 
|Fixed rate                                            |  |                                                            | 5,327  |      |  |      |  |      |  |      |  |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 5,327  |      |  |  | 5,327  | 
|Average interest rate (%)                             |  |                                                            | 4.07   | %    |  |      |  |      |  |      |  |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 4.07   | %    |  |  |        | 
|Accounts Receivables with
related parties (financing) |  |                                                            |        |      |  |      |   |      |  |      |   |            |  |       |   |       |  |  |   |  |  |          |   |  |  |  |        |      |  |  |        | 
|Variable rate                                         |  |                                                            | 149    |      |  |      |  |      |  |      |  |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 149    |      |  |  | 149    | 
|Average interest rate (%)(1)                          |  |                                                            | 3.17   | %    |  |      |  |      |  |      |  |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 3.17   | %    |  |  |        | 
|Non-current investments:                              |  |                                                            |        |      |  |      |   |      |  |      |   |            |  |       |   |       |  |  |   |  |  |          |   |  |  |  |        |      |  |  |        | 
|Securities available for sale                         |  |                                                            | 19,880 |      |  |      |  |      |  |      |  |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 19,880 |      |  |  | 18,948 | 



---

|(1) |  | Weighted average of the year end interest rates applicable to the outstanding amounts.
|--- |  | --------------------------------------------------------------------------------------

136



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##### 



|                                                  |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | ---------- |  | ----- | ------- | ----- |  |  | ------- | - |  | -------- | ------- | - |  |  | --------- | ---- |  |  | --------- | -
|                                                  |  | Liabilities and related derivative instruments subject to interest rate risk at December 31, 2002
|                                                  |  |                                                                                                  
|                                                  |  | Maturities, year ended December 31,                                                              
|                                                  |  |                                                                                                  
|                                                  |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  | 2008 and |         |   |  |  |           | Fair
|                                                  |  | 2003                                                                                              |         | 2004 |  | 2005 |         | 2006 |  | 2007 |         | thereafter |  | Total |         | Value
|                                                  |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |      
|                                                  |  | (in EUR thousands, except percentages)                                                           
|LIABILITIES:                                      |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Lines of Credit:                                  |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Fixed Rate                                        |  |                                                                                                   | 5,823   |      |  |      |        |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 5,823     |      |  |  | 5,823     |  
|Interest rate (%)(1)                              |  |                                                                                                   | 3.78    | %    |  |      |        |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 3.78      | %    |  |  |           |  
|Short-term borrowings                             |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Fixed rate                                        |  |                                                                                                   | 737,144 |      |  |      |        |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 737,144   |      |  |  | 737,144   |  
|Average interest rate (%)                         |  |                                                                                                   | 4.02    | %    |  |      |        |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 4.02      | %    |  |  |           |  
|Bonds:                                            |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Fixed rate                                        |  |                                                                                                   | 365     |      |  |      | 2,546   |      |  |      | 3,635   |            |  |       | 182     |       |  |  |        |   |  |          |        |   |  |  | 6,728     |      |  |  | 6,986     |  
|Average interest rate (%)(1)                      |  |                                                                                                   | 6.00    | %    |  |      | 6.71    | %    |  |      | 6.46    | %          |  |       | 6.00    | %     |  |  |        |   |  |          |        |   |  |  | 6.52      | %    |  |  |           |  
|Variable rate                                     |  |                                                                                                   | 23,463  |      |  |      |        |      |  |      | 145,346 |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 168,809   |      |  |  | 168,809   |  
|Average interest rate (%)(1)                      |  |                                                                                                   | 4.75    | %    |  |      |        |      |  |      | 3.37    | %          |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 3.56      | %    |  |  |           |  
|Loans:                                            |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Fixed rate                                        |  |                                                                                                   | 326,107 |      |  |      | 208,891 |      |  |      | 365,386 |            |  |       | 446,925 |       |  |  | 40,589  |   |  |          | 265,968 |   |  |  | 1,653,866 |      |  |  | 1,776,731 |  
|Average interest rate (%)(1)                      |  |                                                                                                   | 6.38    | %    |  |      | 6.58    | %    |  |      | 5.78    | %          |  |       | 5.98    | %     |  |  | 5.84    | % |  |          | 5.60    | % |  |  | 6.03      | %    |  |  |           |  
|Variable rate                                     |  |                                                                                                   | 109,060 |      |  |      | 212,494 |      |  |      | 82,083  |            |  |       | 85,110  |       |  |  | 121,219 |   |  |          | 99,511  |   |  |  | 709,477   |      |  |  | 709,477   |  
|Average interest rate (%)(1)                      |  |                                                                                                   | 3.51    | %    |  |      | 2.36    | %    |  |      | 3.57    | %          |  |       | 3.97    | %     |  |  | 3.71    | % |  |          | 4.92    | % |  |  | 3.46      | %    |  |  |           |  
|Payables to related parties
(financing)           |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Fixed rate                                        |  |                                                                                                   |        |      |  |      |        |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  |          |      |  |  |          |  
|Average interest rate (%)(1)                      |  |                                                                                                   |        |      |  |      |        |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  |          |      |  |  |           |  
|Variable rate                                     |  |                                                                                                   | 408     |      |  |      |        |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 408       |      |  |  | 408       |  
|Average interest rate (%)(1)                      |  |                                                                                                   | 2.72    | %    |  |      |        |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 2.72      | %    |  |  |           |  
|Lease obligations, excluding
Cross-Border Leases: |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Fixed rate                                        |  |                                                                                                   | 5,340   |      |  |      | 2,137   |      |  |      | 56      |            |  |       | 18      |       |  |  |        |   |  |          |        |   |  |  | 7,551     |      |  |  | 7,262     |  
|Average interest rate (%)(1)                      |  |                                                                                                   | 6.49    | %    |  |      | 3.58    | %    |  |      | 3.58    | %          |  |       | 3.58    | %     |  |  |        |   |  |          |        |   |  |  | 5.64      | %    |  |  |           |  
|                                                  |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|SWAP AGREEMENTS:                                  |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Euro interest rate swap
agreements:               |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Variable to fixed (2)                             |  |                                                                                                   |        |      |  |      | 36,336  |      |  |      | 145,346 |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 181,682   |      |  |  | (16,645   | )
|Average pay rate (%)                              |  |                                                                                                   |        |      |  |      | 5.71    | %    |  |      | 6.66    | %          |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 6.47      | %    |  |  |           |  
|Average receive rate (%)(3)                       |  |                                                                                                   |        |      |  |      | 3.24    | %    |  |      | 3.37    | %          |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 3.35      | %    |  |  |           |  
|Japanese Yen interest rate
swap agreements:       |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Variable to fixed (2)                             |  |                                                                                                   |        |      |  |      | 80,392  |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 80,392    |      |  |  | (4,351    | )
|Average pay rate (%)                              |  |                                                                                                   |        |      |  |      | 3.15    | %    |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 3.15      | %    |  |  |           |  
|Average receive rate (%)(3)                       |  |                                                                                                   |        |      |  |      | 0.01    | %    |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 0.01      | %    |  |  |           |  
|Foreign currency swap
agreements:                 |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Buy Euro                                          |  |                                                                                                   |        |      |  |      |        |      |  |      | 176,635 |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 176,635   |      |  |  | 33,794    |  
|Average fixed interest rate (%)                   |  |                                                                                                   |        |      |  |      |        |      |  |      | 7.65    | %          |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 7.65      | %    |  |  |           |  
|Sell Swiss Franc                                  |  |                                                                                                   |        |      |  |      |        |      |  |      | 206,555 |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 206,555   |      |  |  |           |  
|Average fixed interest rate (%)                   |  |                                                                                                   |        |      |  |      |        |      |  |      | 5.47    | %          |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 5.47      | %    |  |  |           |  
|Buy Euro                                          |  |                                                                                                   |        |      |  |      | 73,554  |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 73,554    |      |  |  | 2,240     |  
|Average fixed interest rate (%)                   |  |                                                                                                   |        |      |  |      | 6.41    | %    |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 6.41      | %    |  |  |           |  
|Sell Japanese Yen                                 |  |                                                                                                   |        |      |  |      | 80,392  |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 80,392    |      |  |  |           |  
|Average fixed interest rate (%)                   |  |                                                                                                   |        |      |  |      | 3.15    | %    |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 3.15      | %    |  |  |           |  
|Foreign currency forward
contract                 |  |                                                                                                   |         |      |  |      |         |      |  |      |         |            |  |       |         |       |  |  |         |   |  |          |         |   |  |  |           |      |  |  |           |  
|Notional amount in EUR                            |  |                                                                                                   | 3,599   |      |  |      |        |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 3,599     |      |  |  | (160      | )
|Notional amount in USD                            |  |                                                                                                   | 3,600   |      |  |      |        |      |  |      |        |            |  |       |        |       |  |  |        |   |  |          |        |   |  |  | 3,600     |      |  |  |           |  



---

|(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.                                      

137



---



##### 



Currency risk

The table below provides information for Telekom Austria on a consolidated
basis including mobilkom austria at December 31, 2002 relating to liabilities
subject to foreign exchange rate risk and foreign currency derivative
instruments which have been entered into in connection with principal and
interest debt payments denominated in foreign currencies.

|                                  |  |                                                                                |   |      |  |      |        |      |  |      |         |            |  |       |   |       |  |  |   |  |  |          |   |  |  |  |         |      |  |  |         | 
|--------------------------------- |  | ------------------------------------------------------------------------------ | - | ---- |  | ---- | ------ | ---- |  | ---- | ------- | ---------- |  | ----- | - | ----- |  |  | - |  |  | -------- | - |  |  |  | ------- | ---- |  |  | ------- | 
|                                  |  | At December 31, 2002 Liabilities and related derivative instruments subject to
|                                  |  | foreign exchange rate risk                                                    
|                                  |  | Maturities, year ended December 31,                                           
|                                  |  |                                                                               
|                                  |  |                                                                                |   |      |  |      |        |      |  |      |         |            |  |       |   |       |  |  |   |  |  | 2008 and |   |  |  |  |         | Fair
|                                  |  | 2003                                                                           |   | 2004 |  | 2005 |        | 2006 |  | 2007 |         | thereafter |  | Total |   | Value
|                                  |  |                                                                                |   |      |  |      |        |      |  |      |         |            |  |       |   |      
|                                  |  | (in EUR thousands, except percentages)                                        
|LIABILITIES:                      |  |                                                                                |   |      |  |      |        |      |  |      |         |            |  |       |   |       |  |  |   |  |  |          |   |  |  |  |         |      |  |  |         | 
|Loans:                            |  |                                                                                |   |      |  |      |        |      |  |      |         |            |  |       |   |       |  |  |   |  |  |          |   |  |  |  |         |      |  |  |         | 
|Fixed rate                        |  |                                                                                |  |      |  |      |       |      |  |      | 206,555 |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 206,555 |      |  |  | 404,172 | 
|Average interest rate(%)(1)       |  |                                                                                |  |      |  |      |       |      |  |      | 5.47    | %          |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 5.47    | %    |  |  |         | 
|Variable rate                     |  |                                                                                |  |      |  |      | 80,392 |      |  |      |        |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 80,392  |      |  |  | 80,392  | 
|Average interest rate(%)(1)       |  |                                                                                |  |      |  |      | 0.01   | %    |  |      |        |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 0.01    | %    |  |  |         | 
|Foreign currency swap
agreements: |  |                                                                                |   |      |  |      |        |      |  |      |         |            |  |       |   |       |  |  |   |  |  |          |   |  |  |  |         |      |  |  |         | 
|Buy Euro                          |  |                                                                                |  |      |  |      |       |      |  |      | 176,635 |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 176,635 |      |  |  | 33,794  | 
|Average fixed interest rate(%)    |  |                                                                                |  |      |  |      |       |      |  |      | 7.65    | %          |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 7.65    | %    |  |  |         | 
|Sell Swiss Franc                  |  |                                                                                |  |      |  |      |       |      |  |      | 206,555 |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 206,555 |      |  |  |         | 
|Average fixed interest rate(%)    |  |                                                                                |  |      |  |      |       |      |  |      | 5.47    | %          |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 5.47    | %    |  |  |         | 
|Buy Euro                          |  |                                                                                |  |      |  |      | 73,554 |      |  |      |        |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 73,554  |      |  |  | 2,240   | 
|Average fixed interest rate(%)    |  |                                                                                |  |      |  |      | 6.41   | %    |  |      |        |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 6.41    | %    |  |  |         | 
|Sell Japanese Yen                 |  |                                                                                |  |      |  |      | 80,392 |      |  |      |        |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 80,392  |      |  |  |         | 
|Average fixed interest rate(%)    |  |                                                                                |  |      |  |      | 3.15   | %    |  |      |        |            |  |       |  |       |  |  |  |  |  |          |  |  |  |  | 3.15    | %    |  |  |         | 



---

|(1) |  | Weighted average of the interest rates applicable to the outstanding
amount.
|--- |  | ----------------------------------------------------------------------------

The fair value of loans and other debt, including bonds, finance leases
and liabilities to banks, is estimated based on the present value of fixed-rate
instruments using market rates. The carrying amount of short-term positions
approximates fair value because of their short maturity. The fair value of
securities available for sale is based on quoted market rates. The fair value
of derivative instruments generally reflects the estimated amount we would
receive or pay to terminate the contracts at the reporting date, taking into
account the current unrealized gains and losses of open contracts. The
estimated fair values of derivatives used to hedge or modify our risk will vary
substantially with future changes in interest rates or with fluctuations in
foreign exchange rates. These fair values should not be viewed in isolation,
but rather in relation to the fair values of the underlying hedged transactions
and the overall reduction in our exposure to adverse fluctuations in interest
and foreign exchange rates.

138



---



##### 



Item 12. Description of Securities Other than Equity Securities

Not applicable

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not applicable

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

None

Item 15. Controls and Procedures

Within 90 days prior to the date of this report, the Company, under the
supervision and with the participation of the Companys management, including
the Chief Executive Officer and the Chief Financial Officer, performed an
evaluation of the effectiveness of the Companys disclosure controls and
procedures. Based on this evaluation, the Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective for gathering, analyzing and disclosing the
information the Company is required to disclose in the reports it files under
the Securities Exchange Act of 1934, within the time periods specified in the
SECs rules and forms. The Companys management necessarily applied its
judgment in assessing the costs and benefits of such controls and procedures,
which by their nature can provide only reasonable assurance regarding
managements control objectives.

Item 16. [Reserved]

PART III

Item 17. Financial Statements

Not applicable

Item 18. Financial Statements

See pages F-1 through F-55, which are included in the appendix.

Item 19. Exhibits

Documents filed as exhibits to this Report:



| | 1.1 |  | The Articles of Association of Telekom Austria AG.                                                                                             
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| | 1.2 |  | The By-laws of Telekom Austria AG incorporated by reference to
Exhibit 3.2 of the Registration Statement filed on Form F-1 on October 31, 2000.
|
| | 8.1 |  | Subsidiaries as of the date of this filing (Structure of Telekom
Austria Group).                                                             

139



---



##### 



SIGNATURES

The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

| |  |        |  |                        
| |  | ------ |  | -----------------------
| |  |        |  | TELEKOM AUSTRIA AG     
| |  |        |  |                        
| |  |        |  |                        
| |  | By     |  | /s/ Heinz Sundt        
| |  |        |  |                        
| |  | Name:  |  | Heinz Sundt            
| |  | Title: |  | Chief Executive Officer
| |  |        |  |                        
| |  |        |  |                        
| |  | By     |  | /s/ Stefano Colombo    
| |  |        |  |                        
| |  | Name:  |  | Stefano Colombo        
| |  | Title: |  | Chief Financial Officer

Dated: April 16, 2003

140



---



##### 



CERTIFICATIONS

I, Heinz Sundt, certify that:

1.     I have reviewed this annual report on Form 20-F of Telekom Austria AG;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
function):



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |              |  |                                    
|-------------------- |  | ------------ |  | -----------------------------------
|                     |  | By           |  | /s/ Heinz Sundt                    
|                     |  |              |  |                                    
|                     |  | Name:
Title: |  | Heinz Sundt
Chief Executive Officer
|                     |  |              |  |                                    
|Date: April 16, 2003 |  |              |  |                                    

141



---



##### 









I, Stefano Colombo, certify that:

1.     I have reviewed this annual report on Form 20-F of Telekom Austria AG;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
function):



| | a. |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |              |  |                                        
|-------------------- |  | ------------ |  | ---------------------------------------
|                     |  | By           |  | /s/ Stefano Colombo                    
|                     |  |              |  |                                        
|                     |  | Name:
Title: |  | Stefano Colombo
Chief Financial Officer
|Date: April 16, 2003 |  |              |  |                                        

142



---



##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                   |                                                                                                                 |  |      |     | 
|---------------------------------- | --------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                   |                                                                                                                 |  | Page
|                                   |                                                                                                                 |  |     
|Telekom Austria Aktiengesellschaft |                                                                                                                 |  |      |    
|Consolidated Financial Statements  |                                                                                                                 |  |      |    
|                                   | Independent auditors reports                                                                                   |  |      | F-2 | 
|                                   | Consolidated balance sheets as of December 31, 2002 and 2001                                                    |  |      | F-5 | 
|                                   | Consolidated statements of operations for the years ended December 31, 2002, 2001 and 2000                      |  |      | F-6 | 
|                                   | Consolidated statements of cash flows for the years ended December 31, 2002, 2001 and 2000                      |  |      | F-7 | 
|                                   | Consolidated statements of changes in stockholders equity for the years ended
December 31, 2002, 2001 and 2000 |  |      | F-8 | 
|                                   | Notes to consolidated financial statements                                                                      |  |      | F-9 | 

F-1



---



##### 



Independent auditors report

The Supervisory Board and Stockholders
Telekom Austria Aktiengesellschaft:

We have audited the accompanying consolidated balance sheet of Telekom Austria Aktiengesellschaft as of December 31, 2002, and the related
consolidated statements of operations, cash flows and changes in stockholders equity for the year ended December 31, 2002.
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. We did not audit the financial statements of
mobilkom austria AG & Co KG and mobilkom austria AG and subsidiaries (collectively mobilkom), wholly-owned consolidated
subsidiaries (74.999 percent owned unconsolidated subsidiaries from January 1, 2002 to June 28, 2002) whose total assets as of December 31, 2002
constitute 32.2 percent of total consolidated assets and whose revenues for the period from June 28, 2002 to December 31, 2002 constitute
30.7 percent of total consolidated revenues. The Companys equity in earnings of mobilkom for the period from January 1, 2002 to June 28, 2002
was euro 142,905,720.77. The financial statements of mobilkom were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for mobilkom, is based solely on the report of the other auditors.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telekom Austria Aktiengesellschaft as of December 31, 2002, and the results
of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted
in the United States of America.

As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of Statements of Financial Accounting
Standards No. 141 Business Combinations and No. 142 Goodwill and Other Intangible Assets effective January 1, 2002.

KPMG Alpen-Treuhand GmbH
Wirtschaftsprüfungs- und Steurberatungsgesellschaft

(KPMG Alpen Treuhand GmbH Signature)



Vienna,
March 12, 2003

F-2



---



##### 



Independent auditors report

The Supervisory Board and Stockholder
mobilkom austria AG & Co KG and
mobilkom austria AG:

We have audited the combined consolidated balance sheet of mobilkom austria AG & Co KG and mobilkom austria AG and subsidiaries (collectively mobilkom), wholly-owned consolidated
subsidiaries of Telekom Austria Aktiengesellschaft (74.999 percent owned unconsolidated subsidiaries from January 1, 2002 to June 28, 2002),
as of December 31, 2002, and the related combined consolidated statements of operations, cash flows and changes in stockholders equity
for the year then ended (not presented separately herein). These combined consolidated financial statements are the
responsibility of mobilkoms management. Our responsibility is to express an opinion on these combined consolidated financial statements
based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the specified forms are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the combined consolidated financial statements referred to above present
fairly, in all material respects, the financial position of mobilkom as of December 31, 2002, and the results
of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted
in the United States of America.

As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of Statements of Financial Accounting
Standards No. 141 Business Combinations and No. 142 Goodwill and Other Intangible Assets effective January 1, 2002.

Grant Thornton
Wirtschaftsprüfungs- und Steuerberatungs-GmbH

-s- Grant Thornton



Vienna,
March 12, 2003

F-3



---



##### 



Independent auditors report

The Supervisory Board and Stockholders
Telekom Austria Aktiengesellschaft:

We have audited the accompanying consolidated balance sheet of Telekom Austria Aktiengesellschaft and subsidiaries (Telekom Austria) as of December 31, 2001, and the related
consolidated statements of operations, cash flows and changes in stockholders equity for each of the years in the two year period then ended.
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telekom Austria as of December 31, 2001, and the results
of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted
in the United States of America.

|                                                                                |  |                                                                       
|------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------
|Grant Thornton  Jonasch & Platzer
Wirtschaftsprüfungs- und Steuerberatungs-OHG |  | KPMG Austria GmbH
Wirtschaftsprüfungs- und Steuerberatungsgesellschaft
|(Grant Thornton - Jonasch & Pletzer)                                            |  | (KPMG Austria GmbH Signature)                                         



Vienna,
March 20, 2002

F-4



---



##### 



TELEKOM AUSTRIA AG
CONSOLIDATED BALANCE SHEETS
(in EUR 000s, except share information)

|                                           |                                                                                                            |                            |           |              |           |              |           |           |           | 
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ------------ | --------- | ------------ | --------- | --------- | --------- | 
|                                           |                                                                                                            |                            |           | December 31, |           | December 31,
|                                           |                                                                                                            |                            |           | 2002         |           | 2001        
|                                           |                                                                                                            |                            |           |              |           |             
|ASSETS                                     |                                                                                                            |                            |           |              |           |              |           |          
|Current assets                             |                                                                                                            |                            |           |              |           |              |           |          
|                                           | Cash and cash equivalents                                                                                  |                            |           | 27,337       |           |              |           | 26,393    |          
|                                           | Short-term investments                                                                                     |                            |           | 5,327        |           |              |           | 0         |          
|                                           | Accounts receivable trade, net of allowances of EUR 74,945 and EUR 47,074
as of December 31, 2002 and 2001 |                            |           | 451,934      |           |              |           | 455,272   |          
|                                           | Receivables due from related parties                                                                       |                            |           | 6,723        |           |              |           | 105,979   |          
|                                           | Inventories                                                                                                |                            |           | 91,261       |           |              |           | 55,786    |          
|                                           | Deferred tax assets                                                                                        |                            |           | 4,657        |           |              |           | 3,822     |          
|                                           | Prepaid expenses                                                                                           |                            |           | 81,935       |           |              |           | 25,405    |          
|                                           | Taxes receivable                                                                                           |                            |           | 22,829       |           |              |           | 38,069    |          
|                                           | Assets held for sale                                                                                       |                            |           | 30,512       |           |              |           | 0         |          
|                                           | Other current assets                                                                                       |                            |           | 142,743      |           |              |           | 128,465   |          
|                                           |                                                                                                            |                            |           |              |           |              |           |          
|                                           |                                                                                                            | TOTAL CURRENT ASSETS       |           |              | 865,258   |              |           |           | 839,191   | 
|                                           |                                                                                                            |                            |           |              |           |              |           |          
|Property, plant and equipment, net         |                                                                                                            |                            | 5,000,659 |              |           |              | 4,591,757 |          
|Goodwill                                   |                                                                                                            |                            | 590,727   |              |           |              | 60,244    |          
|Other intangible assets, net               |                                                                                                            |                            | 725,893   |              |           |              | 20,406    |          
|Investments in affiliates                  |                                                                                                            |                            | 8,642     |              |           |              | 510,682   |          
|Other investments                          |                                                                                                            |                            | 162,682   |              |           |              | 171,504   |          
|Deferred tax assets                        |                                                                                                            |                            | 193,414   |              |           |              | 323,911   |          
|Due from related parties                   |                                                                                                            |                            | 0         |              |           |              | 218,018   |          
|Other assets                               |                                                                                                            |                            | 987,063   |              |           |              | 991,609   |          
|                                           |                                                                                                            |                            |           |              |           |              |           |          
|                                           |                                                                                                            | TOTAL ASSETS               |           |              | 8,534,338 |              |           |           | 7,727,322 | 
|                                           |                                                                                                            |                            |           |              |           |              |           |          
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                            |                            |           |              |           |              |           |          
|Current liabilities                        |                                                                                                            |                            |           |              |           |              |           |          
|                                           | Short-term borrowings                                                                                      |                            |           | 1,309,905    |           |              |           | 978,092   |          
|                                           | Accounts payable  trade                                                                                   |                            |           | 649,890      |           |              |           | 439,529   |          
|                                           | Accrued liabilities                                                                                        |                            |           | 256,790      |           |              |           | 131,296   |          
|                                           | Payables to related parties                                                                                |                            |           | 37,198       |           |              |           | 15,982    |          
|                                           | Deferred income                                                                                            |                            |           | 129,963      |           |              |           | 55,266    |          
|                                           | Income taxes payable                                                                                       |                            |           | 6,077        |           |              |           | 0         |          
|                                           | Other current liabilities                                                                                  |                            |           | 141,210      |           |              |           | 59,969    |          
|                                           |                                                                                                            |                            |           |              |           |              |           |          
|                                           |                                                                                                            | TOTAL CURRENT LIABILITIES  |           |              | 2,531,033 |              |           |           | 1,680,134 | 
|                                           |                                                                                                            |                            |           |              |           |              |           |          
|Long-term debt, net of current portion     |                                                                                                            |                            | 2,079,885 |              |           |              | 2,005,226 |          
|Lease obligations, net of current portion  |                                                                                                            |                            | 1,076,354 |              |           |              | 1,086,874 |          
|Employee benefit obligations               |                                                                                                            |                            | 232,529   |              |           |              | 378,125   |          
|Other                                      |                                                                                                            |                            | 104,997   |              |           |              | 76,569    |          
|                                           |                                                                                                            |                            |           |              |           |              |           |          
|Stockholders equity                       |                                                                                                            |                            |           |              |           |              |           |          
|                                           | Common stock, issued and outstanding shares 500,000,000
with zero par value                                |                            |           | 1,090,500    |           |              |           | 1,090,500 |          
|                                           | Additional paid in capital                                                                                 |                            |           | 452,498      |           |              |           | 451,677   |          
|                                           | Retained earnings                                                                                          |                            |           | 969,626      |           |              |           | 956,837   |          
|                                           | Accumulated other comprehensive income (loss)                                                              |                            |           | (3,084       | )         |              |           | 1,380     |          
|                                           |                                                                                                            |                            |           |              |           |              |           |          
|                                           |                                                                                                            | TOTAL STOCKHOLDERS EQUITY |           |              | 2,509,540 |              |           |           | 2,500,394 | 
|                                           |                                                                                                            |                            |           |              |           |              |           |          
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                            |                            | 8,534,338 |              |           |              | 7,727,322 |          
|                                           |                                                                                                            |                            |           |              |           |              |           |          

see accompanying notes to consolidated financial statements

F-5



---



##### 



TELEKOM AUSTRIA AG
CONSOLIDATED STATEMENTS OF OPERATIONS
(in EUR 000s, except share information)

|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |            |          |  
|------------------------------------------------------------------------ | --------------------------------------------- | ----------------------------------------------------------------------------- | - | - | - |  | --------- | ---------- | ------ | ---- | --------- | ---------- | -------- | - | --------- | ---------- | -------- | -
|                                                                         |                                               |                                                                               |   |   |   |  |           | 2002       |        | 2001 |           | 2000      
|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |           
|Operating revenues                                                       |                                               |                                                                               | a | ) |   |  | 3,118,064 |            |        |      | 2,659,660 |            |          |   | 2,814,397 |           
|Operating expenses                                                       |                                               |                                                                               | b | ) |   |  |           |            |        |      |           |            |          |   |           |           
|                                                                         | Materials                                     |                                                                               |   |   |   |  |           | (196,434   | )      |      |           | (71,908    | )        |   |           | (108,167   | )       
|                                                                         | Employee costs, including benefits and taxes  |                                                                               |   |   |   |  |           | (571,329   | )      |      |           | (567,128   | )        |   |           | (856,718   | )       
|                                                                         | Idle workforce                                |                                                                               |   |   |   |  |           | (29,389    | )      |      |           | (51,952    | )        |   |           | (8,881     | )       
|                                                                         | Depreciation and amortization                 |                                                                               |   |   |   |  |           | (1,016,312 | )      |      |           | (904,075   | )        |   |           | (913,744   | )       
|                                                                         | Impairment charges                            |                                                                               |   |   |   |  |           | (41,871    | )      |      |           | (145,126   | )        |   |           | (2,145     | )       
|                                                                         | Net loss from retirement of long lived assets |                                                                               |   |   |   |  |           | (18,715    | )      |      |           | 0          |          |   |           | 0          |         
|                                                                         | Other operating expenses                      |                                                                               |   |   |   |  |           | (1,186,639 | )      |      |           | (1,114,910 | )        |   |           | (1,223,918 | )       
|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |           
|                                                                         |                                               | OPERATING INCOME (LOSS)                                                       |   |   |   |  |           |            | 57,375 |      |           |            | (195,439 | ) |           |            | (299,176 | )
|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |           
|Other income (expense)                                                   |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |           
|                                                                         | Interest income                               |                                                                               |   | c | ) |  |           | 88,191     |        |      |           | 82,683     |          |   |           | 78,552     |         
|                                                                         | Interest expense                              |                                                                               |   | d | ) |  |           | (244,628   | )      |      |           | (240,986   | )        |   |           | (239,914   | )       
|                                                                         | Dividend income                               |                                                                               |   |   |   |  |           | 448        |        |      |           | 2,229      |          |   |           | 1,405      |         
|                                                                         | Equity in earnings of affiliates              |                                                                               |   |   |   |  |           | 140,543    |        |      |           | 195,450    |          |   |           | 36,314     |         
|                                                                         | Other, net                                    |                                                                               |   |   |   |  |           | 1,882      |        |      |           | (44,005    | )        |   |           | (38,196    | )       
|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |           
|                                                                         |                                               | INCOME (LOSS) BEFORE INCOME TAXES, MINORITY
INTERESTS AND EXTRAORDINARY ITEMS |   |   |   |  |           |            | 43,811 |      |           |            | (200,068 | ) |           |            | (461,015 | )
|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |           
|Income tax (expense) benefit                                             |                                               |                                                                               |   |   |   |  | (26,112   | )          |        |      | 94,913    |            |          |   | 178,829   |           
|Minority interests                                                       |                                               |                                                                               |   |   |   |  | (4,910    | )          |        |      | 530       |            |          |   | 75        |           
|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |           
|                                                                         |                                               | INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS                                      |   |   |   |  |           |            | 12,789 |      |           |            | (104,625 | ) |           |            | (282,111 | )
|Extraordinary loss, net of tax                                           |                                               |                                                                               |   |   |   |  | 0         |            |        |      | 0         |            |          |   | (3,453    | )         
|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |           
|                                                                         |                                               | NET INCOME (LOSS)                                                             |   |   |   |  |           |            | 12,789 |      |           |            | (104,625 | ) |           |            | (285,564 | )
|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |           
|Basic and fully diluted earnings per share                               |                                               |                                                                               |   |   |   |  | 0.03      |            |        |      | (0.21     | )          |          |   | (0.57     | )         
|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |           
|Basic and fully diluted earnings per share excluding
extraordinary items |                                               |                                                                               |   |   |   |  | 0.03      |            |        |      | (0.21     | )          |          |   | (0.56     | )         
|                                                                         |                                               |                                                                               |   |   |   |  |           |            |        |      |           |            |          |   |           |           
|a) includes revenues from related parties of                             |                                               |                                                                               |   |   |   |  | 147,990   |            |        |      | 293,459   |            |          |   | 289,818   |           
|b) includes operating expenses from related parties of                   |                                               |                                                                               |   |   |   |  | 178,857   |            |        |      | 314,769   |            |          |   | 309,094   |           
|c) includes interest income from related parties of                      |                                               |                                                                               |   |   |   |  | 4,992     |            |        |      | 17,619    |            |          |   | 3,138     |           
|d) includes interest expense from related parties of                     |                                               |                                                                               |   |   |   |  | 938       |            |        |      | 749       |            |          |   | 13,045    |           

see accompanying notes to consolidated financial statements

F-6



---



##### 



TELEKOM AUSTRIA AG
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in EUR 000s, except share information)

|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |          |          |  
|---------------------------------------------------- | --------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------- | -------- | --------- | ---- | -------- | -------- | --------- | - | --------- | -------- | -------- | -
|                                                     |                                                                       |                                                                  |            | 2002     |           | 2001 |          | 2000    
|                                                     |                                                                       |                                                                  |            |          |           |      |          |         
|Cash generated from operations                       |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|                                                     | Net income                                                            |                                                                  |            | 12,789   |           |      |          | (104,625 | )         |   |           | (285,564 | )       
|                                                     | Adjustments to reconcile net income to cash
generated from operations |                                                                  |            |          |           |      |          |          |           |   |           |          |         
|                                                     |                                                                       | Depreciation, amortization and impairment charges                |            |          | 1,058,183 |      |          |          | 1,049,201 |   |           |          | 915,889  |  
|                                                     |                                                                       | Employee benefit obligation  non cash                           |            |          | (49,840   | )    |          |          | 3,145     |   |           |          | 262,058  |  
|                                                     |                                                                       | Allowance for doubtful accounts                                  |            |          | 39,184    |      |          |          | 14,818    |   |           |          | 26,483   |  
|                                                     |                                                                       | Change in deferred taxes                                         |            |          | 33,498    |      |          |          | (94,969   | ) |           |          | (180,726 | )
|                                                     |                                                                       | Equity in earnings of affiliates in excess of dividends received |            |          | (45,801   | )    |          |          | (80,731   | ) |           |          | 30,805   |  
|                                                     |                                                                       | Stock purchase plan                                              |            |          | 0         |      |          |          | 0         |   |           |          | 7,196    |  
|                                                     |                                                                       | Loss (gain) on sale of investments                               |            |          | 195       |      |          |          | 0         |   |           |          | (524     | )
|                                                     |                                                                       | Loss on disposal / retirement of equipment                       |            |          | 17,280    |      |          |          | 38,922    |   |           |          | 35,161   |  
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|                                                     |                                                                       |                                                                  | 1,052,699  |          |           |      | 930,386  |          |           |   | 1,096,342 |         
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|                                                     | Changes in assets and liabilities, net of effect of business acquired |                                                                  |            |          |           |      |          |          |           |   |           |          |         
|                                                     |                                                                       | Accounts receivable  trade                                      |            |          | 175,522   |      |          |          | 24,401    |   |           |          | 94,224   |  
|                                                     |                                                                       | Due from related parties                                         |            |          | 3,759     |      |          |          | 69,050    |   |           |          | (12,508  | )
|                                                     |                                                                       | Inventories                                                      |            |          | 6,052     |      |          |          | 19,030    |   |           |          | 4,920    |  
|                                                     |                                                                       | Prepaid expenses                                                 |            |          | (13,792   | )    |          |          | (8,874    | ) |           |          | 2,005    |  
|                                                     |                                                                       | Other assets                                                     |            |          | 4,772     |      |          |          | (47,568   | ) |           |          | 7,808    |  
|                                                     |                                                                       | Accounts payable  trade                                         |            |          | 10,979    |      |          |          | (85,734   | ) |           |          | 143,480  |  
|                                                     |                                                                       | Employee benefit obligation                                      |            |          | (102,565  | )    |          |          | (73,592   | ) |           |          | (61,985  | )
|                                                     |                                                                       | Accrued liabilities                                              |            |          | 3,881     |      |          |          | (54,414   | ) |           |          | 38,723   |  
|                                                     |                                                                       | Due to related parties                                           |            |          | 17,088    |      |          |          | 3,830     |   |           |          | (27,054  | )
|                                                     |                                                                       | Other liabilities                                                |            |          | 230       |      |          |          | 170,490   |   |           |          | 7,282    |  
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|                                                     |                                                                       |                                                                  | 105,926    |          |           |      | 16,619   |          |           |   | 196,895   |         
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|                                                     |                                                                       |                                                                  | 1,171,414  |          |           |      | 842,380  |          |           |   | 1,007,673 |         
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|Cash from (used in) investing activities             |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|                                                     | Capital expenditures, including interest capitalized                  |                                                                  |            | (560,742 | )         |      |          | (459,039 | )         |   |           | (601,538 | )       
|                                                     | Acquisitions and investments, net of cash acquired                    |                                                                  |            | (665,128 | )         |      |          | (4,759   | )         |   |           | (334,662 | )       
|                                                     | Proceeds from sale of equipment                                       |                                                                  |            | 49,819   |           |      |          | 12,106   |           |   |           | 16,133   |         
|                                                     | Purchase of investments  short-term                                  |                                                                  |            | (1,629   | )         |      |          | (2,790   | )         |   |           | (176     | )       
|                                                     | Purchase of investments  long-term                                   |                                                                  |            | (1,107   | )         |      |          | 0        |           |   |           | 0        |         
|                                                     | Sale (purchase) of American call for stock option plan                |                                                                  |            | 2,609    |           |      |          | 0        |           |   |           | (12,527  | )       
|                                                     | Proceeds from sale of investments  short-term                        |                                                                  |            | 6        |           |      |          | 8        |           |   |           | 36,336   |         
|                                                     | Proceeds from sale of investments  long-term                         |                                                                  |            | 225      |           |      |          | 1,285    |           |   |           | 2,719    |         
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|                                                     |                                                                       |                                                                  | (1,175,947 | )        |           |      | (453,189 | )        |           |   | (893,715  | )       
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|Cash from (used in) financing activities             |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|                                                     | Principal payments on bonds                                           |                                                                  |            | (72,673  | )         |      |          | (61,845  | )         |   |           | (202,030 | )       
|                                                     | Proceeds from issuance of long-term debt                              |                                                                  |            | 127,857  |           |      |          | 0        |           |   |           | 377,553  |         
|                                                     | Principal payments on long-term debt                                  |                                                                  |            | (406,294 | )         |      |          | (335,159 | )         |   |           | (138,151 | )       
|                                                     | Change in short-term bank borrowings                                  |                                                                  |            | 237,973  |           |      |          | 74,968   |           |   |           | 387,710  |         
|                                                     | Changes in financing with ÖIAG                                        |                                                                  |            | 0        |           |      |          | 0        |           |   |           | (492,516 | )       
|                                                     | Changes from financing with mobilkom austria                          |                                                                  |            | 114,921  |           |      |          | (73,166  | )         |   |           | (268,520 | )       
|                                                     | Proceeds from sale of tax benefits                                    |                                                                  |            | 0        |           |      |          | 14,547   |           |   |           | 0        |         
|                                                     | Dividends paid                                                        |                                                                  |            | 0        |           |      |          | 0        |           |   |           | (140,549 | )       
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|                                                     |                                                                       |                                                                  | 1,784      |          |           |      | (380,655 | )        |           |   | (476,503  | )       
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|Effect of exchange rate changes                      |                                                                       |                                                                  | 3,693      |          |           |      | 142      |          |           |   | 158       |         
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|Net increase (decrease) in cash and cash equivalents |                                                                       |                                                                  | 944        |          |           |      | 8,678    |          |           |   | (362,387  | )       
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|Cash and cash equivalents at beginning of period     |                                                                       |                                                                  | 26,393     |          |           |      | 17,715   |          |           |   | 380,102   |         
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         
|Cash and cash equivalents at end of period           |                                                                       |                                                                  | 27,337     |          |           |      | 26,393   |          |           |   | 17,715    |         
|                                                     |                                                                       |                                                                  |            |          |           |      |          |          |           |   |           |         

see accompanying notes to consolidated financial statements

F-7



---



##### 



TELEKOM AUSTRIA AG
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in EUR 000s, except share information)

|                           |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  |           |          |  
|-------------------------- | --------------------------------------------------------------------------------- |  | ------------ |  | --------- |  | ---------- |  | --------------- |  | ----------------- | --- | ------------- |  | ------------------- | -------- | - |  | ------ | ------- | - |  | --------- | -------- | -
|                           |                                                                                   |  | Common
stock |  |           |  |            |  | Retained        |  | Accumulated other |     |               |  |                    
|                           |                                                                                   |  | Number of    |  |           |  |            |  | Additional paid |  | earnings          |     | comprehensive |  | Total stockholders
|                           |                                                                                   |  | shares       |  | Par value |  | in capital |  | (see note 20)   |  | income (loss)     |     | equity       
|                           |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |              
|Balance January 1, 2000    |                                                                                   |  | 500,000,000  |  |           |  | 1,090,500  |  |                 |  | 452,105           |     |               |  | 1,487,575           |          |   |  | (107   | )       |   |  | 3,030,073 |         
|Dividends declared         |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  | (140,549            | )        |   |  |        |         |   |  | (140,549  | )       
|Stock purchase plan        |                                                                                   |  |              |  |           |  |            |  |                 |  | 7,924             |     |               |  |                     |          |   |  |        |         |   |  | 7,924     |         
|Change in stock options    |                                                                                   |  |              |  |           |  |            |  |                 |  | (8,352            | )   |               |  |                     |          |   |  |        |         |   |  | (8,352    | )       
|Comprehensive loss         |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  |           |         
|                           | Net loss                                                                          |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     | (285,564 | ) |  |        |         |   |  |           | (285,564 | )
|                           | Unrealized losses on securities, net of
EUR 62 deferred income tax                |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        | (121    | ) |  |           | (121     | )
|                           | Foreign currency translation adjustment                                           |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        | 201     |   |  |           | 201      |  
|Total comprehensive loss   |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  | (285,484  | )       
|                           |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  |           |         
|Balance December 31, 2000  |                                                                                   |  | 500,000,000  |  |           |  | 1,090,500  |  |                 |  | 451,677           |     |               |  | 1,061,462           |          |   |  | (27    | )       |   |  | 2,603,612 |         
|Comprehensive income       |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  |           |         
|                           | Net loss                                                                          |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     | (104,625 | ) |  |        |         |   |  |           | (104,625 | )
|                           | Net unrealized loss on securities, net of
EUR 83 deferred income tax              |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        | (162    | ) |  |           | (162     | )
|                           | Foreign currency translation adjustment                                           |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        | 14,630  |   |  |           | 14,630   |  
|                           | Accumulative effect of accounting change, net
of EUR 5,646 deferred income tax    |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        | (10,959 | ) |  |           | (10,959  | )
|                           | Unrealized net loss of hedging activities,
net of EUR 954 deferred income tax     |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        | (2,102  | ) |  |           | (2,102   | )
|Total comprehensive loss   |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  | (103,218  | )       
|                           |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  |           |         
|Balance December 31, 2001  |                                                                                   |  | 500,000,000  |  |           |  | 1,090,500  |  |                 |  | 451,677           |     |               |  | 956,837             |          |   |  | 1,380  |         |   |  | 2,500,394 |         
|Comprehensive income       |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  |           |         
|                           | Sale of call options, net of
EUR (424) income tax                                 |  |              |  |           |  |            |  |                 |  |                   | 821 |               |  |                     |          |   |  |        |         |   |  |           | 821      |  
|                           | Net income                                                                        |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     | 12,789   |   |  |        |         |   |  |           | 12,789   |  
|                           | Net unrealized loss on securities, net of
EUR 362 deferred income tax             |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        | (687    | ) |  |           | (687     | )
|                           | Foreign currency translation adjustment                                           |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        | (6,496  | ) |  |           | (6,496   | )
|                           | Unrealized net gain of hedging activities,
net of EUR (1,386) deferred income tax |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        | 2,719   |   |  |           | 2,719    |  
|Total comprehensive income |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  | 8,325     |         
|                           |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  |           |         
|Balance December 31, 2002  |                                                                                   |  | 500,000,000  |  |           |  | 1,090,500  |  |                 |  | 452,498           |     |               |  | 969,626             |          |   |  | (3,084 | )       |   |  | 2,509,540 |         
|                           |                                                                                   |  |              |  |           |  |            |  |                 |  |                   |     |               |  |                     |          |   |  |        |         |   |  |           |         

see accompanying notes to consolidated financial statements

F-8



---



##### 



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



|(1) |  | THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
|--- |  | -----------------------------------------------

Description of business, organization and relationship with
the Federal Republic of Austria

Telekom Austria AG and subsidiaries (the Company or Telekom Austria)
is engaged as a full service telecommunications provider of long distance,
local and wireless services, corporate data communication services as well as
internet services. The Company also provides services through pay phones and
supplying telephones and technical equipment for telephone communication. These
activities are conducted and operated primarily in Austria.

On May 1, 1996, Post und Telekom Austria Aktiengesellschaft (PTA) was
incorporated as successor to Post und Telegraphenverwaltung. The
Poststrukturgesetz (Austrian Post Restructuring Act) provided the basis for the
separation of PTA from the Federal Republic of Austria. PTAs operations
included postal services, telecommunications, coach line services and other
activities.

As of December 31, 1997, the postal services, coach line services and
other non-telecommunication-related operations of PTA were transferred to
different legal entities. The operations remaining related to the
telecommunications business and were named Telekom Austria AG.

In 1998, Telecom Italia SpA (Telekom Italia), through its subsidiary
STET Internationale Netherlands NV, became a strategic investor in the Company
by acquiring 25 % plus one share in Telekom Austria AG from the Austrian
government. Telecom Italia previously owned 29.78 % of Telekom Austria but sold
75,000,000 shares on November 4, 2002 in a private placement, reducing its
level of ownership to 14.78 % as of December 31, 2002.

The Federal Republic of Austria, through Österreichische Industrie-Holding
AG (ÖIAG), continues to be a significant shareholder owning approximately
47.17 % of the voting common stock of the Company. In addition to the
transactions described in note (6), the Federal Republic of Austria authorizes
and supervises the Rundfunk und Telekom Regulierungs  GmbH (RTR), which
regulates certain activities of the Company. The government holds the taxing
authority for the Austrian operations of Telekom Austria and imposes taxes such
as income and value added taxes on the Company.

All of the Companys interests in mobile communications business are held
through mobilkom austria AG & Co KG (mobilkom KG) and mobilkom austria AG and
its subsidiaries, collectively these companies are referred to as mobilkom
austria. Prior to a change in tax status in the first quarter 2001 this group
was called mobilkom austria AG (note 18). Through June 28, 2002, the Company
owned 75 % minus one share of the common stock in mobilkom austria AG and a
74.999 % interest in mobilkom KG. The remaining 25 % plus one share of the
common stock in mobilkom austria AG and 25.001 % interest in mobilkom KG were
held by AUTEL Beteiligungs GmbH (Autel) a subsidiary of Telecom Italia Mobile
SpA, a publicly-traded subsidiary of Telecom Italia.

On June 28, 2002, the Company acquired 100 % of Autel, including its
25.001 % equity interest in mobilkom austria, bringing its total interest in
mobilkom austria to 100 %. Consequently, the Company has consolidated mobilkom
austria effective June 28, 2002. The consolidated statement of operations for
the year ending December 31, 2002 reflects the Companys equity in earnings of
mobilkom austria through June 28, 2002 and mobilkom austrias results of
operations for the period June 28, 2002 until December 31, 2002.

Basis of presentation

The consolidated financial statements of Telekom Austria have been
prepared in accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP).

F-9



---



##### 



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

The Company has reclassified certain amounts in prior year financial
statements to conform to the current year presentation.

In December 2001, the RTR enacted a regulation that revised the manner in
which phone calls that are both i) initiated and terminated within Austria and
ii) require inter-connection between multiple networks, are controlled.
Historically, the Company served as a central hub through which all such calls
were inter-connected based on agreements in place between the Company and
Austrian alternative service providers or mobile phone operators. Accordingly,
the Company would recognize revenue and a trade receivable on the
interconnection fee charged to the provider on whose network the call was
initiated and recognize expense and a trade payable to the provider on whose
network the call was terminated. As a result of the new regulation, the Company
is no longer a party to such transactions unless the call either originates or
terminates on its network. Had the new regulation been in place during 2001 and
2000, revenues and expenses in the accompanying consolidated statements of
operations would have been lower by EUR 257,243 and EUR 220,692 for the years
ended December 31, 2001 and 2000, respectively, all of which relates to the
fixed-line segment. This reduction in revenue would not have a significant
impact on consolidated operating income:

|                   |  |                         |            |             |  |          |            |             |  |  |            |   |  |  |            |  
|------------------ |  | ----------------------- | ---------- | ----------- |  | -------- | ---------- | ----------- |  |  | ---------- | - |  |  | ---------- | -
|                   |  | Year ended December 31,
|                   |  |                        
|                   |  | 2001                    |            | 2001        |  | 2000     |            | 2000       
|                   |  | adjusted                |            | as reported |  | adjusted |            | as reported
|                   |  |                         |            |             |  |          |            |            
|Revenues           |  |                         | 2,402,417  |             |  |          | 2,659,660  |             |  |  | 2,593,705  |   |  |  | 2,814,397  |  
|Operating expenses |  |                         | (2,597,856 | )           |  |          | (2,855,099 | )           |  |  | (2,892,881 | ) |  |  | (3,113,573 | )
|                   |  |                         |            |             |  |          |            |             |  |  |            |   |  |  |            |  
|Operating income   |  |                         | (195,439   | )           |  |          | (195,439   | )           |  |  | (299,176   | ) |  |  | (299,176   | )
|                   |  |                         |            |             |  |          |            |             |  |  |            |   |  |  |            |  

Principles of consolidation

The consolidated financial statements include the accounts of Telekom
Austria AG and all material subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.

Investments in companies in which the Company has significant influence,
but less than a controlling financial interest, are accounted for using the
equity method. Under the equity method, only the Companys investments in and
net amounts due to and due from the equity investee are included in the
consolidated balance sheet. The Companys share of the investees earnings is
included in the consolidated operating results and only dividends, cash
distributions, loans or other cash received from or paid to the investee are
included in consolidated cash flows.

Cash and cash equivalents

The Company considers cash in banks and highly liquid investments with
original maturities of three months or less as cash and cash equivalents. Money
market deposits with original maturities of more than three months are
classified as short-term investments along with marketable securities.

Marketable securities

Marketable debt and equity securities, other than investments accounted
for by the equity method, are categorized as either available-for-sale or
held-to-maturity. Securities classified as available-for-sale are reported at
fair value at the balance sheet date and held-to-maturity securities are
reported at amortized cost. Unrealized gains

F-10



---



##### 



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

and losses on available-for-sale securities are included in accumulated
other comprehensive income, net of applicable deferred tax.

Inventories

Inventories consist of merchandise sold in retail shops and material and
spare parts used for the construction of networks, mainly for the Companys own
use. Inventories are valued at the lower of cost or market, cost being
determined on the basis of weighted average cost.

Property, plant and equipment

Property, plant and equipment are stated at cost, which includes certain
costs that are capitalized during the installation and expansion of the
telecommunication network including material, payroll, direct overhead and
interest costs. Value added tax (VAT), which is charged by suppliers and
refunded by the tax authorities, is not included in cost. Plant and equipment
under capital leases are stated at the lower of present value of minimum lease
payments or fair value.

Depreciation on plant and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Plant and equipment under
capital lease and leasehold improvements are amortized on the straight-line
method over the lease term or the estimated useful life of the asset, whichever
is shorter.

The useful lives are:

|                                     |  |       |         | 
|------------------------------------ |  | ----- | ------- | 
|                                     |  | Years
|                                     |  |      
|Transmission equipment               |  |       | 3 - 20  | 
|Cables and wires                     |  |       | 10 - 20 | 
|Communication equipment              |  |       | 4 - 10  | 
|Software                             |  |       | 4 - 8   | 
|Furniture, fixtures and other        |  |       | 3 - 8   | 
|Buildings and leasehold improvements |  |       | 10 - 50 | 

Maintenance and repairs are expensed as incurred while replacements and
improvements are capitalized. The cost and accumulated depreciation of assets
sold or retired are removed from the accounts, and any resulting gain or loss
is reflected in other operating expenses. In the years ended before December
31, 2001 these gains or losses were reflected in other income or expense.

Goodwill and other intangible assets

The Company accounts for goodwill and other intangible assets in
accordance with the provisions of SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. These statements require
that goodwill and other intangible assets with indefinite useful lives not be
amortized, but tested for impairment in accordance with SFAS No. 142 at least
annually, but also on an interim basis if an event or circumstance indicates
that an asset may be impaired. Other intangible assets with estimable useful
lives are amortized over their respective useful lives to their estimated
residual values and reviewed for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Asset.

F-11



---



##### 



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

The goodwill impairment test is a two-step evaluation. The first step
requires the Company to compare the fair value and carrying value of any
reporting unit, as defined by SFAS No. 142, to which goodwill has been
allocated. If the fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists and the second step of the
impairment test must be performed. In the second step, the implied fair value
of goodwill, determined by allocating the aggregate fair value of the reporting
unit to all identifiable tangible and intangible assets, is compared to its
carrying amount. Any shortfall in fair value compared to carrying value is
recognized as an impairment loss.

In each reporting period, the Company is required to reevaluate its
decision that an other intangible asset has an indefinite useful life each
reporting period. If a nonamortizable intangible asset is subsequently
determined to have a definite useful life, the intangible asset is written down
to the lower of its fair value or carrying amount and amortized prospectively
based on its remaining useful life. The impairment test is a comparison of the
fair value of the intangible asset with its carrying value. Any excess of
carrying value over fair value is recognized as an impairment loss.

Amortizable intangible assets are stated at cost and are amortized on the
straight-line method over their estimated useful life, as shown below:

|                               |  |       |         | 
|------------------------------ |  | ----- | ------- | 
|                               |  | Years
|                               |  |      
|Wireless and wireline licenses |  |       | 10 - 15 | 
|Patents and proprietary rights |  |       | 5 - 20  | 
|Subscriber base                |  |       | 6       | 
|Other                          |  |       | 10 - 30 | 

Impairment of long-lived assets and long-lived assets to be disposed of

The Company accounts for long-lived assets in accordance with the
provisions of SFAS No.144 Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured as the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
held for sale are reported at the lower of the carrying amount or estimated
proceeds less cost to sell.

Internally developed software

Certain direct and indirect development costs associated with internal-use
software, including external direct costs of material and services, and payroll
costs for employees devoting time to the software projects, are capitalized and
amortized using the straight-line method over a period not exceeding four
years, beginning when the asset is substantially ready for use. Costs incurred
during the preliminary project stage, maintenance and training costs and
research and development costs are expensed as incurred.

F-12



---



##### 



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

Advertising and promotional costs

Generally, advertising and promotional costs are expensed as incurred and
totaled EUR 153,737, EUR 75,368 and EUR 73,920 for the years ended December 31,
2002, 2001 and 2000, respectively.

Research and development costs

Research and development costs are expensed as incurred and amounted to
EUR 30,338, EUR 21,817 and EUR 28,190 for the years ended December 31, 2002,
2001 and 2000, respectively and are classified in the consolidated statement of
operations according to their functional nature.

Income taxes

Income taxes are accounted for under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amount of
an existing asset or liability and its respective tax basis and operating
losses and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of changes in tax
rates is recognized as income or expense in the period that includes the
enactment date.

Investment tax credits are recognized as a reduction of income taxes in
the period in which those credits are granted.

Deferred income taxes on investments in pass-through enterprises are
provided on the excess of the financial statement carrying amount of the
investment, including the goodwill within the pass-through enterprise, over the
tax basis of the investment.

Earnings per share

Basic and diluted earnings (loss) per share are computed by dividing
consolidated net income (loss) by the weighted average number of common shares
outstanding for the year. As the Company will not issue new shares for the
stock option plan, but has purchased an American call option to satisfy the
obligation, diluted earnings per share equals basic earnings per share, there
were no potentially dilutive securities for any of the periods presented.

Concentration of risks

A portion of the Companys revenue is derived from services provided to
other companies in the telecommunications industry, mainly to alternative
telecommunication and cellular companies and internet online services. As a
result, the Company has some concentration of credit risk in its customer base.
The Company performs ongoing credit evaluations of its large customers
financial condition to support its receivables. As of the balance sheet dates,
the Company does not have any significant concentrations of business transacted
with a particular supplier or lender that could, if suddenly eliminated,
severely impact operations. The Company also does not have a concentration of
available sources of labor, services, franchises, or licenses or other rights
that could, if

F-13



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##### 



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

suddenly eliminated, severely impact operations. The Company invests its
cash with several high-quality credit institutions.

Foreign currency translation

Until December 31, 2001, the Company prepared its consolidated financial
statements in Austrian schilling and then translated them into Euro using the
official fixed exchange rate of 13.7603. Since January 1, 2002 the Company has
adopted the Euro as its functional currency.

Foreign currency receivables and liabilities are recognized at the
exchange rate applicable on the transaction date. Unrealized foreign currency
losses and gains due to exchange rate fluctuations through the balance sheet
date are recognized in the statement of operations.

The functional currency for the Companys foreign operations is the
applicable local currency. The translation from the applicable foreign
currencies to Euro is performed for assets and liabilities using the current
exchange rate in effect at the balance sheet date. Revenues and expenses are
translated using the weighted average exchange rate during the period.
Resulting translation adjustments are recorded as other comprehensive income or
loss.

Revenue recognition

The Company generates revenues from fixed line services to individuals,
commercial and non-commercial organizations and other national and foreign
carriers. Fixed line services include access fees, domestic and long distance
services, including internet, local and fixed line to mobile calls,
international traffic, voice value-added services, interconnection, call center
services and public payphone services.

The Company recognizes long distance and local service revenue based upon
minutes of traffic processed or contracted fee schedules when the services are
rendered. Revenues due from other national and foreign carriers for incoming
calls from outside the companys network are recognized in the period the call
occurs.

Access fees, monthly base fees and lines leased to commercial customers
are billed in advance resulting in deferred revenues. These fees are amortized
over the period the service is provided. Cash discounts and incentives are
accounted for as reductions in revenues when granted.

Product and other service revenues are recognized when the products are
delivered and accepted by customers or when services are provided in accordance
with contract terms.

The installation of customer lines in residences is a separate service and
the Company provides this installation service in situations where it is not
providing other services. Revenue on such installation work is recognized when
the installation work is completed.

The Company has entered into a limited number of agreements with other
telecommunication operators outside of Austria whereby the Company grants some
pre-defined access to existing capacity on its physical network in return for
similar access to the physical network of the counter party. The Company does
not recognize revenue or an obligation to the counter party under such
agreements apart from the trade revenue arising from subscriber transactions
under normal tariff plans. The benefits and costs of such swap agreements will
be reflected in the Companys results of operations in the periods in which
they are realized through reduced interconnection obligations and revenues,
respectively.

F-14



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##### 



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

The Company provides mobile communications services to individuals and
commercial and non-commercial organizations through mobilkom austria. mobilkom
austria generates revenue primarily by providing digital wireless services as
well as value-added services, text and multimedia messaging, m-commerce and
information services. To a lesser extent, mobilkom austria generates revenue
from the sale of wireless handsets.

The Company recognizes mobile usage and roaming service revenue based upon
minutes of traffic processed or contracted fee schedules when the services are
rendered. Revenues due from foreign carriers for international roaming calls
are included in revenues in the period in which the call occurs.

Certain prepaid usage services in the mobile communication segment are
billed in advance resulting in deferred revenues. These fees are amortized over
the period the service is provided. Cash discounts and incentives are accounted
for as a reduction in revenues when granted. Customer acquisition costs are
recognized ratably over the contract period as marketing expense when a service
contract exists.

Revenue and related expenses associated with the sale of wireless handsets
to distributors are recognized when the products are delivered and accepted, as
such sales are separate and distinct from the sale of wireless services.

Activation fees in excess of related expenses are deferred. Activation
fees are recognized as revenues over the average expected contract term. When
direct incremental expenses exceed revenues the amounts are not deferred.

Other service revenues are recognized when delivered and accepted by
customers and when services are provided in accordance with contract terms.

Allowance for doubtful accounts

The Company estimates the portion of its outstanding receivables that are
uncollectible based on aging schedules. Based on historical experience,
uncollectibility is estimated as an increasing percentage of each aging
category. Additionally, the Company records an allowance for specific customers
if circumstances indicate non-collectibility.

The estimated allowance for doubtful accounts relating to receivables sold
under the securitizations described in note (5) are recorded as accrued
liabilities.

Stock compensation

The Company accounts for stock-based employee compensation in accordance
with the intrinsic value method proscribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Further, the Company
accounts for its combination stock option and stock appreciation right plan in
accordance with the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 28, Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans, which requires the plan be accounted for
as a stock appreciation right plan.

The company will recognize a liability and pro rata compensation expense
in the first period in which it is probable that the target stock price
criteria outlined in the plan will be met. Based on historical trends of the
stock and current market conditions, no compensation expense has been
recognized under the plan for any of the years presented. Application of the
fair-value approach proscribed by SFAS No. 123, Accounting for Stock-Based
Compensation, would not effect the amount of compensation expense recognized
under this combination plan.

F-15



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##### 



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

In 2000, under the stock purchase plan, each eligible employee was allowed
to purchase shares worth up to a specified amount at a discount. The Company
reported the whole discount as compensation expense in 2000 as no vesting
period was agreed. Application of the fair-value approach proscribed by SFAS
No. 123, Accounting for Stock-Based Compensation, would not effect the amount
of compensation expense recognized under this combination plan.

Derivative financial instruments

Prior to the adoption of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No.
138, derivative instruments which were not designated as hedges of specific
assets, liabilities, or firm commitments were marked to market with any
resulting gains or losses recognized in earnings. If there was a direct
connection between a derivative instrument and an underlying transaction and a
derivative was so designated, gains and losses did not affect earnings until
the underlying transaction was realized.

Effective January 1, 2001, the Company adopted SFAS No. 133, as amended,
which requires all derivative instruments, such as interest rate swap contracts
and foreign-currency exchange contracts, be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for
holding them. Changes in the fair value of derivative financial instruments are
recognized periodically either in income or stockholders equity (as a
component of other comprehensive income), depending on whether the derivative
is being used to hedge changes in fair value or cash flows. For derivatives
designated as fair value hedges, changes in fair value of the hedged item and
the derivative are recognized currently in earnings. For derivatives designated
as cash flow hedges, fair value changes of the effective portion of the hedging
instruments are recognized in accumulated other comprehensive income in the
balance sheet until the hedged item is recognized in earnings. The ineffective
portion of the value changes are recognized in earnings immediately. SFAS No.
133 also requires that certain derivative instruments embedded in host
contracts be accounted for separately as derivatives.

Upon the adoption of SFAS No. 133, the Company had cash flow hedges only
and, therefore, recorded a transition loss of EUR 11,492, net of tax of EUR
5,920, related to the interest rate swap contracts and a transition gain of EUR
533, net of tax of EUR 275, related to the cross currency swap agreements, in
other comprehensive income. Additionally, the adoption resulted in the
recognition of a derivative instrument asset of EUR 48,359 and a derivative
liability of EUR 17,412.

The Company has entered into various foreign currency forward contracts
which are accounted for as free standing derivatives. These forward contracts
serve as economic hedges of the Companys operating exposure to fluctuations in
foreign currencies. Changes in the fair values of such forward contracts are
recorded directly in income.

Fair value of financial instruments

The carrying amounts of cash, accounts receivable, accounts payable,
receivables due from and payables due to related parties and accrued
liabilities approximate their fair value. The fair values of securities
held-to-maturity and securities available-for-sale is based on quoted market
rates. The fair value of long-term debt and swap agreements is determined based
on the cash flows from such financial instruments discounted at the Companys
estimated current interest rate to enter into similar financial instruments.

The fair value of some investments is estimated based on quoted market
prices. For other investments, mainly in unconsolidated subsidiaries and equity
investments, for which there are no quoted market prices, the Company estimates
the fair value to approximate the carrying value based on the audited financial
statements, if available.

F-16



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##### 



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

Those investments are tested for impairment if losses are generated over
an extended period or the business environment changes materially.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP
requires the use of estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from these estimates.

Changes in accounting principles

Effective January 1, 2002 the Company adopted SFAS Nos. 141, 142, 144 and
EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products).

The adoption of SFAS No. 141 changed, prospectively, the manner in which
the Company accounts for business combinations, primarily relating to the
identification and recognition of goodwill and intangible assets.

As discussed in Goodwill and other intangible assets above, the adoption
of SFAS No. 142 changed the manner in which the Company accounts for goodwill
and intangible assets acquired in business combinations. Upon adoption of SFAS
No. 142, the Company ceased amortization of goodwill and did not recognize
amortization on the indefinite lived intangible assets acquired in the
acquisition of the outstanding interest in mobilkom austria. The following
table reconciles reported net income (loss), basic earnings (loss) per share
and diluted earnings (loss) per share to the corresponding adjusted amounts
excluding the effects of amortization recognized for goodwill in prior years:

|                                            |                       |                                                               |        |      |  |      |          |   |        |  |          |   |        | 
|------------------------------------------- | --------------------- | ------------------------------------------------------------- | ------ | ---- |  | ---- | -------- | - | ------ |  | -------- | - | ------ | 
|Year ended December 31,                     |                       | 2002                                                          |        | 2001 |  | 2000
|                                            |                       |                                                               |        |      |  |     
|Reported net income (loss)                  |                       |                                                               | 12,789 |      |  |      | (104,625 | ) |        |  | (285,564 | )
|                                            | Add back amortization |                                                               |        |      |  |      |          |   |        |  |          |   |       
|                                            |                       | Goodwill                                                      |        |      |  |      |          |   | 50,444 |  |          |   | 24,366 | 
|                                            |                       | Goodwill included in equity in earnings from
mobilkom austria |        |      |  |      |          |   | 25,362 |  |          |   | 1,267  | 
|                                            |                       | Goodwill included in equity in earnings, others               |        |      |  |      |          |   | 1,639  |  |          |   | 13,933 | 
|                                            |                       |                                                               |        |      |  |      |          |   |        |  |          |  
|Adjusted net income                         |                       |                                                               | 12,789 |      |  |      | (27,180  | ) |        |  | (245,998 | )
|                                            |                       |                                                               |        |      |  |      |          |   |        |  |          |  
|Basic and diluted earnings (loss) per share |                       |                                                               |        |      |  |      |          |   |        |  |          |  
|Reported net income (loss)                  |                       |                                                               | 0.03   |      |  |      | (0.21    | ) |        |  | (0.57    | )
|                                            | Add back amortization |                                                               |        |      |  |      |          |   |        |  |          |   |       
|                                            |                       | Goodwill                                                      |        |      |  |      |          |   | 0.10   |  |          |   | 0.05   | 
|                                            |                       | Goodwill included in equity in earnings from
mobilkom austria |        |      |  |      |          |   | 0.05   |  |          |   | 0.00   | 
|                                            |                       | Goodwill included in equity in earnings, others               |        |      |  |      |          |   | 0.00   |  |          |   | 0.03   | 
|                                            |                       |                                                               |        |      |  |      |          |   |        |  |          |  
|Adjusted net income                         |                       |                                                               | 0.03   |      |  |      | (0.06    | ) |        |  | (0.49    | )
|                                            |                       |                                                               |        |      |  |      |          |   |        |  |          |  

F-17



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##### 



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

Adoption of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, changed, prospectively, the criteria which must be met to
classify and account for assets to be disposed of by sale as assets
held-for-sale, requires assets meeting the held-for-sale criteria be reported
separately in the balance sheet and proscribes various incremental disclosure
requirements. SFAS No. 144 also expands the concept of discontinued operations
to include components of an entity that comprise operations and cash flows that
can be clearly distinguished from the rest of the entity and eliminates any
accrual of future operating losses associated with discontinued operations. As
a result of the adoption of SFAS No. 144, the Company classified assets
associated with previously initiated disposal activities meeting the criteria
specified in SFAS No. 144 as held-for-sale separately in the consolidated
balance sheet. Aside from their required classification in the balance sheet,
such assets will continue to be accounted for in accordance with the provisions
of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, until disposal. In addition, under SFAS
No. 144 the Company included net loss from retirement of long lived assets in
arriving at operating income in 2002. In prior years such losses were included
in other, net.

EITF 01-9 addresses the income statement characterization of cash
consideration given by a vendor to a customer, specifically whether that
consideration should be presented in the vendors income statement as a
reduction of revenue or as a cost or expense, and when to recognize the cost
of a sales incentive and how to measure it. The issue concludes that cash
consideration given by a vendor to a customer is presumed to be a reduction of
revenue unless the vendor receives an identifiable benefit sufficiently
separable from the customers purchase of the vendors products and the vendor
can reasonably estimate the fair value of that benefit. The adoption of EITF
Issue 01-9 did not have a material impact on the Companys financial
statements.

In December 2002, the Company adopted SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. SFAS No. 148 amends
SFAS No. 123 to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and proscribes specific guidance on the content, placement and
format of required disclosures. The adoption of SFAS No. 148 did not have a
material impact on the Companys financial statements.

New accounting pronouncements

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which the entity incurs a legal obligation
associated with the retirement of a tangible long-lived asset. SFAS No. 143
also requires the enterprise to record the contra to the initial obligation as
an increase to the carrying amount of the related long-lived asset and to
depreciate that cost over the remaining useful life of the asset. The liability
is adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the initial fair value
measurement. Enterprises are required to adopt SFAS No. 143 for fiscal years
beginning after June 15, 2002. The Company will adopt SFAS No. 143 as of
January 1, 2003 and is currently evaluating the impact of the adoption.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 replaces previous
accounting guidance provided by EITF 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring), and requires companies to
recognize costs associated with exit or disposal activities only when a
liability for these costs is incurred rather than at the date of a commitment
to an exit or disposal plan. Examples of costs covered by SFAS No. 146 include
lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operations, plant closings, or
other exit or disposal activities. The provisions of SFAS No. 146 are to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. Although management believes the adoption of SFAS No. 146 will not
have a material impact on the

F-18



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##### 



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

Companys financial statements, adoption of the statement will result in
differences in the timing of recognition and measurement of expenses relating
to exit and disposal activities.

In November 2002, the FASB issued Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which adopts a characteristics
based approach to identify contracts that qualify as guarantees, clarifies that
a guarantor is required to recognize a liability for the non-contingent aspect
of most guarantees at inception of the guarantee, provides guidance regarding
measurement of any such liability and enhances the disclosure requirements of
guarantors. The provisions of FIN No. 45 applicable to initial recognition and
measurement of non-contingent liabilities associated with a guarantee are
applicable to guarantees issued or modified after December 31, 2002.
Management believes the adoption of these provisions will not have a material
effect on the Companys financial statements. The disclosure requirements of
FIN No. 45 are effective for all interim and annual periods ending after
December 15, 2002 and have been fully incorporated in these financial
statements.

In November 2002, the Emerging Issues Task Force reached consensus on EITF
Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables,
which addresses when and, if so, how an arrangement involving multiple
deliverables should be divided into separate units of accounting. The Issue
also provides guidance with respect to the effect of certain customer rights
due to vendor nonperformance on the recognition of revenue allocated to
delivered units of accounting and addresses the impact on the measurement
and/or allocation of arrangement consideration of customer cancellation
provisions and consideration that varies as a result of future actions of the
customer or the vendor. Finally, this Issue provides guidance with respect to
the recognition of the cost of certain deliverables that are excluded from the
revenue accounting for an arrangement. The Issue is effective for annual
reporting periods beginning after June 15, 2003. The Company has not yet
determined the impact, if any, of the expected adoption of Issue 00-21.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which provides guidance regarding the consolidation of
certain entities in which equity investors do not have the characteristics of
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 introduces the concept of variable
interest entities, explains how to identify a variable interest entity, and
requires that the primary beneficiary of any variable interest entity
consolidate that entity. FIN No. 46 also requires certain disclosures regarding
variable interest entities if the reporting entity is the primary beneficiary
of the variable interest entity or if that enterprise holds a significant
variable interest in a variable interest entity but is not the primary
beneficiary. A transferor of financial assets to a qualifying special-purpose
entity (QSPE) subject to the reporting requirements of SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, is not required to consolidate that QSPE. The accounting
provisions of FIN No. 46 are effective immediately for all variable interest
entities created after January 31, 2003 and no later than the beginning of the
first interim or annual reporting period beginning after June 15, 2003 for
variable interest entities created before February 1, 2003. Certain
disclosure provisions of this interpretation are effective for financial
statements initially issued after January 31, 2003. The Company does not
believe the adoption of FIN No. 46 will have a material effect on its financial
statements.

(2)   BUSINESS COMBINATION

All acquisitions have been accounted for under the purchase method, with
the excess of the purchase price over the estimated fair value of the net
assets acquired accounted for as goodwill. The results of operations of the
acquired businesses are included in the consolidated financial statements from
the dates of the acquisition.

mobilkom austria operates mobile telecommunication networks and provides
ancillary services in Austria, Croatia, Slovenia and Liechtenstein. The
operations include wireless internet access.

F-19



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##### 



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

Prior to June 28, 2002, the Company held a 74.999 % interest in mobilkom
austria. Due to certain substantive participating rights held by the minority
shareholder, the Companys investment in mobilkom austria was accounted for
under the equity method. These participation rights included significant
blocking rights over operating decisions including operating budgets, capital
spending, senior management positions, strategy and dividend distributions.

On June 28, 2002, the Company acquired 100 % of Autel, which held a
25.001% equity interest in mobilkom, from STET Mobile Holding NV, an affiliate
of Telecom Italia, bringing its total interest in mobilkom to 100%.
Consequently, the Company has consolidated the balance sheet of mobilkom as of
December 31, 2002. The consolidated statement of operations for the year ending
December 31, 2002 reflects the Companys equity in earnings of mobilkom through
June 28, 2002 and mobilkom austrias results of operations for the period June
28, 2002 until December 31, 2002. As a result of the acquisition, the Company
gained strategic and operating control of mobile communications service
providers in Austria, Croatia, Slovenia and Liechtenstein.

Autel is a non-operating holding company, the sole purpose of which was to
hold its parents investment in mobilkom austria. The aggregate purchase price
was EUR 693,064, including EUR 3,064 of acquisition related costs. The
following table summarizes the final fair value of the assets acquired and
liabilities assumed at the date of acquisition.

|                                        |  |  |          |  
|--------------------------------------- |  |  | -------- | -
|Current assets                          |  |  | 120,558  |  
|Tangible assets                         |  |  | 229,774  |  
|Intangible assets                       |  |  | 388,165  |  
|Goodwill                                |  |  | 431,304  |  
|Other long-term assets                  |  |  | 64,012   |  
|                                        |  |  |          |  
|Current liabilities                     |  |  | (167,781 | )
|Long-term liabilities                   |  |  | (238,640 | )
|Deferred tax liability from acquisition |  |  | (134,328 | )
|                                        |  |  |          |  
|Net assets acquired                     |  |  | 693,064  |  
|                                        |  |  |          |  

Goodwill of EUR 102,957 is expected to be deductible for tax purposes.

The estimated proportional fair value, by class, of the intangible assets
acquired through the acquisition of Autel are as follows:

|                            |  |  |         | 
|--------------------------- |  |  | ------- | 
|Wireless operating licenses |  |  | 101,863 | 
|Subscriber base             |  |  | 121,241 | 
|Brand name                  |  |  | 159,161 | 
|Other                       |  |  | 5,900   | 
|                            |  |  |         | 
|                            |  |  | 388,165 | 
|                            |  |  |         | 

The intangible asset recognized related to brand name is not subject to
amortization. Intangible assets recognized related to wireless operating
licenses and subscriber base have weighted average useful lives of 14.8 and 6.0
years, respectively. Other intangible assets are comprised primarily of
easement rights and have a weighted average useful life of 5.3 years. The
weighted average useful life of acquired amortizable intangible assets in total
is 11.0 years.

The pro forma consolidated results of operations for the years ended
December 31, 2002 and 2001, as if Autel had been acquired at the beginning of
2002 and 2001, respectively, are estimated to be:

F-20



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##### 



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

|                                                                                                |  |      |           |      |  |  |           | 
|----------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  |  | --------- | 
|                                                                                                |  | 2002 |           | 2001
|                                                                                                |  |      |           |     
|Revenues                                                                                        |  |      | 3,908,226 |      |  |  | 3,943,455 | 
|Net income                                                                                      |  |      | 29,844    |      |  |  | 36,084    | 
|Net income excluding amortization of goodwill and taxes thereon                                 |  |      | 29,844    |      |  |  | 105,479   | 
|Basic and fully diluted earnings (loss) per share                                               |  |      | 0.06      |      |  |  | 0.07      | 
|Basic and fully diluted earnings per share excluding
amortization of goodwill and taxes thereon |  |      | 0.06      |      |  |  | 0.21      | 

The pro forma results include amortization of the intangible assets
presented above, interest expense on debt assumed to finance the purchase and
income taxes as well as other adjustments including amortization of fair value
adjustments to long term debt and pension benefit obligations and the reversal
of deferred gain not representing a liability. The pro forma results of
operations are not necessarily indicative of what actually would have occurred
if the acquisition had been completed as of the beginning of each period
presented, nor are they necessarily indicative of future consolidated results.
During 2001, an unusual charge was made due to the change in tax status of
mobilkom austria, as described in note (18).

On May 21, 2002, the Company purchased the remaining 2.5 % interest of
Jet2Web Internet Services GmbH, a consolidated Austrian internet subsidiary.
The Company acquired this interest for total consideration of EUR 7,851,
consisting of EUR 6,761 in cash, communication services with a fair value of
EUR 1,090 and the assumption of net liabilities in the amount of EUR 860. Given
the insignificant percentage of voting shares acquired, and considering the
level of separately identifiable intangible assets, the Company recorded the
total consideration paid as goodwill. The acquisition was to eliminate the
minority interest.

On January 1, 2002 the Company sold a 75 % interest in Output Service GmbH
(OSG), a formerly consolidated subsidiary, for EUR 26. The Company accounts
for its remaining 25 % interest in OSG using the equity method of accounting.

In January 2002, the Company purchased 26 % of World direct eBusiness
Solutions GmbH (World direct) for EUR 565 and signed a purchase option
agreement for an additional 25 % interest. The purchase price for the
additional 25 % interest was fixed at EUR 534 and prepaid. The Company is
providing all financial funds to and consolidates World direct, since it is
effectively controlled by the Company.

The following acquisitions were completed by mobilkom austria prior to
June 28, 2002. These acquisitions impacted the Companys equity in earnings of
mobilkom austria as well as mobilkom austrias basis in the acquired companies
and, therefore, are presented for information purposes. All amounts noted below
represent 100 % of the acquisition as recorded in the books and records of
mobilkom austria while, as described above, the Companys proportionate share
of mobilkom austrias earnings was only 74.999 % at the time the acquisitions
were completed.

On May 28, 2002, mobilkom austria purchased an additional 5 % of VIPnet
d.o.o. (VIPnet), a consolidated Croatian subsidiary, for EUR 11,076 resulting
in goodwill recognized of EUR 7,326 and bringing its ownership interest to 71 %. Management paid a purchase price exceeding net assets acquired because a
long term strategic aim is to acquire all of the remaining stock held by other
shareholders.

On February 27, 2001, mobilkom austria purchased, through intermediate
subsidiaries, 75 % plus one share of Si.mobil telekomunikacijske storitve d.d.,
Ljubljana (Si.mobil), a cellular phone service provider in Slovenia with 15 %
market share and approximately 155,000 customers, for EUR 145,811 in cash plus
assumption of the sellers shareholder loan totaling EUR 3,591. mobilkom
austria began immediately to manage the business and controls the board of
directors. As the acquisition price was contractually fixed and managements
intent was to acquire the remaining 25 % less one share, the Company recorded
the acquisition of 100 % of Si.mobil and recognized a liability in the amount of
the contractually agreed purchase price totaling EUR 42,795. Accordingly, the
total purchase price

F-21



---



##### 



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

of EUR 188,606 was allocated to the assets and liabilities acquired based on
fair market value and the balance of EUR 186,157 was recorded as goodwill.

Subsequent to the closing, mobilkom austria committed to provide Si.mobil
with shareholder loans totaling EUR 117,209, EUR 58,000 of which was advanced
to Si.mobil in 2002 and EUR 52,169 in 2001.

During 2002, the Company renegotiated the final closing of the remaining
25% less one share of Si.mobil. A new agreement was reached stating that the
final closing was postponed until 2007.

(3)   INVESTMENTS IN AFFILIATES

As of December 31, 2002, the investments in affiliates comprise 26.0%
interests in Herold Business Data (Herold), Omnimedia Werbegesellschaft mbH
(Omnimedia) and 25.1% interest in OSG and a 49.0% interest in paybox
österreich AG (Paybox).

In 1998, the Company acquired its 26% interest in Herold, which is engaged
in the media and information business and is the provider of the telephone
directory in Austria including electronic versions. Goodwill was amortized over
five years and amortization for each of the years 2001 and 2000 was EUR 841. As
of January 1, 2002 the Company ceased amortization in accordance with the
provisions of SFAS Nos. 141 and 142.

In October 2001, the Company purchased 26% of the common stock of
Omnimedia, a marketing and advertising company for EUR 3,401. In accordance
with SFAS Nos. 141 and 142, goodwill totaling EUR 3,161 was not amortized in
2001 and 2002.

In July 2002, the Company sold its 49% interest in Walky Talky Telekom
GmbH, which was acquired in April 2000 for a purchase price of EUR 7,703 for
one Euro and realized a loss of EUR 252 recorded in equity of earnings of
affiliated companies.

The acquisition of a 49% interest in Paybox for a total purchase price of
EUR 5,699 was completed by mobilkom austria prior to June 28, 2002. This
acquisition impacted the Companys equity in earnings of mobilkom austria and,
therefore, is presented for information purposes. An impairment charge of EUR
4,462 was recorded in the year ended December 31, 2002, as the business model
assuming the market roll-out of payments via mobile phones was materially
changed due to the decision of the majority shareholder to cancel the support
of the main products.

A summary of aggregated financial information as reported by equity
investees is as follows:

|                        |  |      |        |      |  |      |        |  |  |  |         |  
|----------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------- | -
|Year ended December 31, |  | 2002 |        | 2001 |  | 2000
|                        |  |      |        |      |  |     
|Revenues                |  |      | 68,045 |      |  |      | 67,491 |  |  |  | 333,561 |  
|Operating income (loss) |  |      | 7,833  |      |  |      | 10,922 |  |  |  | (35,306 | )
|Net income (loss)       |  |      | 8,285  |      |  |      | 6,867  |  |  |  | (45,790 | )

F-22



---



##### 



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

|                           |  |      |        |      |  |  |        | 
|-------------------------- |  | ---- | ------ | ---- |  |  | ------ | 
|At December 31,            |  | 2002 |        | 2001
|                           |  |      |        |     
|Total current assets       |  |      | 81,914 |      |  |  | 86,185 | 
|Total assets               |  |      | 92,911 |      |  |  | 97,382 | 
|Current liabilities        |  |      | 70,129 |      |  |  | 72,021 | 
|Long-term debt             |  |      | 3,846  |      |  |  | 2,921  | 
|Total liabilities          |  |      | 73,975 |      |  |  | 74,942 | 
|Total stockholders equity |  |      | 18,936 |      |  |  | 22,440 | 

(4)   MARKETABLE SECURITIES

Debt securities originating from cross border lease transactions entered
into in 1998 and 1999 (see note (14)) are classified as held-to-maturity as the
Company is contractually obligated to hold these securities until maturity. The
securities are bonds of triple A rated issuers and held by a custodian. Through
a further asset based swap the cash inflows from the securities are transformed
into the cash flow stream required to match a specified portion of the lease
payments. The securities are pledged to a counter-party in the swap agreement.
No sales of securities occurred in 2002, 2001 and 2000. The interest rates on
the securities are fixed and range from 5.65% to 9.01%. Accrued interest is
recorded as interest income. The securities will mature between 2006 and 2011.

|                     |                   |  |           |        |               |  |                |     |       |  |   |       |  |  |         |        | 
|-------------------- | ----------------- |  | --------- | ------ | ------------- |  | -------------- | --- | ----- |  | - | ----- |  |  | ------- | ------ | 
|                     |                   |  |           |        |               |  | Gross          |     | Gross |  |   |       | 
|                     |                   |  | Amortized |        | unrealized    |  | unrealized     |     | Fair 
|                     |                   |  | cost      |        | holding gains |  | holding losses |     | value
|                     |                   |  |           |        |               |  |                |     |      
|At December 31, 2002 |                   |  |           |        |               |  |                |     |       |  |   |       |  |  |         |       
|Non-current assets   |                   |  |           |        |               |  |                |     |       |  |   |       |  |  |         |       
|Available-for-sale   |                   |  |           |        |               |  |                |     |       |  |   |       |  |  |         |       
|                     | debt securities   |  |           | 5,908  |               |  |                | 298 |       |  |   | 1     |  |  |         | 6,205  | 
|                     | equity securities |  |           | 2,456  |               |  |                | 0   |       |  |   | 258   |  |  |         | 2,198  | 
|                     | mutual funds      |  |           | 11,516 |               |  |                | 37  |       |  |   | 1,008 |  |  |         | 10,545 | 
|Held-to-maturity     |                   |  | 138,454   |        |               |  | 21,015         |     |       |  | 0 |       |  |  | 159,469 |       
|At December 31, 2001 |                   |  |           |        |               |  |                |     |       |  |   |       |  |  |         |       
|Non-current assets   |                   |  |           |        |               |  |                |     |       |  |   |       |  |  |         |       
|Available-for-sale   |                   |  |           |        |               |  |                |     |       |  |   |       |  |  |         |       
|                     | mutual funds      |  |           | 8,747  |               |  |                | 20  |       |  |   | 244   |  |  |         | 8,523  | 
|Held-to-maturity     |                   |  | 158,274   |        |               |  | 4,308          |     |       |  | 0 |       |  |  | 162,582 |       

The contractual maturity of debt securities classified as held-to-maturity
were as follows at December 31, 2002.

|                 |                                        |  |           |         |       |  |         |         | 
|---------------- | -------------------------------------- |  | --------- | ------- | ----- |  | ------- | ------- | 
|                 |                                        |  | Amortized |         | Fair 
|                 |                                        |  | cost      |         | value
|                 |                                        |  |           |         |      
|Held-to-maturity |                                        |  |           |         |       |  |         |        
|                 | Due after one year through five years  |  |           | 6,558   |       |  |         | 7,354   | 
|                 | Due after five years through ten years |  |           | 131,896 |       |  |         | 152,115 | 
|                 |                                        |  |           |         |       |  |         |        
|                 |                                        |  | 138,454   |         |       |  | 159,469 |        
|                 |                                        |  |           |         |       |  |         |        

F-23



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##### 



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

Proceeds from sales of available-for-sale securities amounted to EUR 7,070
and EUR 8 in 2002 and 2001, respectively. Gross realized gains from sales of
available-for-sale securities were EUR 46 in 2002. In 2001 and 2000 no such
gains or losses occurred. The specific identification method was used to
determine the cost in computing realized gains and losses.

(5)   ACCOUNTS RECEIVABLE  TRADE

The roll forward of the allowance for accounts receivable trade is as
follows:

|                                                  |  |      |         |      |  |  |         |  
|------------------------------------------------- |  | ---- | ------- | ---- |  |  | ------- | -
|                                                  |  | 2002 |         | 2001
|                                                  |  |      |         |     
|Allowance beginning of the year                   |  |      | 47,074  |      |  |  | 72,202  |  
|Foreign currency adjustment                       |  |      | 2       |      |  |  | (34     | )
|Change in consolidated entities                   |  |      | 32,838  |      |  |  | 0       |  
|Reclassification to accruals for sold receivables |  |      | (26,485 | )    |  |  | 0       |  
|Charged to expenses                               |  |      | 39,184  |      |  |  | 15,069  |  
|Amounts written-off                               |  |      | (17,668 | )    |  |  | (40,163 | )
|                                                  |  |      |         |      |  |  |         |  
|Allowance at the end of the year                  |  |      | 74,945  |      |  |  | 47,074  |  
|                                                  |  |      |         |      |  |  |         |  

|                                       |  |                   |         |                   |  |  |         |  
|-------------------------------------- |  | ----------------- | ------- | ----------------- |  |  | ------- | -
|                                       |  | December 31, 2002 |         | December 31, 2001
|                                       |  |                   |         |                  
|Accounts receivable trade,
gross gross |  |                   | 526,879 |                   |  |  | 502,346 |  
|Allowances                             |  |                   | (74,945 | )                 |  |  | (47,074 | )
|                                       |  |                   |         |                   |  |  |         |  
|Accounts receivable trade, net         |  |                   | 451,934 |                   |  |  | 455,272 |  
|                                       |  |                   |         |                   |  |  |         |  

Of these receivables EUR 219,920 are held for sale due to the
securitization program described in the following paragraphs.

In January 2002, the Company entered into a revolving period
securitization and sold trade receivables to a Qualifying Special Purpose
Entity (QSPE) unrelated to the Company. The Company retains servicing
responsibilities relating to the sold receivables. Solely for the purpose of
credit enhancement from the perspective of the QSPE, the Company retains
interests in the sold receivables (retained interests). These retained
interests are initially measured at estimated fair values, which the Company
believes approximate historical carrying values, and are subsequently measured
based on a periodic evaluation of collections and delinquencies. A maximum of
EUR 250,000 may be
transferred to the trust under the program. Although mobilkom austria has
the same contract with a different trust the total amount is limited to EUR
290,000 for Telekom Austria and mobilkom austria together. The maximum amount
for mobilkom austria is EUR 80,000. At December 31, 2002, retained interest
occurred for mobilkom austria as the program limit was exceeded by EUR 7,930.
Given the short-term, lower-risk nature of the assets securitized, market
movements in interest rates would not impact the carrying value of the
Companys retained interests.

The Company routinely evaluates its portfolio of trade receivables for
risk of non-collection and records an allowance for doubtful accounts to
reflect the carrying value of its trade receivables at estimated net realizable
value. Pursuant to the provisions of the revolving-period securitizations, the
Company effectively bears the risk of potential delinquency or default
associated with trade receivables sold or interests retained. Accordingly, in
the normal course

F-24



---



##### 



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

of servicing the assets sold, the Company evaluates potential
collection losses and delinquencies and updates the estimated fair value of the
Companys retained interest.

The allowances recorded for sold receivables are classified as accrued
liabilities. At December 31, 2002 the accrual totaled EUR 62,481 of which EUR
36,860 relates to mobilkom austria.

In accordance with SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities, the Company has not
recorded a servicing asset as management believes it is not practicable to
estimate this value given that verifiable data as to the fair value of the
compensation and or cost related to servicing the types of the assets sold is
not readily obtainable.

In the period ended December 31, 2002, the net cash received from the QSPE
develops as follows:

|                                                   |  |  |            |  
|-------------------------------------------------- |  |  | ---------- | -
|Gross trade receivables sold to QSPE               |  |  | 2,044,513  |  
|Collections made on behalf of and paid to the QSPE |  |  | (1,732,372 | )
|Deferred purchase price                            |  |  | (104,616   | )
|Unearned discount                                  |  |  | (4,100     | )
|Liquidity and program fees                         |  |  | (8,499     | )
|Increase in retained interests                     |  |  | (7,930     | )
|                                                   |  |  |            |  
|Net cash received from QSPE during the period      |  |  | 186,996    |  
|                                                   |  |  |            |  

Cash settlement with the QSPE takes place on a monthly basis. Gross trade
receivables sold represent the fair value of billed and unbilled receivables
during the period ended December 31, 2002 to the QSPEs. As the Company services
these receivables, collection of the receivables previously sold is made on
behalf of the QSPE. The Company recorded discounts, liquidity and program fees
of EUR 8,427 for the period ended December 31, 2002 related to the
securitization of trade receivables in interest expense in the consolidated
statement of operations.

(6)   RELATED PARTY TRANSACTIONS

The disclosures below present balances and transactions relating to the
immediate shareholder ÖIAG and its subsidiary Österreichische Post AG as
ÖIAG, while other government agencies and government-owned entities are for
practical reasons not disclosed. None of the individual accounts associated
with government agencies or government-owned entities is considered significant
to the Company.

The majority of the related party transactions were carried out with
mobilkom austria through June 28, 2002. Since June 28, 2002, mobilkom austria
is consolidated and intercompany transactions are eliminated in
consolidation. The Company charged mobilkom austria for interconnection
fees, voice telephony, leased lines, rent, repair and other services. mobilkom
austria charged the Company mainly for interconnection fees and handsets.

Österreichische Post AG and its subsidiaries (the Post), a subsidiary of
ÖIAG, which provide postal services, charged the Company for services received
such as postal charges, rent, repair and administration. The Company charged
the Post for IT support, voice telephony, technical services, rent, repair and
other services.

The terms of the services provided by Telekom Austria to government
entities are generally based on standard pricing policies. However, the Company
is obligated to provide voice telephone services for disadvantaged individuals
at reduced tariffs for which it is entitled to an appropriate compensation from
the government on a contractual basis. The reimbursement was EUR 41,670, EUR
43,032 and EUR 83,574 in 2002, 2001 and 2000,

F-25



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##### 



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

respectively. The reimbursement
in 2000 was a result of negotiations with the government which led to an
additional one time payment for the remaining amounts for the years 1998, 1999
and 2000. Beginning January 1, 2001, the new contract with the government
specifies the reimbursement of Euro 13.81 per customer per month, which is
recorded as revenue in the service period.

Telecom Italia and subsidiaries charged the Company for technical and
management services and interconnection fees while the Company charged Telecom
Italia for interconnection services.

One of the Companys consolidated subsidiaries, Telekom Finanzmanagement
GmbH (TFG), provides treasury services for the Company and, until December
29, 2000, for subsidiaries of ÖIAG. As of December 31, 2001, the Company held
investments accounted for under the equity method of accounting in an amount of
EUR 510,682, essentially all of which related to mobilkom austria. As mobilkom
austria is consolidated since June 28, 2002 investments in affiliates only
include investment interests described in note (3) and amount to EUR 8,642.

On June 28, 2001, a partner in a law firm which provides legal services to
the Company was elected to the supervisory board. In 2002 and 2001 (since the
day of appointment), respectively, the Company was charged EUR 993 and EUR 409
for legal services by that law firm.

The Company has entered into agreements with Telecom Italia whereby the
Company grants some pre-defined access to existing capacity on its physical
network in return for similar access to the physical network of Telecom Italia.
The Company does not recognize revenue or an obligation under such agreements
apart from the trade revenue arising from subscriber transactions under normal
tariff plans. The benefits and costs of such swap agreements will be reflected
in the Companys results of operations in the periods realized through reduced
interconnection obligations and revenues, respectively.

The following is the detail of the accounts receivable with related
parties:

|                                           |  |      |       |      |  |  |         | 
|------------------------------------------ |  | ---- | ----- | ---- |  |  | ------- | 
|At December 31,                            |  | 2002 |       | 2001
|                                           |  |      |       |     
|ÖIAG                                       |  |      | 4,296 |      |  |  | 11,590  | 
|Telecom Italia                             |  |      | 435   |      |  |  | 0       | 
|Affiliated companies and other             |  |      | 1,992 |      |  |  | 235     | 
|mobilkom austria  accounts receivable     |  |      | 0     |      |  |  | 25,691  | 
|mobilkom austria  financing short-term    |  |      | 0     |      |  |  | 68,463  | 
|                                           |  |      |       |      |  |  |         | 
|Total receivables due from related parties |  |      | 6,723 |      |  |  | 105,979 | 
|                                           |  |      |       |      |  |  |         | 
|mobilkom austria  financing long-term     |  |      | 0     |      |  |  | 218,018 | 
|                                           |  |      |       |      |  |  |         | 

The following is the detail of the accounts payable to related parties:

|                                    |  |      |        |      |  |  |        | 
|----------------------------------- |  | ---- | ------ | ---- |  |  | ------ | 
|At December 31,                     |  | 2002 |        | 2001
|                                    |  |      |        |     
|ÖIAG                                |  |      | 4,997  |      |  |  | 4,761  | 
|Telecom Italia                      |  |      | 0      |      |  |  | 1,663  | 
|Affiliated companies and other      |  |      | 32,201 |      |  |  | 8,723  | 
|mobilkom austria  accounts payable |  |      | 0      |      |  |  | 835    | 
|                                    |  |      |        |      |  |  |        | 
|Total                               |  |      | 37,198 |      |  |  | 15,982 | 
|                                    |  |      |        |      |  |  |        | 

As of December 31, 2002, EUR 25,032 of the total balance due to affiliated
companies and other relate to Omnimedia, which mainly provides marketing and
advertising services to the Company.

F-26



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##### 



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

The following is the detail of revenues and expenses charged from and to
related parties:

|                        |  |      |         |      |  |      |         |  |  |  |         | 
|----------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|Year ended December 31, |  | 2002 |         | 2001 |  | 2000
|                        |  |      |         |      |  |     
|Revenues                |  |      |         |      |  |      |         |  |  |  |         | 
|mobilkom austria        |  |      | 72,879  |      |  |      | 222,231 |  |  |  | 216,727 | 
|ÖIAG                    |  |      | 56,660  |      |  |      | 55,344  |  |  |  | 63,905  | 
|Telecom Italia          |  |      | 14,361  |      |  |      | 13,448  |  |  |  | 9,186   | 
|Other                   |  |      | 4,090   |      |  |      | 2,436   |  |  |  | 0       | 
|                        |  |      |         |      |  |      |         |  |  |  |         | 
|Total                   |  |      | 147,990 |      |  |      | 293,459 |  |  |  | 289,818 | 
|                        |  |      |         |      |  |      |         |  |  |  |         | 
|Interest income         |  |      |         |      |  |      |         |  |  |  |         | 
|mobilkom austria        |  |      | 4,988   |      |  |      | 17,619  |  |  |  | 3,010   | 
|Other                   |  |      | 4       |      |  |      | 0       |  |  |  | 128     | 
|                        |  |      |         |      |  |      |         |  |  |  |         | 
|Total                   |  |      | 4,992   |      |  |      | 17,619  |  |  |  | 3,138   | 
|                        |  |      |         |      |  |      |         |  |  |  |         | 
|Expenses                |  |      |         |      |  |      |         |  |  |  |         | 
|mobilkom austria        |  |      | 43,590  |      |  |      | 207,172 |  |  |  | 221,005 | 
|ÖIAG                    |  |      | 44,989  |      |  |      | 66,421  |  |  |  | 61,490  | 
|Telecom Italia          |  |      | 23,559  |      |  |      | 25,841  |  |  |  | 26,599  | 
|Other                   |  |      | 66,719  |      |  |      | 15,335  |  |  |  | 0       | 
|                        |  |      |         |      |  |      |         |  |  |  |         | 
|Total                   |  |      | 178,857 |      |  |      | 314,769 |  |  |  | 309,094 | 
|                        |  |      |         |      |  |      |         |  |  |  |         | 
|Interest expense        |  |      |         |      |  |      |         |  |  |  |         | 
|mobilkom austria        |  |      | 837     |      |  |      | 731     |  |  |  | 386     | 
|ÖIAG and other          |  |      | 101     |      |  |      | 18      |  |  |  | 12,659  | 
|                        |  |      |         |      |  |      |         |  |  |  |         | 
|Total                   |  |      | 938     |      |  |      | 749     |  |  |  | 13,045  | 
|                        |  |      |         |      |  |      |         |  |  |  |         | 

For the year ended December 31, 2002, EUR 55,289 of other expenses mainly
relate to advertising and marketing services provided by Omnimedia.

(7)   INVENTORIES

Inventories consist of:

|                                 |  |      |        |      |  |  |        | 
|-------------------------------- |  | ---- | ------ | ---- |  |  | ------ | 
|At December 31,                  |  | 2002 |        | 2001
|                                 |  |      |        |     
|Spare parts, cables and supplies |  |      | 36,830 |      |  |  | 47,758 | 
|Merchandise                      |  |      | 54,431 |      |  |  | 8,028  | 
|                                 |  |      |        |      |  |  |        | 
|Total                            |  |      | 91,261 |      |  |  | 55,786 | 
|                                 |  |      |        |      |  |  |        | 

F-27



---



##### 



(8)   GOODWILL AND OTHER INTANGIBLE ASSETS

Other intangible assets consist of:

|                               |  |      |          |      |  |  |         |  
|------------------------------ |  | ---- | -------- | ---- |  |  | ------- | -
|At December 31,                |  | 2002 |          | 2001
|                               |  |      |          |     
|Wireless and wireline licenses |  |      | 544,893  |      |  |  | 650     |  
|Patents and proprietary rights |  |      | 47,100   |      |  |  | 1,205   |  
|Brandnames                     |  |      | 158,934  |      |  |  | 0       |  
|Subscriber base                |  |      | 120,999  |      |  |  | 0       |  
|Other                          |  |      | 37,952   |      |  |  | 28,956  |  
|                               |  |      |          |      |  |  |         |  
|Total intangibles              |  |      | 909,878  |      |  |  | 30,811  |  
|Less accumulated amortization  |  |      | (183,985 | )    |  |  | (10,405 | )
|                               |  |      |          |      |  |  |         |  
|Net intangibles                |  |      | 725,893  |      |  |  | 20,406  |  
|                               |  |      |          |      |  |  |         |  

Amortization expense was EUR 27,410, EUR 53,339 and EUR 26,802 for the
years 2002, 2001 and 2000, respectively.

In 2002, the main additions to licenses, brandnames and subscriber base
relate to the acquisition of mobilkom austria. Information regarding intangible
assets acquired by mobilkom austria prior to June 28, 2002 is presented for
information purposes as such activity impacted the Companys equity in
earnings. All amounts noted below represent 100% of the acquisition as recorded
in the books and records of mobilkom austria while, as described above, the
Companys proportionate share of mobilkom austrias earnings was only 74.999%
at the time the acquisitions were completed.

Licenses are recorded at cost and amortized on a straight-line basis over
the estimated useful life. In November 2000, mobilkom austria purchased a UMTS
license for Austria with a term of 20 years for EUR 171,540. Interest in the
amount of EUR 6,495 and EUR 8,283 was capitalized in 2002 and 2001,
respectively, on the UMTS license. The UMTS license was not amortized in 2002
because it has not been placed in commercial services.

The Company holds licenses to operate as a mobile telecommunication
service provider from the Austrian, Croatian and Slovenian communication
commissions. The Croatian license, granted for 10 years, was acquired for EUR
13,672 in 1998. Licenses from the Slovenian Government granted in 2001 and 1999
for 15 years, were acquired for EUR 4,637 and EUR 11,121, respectively.

Upon adoption of SFAS 142 on January 1, 2002, as described in note (1),
the Company ceased amortizing goodwill. The following tables illustrate the
changes in net book value of goodwill by segment for the period ended December
31, 2002 and 2001, respectively:

|                            |  |          |         |                |  |                |       |        |  |  |         |   |  |  |         |  
|--------------------------- |  | -------- | ------- | -------------- |  | -------------- | ----- | ------ |  |  | ------- | - |  |  | ------- | -
|                            |  |          |         |                |  | Data           |       | Mobile |  |  |         |  
|                            |  | Internet |         | communications |  | communications |       | Total 
|                            |  |          |         |                |  |                |       |       
|Goodwill, January 1, 2002   |  |          | 59,904  |                |  |                | 340   |        |  |  | 0       |   |  |  | 60,244  |  
|Acquisitions                |  |          | 8,724   |                |  |                | 1,100 |        |  |  | 563,153 |   |  |  | 572,977 |  
|Impairment                  |  |          | (40,893 | )              |  |                | 0     |        |  |  | 0       |   |  |  | (40,893 | )
|Translation adjustment      |  |          | 1,620   |                |  |                | 0     |        |  |  | (3,221  | ) |  |  | (1,601  | )
|                            |  |          |         |                |  |                |       |        |  |  |         |   |  |  |         |  
|Goodwill, December 31, 2002 |  |          | 29,355  |                |  |                | 1,440 |        |  |  | 559,932 |   |  |  | 590,727 |  
|                            |  |          |         |                |  |                |       |        |  |  |         |   |  |  |         |  

F-28



---



##### 



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

|                            |  |          |          |                |  |       |      |   |  |  |          |  
|--------------------------- |  | -------- | -------- | -------------- |  | ----- | ---- | - |  |  | -------- | -
|                            |  |          |          |                |  | Data  |      |   |  | 
|                            |  | Internet |          | communications |  | Total
|                            |  |          |          |                |  |      
|Goodwill, January 1, 2001   |  |          | 216,785  |                |  |       | 453  |   |  |  | 217,238  |  
|Acquisitions                |  |          | 477      |                |  |       | 0    |   |  |  | 477      |  
|Disposals                   |  |          | (115     | )              |  |       | 0    |   |  |  | (115     | )
|Amortization                |  |          | (50,331  | )              |  |       | (113 | ) |  |  | (50,444  | )
|Impairment                  |  |          | (119,950 | )              |  |       | 0    |   |  |  | (119,950 | )
|Translation adjustment      |  |          | 13,038   |                |  |       | 0    |   |  |  | 13,038   |  
|                            |  |          |          |                |  |       |      |   |  |  |          |  
|Goodwill, December 31, 2001 |  |          | 59,904   |                |  |       | 340  |   |  |  | 60,244   |  
|                            |  |          |          |                |  |       |      |   |  |  |          |  

In 2002 and 2001, impairment charges in the amount of EUR 40,441 and EUR
119,950 were recorded for goodwill originally recorded from the acquisition of
Czech On Line (COL). The acquisition was based on a business plan assuming
the full liberalization of the Czech market in the year 2001. As this was first
postponed to the year 2002 and currently the liberalization of the Czech market
overall remains unsatisfactory with regard to interconnection and limited
wholesale offers to alternative operators, the business of COL has not
developed as originally expected. This resulted in an impairment charge in both
years subsequent to the acquisition. The valuation of the reporting unit in
2002 was based on forecasted cash flows and used the weighted average cost of
capital employed of 13.2 % as discount rate. The impairment loss was recorded
in the internet segment in 2002. In 2001 the impairment losses of goodwill were
originally not allocated to segments, but were reclassified in 2002 to the
segments for comparability purposes.

The gross carrying amounts and accumulated amortization of intangible
assets subject to amortization, by major class, are as follows:

|                               |  |             |         |              |  |          |          |   |  |  |         | 
|------------------------------ |  | ----------- | ------- | ------------ |  | -------- | -------- | - |  |  | ------- | 
|                               |  | Acquisition |         | Accumulated  |  | Carrying
|At December 31, 2002           |  | cost        |         | amortization |  | value   
|                               |  |             |         |              |  |         
|Wireless and wireline licenses |  |             | 544,893 |              |  |          | (139,043 | ) |  |  | 405,850 | 
|Subscriber base                |  |             | 120,999 |              |  |          | (10,083  | ) |  |  | 110,916 | 
|Other                          |  |             | 85,052  |              |  |          | (34,859  | ) |  |  | 50,193  | 
|                               |  |             |         |              |  |          |          |   |  |  |         | 
|Total                          |  |             | 750,944 |              |  |          | (183,985 | ) |  |  | 566,959 | 
|                               |  |             |         |              |  |          |          |   |  |  |         | 

|                     |  |             |        |              |  |          |         |   |  |  |        | 
|-------------------- |  | ----------- | ------ | ------------ |  | -------- | ------- | - |  |  | ------ | 
|                     |  | Acquisition |        | Accumulated  |  | Carrying
|At December 31, 2001 |  | cost        |        | amortization |  | value   
|                     |  |             |        |              |  |         
|Wireline license     |  |             | 770    |              |  |          | (32     | ) |  |  | 738    | 
|Other                |  |             | 30,160 |              |  |          | (10,492 | ) |  |  | 19,668 | 
|                     |  |             |        |              |  |          |         |   |  |  |        | 
|Total                |  |             | 30,930 |              |  |          | (10,524 | ) |  |  | 20,406 | 
|                     |  |             |        |              |  |          |         |   |  |  |        | 

F-29



---



##### 



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

The following table presents expected amortization expense related to
amortizable intangible assets for each of the following periods:

|           |  |  |         | 
|---------- |  |  | ------- | 
|2003       |  |  | 56,007  | 
|2004       |  |  | 54,582  | 
|2005       |  |  | 52,756  | 
|2006       |  |  | 50,097  | 
|2007       |  |  | 47,746  | 
|           |  |  |        
|Thereafter |  |  | 305,773 | 
|           |  |  |        

The total carrying amount of intangible assets, other than goodwill, not
subject to amortization is EUR 158,934 as of December 31, 2002. This amount
relates entirely to the value of brandnames.

(9)   PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment transferred to the Company by the government
was recorded upon transfer at cost less accumulated depreciation as of that
date. Acquisitions since then have been recorded at cost.

|                                                          |  |      |            |      |  |  |            |  
|--------------------------------------------------------- |  | ---- | ---------- | ---- |  |  | ---------- | -
|At December 31,                                           |  | 2002 |            | 2001
|                                                          |  |      |            |     
|Land                                                      |  |      | 62,462     |      |  |  | 64,031     |  
|Buildings and leasehold improvements                      |  |      | 653,010    |      |  |  | 655,807    |  
|Communications network and other equipment                |  |      | 9,358,138  |      |  |  | 7,819,867  |  
|Capital leases                                            |  |      | 16,207     |      |  |  | 6,779      |  
|Software                                                  |  |      | 325,387    |      |  |  | 105,686    |  
|Construction in progress, network                         |  |      | 235,263    |      |  |  | 102,143    |  
|                                                          |  |      |            |      |  |  |            |  
|                                                          |  |      | 10,650,467 |      |  |  | 8,754,313  |  
|Less accumulated depreciation (other than capital leases) |  |      | (5,640,965 | )    |  |  | (4,157,643 | )
|Less accumulated depreciation, capital leases             |  |      | (8,843     | )    |  |  | (4,913     | )
|                                                          |  |      |            |      |  |  |            |  
|Property, plant and equipment, net                        |  |      | 5,000,659  |      |  |  | 4,591,757  |  
|                                                          |  |      |            |      |  |  |            |  

Total interest capitalized and amortization and depreciation expenses for
the years ended December 31, 2002, 2001 and 2000 are as follows:

|                                      |                                       |  |         |        |      |  |         |        |  |  |         |        | 
|------------------------------------- | ------------------------------------- |  | ------- | ------ | ---- |  | ------- | ------ |  |  | ------- | ------ | 
|                                      |                                       |  | 2002    |        | 2001 |  | 2000   
|                                      |                                       |  |         |        |      |  |        
|Interest capitalized                  |                                       |  | 2,635   |        |      |  | 2,893   |        |  |  | 3,876   |       
|Depreciation and amortization expense |                                       |  | 989,878 |        |      |  | 875,912 |        |  |  | 889,088 |       
|Thereof                               |                                       |  |         |        |      |  |         |        |  |  |         |       
|                                      | Amortization expense of software      |  |         | 42,623 |      |  |         | 24,276 |  |  |         | 16,499 | 
|                                      | Amortization expense of leased assets |  |         | 2,341  |      |  |         | 1,025  |  |  |         | 2,611  | 

In the period ended December 31, 2002, 2001 and 2000, respectively,
impairment charges of EUR 977, EUR 23,181 and EUR 2,145 are included in
depreciation. These impairment charges related primarily to buildings which

F-30



---



##### 



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

the Company no longer uses. The impairments recorded related to these buildings
equals the carrying value in excess of estimated fair value.

(10)   SHORT-TERM BORROWINGS

The Companys short-term borrowings include:

|                                     |  |      |           |      |  |  |         | 
|------------------------------------ |  | ---- | --------- | ---- |  |  | ------- | 
|At December 31,                      |  | 2002 |           | 2001
|                                     |  |      |           |     
|Current portion of long-term debt    |  |      | 458,995   |      |  |  | 413,470 | 
|Short-term debt                      |  |      | 737,144   |      |  |  | 471,768 | 
|Lines of credit                      |  |      | 5,823     |      |  |  | 5,354   | 
|Current portion of lease obligations |  |      | 107,943   |      |  |  | 87,500  | 
|                                     |  |      |           |      |  |  |         | 
|Total                                |  |      | 1,309,905 |      |  |  | 978,092 | 
|                                     |  |      |           |      |  |  |         | 

The weighted-average interest rate on lines of credit was 4.02 % and 4.77 % in
2002 and 2001, respectively. As of December 31, 2002 the Company has unused
committed lines of EUR 100,000 and recorded commitment fees for these unused
lines of EUR 240, which are 0.1 % of the committed lines. The credit line will
expire on April 2, 2003 and is expected to be renewed on a three months roll
forward basis.

The current portion of lease obligations increased mainly due to the
reclassification of certain payments under the cross border lease that will
become due in 2003.

(11)   ACCRUED LIABILITIES

Accrued liabilities consist of the following:

|                              |  |      |         |      |  |  |         | 
|----------------------------- |  | ---- | ------- | ---- |  |  | ------- | 
|At December 31,               |  | 2002 |         | 2001
|                              |  |      |         |     
|Taxes, other than income      |  |      | 8,517   |      |  |  | 10,138  | 
|Employees                     |  |      | 67,384  |      |  |  | 57,928  | 
|Customer discounts            |  |      | 53,240  |      |  |  | 49,438  | 
|Customer retention programs   |  |      | 37,693  |      |  |  | 0       | 
|Exit costs                    |  |      | 8,363   |      |  |  | 1,912   | 
|Bad debt for sold receivables |  |      | 62,481  |      |  |  | 0       | 
|Other                         |  |      | 19,112  |      |  |  | 11,880  | 
|                              |  |      |         |      |  |  |         | 
|Total                         |  |      | 256,790 |      |  |  | 131,296 | 
|                              |  |      |         |      |  |  |         | 

Other accruals mainly relate to legal fees and law suits, audit fees,
public fees and consulting services.

In establishing accruals management assesses different scenarios of
reasonably estimated outcomes in determining the amount that the Company is
expected to pay upon the resolution of a contingency. The Company records the
most likely of all scenarios contemplated or, if none of the scenarios is more
likely to occur, the scenario with the lowest amount is considered in
establishing the accrual.

F-31



---



##### 



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

During the year ended December 31, 2001, the Company formally terminated
certain leases, which require the Company to refurbish the properties as they
are vacated. Upon termination of the leases the Company had recorded an accrual
totaling EUR 1,912. The Company utilized EUR 1,456 and released EUR 456 of this
accrual in 2002. As of December 31, 2002, the Company recorded an accrual
totaling EUR 8,363 for certain lease contracts, that cannot be terminated, but
the Company will move out in 2003, and accrued the minimum lease payments until
the end of the lease contracts.

(12)   DEFERRED INCOME

|                                            |  |      |         |      |  |  |         |  
|------------------------------------------- |  | ---- | ------- | ---- |  |  | ------- | -
|At December 31,                             |  | 2002 |         | 2001
|                                            |  |      |         |     
|Unearned income                             |  |      | 122,850 |      |  |  | 48,728  |  
|Unamortized balance on sale of tax benefits |  |      | 58,686  |      |  |  | 54,558  |  
|                                            |  |      |         |      |  |  |         |  
|                                            |  |      | 181,536 |      |  |  | 103,286 |  
|Less non-current portion                    |  |      | (51,573 | )    |  |  | (48,020 | )
|                                            |  |      |         |      |  |  |         |  
|Deferred income net of non-current portion  |  |      | 129,963 |      |  |  | 55,266  |  
|                                            |  |      |         |      |  |  |         |  

The deferred income mainly relates to access fees, monthly base fees,
leased lines to commercial customers, and as of December 31, 2002 prepaid
mobile fees and rental income from site sharing relating to mobilkom austria.
These fees are amortized over the period the service is provided.

Additional information concerning the sale of the tax benefits is
contained in note (14).

(13)   LONG-TERM DEBT

The outstanding long-term debt, other than lease obligations are
summarized as follows:

|                                       |  |          |           |      |  |      |           |   |  |  |           |  
|-------------------------------------- |  | -------- | --------- | ---- |  | ---- | --------- | - |  |  | --------- | -
|At December 31,                        |  | Maturity |           | 2002 |  | 2001
|                                       |  |          |           |      |  |     
|Bonds and debentures                   |  |          | 2003-2006 |      |  |      | 175,537   |   |  |  | 249,641   |  
|Bank debt                              |  |          | 2003-2011 |      |  |      | 2,347,652 |   |  |  | 2,169,055 |  
|Other                                  |  |          | 2008      |      |  |      | 15,691    |   |  |  | 0         |  
|                                       |  |          |           |      |  |      |           |   |  |  |           |  
|                                       |  |          |           |      |  |      | 2,538,880 |   |  |  | 2,418,696 |  
|Less current portion of long-term debt |  |          |           |      |  |      | (458,995  | ) |  |  | (413,470  | )
|                                       |  |          |           |      |  |      |           |   |  |  |           |  
|Long-term debt, net of current portion |  |          |           |      |  |      | 2,079,885 |   |  |  | 2,005,226 |  
|                                       |  |          |           |      |  |      |           |   |  |  |           |  

Most of the bonds were issued and loans granted while the Company was
still owned by the government. Of the bank total debt, amounts of EUR 1,751,264
and EUR 2,032,650 at December 31, 2002 and 2001, respectively, are guaranteed
by the Federal Republic of Austria. From the total long-term debt, as of
December 31, 2002 and 2001, respectively, EUR 286,947 and EUR 268,390 are
denominated in Japanese Yen and Swiss Francs. The Company uses cross currency
swaps to reduce the exposure to the risks of adverse changes in exchange rates
as described in note (19).

F-32



---



##### 



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

The interest rates of these loans vary between 4.4% and 7.3%. The weighted
average interest rate for the periods ended December 31, 2002 and 2001,
respectively, were 5.2 % and 5.4% for bank debt and 3.7% and 5.0% for bonds.

The following loans are not guaranteed by the government as they were
entered into after the privatization of the Company.

In March 2000, the Company entered into a loan agreement for EUR 145,000
with the European Investment Bank. As of December 31, 2002 the loan is
outstanding in full in accordance with the repayment terms. Under the terms of
this agreement, the Company must observe covenants requiring the Company to
meet certain financial ratios. If these ratios are not met, the bank would be
entitled to receive collateral from the Company.

Further, in October 2000 the Company entered into a loan agreement for EUR
232,553. As of December 31, 2002 the loan is outstanding in full in accordance
with the repayment terms. Under the terms of the contract the Company has to
maintain certain investments, otherwise the loan becomes due. The interest
rates vary depending on the rating of the Company.

As of December 31, 2002, EUR 260,160 of a syndicated loan granted to
mobilkom austria was outstanding. The original loan totaled EUR 305,000 and was
guaranteed by Telekom Austria AG.

In December 2002 the VIPnet entered into a syndicated loan of EUR 150,000
of which EUR 96,200 were drawn as of December 31, 2002. The loans become due
between 2003 and 2008 and incurred interest of three month EURIBOR plus margin,
depending on operating performance and indebtedness and 0.375 % commitment
fees. The loan was used for the refinancing of the loans to VIPnet.

In March 1999, Si.mobil entered into a loan agreement amounting to EUR
36,000 (original currency: Deutsche Mark 71,000) to finance the construction of
the GSM network in Slovenia. The interest incurred is three month LIBOR plus
1.075 %. The loan is secured by bills of exchange, property, receivables and
shares of Si.mobil. The loan is due in March 2007.

As of December 31, 2002, the Company was in compliance with all covenants
agreed in the different loan agreements mentioned above.

As of December 31, 2002 loans to VIPnets minority shareholders in the
amount of EUR 15,061 are outstanding.

In March 1999, Si.mobil also issued 5,000 bonds with a par value of
Deutsche Mark 1,000. The bonds incur interest of 6 % and are payable
semiannually through March 1, 2006.

The year-end average interest rates for the long-term debt excluding
interest rate swap agreements for 2002 and 2001 are as follows:

|          |  |      |      |      |  |  |      |  
|--------- |  | ---- | ---- | ---- |  |  | ---- | -
|          |  | 2002 |      | 2001
|          |  |      |      |     
|Bonds     |  |      | 5.32 | %    |  |  | 4.32 | %
|Bank debt |  |      | 3.49 | %    |  |  | 5.42 | %

F-33



---



##### 



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

Following is a table that shows the aggregate amounts of long-term debt
maturing during the next five years and thereafter:

|           |  |  |         | 
|---------- |  |  | ------- | 
|2003       |  |  | 458,995 | 
|2004       |  |  | 423,931 | 
|2005       |  |  | 596,450 | 
|2006       |  |  | 532,217 | 
|2007       |  |  | 161,808 | 
|Thereafter |  |  | 365,479 | 

(14)   LEASING

The Company leases equipment used in its operations which are classified
as either operating or capital leases. The lease contracts expire on various
dates through 2010.

Future minimum lease payments for noncancelable operating leases, capital
leases and cross border leases as of December 31, 2002 are:

|                                  |  |        |           |         |  |           |        |   |  |  |         | 
|--------------------------------- |  | ------ | --------- | ------- |  | --------- | ------ | - |  |  | ------- | 
|                                  |  | Cross  |           |         |  |           |        |   |  | 
|                                  |  | border |           | Capital |  | Operating
|                                  |  | leases |           | leases  |  | leases   
|                                  |  |        |           |         |  |          
|2003                              |  |        | 102,719   |         |  |           | 5,340  |   |  |  | 69,122  | 
|2004                              |  |        | 112,878   |         |  |           | 2,137  |   |  |  | 64,239  | 
|2005                              |  |        | 122,292   |         |  |           | 56     |   |  |  | 55,963  | 
|2006                              |  |        | 138,022   |         |  |           | 18     |   |  |  | 53,533  | 
|2007                              |  |        | 163,038   |         |  |           | 0      |   |  |  | 52,251  | 
|after 2007                        |  |        | 1,049,353 |         |  |           | 0      |   |  |  | 12,767  | 
|                                  |  |        |           |         |  |           |        |   |  |  |         | 
|Total minimum lease payments      |  |        | 1,688,302 |         |  |           | 7,551  |   |  |  | 307,875 | 
|                                  |  |        |           |         |  |           |        |   |  |  |         | 
|Less amount representing interest |  |        | (511,268  | )       |  |           | (289   | ) |  |  |         | 
|                                  |  |        |           |         |  |           |        |   |  |  |         | 
|Present value of lease payments   |  |        | 1,177,034 |         |  |           | 7,262  |   |  |  |         | 
|Less current portion              |  |        | (102,719  | )       |  |           | (5,223 | ) |  |  |         | 
|                                  |  |        |           |         |  |           |        |   |  |  |         | 
|Non-current lease obligations     |  |        | 1,074,315 |         |  |           | 2,039  |   |  |  |         | 
|                                  |  |        |           |         |  |           |        |   |  |  |         | 

Total rent expense was EUR 67,666, EUR 52,130 and EUR 52,299 in 2002, 2001
and 2000, respectively.

Cross border leases

In 1999 and 1998, the Company entered into various cross border lease
transactions whereby certain equipment items, mainly switches, were sold to a
U.S.-based trust and leased back over certain terms. Concurrent with the
inception, the Company entered into Payment Undertaking Agreements (PUA) with
several counter-parties whereby the counter-parties agreed to make lease
payments on behalf of the Company in exchange for a deposit. The
counter-parties in the PUAs received upfront payments totaling EUR 509,285 and
EUR 113,763 for a portion of the debt assumed in 1999 and 1998, respectively.
Interest accruing on the cash deposits matches interest on the debt portion
financed through the deposit. In addition to the cash deposits, the Company
purchased debt securities, deposited those securities with a custodian and
pledged the securities to one of the counter-parties in the

F-34



---



##### 



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

PUA; the balance is
to cover the remaining portion of the present value of the lease obligation not
yet covered by the cash deposit made by the Company. The Company then also
entered into a swap agreement with that very counter-party swapping the entire
cash flows from the securities for cash flows from the portion of the lease
payments that the counter-party is obligated to pay under the PUA. As a result
of the swap agreement, interest income on the securities matches interest
expense on the lease.

In 2001, the Company entered a cross border lease transaction whereby
certain equipment items, mainly switches were leased to a U.S.-based trust and
leased back over certain terms. Concurrent with the inception, the Company
entered into Payment Undertaking Agreements (PUA) with several
counter-parties whereby the counter-parties agreed to make lease payments on
behalf of the Company in exchange for the upfront lease payments received under
the head lease. The counter-parties in the PUAs received upfront payments
totaling EUR 200,526 for a portion of the debt assumed in 2001. In addition to
the PUAs the Company provided a loan of EUR 66,554 to the U.S.-based trust.
Interest accruing on the PUAs and the loan match interest on the debt portion.

The difference between the cash proceeds from the sale and the present
value of the future minimum lease payments represents a gain on the sale of a
tax benefit. The net cash effect resulting from these transactions relates to
the total gain from the sale of the tax benefits which amounted to EUR 14,547,
EUR 44,437 and EUR 7,337 in 2001, 1999 and 1998, respectively. The Company is
amortizing these amounts over the term of the lease. The cash
deposits, the securities purchased in connection with the PUA contracts
and the upfront payments received for the head lease and the lease obligations
are recorded separately on the balance sheets as the Company has not been
released from their obligation under the lease and a legal right of offset does
not exist. Accordingly, interest income and expenses totaling EUR 70,634, EUR
58,598 and EUR 56,773 have been recognized in 2002, 2001 and 2000,
respectively.

In 1999, mobilkom austria entered into similar cross border lease
transactions whereby certain equipment items (mainly transceiver stations, base
station controllers and location registers) were sold to four U.S.-based trusts
and leased back over certain terms. As mobilkom austria is consolidated since
June 28, 2002 at December 31, 2002 assets and lease obligations relating to
these transactions totaling EUR 203,386 are now included in the figures below.
Total assets and liabilities recorded in connection with the cross border
leases are as follows:

|                                         |                 |      |           |         |  |  |           |        | 
|---------------------------------------- | --------------- | ---- | --------- | ------- |  |  | --------- | ------ | 
|At December 31,                          |                 | 2002 |           | 2001   
|                                         |                 |      |           |        
|Securities held-to-maturity, non-current |                 |      | 138,454   |         |  |  | 158,274   |       
|Other assets                             |                 |      | 1,038,580 |         |  |  | 1,008,572 |       
|                                         | Thereof current |      |           | 103,978 |  |  |           | 82,421 | 
|Lease obligations                        |                 |      | 1,177,034 |         |  |  | 1,166,846 |       
|                                         | Thereof current |      |           | 102,719 |  |  |           | 82,421 | 

In 2001, two banks issued letters of credit to the trust for the
liabilities of the Company. As of December 31, 2002 these letter of credits
totaled EUR 107,776.

F-35



---



##### 



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

(15)   EMPLOYEE BENEFIT OBLIGATIONS

Long-term liabilities for employee benefits consist of the following:

|                                 |  |      |         |      |  |  |         | 
|-------------------------------- |  | ---- | ------- | ---- |  |  | ------- | 
|At December 31,                  |  | 2002 |         | 2001
|                                 |  |      |         |     
|Contractual termination benefits |  |      | 132,346 |      |  |  | 287,300 | 
|Service awards                   |  |      | 57,862  |      |  |  | 59,186  | 
|Severance                        |  |      | 32,612  |      |  |  | 21,751  | 
|Pensions                         |  |      | 9,709   |      |  |  | 9,888   | 
|                                 |  |      |         |      |  |  |         | 
|Total                            |  |      | 232,529 |      |  |  | 378,125 | 
|                                 |  |      |         |      |  |  |         | 

Contractual termination benefits

In June 2000, June 1999 and in November 1997, the Company offered
voluntary retirement incentive programs (VRIPs) to eligible employees meeting
the criteria detailed in the programs and recorded appropriate accruals. Under
the terms of these programs employees are eligible to receive payments over a
maximum period of 7.5 years until the day of retirement and the benefits are
indexed to inflation.

As of December 31, 2002, the accrual for the VRIPs relate to 1,723
employees. In connection with the VRIPs, the Company made payments of EUR
95,262, EUR 68,456 and EUR 61,985 in 2002, 2001 and 2000, respectively.

An obligation for voluntary termination benefits is recognized when the
eligible civil servant, who cannot be terminated involuntarily, accepts the
offer. The present value of the obligation is determined based on current
compensation levels and the law. An annual increase of 2.5 % for future years
and a discount rate of 4.5 % are used. VRIPs are not funded.

On January 1, 2002 a new law was enacted that allows voluntary early
retirement of Austrian civil servants as early as at the age of 55. In the year
ended December 31, 2002 the Company reversed EUR 57,366 of these accruals
because 656 employees either elected early retirement under the new law or
qualified for early retirement as the result of medical disability.
Consequently, the Companys obligation under the VRIPs was reduced as these
former employees are now covered by the governmental retirement plan. Expenses
associated with the VRIPs as well as the reversals of accruals are reflected as
a reduction of employee costs in the accompanying consolidated statement of
operations.

Actuarial assumptions

The assumptions used in the measurement of obligations for service awards,
severance payments and pensions are shown in the following table:

|                       |                               |      |  |      |   |      |  |     |   |  |  |     |  
|---------------------- | ----------------------------- | ---- |  | ---- | - | ---- |  | --- | - |  |  | --- | -
|At December 31,        |                               | 2002 |  | 2001 |   | 2000
|                       |                               |      |  |      |   |     
|Actuarial assumptions: |                               |      |  |      |   |      |  |     |   |  |  |    
|                       | Discount rate                 |      |  | 5.0  | % |      |  | 5.0 | % |  |  | 5.5 | %
|                       | Rate of compensation increase |      |  | 3.7  | % |      |  | 3.6 | % |  |  | 3.5 | %
|                       | Rate of increase of pensions  |      |  | 1.1  | % |      |  | 1.1 | % |  |  | 1.7 | %

F-36



---



##### 



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

Service awards

Civil servants and employees (together employees) are eligible to
receive service awards. Under these plans, eligible employees receive a cash
bonus after a specified service period. The bonus is equal to two months salary
after 25 years of service and four months salary after 40 years of service.
Employees with at least 35 years of service when retiring are also eligible to
receive a bonus equal to four months salary. The compensation is accrued as
earned over the period of service taking into account estimates of employees
whose employment will be terminated or who will retire prior to reaching the
required service period. All actuarial gains and losses are recognized
immediately in the period realized.

The following table provides a reconciliation of the changes of service
award for the years ended December 31, 2002 and 2001, respectively:

|                                     |  |      |        |      |  |  |        |  
|------------------------------------ |  | ---- | ------ | ---- |  |  | ------ | -
|                                     |  | 2002 |        | 2001
|                                     |  |      |        |     
|Accrual at the beginning of the year |  |      | 59,186 |      |  |  | 60,289 |  
|Change in reporting entities         |  |      | 2,744  |      |  |  | 0      |  
|Service cost                         |  |      | 2,348  |      |  |  | 2,433  |  
|Interest cost                        |  |      | 3,024  |      |  |  | 3,255  |  
|Recognized actuarial losses (gains)  |  |      | (6,930 | )    |  |  | (1,967 | )
|Benefits paid                        |  |      | (2,510 | )    |  |  | (4,824 | )
|                                     |  |      |        |      |  |  |        |  
|Accrual at the end of the year       |  |      | 57,862 |      |  |  | 59,186 |  
|                                     |  |      |        |      |  |  |        |  

Severance

Certain employees are eligible to receive severance payments upon
termination of their employment. Civil servants generally are not eligible to
receive severance payments.

Eligible employees receive severance payments equal to a multiple of their
monthly compensation which comprises fixed compensation plus variable elements
like overtime and bonus. Maximum severance is equal to a multiple of twelve
times eligible monthly compensation. Up to three months of benefits are paid
upon termination, any benefit in excess of that amount are paid in monthly
installments over a period not exceeding ten months. In case of death, the
heirs of an eligible employee will receive 50 % of the severance benefits.

The following table provides a reconciliation of the changes of severance
benefit obligations for the years ended December 31, 2002, 2001 and 2000,
respectively:

|                                            |  |      |       |      |  |      |       |  |  |  |       | 
|------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                            |  | 2002 |       | 2001 |  | 2000
|                                            |  |      |       |      |  |     
|Service cost                                |  |      | 3,926 |      |  |      | 1,893 |  |  |  | 1,452 | 
|Interest cost                               |  |      | 1,311 |      |  |      | 924   |  |  |  | 816   | 
|Amortization of unrecognized net obligation |  |      | 221   |      |  |      | 29    |  |  |  | 0     | 
|Curtailment loss                            |  |      | 683   |      |  |      | 1,876 |  |  |  | 0     | 
|                                            |  |      |       |      |  |      |       |  |  |  |       | 
|Net periodic benefit cost                   |  |      | 6,141 |      |  |      | 4,722 |  |  |  | 2,268 | 
|                                            |  |      |       |      |  |      |       |  |  |  |       | 

F-37



---



##### 



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

|                                                           |  |      |         |      |  |  |        |  
|---------------------------------------------------------- |  | ---- | ------- | ---- |  |  | ------ | -
|                                                           |  | 2002 |         | 2001
|                                                           |  |      |         |     
|Projected benefit obligation at the beginning of the year  |  |      | 22,415  |      |  |  | 16,328 |  
|Change in reporting units                                  |  |      | 4,249   |      |  |  | 0      |  
|Service cost                                               |  |      | 3,926   |      |  |  | 1,893  |  
|Interest cost                                              |  |      | 1,311   |      |  |  | 924    |  
|Actuarial losses                                           |  |      | 7,459   |      |  |  | 6,658  |  
|Curtailment loss                                           |  |      | 683     |      |  |  | 1,876  |  
|Benefits paid                                              |  |      | (3,194  | )    |  |  | (5,264 | )
|                                                           |  |      |         |      |  |  |        |  
|Projected benefit obligation at the end of the year        |  |      | 36,849  |      |  |  | 22,415 |  
|Unrecognized net actuarial losses                          |  |      | (16,093 | )    |  |  | (7,968 | )
|                                                           |  |      |         |      |  |  |        |  
|Accrued liability at the end of the year                   |  |      | 20,756  |      |  |  | 14,447 |  
|Voluntary severance obligation                             |  |      | 11,856  |      |  |  | 7,304  |  
|                                                           |  |      |         |      |  |  |        |  
|Total accrued severance liabilities at the end of the year |  |      | 32,612  |      |  |  | 21,751 |  
|                                                           |  |      |         |      |  |  |        |  

The liability for voluntary severance payments relates to individuals, who
are generally not entitled to severance payments, but have accepted a special
offer by the Company to receive severance payments for voluntary termination of
employment.

Pensions

Defined contribution pension plans

Pension benefits are generally provided by social security for employees
and by the government for civil servants in Austria. The Company is required to
assist in funding the Austrian governments pension and health care
obligations to the Companys current and former civil servants and their
surviving dependents. The Company was legally obligated to make annual
contributions to the Austrian government of 27.5 % until September 30, 2000, of
the compensation of active civil servants (including contributions from the
civil servants). The contribution to the Austrian government was increased to
29.6 % in 2002. Beginning October 2005 the contribution will be reduced to 28.3 %. Contributions to the government, net of the share contributed by civil
servants, were EUR 52,647, EUR 56,380 and EUR 59,064 in 2002, 2001 and 2000,
respectively.

In 2000 and 1999, the Company sponsored a defined contribution plan
covering substantially all employees of one subsidiary. In 2001, this plan was
also offered to the employees of Telekom Austria and all its other Austrian
subsidiaries. The Companys contributions to this plan are based on a
percentage of the compensation not exceeding 5 % of the salaries. The annual
cost of this plan amounted to approximately EUR 6,961, EUR 4,669 and EUR 1,364
in 2002, 2001 and 2000, respectively.

Defined benefit pension plan

The Company provides defined benefits for certain former employees of one
subsidiary. All of such employees are retired and were employed prior to
January 1, 1975. This unfunded plan provides benefits based on a percentage of
the salary depending on the years employed not exceeding 80 % of the salary
before retirement including the pension provided by social security.

F-38



---



##### 



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

The Company uses the projected unit credit method to determine pension
cost for financial reporting purposes. In conjunction with this method the
Company amortizes actuarial gains and losses using the corridor method.

The pension benefits for 2002, 2001 and 2000 are shown in the following
table:

|                                                   |  |      |     |      |  |      |     |   |  |  |       |  
|-------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | ----- | -
|                                                   |  | 2002 |     | 2001 |  | 2000
|                                                   |  |      |     |      |  |     
|Service cost                                       |  |      | 0   |      |  |      | 0   |   |  |  | 0     |  
|Interest cost                                      |  |      | 424 |      |  |      | 504 |   |  |  | 695   |  
|Amortization of actuarial gain                     |  |      | (50 | )    |  |      | (59 | ) |  |  | (17   | )
|Amortization of unrecognized transition obligation |  |      | 343 |      |  |      | 343 |   |  |  | 343   |  
|                                                   |  |      |     |      |  |      |     |   |  |  |       |  
|Net periodic pension benefit cost                  |  |      | 717 |      |  |      | 788 |   |  |  | 1,021 |  
|                                                   |  |      |     |      |  |      |     |   |  |  |       |  

The following table provides a reconciliation of the changes of benefit
obligations for the years ended December 31, 2002 and 2001, respectively:

|                                                          |  |      |       |      |  |  |       |  
|--------------------------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | -
|                                                          |  | 2002 |       | 2001
|                                                          |  |      |       |     
|Projected benefit obligation at the beginning of the year |  |      | 8,926 |      |  |  | 9,145 |  
|Service cost                                              |  |      | 0     |      |  |  | 0     |  
|Interest cost                                             |  |      | 424   |      |  |  | 504   |  
|Actuarial losses (gains)                                  |  |      | (128  | )    |  |  | 90    |  
|Benefits paid                                             |  |      | (895  | )    |  |  | (813  | )
|                                                          |  |      |       |      |  |  |       |  
|Projected benefit obligation at the end of the year       |  |      | 8,327 |      |  |  | 8,926 |  
|Unrecognized net gain                                     |  |      | 1,725 |      |  |  | 1,647 |  
|Unrecognized transition obligation                        |  |      | (343  | )    |  |  | (685  | )
|                                                          |  |      |       |      |  |  |       |  
|Accrued pension liability                                 |  |      | 9,709 |      |  |  | 9,888 |  
|                                                          |  |      |       |      |  |  |       |  

(16)   IDLE WORKFORCE

In connection with its formation and privatization the Company was
required to retain a significant number of employees that are recognized as
civil servants under Austrian law. Despite the Companys conclusion that the
service of such employees is redundant and they are not required to report to
work, they may not be involuntarily terminated according to Austrian law. For
the years ended December 31, 2002, 2001 and 2000, respectively, the Company had
an average of 592, 614 and 261 redundant employees who are referred to as the
idle workforce. In addition, beginning January 1, 2002, the Company expanded
its definition of idle workforce to include employees who are on medical leave
and have applied for early retirement, of which there are 292 for the period
ended December 31, 2002. As a result of the change in definition, the Company
reclassified prior year costs of EUR 2,024 and EUR 1,290 associated with an
average of 56 and 38 such employees from employee costs in the 2001 and 2000
statement of operations to idle workforce.

Additionally, the Company periodically offers voluntarily termination
benefits to selected employees. Costs associated with these special programs
were EUR 9,412 and EUR 27,916 for the period ended December 31, 2002 and 2001,
respectively. Such costs are included in idle workforce.

Costs related to the idle work force are reported separately in the
accompanying consolidated statements of operations.

F-39



---



##### 



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

(17)   STOCK BASED COMPENSATION

Stock option plan

On October 4, 2000, the shareholders of Telekom Austria approved stock
option plans for employees of the Company and mobilkom austria. Under this
plan, the Company may grant a total of 4,686,881 options, each of which entitle
eligible grantees upon exercise of the option to receive at their choice either
cash equal to the difference between the average quoted price of Telekom
Austria stock during the five trading days preceding the exercise and the IPO
price of EUR 9 or shares at an exercise price of EUR 9. One option is
convertible into one share. The options granted may be exercised on specific
dates between May 31, 2002, and February 27, 2004, as long as the average share
price during the five days prior to exercise exceeds the initial public
offering price by 30 % or more. The Company will recognize compensation expense
over the applicable service periods if the performance hurdles are met.

On November 21, 2000, the Company granted all 4,686,881 options. In 2002
and 2001, respectively, 520,766 and 733,188 options were forfeited, therefore,
3,432,927 and 3,953,693 options are outstanding as of December 31, 2002 and
2001, respectively.

As the stock option plans are accounted for in accordance with APB Opinion
25 and related interpretations, the amount of the liability is measured each
period based on the current stock price. As the stock price as of December 31,
2002 and 2001 did not exceed the hurdle, no compensation expense was recorded
in 2002 and 2001.

Stock purchase plan

ÖIAG, the selling shareholder, approved a stock purchase plan for
employees of Telekom and its subsidiaries in which the Company has at least a
50 % interest. Under the stock purchase plan, each eligible employee was
allowed to purchase shares worth up to EUR 1.8 at a total discount of 45 %
from the offering price made up of the 5 % Austrian retail discount and an
additional 40 % employee discount if they purchase at least EUR 0.7 worth of
shares. The maximum benefit to each employee was EUR 0.7. In 2000, the Company
reported a capital contribution by ÖIAG of EUR 7,924 and compensation expense
of EUR 7,196.

(18)   INCOME TAXES

Income (loss) before income taxes, minority interests and extraordinary
items is attributable to the following geographic locations:

|         |  |      |        |      |  |      |          |   |  |  |          |  
|-------- |  | ---- | ------ | ---- |  | ---- | -------- | - |  |  | -------- | -
|         |  | 2002 |        | 2001 |  | 2000
|         |  |      |        |      |  |     
|Domestic |  |      | 33,710 |      |  |      | (199,049 | ) |  |  | (460,184 | )
|Foreign  |  |      | 10,101 |      |  |      | (1,019   | ) |  |  | (756     | )
|         |  |      |        |      |  |      |          |   |  |  |          |  
|Total    |  |      | 43,811 |      |  |      | (200,068 | ) |  |  | (460,940 | )
|         |  |      |        |      |  |      |          |   |  |  |          |  

As described in note 2, on June 28, 2002 the Company acquired the
remaining outstanding interest of mobilkom austria through the acquisition of
Autel. mobilkom austria has been consolidated since that date. Prior to the
acquisition of Autel on June 28, 2002, the Company held a 74.999 % interest in
mobilkom austria which was accounted for under the equity method. In the first
quarter 2001, mobilkom austria recorded a tax expense of

F-40



---



##### 



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

EUR 134,437 due to a
change in tax status of mobilkom austria AG from a taxable entity to a
nontaxable pass-through entity which occurred in the first quarter of 2001 and
which was effective retroactive to July 1, 2000 for tax purposes.
Correspondingly, the Company recorded its 74.999 % proportional share of
mobilkom austrias tax expense and recognized a deferred tax benefit during the
three month period ended March 31, 2001. Thus, the direct income tax effects on
the Company of the change in tax status of mobilkom austria and the
proportional pickup from the income tax expense reported by mobilkom austria
essentially offset each other in the income tax expense reported by the Company
for the year ended December 31, 2001.

Income tax expense (benefit) attributable to income (loss) before income
taxes, minority interests and extraordinary items for the years ended December
31, consisted of the following:

|         |          |  |        |        |      |  |         |         |   |  |          |          |  
|-------- | -------- |  | ------ | ------ | ---- |  | ------- | ------- | - |  | -------- | -------- | -
|         |          |  | 2002   |        | 2001 |  | 2000   
|         |          |  |        |        |      |  |        
|Current  |          |  |        |        |      |  |         |         |   |  |          |         
|         | Domestic |  |        | 1,097  |      |  |         | (292    | ) |  |          | 68       |  
|         | Foreign  |  |        | 5,771  |      |  |         | 0       |   |  |          | 0        |  
|         |          |  |        |        |      |  |         |         |   |  |          |         
|         |          |  | 6,868  |        |      |  | (292    | )       |   |  | 68       |         
|Deferred |          |  |        |        |      |  |         |         |   |  |          |         
|         | Domestic |  |        | 15,627 |      |  |         | (94,278 | ) |  |          | (178,784 | )
|         | Foreign  |  |        | 3,617  |      |  |         | (343    | ) |  |          | (113     | )
|         |          |  |        |        |      |  |         |         |   |  |          |         
|         |          |  | 19,244 |        |      |  | (94,621 | )       |   |  | (178,897 | )       
|         |          |  |        |        |      |  |         |         |   |  |          |         
|Total    |          |  | 26,112 |        |      |  | (94,913 | )       |   |  | (178,829 | )       
|         |          |  |        |        |      |  |         |         |   |  |          |         

Benefits of operating loss carryforwards of EUR 8,641, EUR 7,799 and EUR
194,991 were included in the deferred tax expense (benefit) for the years ended
December 31, 2002, 2001 and 2000, respectively.

Total income tax expense (benefit) was recorded as follows:

|                           |  |      |        |      |  |      |          |   |  |  |          |  
|-------------------------- |  | ---- | ------ | ---- |  | ---- | -------- | - |  |  | -------- | -
|                           |  | 2002 |        | 2001 |  | 2000
|                           |  |      |        |      |  |     
|Continuing operations      |  |      | 26,112 |      |  |      | (94,913  | ) |  |  | (178,829 | )
|Extraordinary items        |  |      | 0      |      |  |      | 0        |   |  |  | (1,779   | )
|Other comprehensive income |  |      | (1,024 | )    |  |      | (6,683   | ) |  |  | (62      | )
|Additional paid in capital |  |      | (424   | )    |  |      | 0        |   |  |  | 4,162    |  
|                           |  |      |        |      |  |      |          |   |  |  |          |  
|                           |  |      | 24,664 |      |  |      | (101,596 | ) |  |  | (176,508 | )
|                           |  |      |        |      |  |      |          |   |  |  |          |  

F-41



---



##### 



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

The Company is subject to income taxes in Austria at a rate of 34 % of
taxable income. The following table shows the principal components for the
difference between the reported income tax expense (benefit) and the amount of
income tax expense (benefit) that would result from applying the Austrian
statutory income tax rate to income (loss) before income taxes, minority
interests and extraordinary items:

|                                                                           |  |      |        |      |  |      |         |   |  |  |          |  
|-------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  |  | -------- | -
|                                                                           |  | 2002 |        | 2001 |  | 2000
|                                                                           |  |      |        |      |  |     
|Income tax expense (benefit) at statutory rate                             |  |      | 14,896 |      |  |      | (68,023 | ) |  |  | (156,719 | )
|Tax incentives                                                             |  |      | (3,626 | )    |  |      | (2,105  | ) |  |  | (19,613  | )
|Tax rate differential on equity in earnings of affiliates                  |  |      | (2,552 | )    |  |      | 9,008   |   |  |  | (12,913  | )
|Nondeductible goodwill amortization and impairment charges                 |  |      | 4,388  |      |  |      | 647     |   |  |  | 8,700    |  
|Tax benefit recognized for prior year goodwill amortization and impairment |  |      | 0      |      |  |      | (40,080 | ) |  |  | 0        |  
|Change in valuation allowance                                              |  |      | 11,008 |      |  |      | 5,456   |   |  |  | 0        |  
|Other                                                                      |  |      | 1,998  |      |  |      | 184     |   |  |  | 1,716    |  
|                                                                           |  |      |        |      |  |      |         |   |  |  |          |  
|Income tax expense (benefit)                                               |  |      | 26,112 |      |  |      | (94,913 | ) |  |  | (178,829 | )
|                                                                           |  |      |        |      |  |      |         |   |  |  |          |  
|Effective income tax rate                                                  |  |      | 59.6   | %    |  |      | 47.4    | % |  |  | 38.8     | %

Tax incentives principally consist of research incentives for 2002 and
2001 and principally consist of investment tax credits for 2000.

The tax effects of each type of temporary differences that give rise to
deferred tax assets and liabilities at December 31 are shown below.

|                                                |                                                                   |  |          |         |      |  |         |         |  
|----------------------------------------------- | ----------------------------------------------------------------- |  | -------- | ------- | ---- |  | ------- | ------- | -
|                                                |                                                                   |  | 2002     |         | 2001
|                                                |                                                                   |  |          |         |     
|Deferred tax assets                             |                                                                   |  |          |         |      |  |         |        
|                                                | Goodwill                                                          |  |          | 44,615  |      |  |         | 108,588 |  
|                                                | Deferred deduction for write downs of investments in subsidiaries |  |          | 76,858  |      |  |         | 82,467  |  
|                                                | Operating loss carryforwards                                      |  |          | 207,232 |      |  |         | 193,325 |  
|                                                | Long-term debt                                                    |  |          | 13,362  |      |  |         | 15,707  |  
|                                                | Other liabilities                                                 |  |          | 5,542   |      |  |         | 0       |  
|                                                | Other                                                             |  |          | 12,354  |      |  |         | 15,775  |  
|                                                |                                                                   |  |          |         |      |  |         |        
|Total deferred tax assets                       |                                                                   |  | 359,963  |         |      |  | 415,862 |        
|Valuation allowance                             |                                                                   |  | (16,214  | )       |      |  | (5,456  | )      
|                                                |                                                                   |  |          |         |      |  |         |        
|Deferred tax assets, net of valuation allowance |                                                                   |  | 343,749  |         |      |  | 410,406 |        
|Deferred tax liabilities                        |                                                                   |  |          |         |      |  |         |        
|                                                | Property, plant and equipment                                     |  |          | (39,683 | )    |  |         | (48,313 | )
|                                                | Other intangible assets                                           |  |          | (88,178 | )    |  |         | 0       |  
|                                                | Accrued liabilities                                               |  |          | (4,892  | )    |  |         | (3,043  | )
|                                                | Other assets                                                      |  |          | (13,866 | )    |  |         | (17,543 | )
|                                                | Employee benefit obligation                                       |  |          | (30     | )    |  |         | (8,714  | )
|                                                | Other                                                             |  |          | (12,351 | )    |  |         | (5,570  | )
|                                                |                                                                   |  |          |         |      |  |         |        
|Total deferred tax liabilities                  |                                                                   |  | (159,000 | )       |      |  | (83,183 | )      
|                                                |                                                                   |  |          |         |      |  |         |        
|Net deferred tax                                |                                                                   |  | 184,749  |         |      |  | 327,223 |        
|                                                |                                                                   |  |          |         |      |  |         |        

F-42



---



##### 



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

At December 31, 2002, the Company had approximately EUR 639,768 of
operating loss carryforwards. Thereof EUR 109,058 relate to foreign
subsidiaries. The expiration dates are as follows:

|      |  |        |         | 
|----- |  | ------ | ------- | 
|Years |  | Amount
|      |  |       
|2003  |  |        | 26      | 
|2004  |  |        | 8,341   | 
|2005  |  |        | 28,959  | 
|2006  |  |        | 42,667  | 
|2007  |  |        | 26,946  | 
|2008  |  |        | 934     | 
|2009  |  |        | 1,185   | 
|      |  |        |         | 
|Total |  |        | 109,058 | 
|      |  |        |         | 

The remaining amount of operating loss carryforwards are in Austria and do
not expire. Their annual usage is limited to 75 % of the taxable income in
Austria for that year.

In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that all the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. As of December 31, 2002 the
Company has recognized a net deferred tax asset of EUR 171,404 related to the
operations in Austria. In order to realize this deferred tax asset the Company
will need to generate future taxable income exclusive of reversing taxable
temporary differences of approximately EUR 672,174 over an indefinite period in
Austria. Additionally, certain foreign subsidiaries will need to generate
future taxable income exclusive of reversing taxable differences of
approximately EUR 54,688 in order to realize the deferred tax asset, net of
valuation allowance, that has been recognized in those jurisdictions. Based on
the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowance. The amount of deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income are
reduced.

During the year ended December 31, 2002 a deferred tax expense of EUR
16,214 and a separate deferred tax benefit of EUR 5,456 were recognized as
adjustments to the valuation allowance because of a change in circumstances
that caused a change in judgement about the realizability of the related
deferred tax asset in future years.

As of December 31, 2002, a deferred tax liability has not been provided
for the excess in the amount of EUR 1,912 for financial reporting over the tax
basis of an investment in a foreign subsidiary that is essentially permanent in
duration. This amount becomes taxable upon a repatriation of assets from the
subsidiary or a sale or liquidation of the subsidiary. It is not practicable to
estimate the amount of the related unrecognized deferred tax liability.

(19)   FINANCIAL INSTRUMENTS

Derivative financial instruments are used by the Company to manage its
exposure to adverse fluctuations in interest and foreign exchange rates. The
Company has established a control environment which includes policies and

F-43



---



##### 



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

procedures for risk assessment, approval, reporting and monitoring of
derivative financial instrument activities. The Company is not a party to
leveraged derivatives and the policies prohibit the holding or issuing of
financial instruments for speculative purposes.

The Company enters into various types of financial instruments in the
normal course of business including derivative financial instruments, for
purposes other than trading.

By their nature, all such instruments involve risk, including market risk
and credit risk of nonperformance by counter-parties, and the maximum potential
loss may exceed the amount recognized in the balance sheets. However, at
December 31, 2002 and 2001, in managements opinion the probability of
nonperformance of the counter-parties in these financial instruments was
remote.

Credit risk

The Company monitors its exposure to credit risk. The Company does not
have any significant exposure to any individual customer or counter-party, nor
does it have any major concentrations of credit risk related to any financial
instruments other than noted under section concentration of credit risk in
significant accounting policies.

The Company does not require collateral in respect of financial assets. In
order to reduce the risk of nonperformance by the other parties to swap
agreements, the contracts are subject to the International Swap Dealers
Agreement.

Market risk

The market risk is monitored by using value at risk models for interest
rate as well as currency risk for the long-term debt and derivative portfolio.

Information with respect to cash flow hedges

Changes in the fair value of interest rate swaps designated as hedging
instruments of variability of cash flows associated with variable rate long
term debt are reported in accumulated other comprehensive income. These amounts
are subsequently classified into financial income as a yield adjustment in the
same period in which the related interest on the floating-rate debt obligations
affect earnings. In 2002 and 2001, respectively, no hedge ineffectiveness
occurred.

Interest rate swap agreements

The Company entered into interest rate swaps to reduce the aggregate
exposure to changes in floating interest rates of the debt portfolio. Fixed
interest rate payments as of December 31, 2002, ranged from 6.7 % to 3.0 %.
Floating-rate payments are based on rates tied to different inter-bank offered
rates.

F-44



---



##### 



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

The following table indicates the types of swaps in use at December 31,
2002 and 2001, and their weighted-average interest rates and the
weighted-average remaining terms of the interest rate swap contracts. Average
variable rates are those in effect at the reporting date and may change
significantly over the lives of the contracts:

|                                                |  |      |            |      |  |  |            |  
|----------------------------------------------- |  | ---- | ---------- | ---- |  |  | ---------- | -
|                                                |  | 2002 |            | 2001
|                                                |  |      |            |     
|Variable to fixed swaps in EUR                  |  |      |            |      |  |  |            |  
|Notional amount in EUR                          |  |      | 181,682    |      |  |  | 181,682    |  
|Average receive rate                            |  |      | 3.35       | %    |  |  | 4.01       | %
|Average pay rate                                |  |      | 6.47       | %    |  |  | 6.38       | %
|Average maturity in years                       |  |      | 2.4        |      |  |  | 3.0        |  
|                                                |  |      |            |      |  |  |            |  
|Variable to fixed swaps in Japanese Yen (JPY) |  |      |            |      |  |  |            |  
|Notional amount in JPY                          |  |      | 10,000,000 |      |  |  | 10,000,000 |  
|Notional amount in EUR                          |  |      | 80,392     |      |  |  | 86,708     |  
|Average receive rate                            |  |      | 0.01       | %    |  |  | 0.02       | %
|Average pay rate                                |  |      | 3.15       | %    |  |  | 3.15       | %
|Average maturity in years                       |  |      | 1.5        |      |  |  | 2.5        |  

Foreign exchange agreements

The Company entered into foreign currency denominated loans, because of
low interest rates connected to loans denominated in Japanese Yen and Swiss
Francs (SFR). The use of cross currency swaps allows the Company to reduce
the exposure to the risk of adverse changes in exchange rates. Fixed interest
rates as of December 31, 2002, range from 6.4 % to 7.7 %.

Additionally, the Company entered into a foreign currency forward contract
to cover the exposure from a loan and interest payments denominated in Swiss
Francs.

The following table indicates the types of foreign exchange agreements in
use at December 31, 2002 and 2001, and if applicable their weighted-average
interest rates, the weighted-average remaining terms and the respective
exchange rates of the contracts:

|                               |  |      |            |      |  |  |            |  
|------------------------------ |  | ---- | ---------- | ---- |  |  | ---------- | -
|                               |  | 2002 |            | 2001
|                               |  |      |            |     
|Cross Currency Swaps EUR  SFR |  |      |            |      |  |  |            |  
|Notional amount in EUR         |  |      | 176,635    |      |  |  | 235,028    |  
|Notional amount in SFR         |  |      | 300,000    |      |  |  | 400,000    |  
|Average receive rate SFR      |  |      | 5.47       | %    |  |  | 5.58       | %
|Average pay rate EUR          |  |      | 7.65       | %    |  |  | 7.74       | %
|Average maturity in years      |  |      | 2.4        |      |  |  | 2.7        |  
|                               |  |      |            |      |  |  |            |  
|Cross Currency Swaps EUR  JPY |  |      |            |      |  |  |            |  
|Notional amount in EUR         |  |      | 73,554     |      |  |  | 73,554     |  
|Notional amount in JPY         |  |      | 10,000,000 |      |  |  | 10,000,000 |  
|Average receive rate JPY      |  |      | 3.15       | %    |  |  | 3.15       | %
|Average pay rate EUR          |  |      | 6.41       | %    |  |  | 6.41       | %
|Average maturity in years      |  |      | 1.5        |      |  |  | 2.5        |  

F-45



---



##### 



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

|                                           |  |            |       |      |  |           |         | 
|------------------------------------------ |  | ---------- | ----- | ---- |  | --------- | ------- | 
|                                           |  | 2002       |       | 2001
|                                           |  |            |       |     
|Foreign Currency Forward Contract  SFR    |  |            |       |      |  |           |         | 
|Notional amount in EUR                     |  |            | 0     |      |  |           | 74,446  | 
|Notional amount in SFR                     |  |            | 0     |      |  |           | 105,906 | 
|Forward exchange rate                      |  |            |      |      |  |           | 1.42    | 
|Exchange rate as of the balance sheet date |  |            |      |      |  |           | 1.48    | 
|Term of the contract                       |  |            |      |      |  | Nov. 2002
|                                           |  |            |       |      |  |           |         | 
|Forward exchange contracts  US $          |  |            |       |      |  |           |         | 
|Notional amount in EUR                     |  |            | 3.599 |      |  |           | 0       | 
|Notional
amount in US $                    |  |            | 3.600 |      |  |           | 0       | 
|Forward exchange rate (weighted)           |  |            | 1.00  |      |  |           |        | 
|Exchange rate as of the balance sheet date |  |            | 1.05  |      |  |           |        | 
|Longest term of the contracts              |  | March 2003 |       |      |  |          |        

The notional amounts of the derivative instruments above do not represent

amounts exchanged by the parties and, therefore, are not a measure of our
exposure. The Companys exposure is limited to the fair value of the contracts
with a positive fair value plus interest receivable, if any, at the reporting
date.

The following table summarizes the fair values of financial instruments:

|                                  |  |          |            |       |  |          |            |       |  |  |            |   |  |  |            |  
|--------------------------------- |  | -------- | ---------- | ----- |  | -------- | ---------- | ----- |  |  | ---------- | - |  |  | ---------- | -
|                                  |  | 2002     |            | 2001 
|                                  |  |          |            |      
|                                  |  | Carrying |            | Fair  |  | Carrying |            | Fair 
|                                  |  | amount   |            | value |  | amount   |            | value
|                                  |  |          |            |       |  |          |            |      
|Financial instruments             |  |          |            |       |  |          |            |       |  |  |            |   |  |  |            |  
|Cash                              |  |          | 27,337     |       |  |          | 27,337     |       |  |  | 26,393     |   |  |  | 26,393     |  
|Accounts receivable  trade       |  |          | 451,934    |       |  |          | 451,934    |       |  |  | 455,272    |   |  |  | 455,272    |  
|Balances due from related parties |  |          | 6,723      |       |  |          | 6,723      |       |  |  | 105,979    |   |  |  | 105,979    |  
|Accounts
payable  trade          |  |          | (649,890   | )     |  |          | (649,890   | )     |  |  | (439,529   | ) |  |  | (439,529   | )
|Payables to related parties       |  |          | (37,198    | )     |  |          | (37,198    | )     |  |  | (15,982    | ) |  |  | (15,982    | )
|Securities held-to-maturity       |  |          | 138,454    |       |  |          | 159,469    |       |  |  | 158,274    |   |  |  | 162,582    |  
|Securities available-for-sale     |  |          | 18,948     |       |  |          | 18,948     |       |  |  | 8,523      |   |  |  | 8,523      |  
|Long-term debt                    |  |          | (2,079,885 | )     |  |          | (2,203,008 | )     |  |  | (2,005,226 | ) |  |  | (2,102,008 | )
|                                  |  |          |            |       |  |          |            |       |  |  |            |   |  |  |            |  
|Derivative financial instruments  |  |          |            |       |  |          |            |       |  |  |            |   |  |  |            |  
|Interest rate swap agreements     |  |          | (20,996    | )     |  |          | (20,996    | )     |  |  | (20,317    | ) |  |  | (20,317    | )
|Cross currency swap agreements    |  |          | 36,034     |       |  |          | 36,034     |       |  |  | 43,998     |   |  |  | 43,998     |  
|Foreign currency forward contract |  |          | (160       | )     |  |          | (160       | )     |  |  | (2,173     | ) |  |  | (2,173     | )

F-46



---



##### 



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

(20)   SHAREHOLDERS EQUITY

Accounting for derivative and hedging activities

Derivative financial instruments are used by the Company to manage its
exposure to adverse fluctuations in interest and foreign exchange rates. The
Company has established a control environment which includes policies and
procedures for risk assessment, approval, reporting and monitoring of
derivative financial instrument activities. The Company is not a party to
leveraged derivatives and the policies prohibit the holding or issuing of
financial instruments for speculative purposes.

For derivatives designed either as fair value or cash flow hedges, changes
in the time value of the derivatives are excluded from the assessment of hedge
effectiveness and are recorded in earnings. Hedge ineffectiveness, determined
in accordance with SFAS No. 133 had no impact on the Companys earnings for
years ended December 31, 2002 and 2001, respectively. No fair value hedges or
cash flow hedges were derecognized or discontinued during the years ended
December 31, 2002 and 2001, respectively.

Unrealized gains and losses recorded in other comprehensive income are as
follows:

|                            |                   |  |              |         |              |  |         |         |  
|--------------------------- | ----------------- |  | ------------ | ------- | ------------ |  | ------- | ------- | -
|                            |                   |  | December 31, |         | December 31,
|                            |                   |  | 2002         |         | 2001        
|                            |                   |  |              |         |             
|Unrealized Losses           |                   |  |              |         |              |  |         |        
|                            | Gross             |  |              | (17,148 | )            |  |         | (18,581 | )
|                            | Less income tax   |  |              | 5,559   |              |  |         | 6,317   |  
|                            |                   |  |              |         |              |  |         |        
|                            | Net of income tax |  |              | (11,589 | )            |  |         | (12,264 | )
|                            |                   |  |              |         |              |  |         |        
|Unrealized Derivative Gains |                   |  |              |         |              |  |         |        
|                            | Gross             |  |              | 1,890   |              |  |         | 0       |  
|                            | Less income tax   |  |              | (643    | )            |  |         | 0       |  
|                            |                   |  |              |         |              |  |         |        
|                            | Net of income tax |  |              | 1,247   |              |  |         | 0       |  
|                            |                   |  |              |         |              |  |         |        
|Unrealized net loss         |                   |  | (10,342      | )       |              |  | (12,264 | )      
|                            |                   |  |              |         |              |  |         |        

Additionally, the Company recorded its share of mobilkom austrias
derivative loss of EUR 1,064, net of deferred income taxes of EUR 376. This
resulted in a total loss of EUR 13,061, net of deferred income taxes as of
December 31, 2001.

F-47



---



##### 



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

Other comprehensive income

Other comprehensive income consist of the following items:

|                                                          |  |            |      |             |  |             |         |               |  |             |        |   |  |  |         |  
|--------------------------------------------------------- |  | ---------- | ---- | ----------- |  | ----------- | ------- | ------------- |  | ----------- | ------ | - |  |  | ------- | -
|                                                          |  | Unrealized |      | Unrealized  |  |             |         |               |  | Accumulated
|                                                          |  | gain       |      | gain (loss) |  | Foreign     |         | other        
|                                                          |  | (loss) on  |      | on hedging  |  | currency    |         | comprehensive
|                                                          |  | securities |      | activities  |  | translation |         | income       
|                                                          |  |            |      |             |  |             |         |              
|Balance January 1, 2000                                   |  |            | 122  |             |  |             | 0       |               |  |             | (229   | ) |  |  | (107    | )
|Changes, net of income tax                                |  |            | (121 | )           |  |             | 0       |               |  |             | 201    |   |  |  | 80      |  
|                                                          |  |            |      |             |  |             |         |               |  |             |        |   |  |  |         |  
|Balance December 31, 2000                                 |  |            | 1    |             |  |             | 0       |               |  |             | (28    | ) |  |  | (27     | )
|Cumulative effect of accounting change,
net of income tax |  |            | 0    |             |  |             | (10,959 | )             |  |             | 0      |   |  |  | (10,959 | )
|Changes, net of income tax                                |  |            | (162 | )           |  |             | (2,102  | )             |  |             | 14,630 |   |  |  | 12,366  |  
|                                                          |  |            |      |             |  |             |         |               |  |             |        |   |  |  |         |  
|Balance December 31, 2001                                 |  |            | (161 | )           |  |             | (13,061 | )             |  |             | 14,602 |   |  |  | 1,380   |  
|Changes, net of income tax                                |  |            | (687 | )           |  |             | 2,719   |               |  |             | (6,496 | ) |  |  | (4,464  | )
|                                                          |  |            |      |             |  |             |         |               |  |             |        |   |  |  |         |  
|Balance December 31, 2002                                 |  |            | (848 | )           |  |             | (10,342 | )             |  |             | 8,106  |   |  |  | (3,084  | )
|                                                          |  |            |      |             |  |             |         |               |  |             |        |   |  |  |         |  

Sale of American call option

On November 21, 2000, Telekom Austria purchased 3,832,248 American call options
for a premium of EUR 12,527. The expiration date is February 27, 2004. The
underlying share of the American call option is the share of Telekom Austria
AG. The strike and execution price of the call option is EUR 9 and settlement
is either physical delivery of the shares or cash, at the request of Telekom
Austria. The American call option will be used to satisfy any obligation
resulting from the stock option plan. The American call option is recorded net
of tax of EUR 4,162 in stockholders equity.

In May 2002, the Company sold 717,701 American call options for an
aggregate price of EUR 1,245. As the original acquisition of the options was
accounted for as permanent equity under the provisions of EITF 96-13, proceeds
from the sale of the options have been credited directly to additional paid in
capital in the accompanying statement of changes in shareholders equity.

Restricted earnings

Dividend distributions are based on earnings determined in accordance with
Austrian accounting standards for Telekom Austria AG on a stand-alone basis. As
of December 31, 2002, no retained earnings as determined under Austrian
accounting rules were available for potential distribution.

F-48



---



##### 



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

(21)   REVENUES

|                                   |  |      |           |      |  |      |           |  |  |  |           | 
|---------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|Year ended December 31,            |  | 2002 |           | 2001 |  | 2000
|                                   |  |      |           |      |  |     
|Revenues from services             |  |      | 2,931,892 |      |  |      | 2,555,596 |  |  |  | 2,700,521 | 
|Revenues from sales of merchandise |  |      | 186,172   |      |  |      | 104,064   |  |  |  | 113,876   | 
|                                   |  |      |           |      |  |      |           |  |  |  |           | 
|Total                              |  |      | 3,118,064 |      |  |      | 2,659,660 |  |  |  | 2,814,397 | 
|                                   |  |      |           |      |  |      |           |  |  |  |           | 

(22)   OTHER OPERATING EXPENSES

|                             |  |      |           |      |  |      |           |  |  |  |           | 
|---------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|Year ended December 31,      |  | 2002 |           | 2001 |  | 2000
|                             |  |      |           |      |  |     
|Interconnection              |  |      | 361,608   |      |  |      | 562,736   |  |  |  | 655,013   | 
|Repairs                      |  |      | 167,496   |      |  |      | 137,345   |  |  |  | 133,346   | 
|Services received            |  |      | 186,516   |      |  |      | 98,653    |  |  |  | 72,491    | 
|Advertising and marketing    |  |      | 153,737   |      |  |      | 75,368    |  |  |  | 73,920    | 
|Rental expenses              |  |      | 67,666    |      |  |      | 52,130    |  |  |  | 52,299    | 
|Commission expenses          |  |      | 25,347    |      |  |      | 4,531     |  |  |  | 4,072     | 
|Bad debt expenses            |  |      | 39,184    |      |  |      | 15,069    |  |  |  | 26,483    | 
|Legal and other consulting   |  |      | 54,368    |      |  |      | 55,304    |  |  |  | 59,058    | 
|Charges from related parties |  |      | 32,980    |      |  |      | 35,062    |  |  |  | 40,433    | 
|Travel expenses              |  |      | 23,363    |      |  |      | 24,676    |  |  |  | 35,644    | 
|Other taxes                  |  |      | 8,665     |      |  |      | 5,242     |  |  |  | 8,411     | 
|Energy                       |  |      | 21,285    |      |  |      | 21,752    |  |  |  | 21,835    | 
|Training expenses            |  |      | 11,773    |      |  |      | 7,131     |  |  |  | 11,859    | 
|Other                        |  |      | 32,651    |      |  |      | 19,911    |  |  |  | 29,054    | 
|                             |  |      |           |      |  |      |           |  |  |  |           | 
|Total                        |  |      | 1,186,639 |      |  |      | 1,114,910 |  |  |  | 1,223,918 | 
|                             |  |      |           |      |  |      |           |  |  |  |           | 

(23)   OTHER, net

|                                          |  |      |          |      |  |      |         |   |  |  |         |  
|----------------------------------------- |  | ---- | -------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|Year ended December 31,                   |  | 2002 |          | 2001 |  | 2000
|                                          |  |      |          |      |  |     
|Foreign exchange losses                   |  |      | (216,261 | )    |  |      | (63,632 | ) |  |  | (89,430 | )
|Foreign exchange gains                    |  |      | 211,422  |      |  |      | 56,474  |   |  |  | 80,474  |  
|Loss from retirement of long-lived assets |  |      | 0        |      |  |      | (39,020 | ) |  |  | (35,161 | )
|Other                                     |  |      | 6,721    |      |  |      | 2,173   |   |  |  | 5,921   |  
|                                          |  |      |          |      |  |      |         |   |  |  |         |  
|Total                                     |  |      | 1,882    |      |  |      | (44,005 | ) |  |  | (38,196 | )
|                                          |  |      |          |      |  |      |         |   |  |  |         |  

In accordance with SFAS No. 144, as amended, the net loss from retirement
of long-lived assets is presented in 2002 in operating income.

F-49



---



##### 



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

(24)   EXTRAORDINARY ITEMS

In 2000, the Company recorded an extraordinary loss of EUR 3,453, net of
tax of EUR 1,779, representing managements commitment to contribute EUR 5,232
to the Austrian fund for forced laborers. This fund was established by the
Parliament of the Federal Republic of Austria and representatives of Austrian
companies in response to claims filed by forced laborers and their descendants
as a result of activity between 1938 and 1945. In April 2001, the Company paid
EUR 5,232 to the Austrian fund for forced labor victims.

(25)   COMMITMENTS AND CONTINGENCIES

In the normal course of business the Company is subject to proceedings,
lawsuits and other claims, including proceedings under laws and regulations
related to interconnection. Such matters are subject to many uncertainties, and
outcomes are not predictable with assurance. Consequently, management is unable
to ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2002. These matters could
affect the operating results or cash flows of any one quarter when resolved in
future periods. However, management believes that after final disposition, any
monetary liability or financial impact to the Company beyond that provided for
at year-end would not be material to its consolidated financial statements.

The Company is aware that other telecommunication companies have recently
recorded impairment charges related to certain investments in UMTS technology.
The Company believes UMTS remains technologically viable and intends to
continue supporting the development of UMTS technology. Further, the Company
believes that future cash flows generated by UMTS will be sufficient to recover
the carrying amount of its investment. The Companys total investment in the
Austrian UMTS license and technical equipment as of December 31,
2002 is EUR 226,974 including capitalized interest of EUR 15,422.

At December 31, 2002, the Company has a carrying value of EUR 7,261 in assets
related to its right to use telephone lines owned by Global Crossing. Though
Global Crossing is under bankruptcy protection, the Company continues to
utilize the leased lines with uninterrupted service. Therefore no impairment
has been taken as of December 31, 2002.

F-50



---



##### 



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

(26)   CASH FLOW STATEMENT

Following is a summary of supplemental cash flow information:

|                                 |  |      |         |      |  |      |         |  |  |  |         | 
|-------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|Years ended December 31,         |  | 2002 |         | 2001 |  | 2000
|                                 |  |      |         |      |  |     
|Cash paid for                    |  |      |         |      |  |      |         |  |  |  |         | 
|Interest                         |  |      | 173,940 |      |  |      | 180,436 |  |  |  | 190,278 | 
|Income taxes                     |  |      | 10,558  |      |  |      | 10,235  |  |  |  | 0       | 
|Cash received for                |  |      |         |      |  |      |         |  |  |  |         | 
|Interest                         |  |      | 11,122  |      |  |      | 18,176  |  |  |  | 30,882  | 
|Tax refunds                      |  |      | 21      |      |  |      | 91,255  |  |  |  | 0       | 
|Non cash investing and financing |  |      |         |      |  |      |         |  |  |  |         | 
|Dividends                        |  |      | 28,294  |      |  |      | 267,505 |  |  |  | 0       | 
|Cross border leasing             |  |      | 0       |      |  |      | 86,315  |  |  |  | 0       | 

(27)   SEGMENT REPORTING

The Companys results are segmented according to the way the business is
managed: Fixed line services, mobile communications, data communications,
internet and other. In connection with the corporate restructuring program set
forth in late 2000, the existing segments reflect certain managerial changes
since the publication of our 2000 annual results. The changes are as follows:

Beginning in 2001, management started evaluating segment performance based
on operating income before depreciation and amortization and idle workforce
(EBITDA). As net losses on the disposal of long-lived assets were
reclassified to operating income in 2002 in accordance with SFAS No. 144, as
amended. EBITDA is further adjusted in the segment reporting to exclude such
amounts.

Costs related to the idle workforce are not controlled by segment heads
but are the responsibility of corporate management, and have not been allocated
to any segment.

All comparative figures for 2000 have been reclassified for the changes in
2001. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (note (1)).

Fixed line services include access fees, domestic long distance services
including internet, local and fixed line to mobile calls, international
traffic, voice value added services, interconnection, call center services, and
public payphone services. The personnel costs of the civil servants not
operatively working were excluded from the fixed line segment as well as the
costs for the golden handshakes and are reported separately as corporate.

Mobile communication services include digital mobile communications
services including value-added services like text and multimedia messaging,
m-commerce and information services. Prepaid services are also offered.

F-51



---



##### 



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

The mobile communication segment comprises 100% of the financial position
and result of operations of mobilkom austria. As discussed in note (1), prior
to June 28, 2002 mobilkom austria was accounted for as an equity method
investee due to certain substantial participation rights of the minority
shareholder, Telecom Italia. Despite such participating rights the day to day
management of mobilkom has been, and remains the responsibility of the segments
heads. Accordingly mobilkom austria is presented as a segment.

Data communication services include domestic and international leased
lines, switched data services, corporate network services and additional
international data service. In the years reported, the data communications
segment received cash discounts from the fixed line segment for the usage of
datalines. Due to a change in cost allocation strategy, these cash discounts
were reduced in 2001 and 2002, compared to prior year, which effected EBIT and
EBITDA of the data communication segment.

The internet includes access, portals and advertising, e-business and
application service provision. The internet business is operated in Austria and
the Czech Republic.

Other includes primarily the treasury activities of the Company.

|                                           |  |            |           |                |  |                |           |          |  |       |         |        |  |  |         |         |  |  |           |   |  |  |            |  
|------------------------------------------ |  | ---------- | --------- | -------------- |  | -------------- | --------- | -------- |  | ----- | ------- | ------ |  |  | ------- | ------- |  |  | --------- | - |  |  | ---------- | -
|                                           |  | Fixed line |           | Mobile         |  | Data           |           |          |  |       |         |        |  |  |         | Segment
|                                           |  | services   |           | communications |  | communications |           | Internet |  | Other |         | totals
|                                           |  |            |           |                |  |                |           |          |  |       |         |       
|Year ended December 31, 2002               |  |            |           |                |  |                |           |          |  |       |         |        |  |  |         |         |  |  |           |   |  |  |            |  
|External revenues                          |  |            | 1,851,257 |                |  |                | 1,819,219 |          |  |       | 269,709 |        |  |  | 66,130  |         |  |  | 0         |   |  |  | 4,006,315  |  
|Intersegmental revenues                    |  |            | 205,992   |                |  |                | 90,132    |          |  |       | 60,298  |        |  |  | 53,494  |         |  |  | 0         |   |  |  | 409,916    |  
|                                           |  |            |           |                |  |                |           |          |  |       |         |        |  |  |         |         |  |  |           |   |  |  |            |  
|Total revenues                             |  |            | 2,057,249 |                |  |                | 1,909,351 |          |  |       | 330,007 |        |  |  | 119,624 |         |  |  | 0         |   |  |  | 4,416,231  |  
|EBITDA                                     |  |            | 813,168   |                |  |                | 660,863   |          |  |       | 46,552  |        |  |  | (13,409 | )       |  |  | (70       | ) |  |  | 1,507,104  |  
|Depreciation and amortization              |  |            | 834,553   |                |  |                | 268,757   |          |  |       | 36,009  |        |  |  | 52,280  |         |  |  | 0         |   |  |  | 1,191,599  |  
|Income/loss from retirement of equipment   |  |            | (5,051    | )              |  |                | (11,376   | )        |  |       | (1,894  | )      |  |  | (720    | )       |  |  | 0         |   |  |  | (19,041    | )
|EBIT                                       |  |            | (26,436   | )              |  |                | 380,730   |          |  |       | 8,649   |        |  |  | (66,409 | )       |  |  | (70       | ) |  |  | 296,464    |  
|Interest income                            |  |            | 77,307    |                |  |                | 23,466    |          |  |       | 370     |        |  |  | 93      |         |  |  | 34,911    |   |  |  | 136,147    |  
|Interest expense                           |  |            | 217,404   |                |  |                | 53,150    |          |  |       | 423     |        |  |  | 3,104   |         |  |  | 34,415    |   |  |  | 308,496    |  
|Income tax expense (benefit)               |  |            | 12,922    |                |  |                | 18,177    |          |  |       | 1,305   |        |  |  | (5,712  | )       |  |  | 145       |   |  |  | 26,837     |  
|Net income (loss)                          |  |            | (131,162  | )              |  |                | 312,877   |          |  |       | 9,831   |        |  |  | (64,480 | )       |  |  | 281       |   |  |  | 127,347    |  
|Total assets                               |  |            | 6,236,558 |                |  |                | 2,832,149 |          |  |       | 168,461 |        |  |  | 94,903  |         |  |  | 1,007,021 |   |  |  | 10,339,092 |  
|Additions to property, plant and
equipment |  |            | 307,531   |                |  |                | 321,656   |          |  |       | 19,888  |        |  |  | 13,291  |         |  |  | 0         |   |  |  | 662,366    |  

|                                           |  |            |           |                |  |                |           |          |  |       |         |        |  |  |          |         |  |  |         |   |  |  |            |  
|------------------------------------------ |  | ---------- | --------- | -------------- |  | -------------- | --------- | -------- |  | ----- | ------- | ------ |  |  | -------- | ------- |  |  | ------- | - |  |  | ---------- | -
|                                           |  | Fixed line |           | Mobile         |  | Data           |           |          |  |       |         |        |  |  |          | Segment
|                                           |  | services   |           | communications |  | communications |           | Internet |  | Other |         | totals
|                                           |  |            |           |                |  |                |           |          |  |       |         |       
|Year ended December 31, 2001               |  |            |           |                |  |                |           |          |  |       |         |        |  |  |          |         |  |  |         |   |  |  |            |  
|External revenues                          |  |            | 2,147,083 |                |  |                | 1,506,026 |          |  |       | 247,351 |        |  |  | 42,995   |         |  |  | 0       |   |  |  | 3,943,455  |  
|Intersegmental revenues                    |  |            | 309,657   |                |  |                | 207,153   |          |  |       | 82,815  |        |  |  | 56,493   |         |  |  | 292     |   |  |  | 656,410    |  
|                                           |  |            |           |                |  |                |           |          |  |       |         |        |  |  |          |         |  |  |         |   |  |  |            |  
|Total revenues                             |  |            | 2,456,740 |                |  |                | 1,713,179 |          |  |       | 330,166 |        |  |  | 99,488   |         |  |  | 292     |   |  |  | 4,599,865  |  
|EBITDA                                     |  |            | 870,999   |                |  |                | 571,307   |          |  |       | 54,690  |        |  |  | (20,143  | )       |  |  | (73     | ) |  |  | 1,476,780  |  
|Depreciation and amortization              |  |            | 835,986   |                |  |                | 267,784   |          |  |       | 35,340  |        |  |  | 129,822  |         |  |  | 0       |   |  |  | 1,268,932  |  
|EBIT                                       |  |            | 35,013    |                |  |                | 303,523   |          |  |       | 19,350  |        |  |  | (149,965 | )       |  |  | (73     | ) |  |  | 207,848    |  
|Interest income                            |  |            | 65,727    |                |  |                | 20,518    |          |  |       | 372     |        |  |  | 168      |         |  |  | 30,090  |   |  |  | 116,875    |  
|Interest expense                           |  |            | 222,171   |                |  |                | 49,910    |          |  |       | 758     |        |  |  | 1,816    |         |  |  | 29,915  |   |  |  | 304,570    |  
|Income tax expense (benefit)               |  |            | (185,275  | )              |  |                | 133,645   |          |  |       | (5,429  | )      |  |  | (4,346   | )       |  |  | 37      |   |  |  | (61,368    | )
|Extraordinary losses                       |  |            | 0         |                |  |                | 0         |          |  |       | 0       |        |  |  | 0        |         |  |  | 0       |   |  |  | 0          |  
|Net income (loss)                          |  |            | (70,546   | )              |  |                | 131,772   |          |  |       | 20,934  |        |  |  | (147,012 | )       |  |  | 63      |   |  |  | (64,789    | )
|Total assets                               |  |            | 7,106,580 |                |  |                | 2,214,101 |          |  |       | 195,022 |        |  |  | 140,022  |         |  |  | 520,062 |   |  |  | 10,175,787 |  
|Additions to property, plant and
equipment |  |            | 397,516   |                |  |                | 363,177   |          |  |       | 31,493  |        |  |  | 20,022   |         |  |  | 0       |   |  |  | 812,208    |  

F-52



---



##### 



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

|                                           |  |            |           |                |  |                |           |          |  |       |         |        |  |  |         |         |  |  |         |   |  |  |            |  
|------------------------------------------ |  | ---------- | --------- | -------------- |  | -------------- | --------- | -------- |  | ----- | ------- | ------ |  |  | ------- | ------- |  |  | ------- | - |  |  | ---------- | -
|                                           |  | Fixed line |           | Mobile         |  | Data           |           |          |  |       |         |        |  |  |         | Segment
|                                           |  | services   |           | communications |  | communications |           | Internet |  | Other |         | totals
|                                           |  |            |           |                |  |                |           |          |  |       |         |       
|Year ended December 31, 2000               |  |            |           |                |  |                |           |          |  |       |         |        |  |  |         |         |  |  |         |   |  |  |            |  
|External revenues                          |  |            | 2,375,649 |                |  |                | 1,280,043 |          |  |       | 209,078 |        |  |  | 32,419  |         |  |  | 0       |   |  |  | 3,897,189  |  
|Intersegmental revenues                    |  |            | 279,199   |                |  |                | 221,005   |          |  |       | 103,755 |        |  |  | 28,662  |         |  |  | 0       |   |  |  | 632,621    |  
|                                           |  |            |           |                |  |                |           |          |  |       |         |        |  |  |         |         |  |  |         |   |  |  |            |  
|Total revenues                             |  |            | 2,654,848 |                |  |                | 1,501,048 |          |  |       | 312,833 |        |  |  | 61,081  |         |  |  | 0       |   |  |  | 4,529,810  |  
|EBITDA                                     |  |            | 573,506   |                |  |                | 436,548   |          |  |       | 57,439  |        |  |  | (5,427  | )       |  |  | (133    | ) |  |  | 1,061,933  |  
|Depreciation and amortization              |  |            | 856,700   |                |  |                | 174,442   |          |  |       | 33,011  |        |  |  | 1,851   |         |  |  | 0       |   |  |  | 1,066,004  |  
|EBIT                                       |  |            | (283,194  | )              |  |                | 262,106   |          |  |       | 24,428  |        |  |  | (7,278  | )       |  |  | (133    | ) |  |  | (4,071     | )
|Interest income                            |  |            | 68,223    |                |  |                | 18,201    |          |  |       | 692     |        |  |  | 368     |         |  |  | 24,813  |   |  |  | 112,297    |  
|Interest expense                           |  |            | 229,999   |                |  |                | 35,296    |          |  |       | 422     |        |  |  | 836     |         |  |  | 24,201  |   |  |  | 290,754    |  
|Income tax expense (benefit)               |  |            | (176,100  | )              |  |                | 76,034    |          |  |       | (454    | )      |  |  | (2,463  | )       |  |  | 188     |   |  |  | (102,795   | )
|Extraordinary losses                       |  |            | 3,118     |                |  |                | 1,343     |          |  |       | 336     |        |  |  | (0      | )       |  |  | 0       |   |  |  | 4,797      |  
|Net income (loss)                          |  |            | (208,987  | )              |  |                | 167,456   |          |  |       | 31,136  |        |  |  | (4,645  | )       |  |  | 727     |   |  |  | (14,313    | )
|Total assets                               |  |            | 7,268,585 |                |  |                | 1,921,469 |          |  |       | 204,620 |        |  |  | 264,786 |         |  |  | 417,489 |   |  |  | 10,076,949 |  
|Additions to property, plant and
equipment |  |            | 545,454   |                |  |                | 323,074   |          |  |       | 34,560  |        |  |  | 14,605  |         |  |  | 0       |   |  |  | 917,693    |  

EBITDA differs from consolidated net income as a result of the following
differences:

|                                                                       |  |      |            |      |  |      |            |   |  |  |           |  
|---------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  |  | --------- | -
|                                                                       |  | 2002 |            | 2001 |  | 2000
|                                                                       |  |      |            |      |  |     
|EBITDA  segment totals                                                |  |      | 1.507.104  |      |  |      | 1.476.782  |   |  |  | 1.061.933 |  
|Idle workforce                                                         |  |      | (29.389    | )    |  |      | (51.952    | ) |  |  | (8.881    | )
|Depreciation and amortization                                          |  |      | (1.058.183 | )    |  |      | (1.049.201 | ) |  |  | (915.889  | )
|Income/loss from retirement of equipment                               |  |      | (18.715    | )    |  |      | 0          |   |  |  | 0         |  
|Interest income                                                        |  |      | 88.191     |      |  |      | 82.683     |   |  |  | 78.552    |  
|Interest expense                                                       |  |      | (244.628   | )    |  |      | (240.986   | ) |  |  | (239.914  | )
|EBITDA  mobilkom austria prior to acquisition                         |  |      | (351.409   | )    |  |      | (571.307   | ) |  |  | (436.548  | )
|Equity in earnings of affiliates  mobilkom prior to acquisition       |  |      | 142.906    |      |  |      | 197.941    |   |  |  | 125.265   |  
|Equity in earnings of affiliates  other                               |  |      | (2.362     | )    |  |      | (2.491     | ) |  |  | (88.951   | )
|Other                                                                  |  |      | 10.296     |      |  |      | (41.537    | ) |  |  | (36.582   | )
|                                                                       |  |      |            |      |  |      |            |   |  |  |           |  
|Income (loss) before taxes, minority interests
and extraordinary items |  |      | 43.811     |      |  |      | (200.068   | ) |  |  | (461.015  | )
|Income tax (expense) benefit                                           |  |      | (26.112    | )    |  |      | 94.913     |   |  |  | 178.829   |  
|Extraordinary                                                          |  |      | 0          |      |  |      | 0          |   |  |  | (3.453    | )
|Minority interests                                                     |  |      | (4.910     | )    |  |      | 530        |   |  |  | 75        |  
|                                                                       |  |      |            |      |  |      |            |   |  |  |           |  
|Net income                                                             |  |      | 12.789     |      |  |      | (104.625   | ) |  |  | (285.564  | )
|                                                                       |  |      |            |      |  |      |            |   |  |  |           |  

The segment totals reconcile to the consolidated financial statements as a
result of eliminating transactions and balances between consolidated segments
and the results of operations by mobilkom austria prior to June 28, 2002 (note
(2)). Therefore, the mobile communication column in the reconciliation for the
period ended December 31, 2002 represents the results of operations of mobilkom
austria for the period from January 1 through June 28,

F-53



---



##### 



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

2002, while the same
column in the reconciliation for the period ended December 31, 2001 represents
the results of operations of mobilkom austria for the period from January 1
through December 31, 2001. The following tables reconcile the segment totals to
the accompanying consolidated financial statements:

|                                           |  |         |            |              |  |                |            |              |  |  |          |   |  |  |           | 
|------------------------------------------ |  | ------- | ---------- | ------------ |  | -------------- | ---------- | ------------ |  |  | -------- | - |  |  | --------- | 
|                                           |  | Segment |            |              |  |                |            | Mobile       |  |  |          |  
|                                           |  | totals  |            | Eliminations |  | communications |            | Consolidated
|                                           |  |         |            |              |  |                |            |             
|Year ended December 31, 2002               |  |         |            |              |  |                |            |              |  |  |          |   |  |  |           | 
|Total revenues                             |  |         | 4,416,231  |              |  |                | (391,217   | )            |  |  | (906,950 | ) |  |  | 3,118,064 | 
|Depreciation and amortization              |  |         | 1,191,600  |              |  |                | (197       | )            |  |  | (133,220 | ) |  |  | 1,058,183 | 
|Interest income                            |  |         | 136,147    |              |  |                | (37,051    | )            |  |  | (10,905  | ) |  |  | 88,191    | 
|Interest expense                           |  |         | 308,496    |              |  |                | (37,058    | )            |  |  | (26,810  | ) |  |  | 244,628   | 
|Income tax (expense) benefit               |  |         | 26,837     |              |  |                | 1,966      |              |  |  | (2,691   | ) |  |  | 26,112    | 
|Net income (loss)                          |  |         | 127,347    |              |  |                | 75,986     |              |  |  | (190,544 | ) |  |  | 12,789    | 
|Total assets                               |  |         | 10,339,092 |              |  |                | (1,804,754 | )            |  |  | 0        |   |  |  | 8,534,338 | 
|Additions to property, plant and
equipment |  |         | 662,366    |              |  |                | (2,300     | )            |  |  | (129,100 | ) |  |  | 530,966   | 

|                                           |  |         |            |              |  |                |          |              |  |  |            |   |  |  |           |  
|------------------------------------------ |  | ------- | ---------- | ------------ |  | -------------- | -------- | ------------ |  |  | ---------- | - |  |  | --------- | -
|                                           |  | Segment |            |              |  |                |          | Mobile       |  |  |            |  
|                                           |  | totals  |            | Eliminations |  | communications |          | Consolidated
|                                           |  |         |            |              |  |                |          |             
|Year ended December 31, 2001               |  |         |            |              |  |                |          |              |  |  |            |   |  |  |           |  
|Total revenues                             |  |         | 4,599,865  |              |  |                | (227,026 | )            |  |  | (1,713,179 | ) |  |  | 2,659,660 |  
|Depreciation and amortization              |  |         | 1,268,932  |              |  |                | 48,053   |              |  |  | (267,784   | ) |  |  | 1,049,201 |  
|Interest income                            |  |         | 116,875    |              |  |                | (13,674  | )            |  |  | (20,518    | ) |  |  | 82,683    |  
|Interest expense                           |  |         | 304,570    |              |  |                | (13,674  | )            |  |  | (49,910    | ) |  |  | 240,986   |  
|Income tax (expense) benefit               |  |         | (61,368    | )            |  |                | 100,100  |              |  |  | (133,645   | ) |  |  | (94,913   | )
|Net income (loss)                          |  |         | (64,789    | )            |  |                | 91,936   |              |  |  | (131,772   | ) |  |  | (104,625  | )
|Total assets                               |  |         | 10,175,787 |              |  |                | (234,364 | )            |  |  | (2,214,101 | ) |  |  | 7,727,322 |  
|Additions to property, plant and
equipment |  |         | 812,208    |              |  |                | 0        |              |  |  | (363,177   | ) |  |  | 449,031   |  

|                                           |  |         |            |              |  |                |          |              |  |  |            |   |  |  |           |  
|------------------------------------------ |  | ------- | ---------- | ------------ |  | -------------- | -------- | ------------ |  |  | ---------- | - |  |  | --------- | -
|                                           |  | Segment |            |              |  |                |          | Mobile       |  |  |            |  
|                                           |  | totals  |            | Eliminations |  | communications |          | Consolidated
|                                           |  |         |            |              |  |                |          |             
|Year ended December 31, 2000               |  |         |            |              |  |                |          |              |  |  |            |   |  |  |           |  
|Total revenues                             |  |         | 4,529,810  |              |  |                | (214,365 | )            |  |  | (1,501,048 | ) |  |  | 2,814,397 |  
|Depreciation and amortization              |  |         | 1,066,004  |              |  |                | 24,327   |              |  |  | (174,442   | ) |  |  | 915,889   |  
|Interest income                            |  |         | 112,297    |              |  |                | (15,544  | )            |  |  | (18,201    | ) |  |  | 78,552    |  
|Interest expense                           |  |         | 290,754    |              |  |                | (15,544  | )            |  |  | (35,296    | ) |  |  | 239,914   |  
|Income tax (expense) benefit               |  |         | (102,795   | )            |  |                | 0        |              |  |  | (76,034    | ) |  |  | (178,829  | )
|Net income (loss)                          |  |         | (14,313    | )            |  |                | (103,795 | )            |  |  | (167,456   | ) |  |  | (285,564  | )
|Total assets                               |  |         | 10,076,949 |              |  |                | (92,793  | )            |  |  | (1,921,469 | ) |  |  | 8,062,687 |  
|Additions to property, plant and
equipment |  |         | 917,693    |              |  |                | 0        |              |  |  | (323,074   | ) |  |  | 594,619   |  

In 2002, 2001 and 2000, more than 90 %, 94 % and 97 %, respectively, of
the revenues generated by the reportable segments relate to operations in
Austria and essentially all of the long-lived assets were located in Austria.

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

(28)   SUBSEQUENT EVENTS

As of January 1, 2003 management reorganized its operations into two
distinct business lines: wireline, which will include fixed line, data
communication and internet services, and wireless. Wireline will focus on
wholesale and
retail customers. Wholesale customers including telecommunication
operators and service providers, will be offered network-based services, while
retail customers, including business and residential end-users will be offered
voice telephony, data communications, internet and other services. Wireless,
operated by our wholly-owned mobile communication segment, offers a full range
of digital mobile communications services to business and residential
customers.

On January 7, 2003 mobilkom austria signed a partnership agreement with
Vodafone to co-operate in the Austrian, Croatian and Slovenian market. The
co-operation will extend the range of existing products and services of
Mobilkom and improve the product portfolio in particular for business
customers. Both companies will collaborate in the field of roaming, purchasing,
development of new products and services, technical platforms, global account
management and joint marketing initiatives. With Eurocall, the first joint
product to be launched in the first quarter 2003, mobilkom austria will offer
favorable and transparent roaming prices to users in 26 European countries and
will be receiving visitor roaming traffic as the preferred mobile operator for
Vodafone customers from 26 countries.

As of January 30, 2003, mobilkom austria has acquired additional 9 % of
VIP net for a total purchase price of EUR 20,920, which brings total holding to
80 %.

In January 2003, the Company sold 500,000 American call options for an
aggregate price of EUR 880. The underlying share of the American call options
is the share of Telekom Austria AG.

In January and February 2003, additional credit lines totaling EUR 300,000
were made available to the Company by various banks. They expire between
November 2003 and January 2004.

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