**As filed with the Securities andExchange Commission**

 

 

**SECURITIES AND EXCHANGECOMMISSION**

 

**Washington, D.C. 20549**

 

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**FORM 20-F**

 

| **o**      |   | **REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)  OF****THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------|-----------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                      |
|       |   | **OR**                                                                                                    |
|       |   |                                                                                                      |
| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE  SECURITIES EXCHANGE ACT OF 1934**              |
|       |   |                                                                                                      |
|       |   | **For the fiscal  year ended December 31, 2003**                                                          |
|       |   |                                                                                                      |
|       |   | **OR**                                                                                                    |
|       |   |                                                                                                      |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**             |

 

**Commission file number: 1-13980**

____

**Koninklijke KPN N.V.**

(Exact name of registrant as specified in its charter)

 

**Royal KPN N.V.**

(Translation of Registrant’s Name into English)

 

**TheNetherlands**

(Jurisdiction of incorporation or organization)

 

**Maanplein 552516 CK The HagueThe Netherlands**

(Address of principal executive offices)

 

Securities registered or to beregistered pursuant to Section 12(b) of the Securities Exchange Act of1934:

 

| **Title of each class**                     |   | **Name of each exchange****on which registered**  |
|---------------------------------------------|--------|---------------------------------------------------|
| Ordinary Shares  American Depositary Shares |   | New York Stock Exchange*  New York Stock Exchange |

 

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*                                         TheRegistrant’s Ordinary Shares are not listed for trading, but only in connectionwith the registration of American Depositary Shares (“ADSs”) which areevidenced by American Depositary Receipts (“ADRs”).

 

Securities registered or to be registeredpursuant to Section 12(g) of the Securities Exchange Act of 1934:

 

**None**

 

Securities for which there is a reportingobligation pursuant to Section 15(d) of the Securities Exchange Act of1934:

 

**None**

 

Number of outstanding shares of each of theRegistrant’s classes of capital or common stock as of December 31, 2003,the close of the period covered by the annual report:

 

•             2,490,996,876Ordinary Shares; and

 

•             1 Special Share

 

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 (orfor such shorter period that the registrant was required to file such reports)and (2) has been subject to such filing requirements for the past90 days.

 

Yes ý           No o

 

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

 

Item 17 o           Item 18 ý

 

 

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**ANNUAL REPORTAND FORM 20-F 2003**

 

Thispublication is produced in both Dutch and English and comprises the full AnnualReport for 2003 of Koninklijke KPN N.V. This document complies with theapplicable Dutch regulations. For Dutch statutory purposes the official Dutchlanguage version of the Annual Report prevails. It also forms the 2003 AnnualReport on Form 20-F for filing with the Securities and Exchange Commission(SEC) in the United States. Cross-references to Form 20-F are set out at theend of this document.

 

1

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CONTENTS

 
| **Profile**                                      | **3**   |
|--------------------------------------------------|---------|
| Mission  statement                               | 3       |
| Strategy                                         | 3       |
| Presentation  of financial and other information | 4       |
| Forward-looking  statements                      | 5       |
| Key  financial figures and workforce             | 6       |
|                                             |    |
| **Foreword  by the Chairman and CEO**            | **8**   |
|                                             |    |
| **Information  about the Company**               | **12**  |
| History  and developments                        | 12      |
| Organizational  structure                        | 15      |
| Fixed  division                                  | 16      |
| Mobile  division                                 | 23      |
| Other  activities                                | 29      |
| Property,  plant and equipment                   | 31      |
| Research  and development                        | 36      |
| Intellectual  property                           | 36      |
| Regulatory  developments                         | 37      |
| Risk  factors                                    | 46      |
|                                             |    |
| **Operating  results**                           | **52**  |
| Overview                                         | 52      |
| Fixed  division                                  | 64      |
| Mobile  division                                 | 73      |
| Other  activities                                | 83      |
| Liquidity  and capital resources                 | 84      |
| Critical  accounting policies and estimates      | 92      |
|                                             |    |
| **Social  and environmental responsibility**     | **100** |
|                                             |    |
| **Corporate  governance**                        | **101** |
|                                             |    |
| **Remuneration  report**                         | **115** |
|                                             |    |
| **Report  by the Supervisory Board**             | **125** |
|                                             |    |
| **Financial  statements**                        | **129** |
|                                             |    |
| **Other  information**                           | **220** |
|                                             |    |
| **Five-year  summary**                           | **223** |
|                                             |    |
| **Information  per quarter**                     | **225** |
|                                             |    |
| **Information  about the KPN share**             | **226** |
| Dividend  policy                                 | 227     |
|                                             |    |
| **Additional  information for shareholders**     | **230** |
|                                             |    |
| **Glossary  of terms**                           | **241** |
|                                             |    |
| **Cross-reference  to Form 20-F**                | **246** |
|                                             |    |
| **Exhibits**                                     |    |

 

2

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**PROFILE**

 

We offer telecommunications services to bothconsumers and business customers. Our core activities are telephony and dataservices through our fixed network in the Netherlands, mobiletelecommunications services in Germany, the Netherlands and Belgium and dataservices in Western Europe. We are the market leader in the major segments ofthe Dutch telecommunications market. Through E-Plus in Germany and BASE inBelgium, we hold the number three position in the mobile market in thesecountries.

 

At the end of December 2003, we had 7.7 million fixed-linesubscribers and 1.5 million Internet customers in the Netherlands and 14.7 million mobilecustomers in the Netherlands, Germany and Belgium. As of the same date, we had 32,736 employees.

 

We were incorporated in 1989. Our shares are listedon the stock exchanges of Amsterdam, New York, London and Frankfurt.

 

**Mission statement**

 

*‘We are committed to providing a portfolio of modern,high quality telecommunications services to our customers. We want to help ourcustomers to achieve their goals and to enrich their lives, whether forbusiness or pleasure.’*

 

We believe this approach will lead to satisfied customers, providing thebasis for profitable growth and to value creation for our shareholders.

 

We believe that service quality and customer satisfaction will onlyflourish if our employees are motivated to provide the best possible service toour customers.

 

We are conscious of our responsibilities and are accountable for ourperformance also to all stakeholders.

 

**Strategy**

 

We aim to continuously improve our operational andfinancial performance. Among the numerous business aspects that we focus on,customer satisfaction stands out above all others, as this is a prerequisitefor profitable growth. To that end, we have started a number of initiativesduring 2003 with the aim of increasing our quality of service. We haveconfidence in the potential for growth in broadband services in both of ourcore divisions (Fixed and Mobile) and in the potential for further increasingthe number of mobile subscribers. We closely monitor the regulatory climate inthe countries in which we operate because of its importance to our company.

 

In the Fixed division, our objective is to retainmarket leadership in the Netherlands. Our strategy is focused on preserving asmuch as possible our traditional voice and data revenues, whilst at the sametime increasing revenues from Internet and broadband services, with an emphasison cash flow. Like other incumbent telecommunications operators, our Fixeddivision is experiencing pressure on its traditional voice and data revenuesdue to competition from other operators (including mobile) and migration toless expensive IP-based services. Our customer loyalty is being enhancedthrough improved quality of service and the introduction of discount packages,which we launched in the course of 2003. Broadband experienced substantialgrowth in 2003, mainly due to ADSL in the consumer market. Although currentgrowth in Internet and broadband is being generated almost exclusively inconnectivity, we believe there is also potential for growth of new services andapplications, both in the consumer and business markets. As a first step, weintroduced our broadband portal in November 2003. The increase in the number ofbroadband connections and the growth in content and

 

3

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new applications serve to mutually reinforce andsupport each other. Within the Fixed division, Fixed Networks services both residential andbusiness customers, while Business Solutions provides business customers andservice providers with data connectivity, customized communications solutionsand international services through our KPN EuroRings portfolio and thedistribution of Infonet data communication services.

 

Our Mobile division aims to significantly increaseits customer base. We believe the best opportunities for customer growth are inGermany and Belgium. This strategy was already successfully implemented in 2003at E-Plus in Germany. In the Dutch market we aim to maintain our clear marketleadership position. We see the possibility of further increasing usage percustomer, mainly through developing and commercializing mobile data services,such as i-mode. These services are currently based on our existing GSM/GPRSnetwork. Our future service offerings will also use UMTS networks that havemore capacity and higher speeds than present networks, thus making newapplications possible. We will meet the construction and coverage obligationsof the acquired UMTS licenses, with the pace of the rollout depending oncustomer demand.

 

The boundaries between the mobile and fixedtelecommunications markets are blurring. Our customers are increasingly lookingfor access to communication and personal information everywhere and at anytime, irrespective of the underlying technology. Businesses are increasinglymanaging the total cost of ownership across mobile and fixed voice, as well asacross data services. We see opportunities to increase customer retentionthrough, for example, service bundling and joint marketing. Convergence betweenfixed and mobile is also evident with high-speed wireless data services (WiFi)at public hotspots such as hotels and restaurants.

 

We are confident that we are well positioned toachieve our goals.

 

**Presentation of financial and other information**

 

In this Annual Report and Form 20-F (referred tohereinafter as Annual Report),

(1)          ‘KPN’ refers toKoninklijke KPN N.V.,

(2)          ‘We’, ‘us’, ‘our’, the‘Company’, the ‘Group’ and similar terms refer to KPN and any or all of itssubsidiaries and joint ventures as the context requires,

(3)          ‘E-Plus’ refers to E-PlusMobilfunk GmbH & Co. KG, a limited liability partnership, and any orall of its subsidiaries as the context requires,

(4)          ‘KPN Mobile’ refers to KPNMobile N.V. and any or all of its subsidiaries as the context requires,

(5)          ‘BASE’ means BASEN.V./S.A.,

(6)          ‘SNT’ means SNT Group N.V.and any or all of its subsidiaries as the context requires, and

(7)          ‘NTT DoCoMo’ means NTTDoCoMo, Inc. and any or all of its subsidiaries as the context requires.

 

All market share information in this Annual Report isbased on management estimates.

 

In compiling the information in this Annual Report, wehave used data and projections obtained from industry surveys, market researchand other publicly available information. Such sources and other publicationsgenerally state that the information they contain has been obtained fromsources believed to be reliable but that the accuracy and completeness of suchinformation is not guaranteed and that the projections they contain are basedon a number of significant assumptions. We have not verified this informationindependently or determined the reasonableness of such assumptions. As a result,this information may not be accurate, complete, adequate, up-to-date orcomprehensive.

 

Detailsof key exchange rates used in the preparation of this Annual Report are givenelsewhere in this document, together with Noon Buying Rates in New York for theequivalent periods.

 

4

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**Forward-lookingstatements**

 

We have made forward-looking statements in this AnnualReport. These statements are based on our beliefs and assumptions and oninformation currently available to us. They include information concerning ourpossible or assumed future results of operations, business strategies,financing plans, competitive position, potential growth opportunities,potential operating performance or expense improvements and the effects offuture legislation or regulation.

 

Forward-looking statements include all statements thatare not historical facts and can be identified by the use of forward-lookingterminology such as the words ‘believe,’ ‘expect,’ ‘plan,’ ‘intend,’ ‘anticipate,’‘estimate,’ ‘predict,’ ‘potential,’ ‘continue,’ ‘may,’ ‘will,’ ‘should,’‘could’, ‘shall’, or the negative of these terms or similar expressions.Examples of forward-looking statements include but are not limited to:

 

•                                          telecommunications usagelevels and market conditions, including the number of telephone access lines,traffic patterns (including Internet usage) and customer growth;

•                                          competitive forces inliberalized markets, including pricing pressures, technological developments,alternative routing developments and our ability to retain market share in theface of competition from existing and new market entrants;

•                                          regulatory developmentsand changes, including, with respect to the levels of tariffs, the terms ofinterconnection, electromagnetic field strengths of mobile transmissionequipment, customer access and international settlement arrangements, and theoutcome of legal and regulatory proceedings;

•                                          the success and marketacceptance of business, strategic, operating and financial initiatives (many ofwhich are untested), the level and timing of the growth and profitability ofnew initiatives, startup costs associated with entering new markets, thesuccessful deployment of new systems and applications to support newinitiatives, efforts at improving customer satisfaction, and local conditionsand obstacles;

•                                          the amounts of futurecapital expenditures;

•                                          our dependence on andrelationship with suppliers;

•                                          the timing of the rolloutof Universal Mobile Telecommunications System (UMTS) networks and other new,enhanced or upgraded networks, systems, products and services, and theirperformance and impact on our financial position;

•                                          the availability, termsand deployment of capital, particularly in view of our debt refinancing needs;

•                                          the possibility of salesof our shares by the State of the Netherlands;

•                                          the impact of tax rulings,the timing for settlement of tax losses carried forward and uncertaintiesregarding future tax liabilities;

•                                          the amount and timing ofany potential future impairment charges for our licenses, goodwill or otherassets;

•                                          the impact of regulatorycompetitive developments on capital outlays and our ability to achieve costsavings and realize productivity improvements;

•                                          uncertainties associatedwith developments related to the introduction of the International FinancialReporting Standards (IFRS), as well as with developments related to Dutch or USGAAP;

•                                          general economicconditions, government and regulatory policies, and business conditions in themarkets we and our affiliates serve; and

•                                          risks related toinformation and communication technology systems generally.

 

Forward-looking statements involve risks,uncertainties and assumptions. Actual results may differ materially from thoseexpressed in these forward-looking statements. You should not put unduereliance on any forward-looking statements. Other than as required byapplicable law or the applicable rules of any exchange on which our securitiesmay be listed, we have no intention or obligation to update forward-lookingstatements after we distribute this Annual Report.

 

5

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**Key financialfigures and workforce**

 

**OPERATING REVENUES**

 

Amounts in millions of euro
| **2003** |   | **2002** |   | **2001** |   |
|----------|--------|----------|--------|----------|--------|
| 12,907   |   | 12,784   |   | 12,859   |   |

 

**OPERATING RESULT**

 

Amounts in millionsof euro
| **2003** |   | **2002** |   | **2001** |   |
|----------|--------|----------|--------|----------|--------|
| 3,108    |   | -5,581   |   | -14,436  |   |

 

**PROFIT OR LOSS BEFORE TAXES**

 

Amounts in millionsof euro
| **2003** |   | **2002** |   | **2001** |   |
|----------|--------|----------|--------|----------|--------|
| 2,246    |   | -6,759   |   | -8,968   |   |

 

**PROFIT OR LOSS AFTER TAXES**

 

Amounts in millionsof euro
| **2003** |   | **2002** |   | **2001** |   |
|----------|--------|----------|--------|----------|--------|
| 2,731    |   | -9,542   |   | -7,495   |   |

 

**NET CASH FLOWS**

 

Amounts in millions of euro
|                 |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------|--------|----------|--------|----------|--------|----------|--------|
| Operating activities |   | 4,087    |   | 3,975    |   | 2,565    |   |
| Investing activities |   | -48      |   | -335     |   | -1,664   |   |
| Financing activities |   | -4,853   |   | -8,329   |   | 2,947    |   |

 

**CAPITAL**

 

Amounts in millions of euro
|                                            |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Total assets                                    |   | 24,125   |   | 25,161   |   | 41,122   |   |
| Group equity                                    |   | 7,359    |   | 4,780    |   | 12,172   |   |
| Loans (long-term portion)                       |   | 9,207    |   | 12,648   |   | 16,747   |   |
| Loans (short-term portion) and bank  overdrafts |   | 952      |   | 2,360    |   | 5,724    |   |
| Cash and cash equivalents                       |   | 1,839    |   | 2,657    |   | 7,343    |   |

 

**RATIOS**

 
| **In %**                          |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Pay-out ratio (2003 proposed) (1) |   | 22.5     | %      | —   |   | —   |   |
| Operating margin (2)              |   | 24.1     | %      | -43.7    | %      | -112.3   | %      |
| Solvency (3)                      |   | 30.5     | %      | 19.0     | %      | 29.6     | %      |

 

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(1) Pay-out ratio: dividend per ordinary sharedivided by earnings per (ordinary) share as determined under Dutch GAAP.

(2) Operating margin: operating result divided bytotal operating revenues as determined under Dutch GAAP.

(3) Solvency: shareholder’s equity plus minorityinterests (group equity) divided by total assets as determined under DutchGAAP.

 

6

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**PER-SHARE INFORMATION**

 

Amountsin euro
|                                          |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Dividend per ordinary share (1)               |   | 0.25     |   | —   |   | —   |   |
| Net income per ordinary share (non-diluted)   |   | 1.11     |   | -3.94    |   | -5.88    |   |
| Net income per ordinary share (fully diluted) |   | 1.09     |   | -3.94    |   | -5.88    |   |

 

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(1)          Theproposed dividend over 2003 consists of a cash dividend of EUR 0.12 per shareand an additional special cash dividend of EUR 0.13 per share.

 

**WORKFORCE**

 

Includingconsolidated and international participations
|                                  |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Average number of FTEs (1)            |   | 31,267   |   | 40,195   |   | 45,720   |   |
| Number of FTEs as of December 31      |   | 29,668   |   | 34,990   |   | 46,214   |   |
| Number of employees as of December 31 |   | 32,736   |   | 38,118   |   | 49,121   |   |

 

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(1)          One FTE (Full TimeEquivalent) equals an employment of 37 hours per week.

 

**ANNUAL HIGH AND LOW CLOSING PRICES OFOUR ORDINARY SHARES ON THE STOCK EXCHANGE OF AMSTERDAM AND OUR ADSs ON THE NEWYORK STOCK EXCHANGE (NYSE)**

 
|   |   | **Stock  Exchange of Amsterdam** |   | **NYSE** |   |
|--------|--------|----------------------------------|--------|----------|--------|
|   |   | **High**                         |   | **Low**  |   | **High** |   | **Low** |   |
|   |   | **EUR**                          |   | **USD**  |   |
| 2001   |   | 18.0                             |   | 2.2      |   | 16.9 |   | 2.1 |   |
| 2002   |   | 6.9                              |   | 4.0      |   | 6.8 |   | 3.7 |   |
| 2003   |   | 7.1                              |   | 5.4      |   | 8.0 |   | 5.9 |   |

 

7

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**FOREWORD BY THE CHAIRMAN****AND CEO**

 

•                  Strong broadband growth: ADSL connections upfrom 310,000 to 746,000

•                  i-mode customers up from 236,000 to 868,000

•                  Mobile connections up from 13.4 million to 14.7million

•                  Profit after taxes of EUR 2,731 million

•                  Newly formulated dividend policy

 

**OPENINGREMARKS**

 

Accessanywhere. To the Internet, the corporate network and, of course, to anyone youwish to speak to. This is what telecommunication promises to fulfil, and it iswhere KPN’s ambitions lie. Broadband technologies such as DSL (of which ADSL isthe best known variant) enable us to put our customers in touch with ‘their’world. They can retrieve information or watch a news report, wherever they areand whenever they choose. If they happen to have a mobile broadband connectiontoo, managing their own life is even easier because people feel that it helpsthem to regain control of their own time. No wonder broadband is so popular.

 

2003was the third successive year that witnessed an economic downturn, a recessionthat affected the telecommunications sector too. But the success of broadbandinjected new life into the sector. In 2002 we were still on the rebound afterthe Internet bubble burst, but in 2003 we forged ahead with new products andservices and intensive marketing campaigns.

 

Thebreakthrough of i-mode was largely thanks to our commitment to productdevelopment and the marketing strategy we usually follow when introducing a newproduct. For instance, our intensive marketing campaign at the end of the 1990swas geared towards convincing consumers of the convenience of mobile telephony.At the end of 2003 we had 868,000 i-mode customers in the Netherlands, Germanyand Belgium. On February 20, 2004, we welcomed our millionth i-mode customer.The total number of mobile customers increased from 13.4 million to 14.7 millionin 2003.

 

E-Plusexceeded it 2003 target of 8 million customers, with a final count of 8.2million. This is partly due to the marketing campaign (E-Plus verbindet -E-Plus connects) that was mounted over the past year. BASE got off to a slowstart in 2003 but sprinted ahead in the last quarter with 91,000 new customers,which accounted for three-quarters of all new BASE customers for the entireyear.

 

Thesepositive trends were offset by a number of factors exerting a downward pressureon turnover. They include increasing competition in fixed telephony services(especially from carrier select providers coupled with restrictions imposed onus by OPTA) and the shift from fixed telephony to mobile (the number of peoplewho only phone using a mobile is increasing). Also it is important to rememberthat the success of broadband has its downside. Customers who are ‘alwaysonline’ no longer pay for service by the minute.

 

**FINANCIALRESULTS IN 2003**

 

Aftertwo years of losses, KPN became profitable again in 2003.  In 2003, we recorded net profits of EUR 2.7billion, in contrast to the net loss of EUR 9.5 billion we reported for 2002.These figures were heavily influenced by one-off effects. Achieving the recordprofit in 2003 was partially thanks to a tax benefit in that year, whereas theloss in 2002 was mainly due to considerable impairments on goodwill andlicenses. But also when we look at the underlying trends, we see a clearimprovement in the results.  The keydrivers of the turnaround are significant cost savings combined with lowerdepreciation and interest payments. Cash flow in 2003 was healthy, as it was in2002: cash flow from operating activities, minus investments in property, plantand equipment, amounted to EUR 2.7 billion last year, which helped to reducenet debt by EUR 4.1 billion to EUR 8.3 billion.

 

8

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Ouroperating revenues rose by 1%. Leaving aside non-recurring revenues from thesale of non-core activities and the termination of the roaming agreements withQuam and MobilCom, our core divisions realized 3.5% growth. The biggestcontributor to the upswing came from our Mobile division, in particular via thesturdy growth in the numbers of connections. The Fixed division was confrontedin 2003 by a fall in the turnover on traditional telephony due to increasedcompetition and the knock-on effects of fixed-mobile substitution. However, thedrop was offset by growth in wholesale traffic volumes and, as previouslymentioned, growth in the broadband market.

 

In2003, the operating result rose to EUR 3.1 billion, a result that was likewiseheavily influenced by one-off effects, but in point of fact all our divisionsshowed better results than in 2002. Several factors considerably boostedprofitability in the Fixed division: staff cuts resulting from thereorganization, saving costs in general, and lower depreciation charges due toa capex optimization program. Thanks to the growth realized and the lowerdepreciation and amortization costs due to impairments in 2002, profitabilityin the Mobile division increased.

 

Inshort, our operating activities – and our business results – show a clearimprovement. Coupled with greater reductions in debt, this resulted in astrongly improved financial position.

 

Itwas owing to these positive developments that we were able to announce in 2003that dividend payments would be resumed, so in this respect too, KPN isperforming normally again. A dividend of EUR 0.12 per share, supplemented by aspecial dividend of EUR 0.13 per share over 2003, will be proposed toshareholders.  From 2004 we intend topay at least EUR 0.20 dividend per share.

 

**THE PLAYINGFIELD**

 

Since the end of the1990s it has been anticipated that a rising number of (broadband) connectionswill lead to an increased supply of content (information and entertainment overthe Internet). The greater the volume of content, the higher the demand forfast connections. This rise started happening in 2003 and since then ourtechnicians have been working overtime to hook up our customers. Meanwhile,website builders and content suppliers are making sure that our customers canreap the benefits of their fast connections.

 

Wekick the ball on both sides of the playing field: we provide connections and weoffer access to content. Naturally, we follow what our customers want and wekeep a close eye on their preferences, but our main aim is to leave thecustomer free to pursue these interests and preferences themselves. They shouldbe able to retrieve the content they need, whenever they need it and it is ourjob to make that possible. A comparison with telephone traffic seems apt here:you should be able to call anybody but it is your choice whether you call ornot. The same will also apply to content. We will provide access to‘everything’, so that customers can choose for themselves.

 

**CONNECTIONS**

 

Overthe next few years we will focus on the growth of (A)DSL and (A)DSL-basedcorporate networks. We are going to offer Business DSL nationwide too; we areworking hard to modify our telephone exchanges for this purpose. By the end of2003 the service is available to over 97% of all companies in the Netherlands.

 

Asfar as Internet connections are concerned, the motto is: the faster, thebetter. That is why we increased the speed of ADSL several times last year. Wefirmly believe that the demand for bandwidth will continue to rise, so we areworking on even faster versions. We are considering further possibilities forDSL over existing copper networks but we also anticipate the unlimitedpotential of fiber-optic technologies. In 2003, therefore, we introduced theconcept of *Deltaplan Glas*, a plandesigned to put the Netherlands at the forefront in the field of ICT solutions.For financial and practical reasons, we prefer to work with other companies inthe sector to realize a single fiber-optic access national network, since onefiber-optic network should be sufficient. However, if cooperation in this areais not possible, KPN will implement its own plans.

 

9

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In mobile communicationstoo, there is a shift away from narrowband to broadband. GSM will be around foryears to come and our current mobile activities are extremely healthy. But thatdoes not alter the fact that the future lies with new broadband technologiessuch as UMTS. We can assume that consumer demand for i-mode will continue togrow unabated, but we also expect business customers to make increasing use ofmobile data solutions, either to cut costs or increase turnover and develop newservices.

 

In 2003 we launched anumber of UMTS pilots in the Netherlands and Germany, in which businesscustomers work with us to test new applications. Voice, data and imagecommunication media are proving surprisingly easy with UMTS. We are nowfocusing on safeguarding quality on a large scale. Consumers ought to have abroad range of UMTS handsets at their disposal and a stable network thatfunctions technically in an excellent way in conjunction with the GSM network.

 

In2003 we launched the first public access Wireless Internet services(WiFi/Wireless LAN). We expect that in the future various telecommunicationstechnologies (ADSL, GPRS, UMTS and WiFi) will increasingly be used incombination with each other. Combining these systems is the key to our abilityto offer our customers the best connection wherever they are. This is why ourfixed and mobile divisions are now cooperating more closely. Jointly they willbe able to seize new opportunities that lie in their common field and this willenhance what we can offer. We want to introduce discount offers for customerswho subscribe to more than one of KPN’s products: fixed telephony, mobiletelephony, ADSL and Internet. Moreover, we intend to add fixedtelecommunications services to the current service portfolio of E-Plus inGermany.

 

Servicesfor our large business customers are also a focal point. Telecommunications arebecoming consistently more important in today’s business world, but companiesare finding they need to invest increasingly more time and energy to keep upwith new technologies. For this very reason, a growing number of companies isoutsourcing the design and management of their communications infrastructure toKPN, so they can concentrate fully on their core business. Early in 2003, KPNregained its own European network, enabling us to make a comeback in thewholesale and international markets for corporate networks.

 

**CONTENT**

 

Whenwe think of content, the first things we think of are information andentertainment offered over the Internet. We want to branch out into this areavia our providers (Planet, HetNet and XS4ALL) as well as through our broadbandportal and via i-mode. Our subscribers can use their ADSL connection to watchnews reports, a film of their choice, or ‘lose’ themselves in a favorite game –whenever it is convenient for them. ‘Access to the world’ is evolving into‘Access to your world’. Or, in one slogan: ‘Today’s world is your world’.

 

Weare convinced that broadband services will continue to evolve, and we want tomake our mark in that field too. We built a fiber-optic test environment forthe pilots in Eindhoven and Almere in order to eliminate capacity problems whentesting any new applications. We also took the initiative in launching programsto develop broadband services for social purposes. In this area too, we arecooperating with other organizations. One example is the *DigiBeter* project, an online facility thatenables chronically ill children to ‘go to school’. Another example is the *Televoorgeleiden* project, an alternativemethod whereby suspects do not have to be brought in person before theassistant public prosecutor in court.

 

KPNis also investing in the development of mobile data services in the healthcare, education and security sectors. We have set up a project for ambulanceservices in the Netherlands. Every year, 450 people die as a result of heartproblems because ambulance paramedics do not have the appropriate communicationfacilities and cannot get patients to the right hospital on time. GPRStechnology may well turn this problem into a thing of the past.

 

**KPN ANDREGULATIONS**

 

Wehardly need to point out that a transparent and future-oriented regulatoryframework is highly important to a company like KPN. This is why we haveentered into dialogue with the government, the Dutch regulator OPTA and variouslobby groups. We are in favor of telecommunications legislation such as the

 

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TelecommunicationsAct although we do hold a different opinion than the regulator on a fewmatters. For instance, one sticking point we have is that our competitors mayutilize our network below cost price. We do not see this as being conducive topromoting competition in the long term. We also believe that this course ofevents will be detrimental to the climate of investment and innovation.

 

This problem has taken on an extra dimension in thediscussion about fiber to the home. Big investments will be necessary with allthe inherent risks. Therefore, it is even more important that the futureregulatory framework is certain. It is the government’s remit to ensure thatthe regulatory framework is stable and dependable and we have addressed thegovernment on this point. An up-to-date communications infrastructure is of utmostimportance for the knowledge economy and building it is in line with innovationpolicies in the Netherlands and Europe.

 

**A FINAL WORD**

 

KPNhas weathered turbulent times: acquisitions followed by divestments;spectacular growth followed by setbacks. This is past history as we are nowfinancially healthy, our debt has been reduced to manageable proportions andonce again we are making a profit. The agreement with the Dutch tax authoritieson the fiscal consequences of the legal restructuring of KPN’s German mobileactivities and the re-financing of KPN Mobile can be seen as the final step inthe restructuring phase.

 

Noneof the above means that we are treading water; that is the last thing wewant.  We are developing new services,testing new technologies and exploring new markets, based on the knowledge thathigh-quality service and satisfied customers are the ‘make-or-break’ factors.That is our strategy for profitable growth and it forms the foundation for ourfuture expansion.

 

OurFixed division is making an exerted effort to expand growth in broadband in theNetherlands. We are looking at ways we can deploy our Mobile division to workwith others to make us even stronger because ultimately we would like to growinto a bigger mobile player in Europe. Even though KPN is powerful enough toexpand in Germany via E-Plus, we would like to reap the benefits of economiesof scale and geographical scope. Although we do not rule out acquisitions wewill only go ahead on the basis of solid financing and the approval of ourshareholders.

 

KPNhas much to thank its shareholders for. During the recent years ofrestructuring, their trust was really put to the test. Reinforcing that trusthas top priority. We, the management and staff at KPN, are more than one hundredper cent aware that we can only set our business wheels in motion if we havethe continued support of our shareholders. On a personal note, I also want toexpress special thanks to our employees for their efforts and dedication overthe past year.

 

AdScheepbouwer

 

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**INFORMATIONABOUT THE COMPANY**

 

**History and developments**

 

Koninklijke KPN N.V. was incorporated under the lawsof the Netherlands on January 1, 1989. On June 28, 1998 our name waschanged from Koninklijke PTT Nederland N.V. to Koninklijke KPN N.V. We have ourcorporate seat in The Hague, the Netherlands. We are registered under number02045200 at the Commercial Register of the Chamber of Commerce for Haaglanden,The Hague, the Netherlands, and our executive offices are located at Maanplein55, 2516 CK The Hague, the Netherlands. Our telephone number is (+31) 704460986. Our agent for service of process in the United States is KPNINS, Inc., 494 8th Avenue, 23rd floor, New York NY10001.

 

KPN was incorporated with two main subsidiaries: PTTTelecom B.V., offering telecommunications services, and PTT Post B.V., servingas the primary postal company in the Netherlands. In the period fromincorporation until the listing of our shares on the Stock Exchange ofAmsterdam in June 1994, the State of the Netherlands was our soleshareholder. At the end of 2003, the State held 19.3% of our outstandingshares.

 

In 1997, Koninklijke KPN N.V. decided to separate itscable activities from its core business. Vision Networks, a wholly ownedsubsidiary holding interests in cable activities, was deconsolidated after aninternal legal demerger in 1998. During 2002, Vision Networks sold itsremaining material assets and, subsequently, the Supervisory Board of Vision Networksceased its activities. As a result, we regained full control over VisionNetworks, which is fully consolidated in our financial statements as of the endof 2002.

 

The demerger of our mail, express and logisticsbusiness operations to TNT Post Group (TPG) became effective on June 28,1998, with retroactive effect from January 1, 1998. The demerger resultedin the transfer of approximately EUR 1.6 billion of our equity to TPG.

 

In 1998, we also established KPN Orange, a 50:50 jointventure with a wholly-owned subsidiary of Orange plc, to provide mobiletelecommunications services in Belgium. In February 2001, we acquired theremaining shares (50%) of KPN Orange. As from April 2002, the brand nameOrange was changed to BASE.

 

In November 1999, we transferred our mobilebusiness to a separately incorporated subsidiary KPN Mobile N.V. KPN Mobileissued new shares to NTT DoCoMo in August 2000, as a result of which NTTDoCoMo held a 15% interest in KPN Mobile. Upon the financial restructuring ofKPN Mobile in December 2002, NTT DoCoMo decided not to exercise itsanti-dilution rights, resulting in a decrease of its interest to 2.16%.

 

In February 2000, we completed our acquisition ofa 77.49% indirect interest in E-Plus, Germany’s third largest mobile network operator.Until March 13, 2002 we shared control of E-Plus with BellSouthCorporation (BellSouth), which held the remaining 22.51% indirect interest. OnMarch 13, 2002, BellSouth converted its 22.51% indirect interest in E-Plusinto 234.7 million of our ordinary shares (which BellSouth subsequentlysold) and since then we have had full control of E-Plus.

 

On August 4, 2000, we acquired one of five UMTSlicenses in the Netherlands for EUR 711 million. On August 31,2000, E-Plus (through a subsidiary) acquired one of six UMTS licenses inGermany for EUR 8.4 billion. On March 2, 2001, we acquired aUMTS license in Belgium for EUR 150 million.

 

On September 21, 2000, we acquired a 15% interestin Hutchison 3G UK Holdings Limited (Hutchison 3G UK) for EUR 1.5 billion.Hutchison 3G UK indirectly owns a UMTS license in the UK. NTT DoCoMo alsoacquired a 20% interest in Hutchison 3G UK. In August2002, we announced that we no longer considered Hutchison 3G UK a strategicparticipation and, accordingly, we wrote off our investment at

 

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that time, based on an analysis of therecoverable value.On November 7, 2003,Hutchison Whampoa Limited (HWL) and KPN Mobile entered into agreements wherebythe Hutchison 3G UK shares held by KPN Mobile and related documents were placedwith an independent escrow agent pending completion of the transfer of theshares. KPN Mobile agreed not to exercise its voting rights on the Hutchison 3GUK shares during the escrow period. The consideration amounts to GBP 60million plus three further planned payments of GBP 10 million each in2005, 2006 and 2007. The shareholders’ agreement between the parties has beenterminated and related court actions settled, and accordingly we have no furtherfinancial commitments to Hutchison 3G UK.

 

On May 14, 2001, we announced that Vodafone’soffer for the shares of Eircell, the mobile operator of eircom (Ireland), hadbeen accepted as a result of which we received approximately 220 millionshares in Vodafone. We sold these shares for approximately EUR 572 millionin June 2001.

 

On September 28, 2001, we sold our data centeractivities to French IT service provider Atos Origin for approximately EUR163 million. Atos Origin will manage these activities for us for a minimumperiod of six years as from 2001.

 

In November 2001, we sold our 21% interest in theIrish telecommunications operator eircom to Valentia for EUR 632 million.

 

In November 2001, with retroactive effect toJuly 1, 2001, we sold and transferred our call company and call centers toSNT, a company in which we hold a 50.78% stake. SNT is listed on the StockExchange of Amsterdam and is fully consolidated in our financial statements.

 

On December 11, 2001, KPN Mobile sold its 22.28%interest in the Indonesian mobile operator Telkomsel to SingaporeTelecommunications for EUR 668 million.

 

On February 4, 2002, we completed the sale of our44.66% interest in Pannon GSM, the Hungarian mobile operator, to Telenor SA forEUR 603 million.

 

On February 5, 2002, we sold our End UserServices business to Atos Origin for approximately EUR 6.32 million. AtosOrigin has agreed to manage these services for a minimum period of six years asfrom 2002. On August 19, 2002, we reached a definitive agreement with AtosOrigin for its acquisition of the activities of KPN’s Software House for EUR24 million.

 

On May 31, 2002, KPNQwest N.V. (KPNQwest), inwhich we held a 39.9% stake, filed for bankruptcy.

 

On July 31, 2002, we sold 55% of the shares ofKPN Netwerk Bouw B.V., our network construction unit, to Volker Wessels Stevin(VWS) for EUR 13.75 million. It is expected that VWS will acquire theremaining 45% on January 1, 2005.

 

On February 13, 2003, we sold our telephonedirectory business, Telefoongids Media B.V., formerly known as TeleMediaNederland B.V., to a syndicate led by 3i Group plc and Veronis Sulher Stevensonfor EUR 500 million.

 

On February 28, 2003, we sold our 16.33%participation in Ukrainian Mobile Communications for USD 55 million.

 

On April 25, 2003, we finalized the sale of the assetsand activities of KPN Belgium and of our Belgian Internet provider, PlanetInternet Belgium, to Scarlet Telecom.

 

On May 5, 2003, we acquired 51% of WiFi providerHubHop. On December 31, 2003, we acquired the remaining 49%. HubHop offers fastwireless Internet connections in public venues in the Netherlands.

 

On June 16, 2003, we sold our direct stake (6.48%) inthe Czech telecommunications provider Ceský Telecom to Credit Suisse FirstBoston for EUR 223 million. On December 8, 2003, we completed the sale of ourindirect stake in Ceský Telecom for EUR 347 million. We no longer have aninterest in Ceský Telecom.

 

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On November 1, 2003, we sold our repair activities toTeleplan International NV.

 

On December 1, 2003, the shareholders of theinternational satellite company Inmarsat accepted the offer by GrapecloseLimited for all of the issued share capital of Inmarsat. Xantic (owned for 65%by us and for 35% by Telstra of Australia) received approximately USD 88million (EUR 70 million) in proceeds from the sale of its shares in Inmarsat onDecember 31, 2003.

 

On December 29, 2003, we sold our remaining 30%interest in KPN Lease to De Lage Landen.

 

For the financial impact of our recent major assetdisposals, please refer to the section titled ‘Sale of activities and assets’,under ‘Operating results–Overview–Trends’.

 

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**Organizational structure**

 

As from January 1, 2003, we combined our FixedNetworks and Business Solutions divisions into one division (Fixed). The mainpurpose of this clustering was to reduce internal complexity, thus improvingefficiency and customer satisfaction. Within the Fixed division, we are in theprocess of changing our market approach (portfolio development and customerprocesses) to focus on the following markets: Consumer, Business and Operations& Wholesale.

 

Our business unit KPN EnterCom (which delivers,installs and services communications equipment for business customers) was partof Other activities until December 31, 2003. We are in the process of movingKPN EnterCom from Other activities to the Fixed division in 2004. In addition,we are also in the process of moving the distribution channel for personalsales, KPN Sales (including External Distribution), from the Fixed division toOther activities.

 

Thelist below reflects our organizational structure as of December 31, 2003(before the changes described above).

 

Boardof Management

•                  Corporate Staff

•                  Corporate Center

•                  KPN Services

•                  Divisions

•                  Fixed Division

•                  Fixed Networks

•                  Fixed Telephony

•                  Carrier Services

•                  SNT

•                  XS4ALL

•                  Planet Media Group

•                  Fixed Network Operator

•                  KPN.com*

•                  External Distribution*

•                  Business Solutions

•                  Transmission Services

•                  IP Services

•                  Integrated Solutions

•                  Managed Application Services

•                  KPN EuroRings

•                  KPN Sales*

•                  Mobile Division

•                  E-Plus

•                  KPN Mobile The Netherlands

•                  BASE

•                  Other Activities

•                  KPN EnterCom

•                  Xantic

•                  PanTel

•                  Euroweb

•                  Infonet

•                  KPN Retail*

 

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** distribution channel*

 

For more information, please refer to the sectiontitled ‘Legal Structure’, under ‘Additional information to shareholders’,elsewhere in this Annual Report.

 

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**Fixed division**

 

Our Fixed division consists of Fixed Networks andBusiness Solutions.

 

**FixedNetworks**

 

Fixed Networks comprises our fixed-line voice services(wholesale and retail) and our Internet Service Providers (ISPs): PlanetInternet, Het Net and XS4ALL. Our Fixed Telephony business unit provides accessservices to business and residential customers. Our business unit CarrierServices provides interconnection and other wholesale carrier services. We alsoown 50.78% of SNT, a company that delivers Customer Relationship Management(CRM) services.

 

Other units within Fixed Networks are Fixed NetworkOperator (customer equipment installation and service provider) and twodistribution channels: External Distribution (through business partners) andKPN.com (our Internet distribution channel).

 

**FIXEDTELEPHONY**

 

Fixed Telephony includes access services throughanalog and digital lines and local, national long-distance and internationalcalling services, as well as calls to mobile and Internet service providers.Fixed Telephony targets both residential and business customers. Our networkconnects over 85% of households in the Netherlands.

 

***Access services***

 

We are the largest provider of fixed-line telephonyservices in the Netherlands. As of December 31, 2003, we supplied approximately7.7 million connections to customers, including 1.6 million ISDN connections.Our access services include providing homes in the Netherlands with publicswitched telephone network (mainly analog) lines (PSTN lines), ISDN (digital)access lines, ADSL access lines and various supplementary services. ADSL accessservices are provided by our ISPs. ADSL access revenues are accounted forpartly at our and external ISPs and partly at our IP Services business unit,which is part of Business Solutions.

 

PSTN lines are connected to our network throughdigital exchanges. Each PSTN line provides a single telecommunications channel.In addition, we offer ISDN access lines with two, 15, 20 and 30 channels.Unlike a PSTN line, ISDN allows a single access line to be used for a number ofpurposes at the same time, including voice, video telephony, data, Internet andfacsimile transmission. ISDN also provides higher quality voice connections anda larger bandwidth, which increases the overall capacity of the access network.

 

***Value-added services***

 

We are continuing to develop new, value-added servicesand we focus increasingly on customer care. We have also responded to changingusage patterns by offering services in the Netherlands that integrate fixed,mobile and Internet services, such as voicemail, call waiting, call forwardingfrom fixed to mobile phones, calling line identification and automatic callback features when the line is busy. Services also include tailor-made businesspackages, number portability, multimedia kiosks, billing for 0900 paidinformation services provided by other operators, reduced rate numbers, on-lineaccess to telephone bills and Internet call alert (*BelBericht*), signaling calls if a line is in use forInternet.

 

We have introduced discount packages for theresidential and business markets combining call bundles with discounts. Threediscount packages for the residential market offer 100, 200 or 300local/national minutes subject to certain restrictions (in particular, the callcredit can only be used in the evenings and during the weekends) at a flat feeand a discount on calls that are excluded from the bundle. The

 

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discount package for the business market givescustomers a call bundle ranging from EUR 20 to EUR 1,000 per month withdiscounts of up to 25% depending on the call category and the call bundle. Itis expected that the discount packages for the business market will increaseour competitiveness in the business market segment, customer loyalty and ourmarket share.

 

In 2002, we fully implemented a wholesale Internetoriginating service, which offers Internet Service Providers the possibility ofbilling their customers directly for the time spent on our network. We haveretail and wholesale originating access services that use a special prefix(0676) for Internet access in order to accommodate special tariff plans, torelieve pressure on our exchanges and to allow Internet traffic to be handledmore efficiently. In addition, we intend to introduce further products andservices based on our DSL broadband platform, which are designed to beattractive to both ISPs and end users. We aim to connect as many ISPs aspossible to our network so that our customers have a wide choice of serviceproviders, while at the same time offering ISPs a large potential customerbase, a strong supporting brand and low costs due to economies of scale. ADSLaccess revenues are accounted for partly at our and external ISPs and partly atour IP Services business unit.

 

***Calling services***

 

As a result of the liberalization of thetelecommunications market in the Netherlands, telephone customers are free tochoose providers either through carrier pre-selection, which allows the user toselect a carrier to handle any domestic local (from August 1, 2002) andlong-distance or international call on a default selection basis, or throughcarrier selection, which allows the user to select a carrier on a call-by-callbasis by dialing the carrier’s numeric prefix before dialing the telephonenumber. We have responded to the challenge posed by our competitors byintroducing discount packages and what we believe to be innovative,customer-oriented products and services.

 

***Traffic***

 

We market:

•                  Local telephony traffic:call minutes from calls within a call area or to the adjacent call area,including call minutes for dial-up to ISPs.

•                  Domestic long-distancetraffic: call minutes from calls between customers in different local callareas in the Netherlands.

•                  Fixed-to-mobile traffic:call minutes from one of our fixed lines to a mobile telephone.

•                  Outbound internationaltraffic: call minutes from international calls by direct dialing.

 

***Tariffs***

 

Our tariffs for fixed-line voice telephony servicesare subject to regulatory approval. Under the regulatory framework that appliesto the Dutch telecommunications sector, these tariffs will continue to besubject to regulation for as long as the Dutch regulator designates us ashaving significant market power. In 1999, tariffs for our public fixed-linevoice telephony services became subject to a price cap regime. In 2001, theDutch regulator ordered us to increase the price difference between ourwholesale and retail prices. This led to a new tariff structure for localtraffic, whereby the call setup charge was reduced and the price per minute wasincreased. In 2002, we were allowed to raise both our traffic and subscriptiontariffs by 4.5%, on August 1 and September 1, respectively. On July1, 2003 we increased both the call setup charge and traffic charges by 3.5%.

 

***Connection and subscription fees***

 

These revenues consist principally of monthlysubscription fees charged bi-monthly to customers for providing access lines,as well as one-time initial connection fees. Total net sales from connections,for which we charge a one-off connection fee and subscriptions, depend on thenumber of new connections and customer lines, the percentage of‘do-it-yourself’ packages (which have lower fees), the mix of the customer base(fees for digital lines are higher than for analog lines) and fees charged forour services. The level of monthly subscription fees is higher for ISDN accesslines than for standard analog access

 

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lines. In 2002, we changed our billing policy to apolicy that requires all subscription fees be paid in advance. In 2003, weintroduced discount packages for the residential and business markets. Charges,connection and subscription fees are subject to regulatory approval.****As described above under ‘Tariffs’, wewere allowed to raise both our traffic and subscription tariffs in 2002.Following a reduction by each of the Dutch mobile operators of their mobileterminating access tariffs, we reduced our fixed-to-mobile tariffs on averageby 17% as of January 2004.

 

***Traffic charges***

 

All traffic charges are based on per-second chargesplus a call setup charge. Prices are set according to the distance called, thetime of day and whether the day is a business day, a weekend or a publicholiday and whether the customer preselected the number dialed as a reducedrate number.

 

***Competition***

 

Primarily due to the early liberalization of thetelecommunications sector in the Netherlands, we believe that our home markethas become one of the most competitive telecommunications markets in Europe.Carrier select and carrier preselect operators are very active in theNetherlands. Our major competitors in this field are Tele2 and Scarlet, whichtarget the residential and small and medium-sized business markets. Severalfixed operators (for instance Versatel, BT Netherlands and Worldcom) are alsoactive in the Netherlands with their own networks. They focus mainly onbusiness customers and offer a wide range of services, from voice to data/IPand bandwidth services. During 2003, we and other operators such as Colt andVersatel, gradually introduced VoDSL in the Dutch telecommunications market. Anincreasing number of Dutch households, at the end of December 2003 estimated byus at approximately 8%, use mobile-only solutions.

 

***Distribution and sales***

 

Fixed telephony uses a variety of sales anddistribution channels, including KPN.com (our Internet distribution channel)and our retail stores, part of our Other activities, for residential customers.Business customers are mainly serviced through KPN Sales, supported by our owndedicated sales teams.

 

**CARRIERSERVICES**

 

We are the leading provider in the Netherlands ofinterconnection and other wholesale carrier services to third partytelecommunications companies. Our Carrier Services business unit providesnational and international carrier and network access and other services forthe wholesale market. The three principal activities are national wholesaleservices, international wholesale voice services and local loop services.

 

***National wholesale services***

 

We offer access and interconnection in the Netherlandsand transit services in the Netherlands and abroad to numeroustelecommunications companies, including other international, national andregional fixed-line operators, mobile telecommunications operators, carrierselect operators and ISPs. Carrier Services provides Main Distribution Frame(MDF) access services to the market. MDF access services are also provided byCarrier Services as a semi-finished product internally to IP Services (part ofBusiness Solutions), which sells ADSL products.

 

We offer a comprehensive range of network accessservices that give other telecommunications companies access to our fixedtelephony network, including:

•                  Terminating services.Callers from other telecommunications operators’ networks calling users of ourfixed telephone network.

•                  Originating services.Carrier preselect and carrier select operators have access to calls originatingon our network. We also offer callers on our network interconnection withpremium rate numbers (with prefixes of 0800 or 0900) and pagers or virtualprivate networks.

 

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•                  Internet-originatingservices. We provide these services to ISPs, allowing them (through the use ofdial-up numbers with the 0676 prefix) to bill their customers directly fortheir Internet airtime usage.

•                  Transit services. We routeincoming and outgoing national and international calls between othertelecommunications operators’ networks, for example mobile telecommunicationsoperators, through our network.

 

***International wholesale voice services***

 

We are an internationally active network operatorspecialized in wholesale international telecommunications services. Theseglobal switched services include international voice transmission handling,transit through our network of international calls from one foreign network toanother (voice hubbing), wholesale freephone services and solutions for mobileoperators. We are expanding our entire portfolio by introducing new servicesthroughout Europe. Most of these services are based on the European voiceplatform developed by us, which utilizes transmission services supplied by KPNEuroRings.

 

***Local loop services***

 

These services include main distribution frame (MDF)access and MDF co-location. Competing telecommunications operators may requesta connection through our main distribution frame to their customers. We havebeen offering main distribution frame access since June 1, 2000. We offerline sharing as part of the MDF access portfolio.

 

***Tariffs***

 

Wholesale tariffs are subject to regulatory approval.We believe our wholesale tariffs for terminating services are among the lowestin Europe. Our wholesale tariffs for originating services approximate theaverage tariffs of our competitors. In 2001, we were required to increase thedifference between our wholesale tariffs and end-user tariffs. This led to asubstantial reduction of approximately 25% in our wholesale tariffs.

 

***Competition***

 

National wholesaleservices and local loop services are regulated, due to our significant marketpower in this market. International wholesale voice services are not regulated.Our main competitors in this area are international telecommunication companiesincluding AT&T, WorldCom, Deutsche Telekom and France Télécom.

 

***Distribution and sales***

 

Our wholesale carrier services business supplementsthe efforts of our distribution channels with their own dedicated sales teams.

 

**OTHER UNITSWITHIN FIXED NETWORKS**

 

Other units within Fixed Networks include SNT(customer relationship management provider), the ISPs Planet Media Group andXS4ALL, Fixed Network Operator (customer equipment installation and serviceprovider) and the distribution channels External Distribution (through businesspartners) and KPN.com.

 

***SNT***

 

Our 50.78% owned and fully consolidated subsidiary SNTprovides Customer Relationship Management (CRM) concepts for clients.Management information, which clients can use to further shape their marketingstrategy and build up lasting relationships with customers, is distilled fromthese customer contacts using data mining technologies. SNT provides servicesto millions of consumers annually in the Netherlands, Belgium and Germany. SNTconsists of three companies: SNT Netherlands, SNT Belgium and SNT Germany.Within SNT Netherlands, the market research bureau Interview-NSS operates underits own name. 

 

In 2003, SNT transferred all its Scandinavian assetsand operations to a new alliance company Excellent-SNT in exchange for 24% ofthe shares in the alliance company. A similar structure has been set up for theFrench operations, resulting in an interest of 30% in the new French alliancecompany VITALICOM. In February 2003, SNT and Capital One signed an agreementcovering a long-term collaboration in Europe. We believe that the strongposition of SNT in the Dutch and other European markets will enable us to growfurther in these markets.

 

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***Internet Service Providers***

 

Our ISPs comprise Planet Media Group and XS4ALL. As ofDecember 31, 2003, we had the most registered ISP subscribers in theNetherlands. Planet Media Group consists of two ISPs: Het Net and PlanetInternet. Our strategy is focused solely on the Netherlands. We are building onour existing customer base and on the strength of our brand names in theNetherlands.

 

***Fixed Network Operator***

 

Our Fixed Network Operator operates and maintains ournetworks. Revenues of the Fixed Network Operator unit are primarily generated internally.

 

***Tariffs***

 

SNT charges customers on the basis of subscriptions ortransactions. We charge our customers a monthly subscription fee for Internetuse. Additional services are charged per service. Technological developmentsare putting prices under pressure.

 

In September 2001, we ceased offering freeInternet access in the Dutch market. We migrated customers fromsubscription-free to paying services and broadband. All our ISP customers arenow paying Internet subscribers. Through the Internet-originating servicesoffered by Carrier Services, we changed the business model for our own ISPs andother ISPs from a terminating model to an originating model, whereby the use ofthe infrastructure is charged to the customer through the ISP.

 

***Competition***

 

Competition in the ISP market remains strong. Our maincompetitors in the ISP market are: Chello, Tiscali, Wanadoo and Zonnet.

 

Technological developments in CRM are putting CRMprices under pressure. Nevertheless, we believe that SNT is well positioned inthe Dutch and other European markets and has a solid foundation for furthergrowth. Our main competitors in the CRM market include Teleperformance(France), ClientLogic (Canada), Sitel (US), and Stream (US).

 

***Distribution and sales***

 

KPN.com is our Internet distribution channel, whichhelps to generate sales and provides information to customers. We use theInternet as a low-cost alternative distribution channel for our retail andbusiness products and services.

 

External Distribution acts as an agent for the salesand distribution of Fixed Network Services through external sales channels. Itis essential for some of our business units to promote sales of their productsand services through third party retailers and dealers. Business operators intelecommunications related industries (IT software and hardware) are expandingtheir portfolios with telecommunications products and services.

 

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**BusinessSolutions**

 

Business Solutions comprises our data/IP services, whichwe mainly sell in the Dutch market and through our KPN EuroRings unit inWestern Europe. We believe that we are the leading provider of data/IPconnectivity services in the Dutch corporate market in terms of revenues.

 

The demand for secure, high quality bandwidth datatransmission is driven by:

 

•             liberalization of thetelecommunications market in Europe, resulting in declining prices;

•             technologies allowingeasier broadband access;

•             development of end-to-endsolutions using managed high-quality and high-bandwidth applications;

•             digitization of thebusiness environment, leading to demand for higher capacity leased lines; and

•             growth of intranet andextranet applications.

 

We provide business customers access to reliable, highcapacity bandwidth, using our CityRings and Lambda networks. Our CityRingsnetwork is located in and around the main cities of the Netherlands. We believethat our Lambda fiber optic network in the Netherlands, which is jointly usedby all of our business segments, will enable us to respond quickly to futurechanges in capacity demand. The Lambda network is an important part of ourdata/IP backbone and is connected to the EuroRings fiber optic network and ourCityRings network.

 

Business Solutions currently comprises the followingunits:

 

**TRANSMISSIONSERVICES (TS)**

 

The TS business unit provides a range of transmissionservices to our other units and to third party operators, as well assemi-manufactured components used in our other business units and divisions.Leased or private line services (analog and digital lines in several bandwidthcategories) and value-added network services are provided to businesses thatwish to build their own networks.

 

**IP SERVICES(IPS)**

 

This business unit provides xDSL services, which aretargeted at corporate clients and Internet Service Providers. The activities ofIPS are structured in the business lines Wholesale Access & ConnectivityServices (WACS), Epacity (business xDSL) and Broadband Networks (LAN-i/IAS).The service portfolio of WACS is based on access networks and backbone orconnectivity networks, mainly offered to ISPs for ADSL. Epacity includesbusiness xDSL services for business customers. Broadband Networks offersInternet Access Services to medium-sized businesses in connection with otherservices.

 

**INTEGRATEDSOLUTIONS (IS)**

 

The IS business unit sells all-inclusive businesssolutions packages to corporate clients based on the one-stop shopping concept.Revenues are generated based on fees charged for component parts of servicesoffered (e.g., such as data communication and private network services) andconsulting services fees based on the amount of time spent.

 

**OTHER UNITSWITHIN BUSINESS SOLUTIONS**

 

Other units within Business Solutions include:

 

***Managed Application Services (MAS)***

 

This unit provides applications to customers in ajoint effort with partners such as PeopleSoft, Oracle and SAP, as well ase-business services, consulting services and housing and hosting services.

 

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***KPN EuroRings***

 

This unit commenced operations in January 2003and provides international connectivity services based on our KPN EuroRingsportfolio. The KPN EuroRings networks consist of fiber optic networks in theNetherlands, Germany, Belgium and the United Kingdom. Furthermore, KPNEuroRings has expanded its network in Europe by obtaining Indefeasible Rightsof Use (IRUs) or lease rights in several cities and parts of Europe, includingthe Northern region of France, Lyon, Luxembourg, Vienna, Milan, Barcelona, Madrid,Dublin, Copenhagen, Helsinki, Stockholm, Oslo, Zurich, Geneva, Prague,Bratislava and Budapest. This unit also conducts transit activities through oursubmarine cable assets and our 100% stake in Infonet Nederland. We are theexclusive distributor of Infonet Services Corporation’s portfolio in theNetherlands. Through Infonet Nederland we offer worldwide connectivity servicesthat cannot be covered by the current EuroRings portfolio.

 

***Tariffs***

 

Pricing for data transmission andconnectivity services is provided under monthly subscription fees based on theamount of capacity or functionality provided, and for leased lines also on thecommunication distance. For a limited range of services pricing is providedunder traffic fees, some of which are flat fees. Customers are typically billedfor capacity made available to them on a monthly basis. We offer various levelsof quality and functionality in our services and this is reflected in ourrates. The leased line business is almost completely regulated and service feesare therefore based on prescribed cost-based calculations as stipulated by theDutch telecommunications regulator (OPTA). For other services, includingvalue-added networks, we compete on the basis of service quality. The marketfor broadband services is very competitive. The increasing migration ofcustomers to higher bandwidth services has resulted in lower prices for leasedlines and frame relay connections. The international connectivity services andthe national broadband business are being negatively affected by overcapacity,which has contributed to declining prices since 2002.

 

***Competition***

 

We believe we are the leading provider of data/IPservices in the Netherlands in terms of revenues. In the Netherlands we haveconstructed several networks to assure the efficient handling of the rapidlyincreasing demand for larger volumes of data communications. These networkswill use capacity available on our Lambda network. International offerings areprimarily based on our international network of KPN EuroRings. We have manycompetitors in the data transmission services market, such as BT Ignite,WorldCom, Colt, Enertel and Versatel. Our competitors are investing in theconstruction of backbone infrastructure in the Netherlands and in building localnetworks in large Dutch cities, comparable to our CityRings network. Ourcompetitors offer services ranging from digital leased lines to value-addednetwork services. In 2003, competition on IP-based connectivity for thebusiness market further intensified. The international portfolio, inparticular, is competing in a market with excess capacity and, consequently,declining prices.

 

***Distribution and sales***

 

Distribution and sales of our data/IP Services aremainly done through KPN Sales and dedicated sales teams for corporate andbusiness clients. Integrated Solutions has consultants that integrate data/IPServices with custom-made programs for customers.

 

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**Mobile division**

 

Weare a mobile telecommunications provider in Germany, the Netherlands andBelgium. In 2003, we succeeded in increasing our customer base by 9.1% to 14.7million as of December 31, 2003.

 

InGermany, we are the third largest mobile telecommunications provider with 8.2million customers as of December 31, 2003, representing an estimatedmarket share of approximately 12.7%. The two largest mobile telecommunicationsproviders together have an estimated market share of 80.0%.

 

Inthe Netherlands, we are the largest mobile telecommunications provider with 5.2million customers, representing an estimated 40.2% share of the total Dutchmobile telecommunications market as of December 31, 2003.

 

InBelgium, we are the third largest mobile telecommunications provider and wewere the first to provide DCS 1800 services in Belgium. BASE had1.3 million customers as of December 31, 2003, representing anestimated market share of 15.0%.There are two other Belgian mobile telecommunications providers.

 

We provide mobile telecommunications services rangingfrom standard voice services and value-added services (such as call waiting,call forwarding, voicemail and short text messaging services (SMS)) to advanceddata applications. We expect person-to-person communication services (such asvoice, SMS and e-mail) to remain the main source of revenue for mobileoperators in the coming years, whilemobile multimedia services will increasingly become a differentiator in mobileoperator offerings:

•                  Usage of information, entertainment and mobilecommerce services will gradually increase and gain mass-market acceptance infuture years.

•                  Growth will come increasingly from encouragingour existing customers to use progressively more advanced data services, aswell as from improving the quality of the customer base and increasing ourmarket share in Germany and Belgium. Our goal is to be one of the leadingproviders of mobile communication services.

•                  In future years, we expect that theintroduction of UMTS based services will accelerate the use of new dedicateddata services. We have committed substantialresources to the development of new services and applications for mobiletelecommunications users, including the commercialization of UMTS.

Anincreasing number of consumers are becoming mobile-only users, reflecting agrowing trend that will lead to further usage of mobile networks at the expenseof fixed networks.

 

**i-mode**

 

Pursuant to license agreements with NTT DoCoMo, webegan introducing i-mode services in Germany in March 2002, in theNetherlands in April 2002 and in Belgium in October 2002. i-modeusers have access to numerous mobile multimedia services via an attractive,user-friendly terminal with a large color display and high-quality sound. Thei-mode services consist of communication, information, and entertainment andtransaction services on so-called content sites, especially provided fori-mode. Some of our major i-mode content partners are CNN, Disney, Dow Jones,Sony, Financial Times Deutschland, E-Bay and Atari. Ring tones, games and newsare currently the favorite i-mode services.

 

Besides access to multimedia services, i-mode alsoprovides an e-mail service (i-mail). The second-generation i-mode handsets,introduced in the summer of 2003, support Java, the exchange of multimediaattachments via MMS or i-mail, and an integrated camera (optional). We plan tocontinuously enhance our i-mode services. Next steps include the support ofvideo services (video download, video messaging and streaming video) and videotelephony. UMTS will enhance i-mode services with faster access, richer contentand more services (such as video telephony).

 

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Weclosely coordinate with other i-mode operators, which consist of NTT DoCoMo ofJapan, KGT of Korea, Telefónica Moviles of Spain, Wind of Italia, Bouygues ofFrance and Cosmote of Greece (as of May 2004). The coordination covers severalbusiness areas, including marketing, content development and handset sourcingas well as the sharing of learning experiences and quality insurance.

 

As of December 31, 2003, we had 868,000 i-modecustomers (including 622,000 postpaid customers) in the three core markets inwhich we operate. Industry sources indicate that the total number of i-modecustomers worldwide was approximately 42 million as of December 31, 2003, ofwhich 40.3 million were in Japan.

 

**Germany**

 

On February 24, 2000, we acquired a 77.49% interest inE-Plus. On March 13, 2002, BellSouth converted its 22.51% indirectinterest in E-Plus into 234.7 million of our ordinary shares. As from thisdate, we obtained full control over E-Plus. Accordingly, all informationconcerning E-Plus in this section reflects all of E-Plus’ business, even thoughwe indirectly owned only 77.49% of E-Plus during the period fromFebruary 24, 2000 to March 13, 2002.

 

Reflecting the growth of the mobile market in Germanyand increased market share for E-Plus, the customer base of E-Plus increased toover 8.2 million at year-end 2003. In 2002, our focus on more profitablepostpaid customers led to a significant decrease in the prepaid customer base,resulting in a customer base of about 7.0 million by mid-2002. A balancedgrowth strategy, with a focus on both profitability and market share, succeededin attracting new customers. Withmore than 8.2 million customers in Germany,representing an estimated market share of approximately 12.7% as of December 31, 2003, E-Plus iscontinuing to strengthen its position as the number three operator in theGerman market based on revenues and customer base. E-Plus’ network currently covers 98.7% of the German population. The number of prepaid customers as ofDecember 31, 2003 was approximately 4.3 million, while the number of postpaid customers as of the same date wasapproximately 3.9 million,representing a 47.2% share of thetotal customer base.

 

We acquired one of six UMTS licenses in Germany forapproximately EUR 8.4 billion on August 31, 2000. E-Plus plans todevelop the network components required to utilize the frequencies madeavailable under the license. In June 2003, E-Plus acquired 3,727 UMTS sitesfrom MobilCom Multimedia GmbH. Of these sites, 942 were already equipped.

 

By the end of 2003, E-Plus had over 12,000 GSM networkbase stations covering approximately 73.7% of the country (and 98.7% of thepopulation). To be on par with the competition, E-Plus refocused on its rolloutactivities, launching an extensive GSM program in 2003. E-Plus also expectsthat improvements in GSM indoor coverage will contribute to profitable growth.At the end of 2003, E-Plus also had integrated approximately 1,000 Node Bs(UMTS sites) into its network. The UMTS pilot networks are installed in Berlin,Hanover, Munich and Düsseldorf/Duisburg. E-Plus plans to launch our UMTSservices only once they meet their standards with respect to quality ofnetwork, devices and services. E-Plus expects to commercially launch UMTSservices in the second half of 2004.

 

***Products and services***

 

In addition to standard mobile telecommunicationsservices, E-Plus offers a wide range of value-added mobile voice and dataproducts and services, together with fixed and mobile Internet applications.

 

In March 2002, E-Plus was the first operator inEurope to introduce i-mode services. As of December 31, 2003, E-Plus had440,000 i-mode customers. The fast growing handset portfolio is acceleratingthe rate of i-mode adoption. i-mode prepaid services were launched in November2003, which is expected to contribute to further growth in the number of i-modeusers.

 

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In April 2003, E-Plus launched a successful new imagecampaign. The TV-campaign had the highest advertising recall rates for E-Plusto date. The campaign was characterized by a focus on brand values andservices.

 

In May 2003, E-Plus also introduced the E-Plus onlinedata tariffs. These data tariffs, with their highly competitive pricing, havehelped accelerate the acceptance of mobile data usage.

 

E-Plus currently offers a broad range of mobile voiceand data communications services in the German market under the brand nameE-Plus and is playing a leading role in introducing innovative products andservices in that market. E-Plus offers its customers the ability to use mobiletelecommunications services outside of Germany in approximately 137 countries and,as of December 31, 2003, had signed international roaming agreements with248 mobile telecommunications providers.

 

E-Plus has successfully introduced a number ofpromotional Jubilee Tariffs, such as ‘Privat MU Jubilee’ (no monthly fee; EUR9.95 minimum turnover) and ‘Time & More Jubilee’ (1,000 free minutes duringthe weekend for E-Plus to E-Plus and E-Plus to PSTN) as a first approach toattract customers using fixed telephony services. These Jubilee Tariffs had apositive impact on subscriber growth and usage.

 

As part of our mobile data communication portfolio,E-Plus offers Wireless LAN as a complementary technology, enabling wirelessbroadband services in areas where mobility is not required or practical. Thefirst hotspots were launched in January 2004. The WiFi offer will be launchedas a pilot in February 2004.

 

***Tariffs***

 

E-Plus offers a variety of tariff structures, bothunder monthly subscription fees and in a prepaid format. This also applies toi-mode services. Under our postpaid offerings, we offer bundled minutes at adiscounted price per minute for the commitment to a minimum amount of minuteseach month. For i-mode, we structured the pricing to be flat up to a usagethreshold, beyond which the customer starts paying per data volume. For prepaidcards, we offer reloading of call credit by means of cash purchase, credit cardor bank transfer. In all tariff plans, we have different tariffs per minute,depending on the time of the day or day of the week, in order to stimulatecalls outside peak hours.

 

***Competition***

 

Fourmobile network operators, all of whom have acquired UMTS licenses, arecurrently competing in the German mobile telecommunications market: T-Mobile,Vodafone, E-Plus and O2. Quam and MobilCom acquired the remainingtwo UMTS licenses in Germany. In 2002, Quam and MobilCom decided to suspendtheir UMTS activities. MobilCom has since returned its UMTS license to theGerman authorities.

 

Webelieve that, as of December 31, 2003, T-Mobile and Vodafone together had anestimated market share of 80.0%. Inaddition, there are a number of independent service providers in Germany thatpackage and sell the products and services of various network operators, eitherunder the network operator’s brand or re-branded as their own. Some of theseservice providers operate exclusively with one network operator, while othersoffer competing products and services. In all cases, the service providers sellto both the business and residential markets. The main service providersin Germany are Debitel, Talkline, Victor Vox and MobilCom.

 

Inthe mature and very competitive German market, the strategy of E-Plus is tooffer competitive services and tariffs in order to further grow its customerbase. Fixed-line tariffs are also considered in our pricing policies sincefixed-to-mobile substitution is increasing in Germany.

 

***Distribution and sales***

 

We offer our services through our own chain of 140shops. Apart from these, we offer our services through resellers and serviceproviders, who may repackage our offers tailoring them to their

 

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needs. Among these parties are Debitel, MobilCom,Talkline and Alphatel. We also sell our products via our Internet website. Forthe business market, we also use these channels as well as a direct salesforce.

 

**TheNetherlands**

 

We were the sole provider of mobile telecommunicationsservices in the Netherlands during the 1980s and the first half of the 1990swith our analog networks. In 1994, we began building our GSM 900 network and providingdigital mobile telecommunications services.

 

The opening of the mobile telecommunications market tocompetition in 1995, the introduction of prepaid connections duringDecember 1997 and the subsequent launch of three competitive new GSMnetworks between September 1998 and February 1999, in combinationwith reduced call charges per minute, led to significant market penetration anda mature mobile telecommunications customer base in the Netherlands. The mobilepenetration rate in the Netherlands increased from 75% in January 2003 to80% in December 2003. As of December 31, 2003 we had a total of5.2 million mobile customers, representing an estimated 40.2% share of themobile telecommunications market in the Netherlands. The number of prepaidcustomers as of December 31, 2003 was 3.2 million and the number ofpostpaid customers as of the same date was 2.0 million, or 37.5% of ourtotal customer base.

 

Our current network is based on both the GSM 900 andDCS 1800 standards, which are the dominant digital standards in Europe. Webelieve that we have the largest mobile network in the Netherlands, with morespectrum availability than any of our competitors (Vodafone, Telfort, Orangeand T-Mobile). Our mobile network provides approximately 99.6% outdoor coveragein the Netherlands.

 

On August 4, 2000 we acquired one of five UMTSmobile telecommunications licenses in the Netherlands for approximately EUR711 million. In 2003, we began the rollout of our UMTS network. By the endof 2003, about 217 sites had been installed and approximately 334 were underconstruction. We plan to launch our UMTS services only once they meet ourstandards with respect to quality of network, devices and services. Wecurrently anticipate that the commercial rollout of UMTS services in theNetherlands will begin in the second half of 2004.

 

The first step towards the introduction of dataservices on the UMTS network in the Netherlands consists of extensive pilots.For these pilots we are utilizing our UMTS network in large parts of theprovince of South Holland in addition to our GSM/GPRS network. The UMTS pilotswill run for several months. They form part of our preparations for the broadermarket introduction of services over UMTS.

 

***Products and services***

 

In April 2002, we introduced i-mode services forpostpaid subscribers. As of December 31, 2003, we had 403,000 i-mode customers.In August 2003 we introduced Multimedia Message Services (MMS) and i-modefor prepaid subscriptions. Besides i-mode and MMS, we offer a range of standardand value-added mobile voice and data services, such as voicemail, SMS and callwaiting. We also offer data and fax transmission, virtual private networks forbusiness customers, and multimedia services. Our customers also have thecapability to use mobile telecommunications services outside of the Netherlandsin approximately 175 countries. As of December 31, 2003, our Dutchoperator had international roaming agreements with 234 other mobiletelecommunications operators.

 

Inthe Netherlands, we expect to offer Wireless LAN services as part of our mobiledata communication portfolio in the second half of 2004. A pilot is underway inwhich the mobile product Internet Everywhere (GPRS) is being offered in apackage together with hotspot access. The growing demand for mobile dataservices, particularly those that implement the latest Internet technologies,is expected to lead to increased usage of mobile telecommunications. We havedeveloped several innovative mobile data services, such as our EasyInfoinformation service, which allows users to receive news from CNN and weather,traffic and share price information via voice messages or SMS, and our FaxMailservice, which allows customers to receive and store faxes.

 

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Other innovative products and services include Grip,which enables our business customers to integrate their fixed and mobilenetworks.

 

***Tariffs***

 

In the Netherlands, we offer our mobile services as aprepaid or postpaid proposition. The prepaid proposition is mainly based ontraffic-based pricing. The postpaid proposition is based on a combination of amonthly subscription fee and traffic-based pricing. Under our postpaidofferings, we offer bundled minutes at a discounted price per minute for the commitmentto a minimum amount of minutes per month. In 2003, prices for mobile servicesstabilized.

 

***Competition***

 

Our mobile operator competitors, all of whom acquiredUMTS licenses, are Vodafone, Telfort, Orange and T-Mobile. In addition, wesigned wholesale service provider contracts with OneTel, Debitel and AlbertHeijn. These contracts provide for the distribution of only non-brandedwholesale packages by these service providers. In 2001, Tele2 began offeringmobile telecommunications services as a Mobile Virtual Network Operator (MVNO)using Telfort’s network.

 

The strategy in the Dutch mobile market hashistorically focused on growth in customer base and market share. This strategyled to significant growth in the number of subscribers in both the prepaid andpostpaid segments. This has been justified based on the positive prospects forthe mobile telecommunications industry, including the rapid development ofmobile data services. Gradually, however, there has been increasing pressure todeliver profitable growth. In addition, the market for mobile voice services isbecoming saturated, accompanied by increasing competition and downward pricepressures. As the market leader in a saturating market, our focus shifted in2003 from customer acquisition to retention, while at the same time stimulatingcustomer loyalty and usage of services.

 

We believe that our leading role in both the businessand residential segments of the Dutch mobile telecommunications market is dueto our well-known brands KPN and Hi, the quality of our network, our extensivedistribution network, our commitment to customer care, and the introduction ofa range of innovative products and services.

 

We have been designated as an operator withsignificant market power for mobile public telephone networks and services. Asa result, we are required to meet reasonable requests for special access and tooffer interconnection and special access in a non-discriminatory way.

 

***Distribution and sales***

 

In the Netherlands, weoffer our services via KPN-branded sales channels dedicated to the main marketsegments, third party channels for both the consumer and the business marketand our 86 Primafoon shops, 1 i-mode shop and 17 Business Centers (which shopsare part of our Other activities). Wholesale services are provided to a fewexternal service providers. For handling its customers’ traffic abroad, we useroaming partners and we offer roaming services to foreign operators.

 

**Belgium**

 

The Belgian mobile telecommunications market offersgrowth potential for BASE, our mobile operator in Belgium. BASE launched itscommercial operations in September 1999 and its prepaid service inNovember of the same year. BASE had approximately 1.3 millioncustomers as of December 31, 2003, representing an estimated market shareof approximately 15.0% (2002: 14.4%, 2001: 13.0%). We re-branded KPN Orange asBASE in 2002. During the summer of 2003, BASE ran a large-scale repositioningcampaign under the slogan ‘Freedom of Speech’, which caused spontaneous brandawareness to improve from 36% in May to 86% in December of the year underreview. At the beginning of thefourth quarter of 2003, BASE started to advertise with

 

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specificpropositions and has since positioned itself as a low-cost operator with atransparent tariff structure, which is also competitive with fixed offerings. This provided the basis for an accelerated growthof the customer base over the fourth quarter of 2003. In that quarter thecustomer base increased by 7.7%. BASE’s growth in net additions in 2003amounted to approximately 10%, compared to 15% for 2002 and 20% for 2001.BASE’s network currently covers more than 99% of the Belgian population. During2003, indoor coverage improved from 81% to 91% after investing EUR 100 millionin the GSM network during 2003. The number of GSM sites increased from 1,717 to1,993. Also, most of the existing 1800MHz sites were extended with 900MHzantennas, giving extended coverage to these sites. As the third entrantto the market, BASE’s first objective has been to build up network coverage,which we believe has now reached competitive levels.

 

In March 2001, we acquired one of the three UMTSlicenses in Belgium for EUR 150 million. In September 2003, BASEsuccessfully tested UMTS services at its site in Aartselaar and thus satisfiedthe first UMTS license requirement of the Belgian telecommunications regulator(BIPT). Pursuant to a license agreement with NTT DoCoMo in October 2002,BASE introduced i-mode services, which have also been available as prepaidservices as of November 2003. As of December 31, 2003, BASE had 25,000i-mode customers.

 

***Products and services***

 

BASE offers a portfolio of voice and data products andservices focused on ease of use and supported by a clear tariff structure. Inthe course of 2003, BASE introduced i-mode to the Belgian market.

 

***Tariffs***

 

BASE offers prepaid and postpaid propositions.Characteristic for all propositions is the simplicity of the offer andpossibility to choose flat rates, if preferred by the customer. BASE alwaysinvoices calls per second. For i-mode, customers pay a fixed rate excludingsubscriptions on content sites. Postpaid propositions do not include a fixedmonthly subscription fee. Instead, customers buy a package with a set number ofminutes. Prepaid cards can be reloaded using scratch cards, ATM or credit card.

 

***Competition***

 

The other mobile operators in Belgium are Proximusand Mobistar. The shareholders of Proximus are Vodafone (25%) and Belgacom(75%). Orange owns a 50.79% equity interest in Mobistar.

 

***Distribution and sales***

 

BASE products and services are available at well-knownnation-wide retail chains like BelCompany, The Phone House, Expert, Carrefour,Mediamarkt and Cora as well as at own BASE shops and web channels. Currently,we operate approximately 40 BASE shops.

 

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**Other activities**

 

Duringthe year under review, our Other activities included KPN EnterCom (whichdelivers, installs and services communications equipment for businesscustomers), our international participations (Xantic, PanTel, Euroweb andInfonet), KPN Retail (Primafoon stores and Business Centers), Corporate Center(head office functions), KPN Services (group services). Our Corporate Centerand KPN Services mainly generate internal revenues.

 

**KPN ENTERCOM**

 

Through our EnterCom business unit, we provide a rangeof business communications solutions for the Dutch business market. We alsosell a wide variety of voice communications equipment for use at customerspremises and offer complementary consultancy, implementation, outsourcing andmaintenance and support services.

 

Ouractivities are divided into two separate companies:

•                  KPN EnterCom Solutions B.V., which designs,delivers and integrates voice and data communication solutions; and

•                  TelecomManagement B.V., which manages integrated communication solutions.

 

KPN EnterCom Solutions has organizedits activities into five business lines offering communication solutions:

•                  Voicefor large business systems;

•                  Voicefor small and mid-sized business systems;

•                  Specials,concentrating on solutions for special events, call centers and dealing andtrading;

•                  EnterpriseNetworks, providing communication solutions for data, including Voice over IP(VoIP), network solutions and managed firewalls; and

•                  Cablecom, a strong playerin the Dutch market for in-house cabling systems in the form of both voice anddata communication, including Wireless LAN. For large enterprises with complexprivate cable networks, Cablecom offers on-premise maintenance, repair andnetwork management services.

 

All business lines offerimplementation, maintenance and support and consultancy services.

 

TelecomManagement offers management and outsourcing solutions fortelecommunications management and the infrastructure of organizations and ‘Professional Services’,**consultants,implementation/project managers and specialists in management or technology.

Severalof the largest companies in the Netherlands have outsourced their voicenetworks to Telecom Management. Since November 2002, Telecom Management hasalso been managing our voice network.

 

**XANTIC**

 

Xanticis the result of a merger between Station 12, SpecTec and Telstra GlobalSatellite. We hold a 65% interest in Xantic, the other 35% being held byTelstra Australia. Xantic offers a broad portfolio of solutions in the areaknown as CAT (Content, Applications and Transactions). Xantic is a leadingsatellite communications provider, delivering high-level information andcommunication technology and CAT oriented solutions for thebusiness-to-business environment. Xantic is particularly strong in maritimeoriented businesses. In December 2003, Xantic sold its 5.3% stake in Inmarsat,an international satellite company.

 

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**PANTEL**

 

Asthe leading alternative choice for business customers in Hungary and awholesale provider in the Central Eastern European region, PanTel offers acomplete nationwide package of fixed-line telecommunications services (voice,data, Internet). We hold a 75.19% interest in PanTel.

 

**EUROWEB**

 

Wehold a 50.2% stake in EuroWeb International Corp. EuroWeb is fully consolidatedin our financial statements and is listed on Nasdaq. EuroWeb providestelecommunications solutions to the Central European corporate market via theInternet. EuroWeb clients include Central European governments, multinationals,insurance companies and various media enterprises.

 

**INFONETSERVICES**

 

Infonetis a supplier of international network services, active in approximately180 countries and listed on the New York Stock Exchange. Infonet providesinternational communication solutions for voice and data, electronic mailservices and global network services, based on the one-stop shopping concept. Wehold a 17.7% stake in Infonet Services Corporation.

 

**ČESKÝTELECOM**

 

ČeskýTelecom, the incumbent operator in the Czech Republic, provides fixed andmobile services. The company is listed on the Prague and London StockExchanges. We held a direct interest (6.48%) and an indirect interest (13.8%)in Český Telecom, which we sold in 2003. Accordingly, we no longer have aninterest in Český Telecom.

 

**KPN RETAIL**

 

Primafoon shops and Business Centers are retail storeswhere KPN’s products are sold. The shops sell telephones, mobile and fixedcommunications as well as personal computers and facsimile machines.  As part of our restructuring program, wereduced the number of KPN shops from 187 at the end of 2001 (2002: 108) to 107at the end of 2003. No further reductions are planned in the number of shops.

 

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**Property****, plant and equipment**

 

**Networkinfrastructure**

 

**FIXEDTELEPHONY**

 

Our public switched telephone network (PSTN) and ISDNnetwork in the Netherlands consist of approximately 1,350 access areas and 40trunk exchanges connected by a long-distance transmission network. As ofDecember 31, 2003, our network connected over 85% of the total households inthe Netherlands. Our network is also connected to networks of other operators.

 

Customer access to the network consists primarily oftwisted pair copper access lines (two twisted pair wire and four wireaccesses). In some areas, ISDN-30 connections are made through the fiber opticCityRings network.

 

Each customer line ends in one of the 1,350 accessareas and is served by one of our 483 local exchanges. Each local exchange isconnected through independent transmission routes to 40 independent trunkexchanges located at 34 sites in the Netherlands. These trunk exchanges areinterconnected in two independent networks of 20 trunk exchanges each thatcover the entire Netherlands.

 

We have managed to maintain a low percentage ofunannounced outage time per subscriber line, and our telephony network isdesigned and engineered to have general availability, internal blocking andoutages during peak hours below 1% end-to-end, measured on a yearly basis.

 

**TRANSMISSIONNETWORKS**

 

Transmission services are provided primarily on thebasis of synchronous digital hierarchy and dense wavelength divisionmultiplexing (DWDM) technology.

 

To accommodate the fast growth in demand forhigh-speed transmission, defined as 155 Mb/s and higher, KPN hasimplemented a fiber optic network with synchronous digital hierarchy and densewavelength division multiplexing-based transmission technology. This fiberoptic (Lambda) network became operational in its current form at the end of2000 and consists primarily of a countrywide network linking 34 backbonelocations and providing transmission capacity to connect 1,350 access networkareas to the backbone. The 34 main locations on the backbone are allinterconnected with 2.5 Gb/s routes. Each of the access network areas isconnected to the backbone network to two separate locations.

 

**INTERNATIONALNETWORK**

 

For the provision of international wholesale voice serviceswe operate an international transmission network (in consortia) that includesland and submarine cables as well as satellite transmission systems, which,based on management estimates, directly connects approximately 200telecommunications operators worldwide. The network is partly circuit-switchedand partly based on IP trunking technology with a flexible capacity and maininternational switches located in the Netherlands. In addition, we have ninepoints of presence in Europe (Frankfurt, Düsseldorf, Paris, London, Brussels,Milan, Madrid, Zurich and Vienna) and an exchange in New York and Hong Kong.

 

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**Data networks**

 

The average quarterly usage levels of ourData/IP networks in 2003 are summarized in the following table:

 
|                            |   | **Q4 03** |   | **Q3 03** |   | **Q2 03** |   | **Q1 03** |   |
|---------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|-----------|--------|
| Lambda (*fiber optic backbone*) |   | 58        | %      | 53        | %      | 52        | %      | 50        | %      |
| Hirka (*traditional backbone*)  |   | 64        | %      | 61        | %      | 62        | %      | 62        | %      |
| CityRings                       |   | 20        | %      | 20        | %      | 20        | %      | 26        | %      |

 

The increase in the usagerates of the Lambda and Hirka networks is a result of the high utilization ofthe equipment/networks and the accelerated rollout of ADSL. The small decreasein the third quarter of 2003 (Hirka) is due to migration to the Lambda network.

 

**FR/ATMNETWORKS**

 

We operate a frame relay (FR) network, known asNatvan, to provide a large number of data services for:

•                  the backboneinfrastructure that supports the KPN dial-in network from 20 dial-in PoPs tothe ISPs;

•                  LAN interconnect servicesfor corporate customers;

•                  supporting the backboneinfrastructure that enables the bulk transport of X.25 services through leasedlines as well as through ISDN channels; and

•                  native frame relay (64Kb/s through 2 Mb/s) VPNs.

 

Our ATM network is used to provide flexible leasedline services and a carrier network for our frame relay network and to connectADSL/SDSL customers to our data/IP services backbone.

 

**ETHERNETNETWORK**

 

Metro rings have been rolled out in the 80 largestaccess areas of KPN Ethernet. Apart from providing a regional Ethernettransport service, ATM-based offnet connections can also be provided.

 

**IP/MPLSBACKBONE**

 

Our data/IP services are deployed on the Lambda (DWDM)network. This network connects our data/IP MPLS backbone routers: IP servicerouters are connected through the MPLS core.

 

**ACCESS NETWORK**

 

Our access network consists primarily of twisted paircopper, providing nearly all of the eight million Dutch homes with two pairs ofcopper wire in the tertiary part of the access network. The percentage of thesedouble pairs connected to the secondary and primary level of the access networkdepends on when the particular portion of the network was constructed. Theaccess network terminates in 1,350 access areas. Over 85% of the Dutchhouseholds are actively connected to our access network.

 

At December 31, 2003, 251 city ring areas (in 107access areas), forming our CityRings network, and 328 non-city ring areas (in328 access areas) were accessed by fiber. Fiber access generally permits speedsin excess of 155 Mb/s.

 

In certain cases, wireless transmission systems areused in the access network, (for example, as backup or if fiber access is notavailable). By the end of 2003, approximately 250 wireless transmission systemshad been deployed in the access network.

 

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**KPN EURORINGSNETWORK**

 

The KPN EuroRings network is based on DWDM technologyup to 10 Gb/s in the Netherlands, Germany, France and Belgium, with links tothe United Kingdom and the United States.

 

**Developmentof the telephony network**

 

The Internet has significantly changed the way inwhich the fixed telephony network is being used. Based on management estimates,the principal consequences of the growth of Internet traffic for us are asfollows:

•                  in December 2003, 35%of the traffic minutes on our domestic fixed telephony network were Internettraffic. This percentage is expected to decrease slowly as a result of theintroduction of ADSL; and

•                  whereas the average voicesession lasts approximately 3.5 minutes, the average Internet session lastsabout twice as long.

 

**DEVELOPMENTSIN PSTN/ISDN**

 

Depending on the development of voice traffic on thefixed telephony network, we are upgrading our network as follows:

•                  we are replacing old localexchanges (with analog switching fabric) with fully digital exchanges, spreadover several years;

•                  to prevent disturbance ofvoice traffic handling in the trunk network, we have removed Internet trafficfrom the fixed telephony network at the local exchange level. Using a separateset of trunk exchanges, we feed this traffic to dial-in platforms and henceinto the data network. We implemented this concept at the end of 2002 by usingspecialized technology at the local exchange level and introducing an Internetdial-in prefix (0676);

•                  we have installed xDSL atabout 800 sites, reaching 95% of the Dutch population, and deliveredco-locations at 263 sites (of which 100 are currently in use), makingapproximately 67% of the access network available for competitors. Thisoffloads Internet traffic from the telephony network; and

•                  we have introduced a newMass Calling platform, which has been developed to protect the network againsthigh traffic volumes during a short period as a result of mass calling andmedia events. These services also have the capability to handle calls frommobile networks.

 

**VOICE OVER IP**

 

We currently deliver voice services primarily on thebasis of PSTN, ISDN and GSM. In the coming years, we expect that the importanceof voice services originating from or delivered over IP networks will increase.The development of voice over IP started mainly in the business environment andis confined mostly to voice services in closed business domains (VoIP over VPNand LAN). We believe that a market will emerge for interconnection betweenexisting public platforms for voice services and voice over IP. The coststructure of voice services based on IP connectivity may be very different fromthat of traditional switch-based voice services, allowing pricedifferentiation. When market developments are favorable we intend to provideinterconnection services for IP-based originating voice traffic seekingtermination on traditional voice platforms, as well as replacement of PSTNtrunk routes by voice over trunk routes. We will also develop voice over dataservices for the corporate and consumer markets.

 

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**Developmentof the data network**

 

To carry the exponential growth in volume andbandwidth associated with the advent of multimedia services, we foresee majordevelopments in our data communications network in order to enhance quality,coverage and customer service. We have already taken the initial developmentand rollout steps for this new data-centric network.

 

The larger building blocks in this evolution of thedata network are broadband access systems. ADSL/SDSL is becoming a mainstreamtechnology for us, providing broadband access to large numbers of customersusing the copper access network. In areas with major business activity, weemploy fiber to office systems, predominantly based on our CityRings network.Our access networks built after December 2000 are generally prepared forfiber for home use, by means of ducts. We believe that our IP/MPLS backbonewill become our core transport platform. We anticipate that our frame relay andATM networks will develop into feeder networks for our IP/MPLS backbone andthat the NatVan network will be mainly used for X.25 services and frame relayservice up to 2 Mb/s. The ATM network is designed to provide access at 150 Mb/s.10Mb/s and higher speeds in the largest areas will be provided through EthernetAccess. We believe that the Lambda network will carry the majority of ourtraffic in the future. Using the 2x14 core locations as hubs, the network isdesigned to be extended to 300 smaller locations to provide 2.5 Gb/s SDHconnections as market demand arises. Over 85% of the Dutch households is actively connected to our accessnetwork.

 

**Mobilenetworks**

 

**DEVELOPMENTOF THE MOBILE NETWORK**

 

The world around us and the services and devices in it are increasinglybecoming wireless and online. This is caused by a number of major trends,including progressive individualization among the younger generation and agrowing harmonization of private and professional life in the business market.Our view is that mobile connectivity will increase further over the years tocome. Several kinds of devices will become mobile-connected, such as laptops,high-quality digital cameras, gaming consoles, car/truck management andmachine-to-machine communication. In addition to the current 2G technology, anentire range of mobile data technologies is emerging to support this need forwireless and online usage:

•                  2.5G: narrowbanddata technologies (10 – 100 Kb/s): GPRS, HSCSD; and

•                  3G: broadbanddata technologies (100 and more Kb/s): UMTS, Wireless LAN, DVB, EDGE.

 

Our strategy is to profit from the increasing demand for secure mobiledata access and the increasing penetration of mobile access devices, and offerour customers solutions for secure access via GPRS, HSCSD and UMTS, inaccordance with the industry standards as set by the Third GenerationPartnership Project (3GPP). Next to these access technologies we are offeringcustomer convenience with Wireless LAN hotspots. We will keep investing in our GSMnetworks in order to maintain and improve quality and coverage, and providesufficient voice and data capacity.

 

Broadband offers three unique selling pointsover narrowband technologies that will prove to be crucial for future success:

•                  higher speed: thismakes current services richer and thus more user friendly, as is the case withvideo-like services;

•                  larger datavolumes, which enhance the number of services (pictures, clips, sounds, radio)and renders them more useful (attachments for business users); and

•                  higher dataservice quality. This makes guaranteed throughput and quality possible ratherthan ‘best effort’ services.

 

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**ROLLOUT OFMOBILE NETWORKS**

 

The current network rollout is focused on achieving maximum synergybetween GSM and UMTS, for example with infrastructure and transmission. Reuseof our GSM infrastructure in some areas can provide up to 75% of the basic UMTSinfrastructure. The UMTS rollout planning is in line with the license obligationsset by the regulatory authorities. Nokia and Ericsson will be our primary UMTSnetwork suppliers in Germany, the Netherlands and Belgium. We will at leastcomply with all regulatory requirements on the rollout and will accelerate therollout as and when it becomes commercially attractive.

 

Selected user tests are currently beingconducted in Germany and the Netherlands. The commercial launch of UMTS inGermany and the Netherlands is anticipated to take place in 2004 with coveragein the main cities and important business areas. Timing also depends on theavailability of handsets and on when our quality standards have been met.

 

The following table summarizes the number ofbase stations equipped and installed as of December 31, 2003:

 
| **Number  of base stations  integrated in the network** |   | **Germany** |   | **Netherlands** |   | **Belgium** |   |
|---------------------------------------------------------|--------|-------------|--------|-----------------|--------|-------------|--------|
|                                                    |   |        |   |            |   |        |   |
| 2G sites                                                |   | 12,241      |   | 3,910           |   | 1,993       |   |
| 3G sites                                                |   | 1,033       |   | 217             |   | 2           |   |
| Total sites                                             |   | 13,274      |   | 4,127           |   | 1,995       |   |

 

The averageutilization of our 2G networks in 2003 is summarized in the following table:

 
|               |   | **Germany** |   | **Netherlands** |   | **Belgium** | ** ** |
|--------------------|--------|-------------|--------|-----------------|--------|-------------|------------|
|               |   |        |   |            |   |        |       |
| Average usage in % |   | 40.6        |   | 66.4            |   | 19.1        |       |

 

The coverage ofour 2G network as of December 31, 2003 is shown in the following table:

 
| **Coverage in%**   |   | **Germany** |   | **Netherlands** |   | **Belgium** | ** ** |
|--------------------|--------|-------------|--------|-----------------|--------|-------------|------------|
|               |   |        |   |            |   |        |       |
| Outdoor population |   | 98.7        |   | 99.6            |   | 99.3        |       |
| Indoor population  |   | 73.7        |   | 88.3            |   | 91.4        |       |
| Area               |   | 94.3        |   | 96.8            |   | 96.3        |       |

 

**Properties**

 

KPN holds approximately 1,945 buildings as ofDecember 31, 2003, the majority of which are owned freehold and locatedprincipally in the Netherlands. Approximately 1,828 of our buildings housetelephone and data transmission network equipment, which cannot readily beadapted to alternative uses. The remainder of the properties comprises offices,shops, storage facilities, residential properties and buildings for othermiscellaneous uses. As of December 31, 2003, our land and buildings had abook value of EUR 881 million, our plant and equipment had a book value ofEUR 7,082 million, and our other tangible fixed assets had a book value ofEUR 1,156 million.

 

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**Research and development**

 

On January 1, 2003, the Dutch Organization forApplied Scientific Research (TNO) took over KPN Valley, which encompassed ourresearch and development activities. The research activities have become thecore of a new TNO institute, named TNO Telecom. Parts of other institutes,specializing in telecommunications and ICT, are expected to be added by TNO tothis new institute.

 

We intend to maintain and further develop ourrelationship with TNO Telecom. We wish to benefit from the telecommunicationsknowledge that will be acquired by TNO Telecom in order to support thenecessary innovations within KPN. Since we intend to remain a key client of TNOTelecom, a long-term contract with TNO has been signed. Under this contract, we have annual purchasecommitments ending December 31, 2006, which commitments decline each year. Thecommitments amount to EUR 68 million in total.

 

Our research and development expenditures charged byTNO Telecom in 2003 totaled approximately EUR 23 million. Our research anddevelopment expenditures related to KPN Valley totaled EUR 32 million in2002 and EUR 46 million in 2001.

 

**Intellectual property**

 

We pursue an active strategy aimed at developing andprotecting our intellectual property rights. To protect these rights, wecurrently rely on a combination of patents, trademarks, service marks, tradesecrets, copyrights, database protection, confidentiality agreements with ouremployees and third parties and protective contractual provisions. Our currentportfolio of intellectual property rights consists of approximately 2,250registered trademarks, 125 design right registrations and 330 patent families.We intend to invest in the growth of our intellectual property rightsportfolio, to take steps to protect these rights, and to generate revenue fromthese rights where appropriate (for example, through licensing arrangements).KPN owns a number of patents that are essential for the commercial exploitationof telecommunication technology and services. A number of suppliers enteredwith us into license agreements on a number of these patents.

 

We may be subject to claims alleging that we haveinfringed upon third party intellectual property rights. Claims of this naturecould require us to spend significant amounts of time and money to defendourselves, regardless of their merit. If any of these claims were to prevail,we could be forced to pay damages, comply with injunctions or halt theprovision of our services while we re-engineer them or seek licenses tonecessary intellectual property, which might not be available on commerciallyreasonable terms, or at all.

 

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**Regulatory developments**

 

**European Union- New regulatory framework for electronic communications**

 

In 2002, the European Union (EU) adopted a newregulatory framework for the electronic communications sector, which replacedthe existing EU regulatory framework. The new framework consists of fiveprincipal directives, aiming at a further harmonization of regulation withinthe European Union, clear policy objectives to be pursued by nationalregulatory authorities (NRAs) and ‘technological neutrality’. The directivesinclude regulation on licensing regimes, measures to be taken to protectconsumers and ensure universal provision of certain telecommunicationsservices, specific privacy regulation for electronic communication and theterms and conditions for access to networks and interconnection. The directivesmaking up the main elements of the new regulatory framework were to betransposed into national law by July 25, 2003, which date was not met in thethree main countries in which we operate (the Netherlands, Germany andBelgium). We anticipate that the implementation will be effected during thecourse of 2004 in all three countries.

 

One of the most important changes to the previousframework is the alignment of thresholds for *ex ante* regulation withgeneral competition law. It is also intended to ensure greater consistency ofapproach amongst NRAs within the Member States of the EU. When defining marketsfor potential *ex ante*regulation, NRAs are required to take utmost accountof the list of markets, which are specified by the European Commission in aRecommendation. NRAs may, with the Commission’s consent, also propose marketsnot included in the Recommendation. The Commission will periodically review theRecommendation, with the first such review expected in June 2004.

 

Specificobligations can only be imposed on undertakings with an individual orcollective significant market power (SMP) in the markets so identified. SMPunder the new framework is consistent with the concept of dominance undergeneral EU competition law. This generally implies a market share of at least40-50%, with other factors to be taken into consideration. The SMP thresholdunder the existing EU regulatory framework required only a 25% market share andwas applicable to markets predefined in the legislation. The obligations to beapplied (‘remedies’) may vary and are expected to be the subject of furtherconsultation during 2004. *Ex ante*regulatory obligations may only be imposed where there is no effectivecompetition, i.e. in markets where there are one or more undertakings with SMP,and where competition law remedies are not sufficient to address the problem.Also, the imposition of a specific obligation on an undertaking with SMPrequires a justification that the obligation in question is appropriate andproportionate in relation to the nature of the problem identified. Thepractical consequences of the new framework for us depend on how the directivesare implemented, how NRAs apply the new rules and how the Commission seeks tointerpret and harmonize the application of the new regulatory framework.

 

The modified directive concerning privacy andelectronic communication contains amendments and additions to the existingdirective that apply to matters like the use of location data in electroniccommunication networks and services and unsolicited communication (includingspamming).

 

**The Netherlands**

 

The Telecommunications Act (the Act) embodies themain telecommunications regulations in the Netherlands. The present Act isbased on European rules introduced in the 1990s. In November 2003, the LowerHouse of Parliament (*Tweede Kamer*) adopted the legislativeproposals for the transposition of the new European directives for electroniccommunication into national law. The amended Act is expected to becomeeffective in the spring of 2004.

 

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Certain requirements in the present Act apply toall operators of public telecommunication networks or telecommunicationsservices, including the requirement to offer interconnection and numberportability. In the current legislation, operators of fixed public telephonynetworks and fixed public telephony services, mobile public telephony networksand mobile public telephony services and leased lines which have beendesignated as having significant market power (generally a market share inexcess of 25%) are subject to more stringent requirements. The most importantof these are offering end users and other market players transparent andnon-discriminatory access to their networks and services. Designated operatorsof fixed public telephony networks, fixed public telephony services and leasedlines are also required to offer this access at cost oriented prices. Operatorsof mobile public telephony networks and mobile public telephony services areonly required to charge cost oriented prices for interconnection if they havebeen designated as having significant market power on the nationalinterconnection market with regard to fixed and mobile public telephoneservices together. In 2003, as in previous years, we were designated as anoperator with significant market power in three markets: fixed telephony,mobile telephony and leased lines, but not on the national market for fixed andmobile telephony together.

 

The obligations imposed upon us under the currentregulatory framework remain applicable (with a maximum period of 24 months)until the new regulatory framework is implemented and the NRA (OPTA) hasexecuted its obligations to investigate the markets and decide on thedesignation of operators with SMP thereupon. If no SMP designation – based onthe new European SMP concept in line with competition law dominance – were tofollow on the market under investigation, the current obligations would belifted. If a new SMP designation were to follow under the new regime, theobligations imposed would replace the existing obligations.

 

General anti-trust legislation in the Netherlandsis embedded in the Competition Act and the EU Treaty. The provisions of theCompetition Act are based on European competition rules. Netherlands Anti-TrustAuthority (NMa) enforces the rules in the Netherlands. Like the EuropeanCommission, the NMa may impose on companies that have breached competition lawspenalties of up to 10% of their total turnover in the previous business year.

 

**Fixedtelephony - the Netherlands**

 

We are required to charge cost oriented prices forfixed public telephone services, consisting of telephone lines, local telephonecalls, national telephone calls, fixed-to-mobile telephone calls, standard telephonedirectory listings and the directory enquiries services. Determination ofwhether prices are cost oriented has taken place since July 1, 1999 through aprice ceiling system. Under this system, we had to reduce our prices by atleast 5.3% each year, with the proviso that we were allowed to correct theseprices for inflation. This price ceiling system was replaced by a system ofsafety caps, running from July 1, 2002 until July 1, 2006. Under this system,the prices of telephone lines, local telephone calls, national telephone callsand fixed-to-mobile telephone calls are allowed to raise only by the rate ofinflation. Inflation for the first year, ending June 30, 2003, has been peggedat 4.5%. For the period from July 1, 2003 through July 1, 2004, inflation hasbeen pegged at 3.5%. In 2003, we raised our prices to the full extent permittedunder this system.

 

Since July 1, 2002, we have been obliged toallocate our wholesale specific costs to our retail traffic on a proportionatebasis. This includes the costs of wholesale billing and the Carrier Servicesorganization, wholesale interest on billable amounts receivable and costsdirectly attributable to carrier preselection. This measure is part of theintegration of the systems that regulate our end-user and interconnectionprices.

 

In October 2002, OPTA published a consultationdocument regarding the development of an integrated regulatory framework forthe floor of our end-user prices. Although the policy proposals set forth inthe consultation document held out the prospect of improving, to a certainextent, our ability to introduce tariff packages and call bundles, as inneighboring countries, we informed OPTA that, in our view, the terms andconditions of the tariff regulation were still far too rigid. However, inAugust 2003, OPTA relinquished its policy proposals and decided that in view ofthe uncertainty entailed in the introduction of the new regulatory framework,the present price squeeze guidelines and system for examining discounts willremain unchanged. In its decision, OPTA considered that our competing

 

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retailers might be forced out of business if OPTAwere to relax the current lower limit tariff regulation. In line with thisdecision, OPTA rejected a number of tariff packages and call bundles proposedby us. In all cases we appealed OPTA’s decisions, which appeals remainoutstanding.

 

Some fixed operators significantly increased theirterminating fees in 2002. We have filed notices of disputes with OPTA citingthree operators, Priority, UPC and Versatel, who in our view are chargingunreasonably high fees. Following this step, OPTA published policy guidelinessetting out how it will scrutinize the fairness of fixed terminating fees of non-designatedoperators. By way of a guideline for a maximum fair fee, OPTA considers itreasonable to phase in for other operators the fees applicable to thedesignated operator (KPN) with a delay of three years. However, if an operatorcharges a terminating fee that is higher than our own terminating fee, weretain the possibility to pass the surplus on to our retail customers bydifferentiating our end-user prices. In its November 18, 2003 decisions, OPTAconfirmed its earlier decisions ruling that the terminating fees of the threeoperators were unreasonably high and must be lowered to the maximum level setout in the policy guidelines. We have appealed this ruling before the RotterdamDistrict Court because we take the view that call termination rates, which arenot reciprocal to our call termination rates, will distort competition even ifend-user prices are differentiated.

 

**INTERCONNECTION**

 

The prices we charge competitors for the use of ourfixed network must be cost oriented. This is examined once a year and, no laterthan July 1 each year, OPTA sets the prices we may charge in the coming twelvemonths. The cost basis deemed to exist for a hypothetical efficient operator isused as the yardstick for cost oriented prices for the terminating access service.

 

This cost basis has been modeled on the ‘Bottom-upLong Run Incremental Costs’ (BU-LRIC) cost allocation model. Our actual costbasis is taken as the criterion for prices for originating access services(special access) and unbundled access services. The Embedded Direct Cost (EDC)model is used to allocate these costs.

 

As part of the ongoing integration of the systemsused to regulate the prices of our end-user and interconnection services, OPTAhad the intention to introduce a multi-year tariff regulation system forinterconnection and special access offered by us, designed to give both us andother market players certainty for a prolonged period and to give us an extraincentive to improve efficiency. Basedon continuing new insights, the uncertainty entailed in the introduction of thenew regulatory framework, theresponses to OPTA’s policy plans and the unpredictability of traffic volumes,OPTA decided not to go ahead with its plans for the time being and to maintainthe current wholesale tariff regulation regime for the period from July 1, 2003through July 1, 2004.

 

Withinthat context, OPTA decided, on July 24, 2003, not to approve the costallocation system submitted by us to determine the tariffs applied by us forthe terminating access, originating access and unbundled access services. Inits decision, OPTA listed the tariffs that would apply if we had submitted thecost price allocation in accordance with OPTA’s instructions, requiring us toreduce the tariffs payable by other operators for traffic terminating on ournetwork by 5%, to reduce the wholesale tariffs for calls originating in ourfixed network by 10%, and to reduce the tariffs for various unbundled accessservices by 30% on average. As we do not agree with OPTA’s cost calculation method,we have lodged an objection against this decision. We also filed a request forinjunctive relief with the President of the Rotterdam District Court, but onOctober 9, 2003, the request was dismissed. We will now await OPTA’s ruling onour objections. If OPTA’s ruling is upheld, we estimate that the ruling willreduce our annual revenues and operating profit by approximately EUR 35million.

 

**UNBUNDLEDACCESS**

 

We are required to provide our competitors(including our own services and our associated companies) with full and sharedunbundled access to our local copper loops on fair, transparent andnon-discriminatory terms and at cost-oriented prices. We must also allow a newentrant to co-locate its own network equipment. Within the context of a disputereferred to OPTA by Tiscali, OPTA has ruled on periodic co-location prices(rent and electricity). Based on a comparison with commercial real estateprices for ‘ordinary’ business accommodation, OPTA has set the prices atapproximately 10%

 

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of our original prices. We lodged an objection, butin March 2003 the claim was dismissed. Both KPN and Tiscali have appealed thisruling before the Rotterdam District Court.

 

In its March 11, 2003 decision, OPTA imposed a EUR375,000 fine on us for violating a prohibition on discrimination in providingunbundled access to part of our company that offers DSL services on behalf ofKPN as well as competing providers of DSL services. Our business unit is saidto possess details of our subscribers that allowed it to place orders forunbundled access lines easier and more accurately. OPTA holds this to be at thedisadvantage of competing operators because they lacked the same details. Wefiled an objection against this ruling, but in November 2003 the claim wasdismissed. We have appealed this ruling before the Rotterdam District Court. Inanother decision of December 19, 2003, OPTA imposed a EUR 90,000 and a EUR180,000 fine on us for violating the obligation to charge cost-oriented pricesand the prohibition on discrimination in providing unbundled access tocompeting providers of DSL services, respectively. We have submitted a noticeof objection to this ruling.

 

**BITSTREAMACCESS**

 

OPTA imposed a penalty-carrying order on us requiringus to submit to OPTA an offering for a bitstream access service. According toOPTA, this service falls under the definitions of special access and leasedlines. OPTA is of the opinion that we are breaching non-discrimination rules byproviding the service to parts of our own company but not to other parties. Wehave filed an objection to the decision to impose a penalty because we disputethat bitstream access can be construed as a regulated service, which wasdismissed by OPTA as unfounded. We have appealed this ruling before theRotterdam District Court. Pending the outcome of the appeal, and to avoidhaving to pay penalties, we have published an offering for bitstream access,albeit under protest.

 

Withinthe context of another dispute referred to OPTA by Tiscali, OPTA obliged us tomake an offer to Tiscali for a bitstream access service identical to thebitstream access service provided to our own retail service (*ADSL by KPN*)and at cost-oriented prices. Werequested, and obtained, injunctive relief from the President of the RotterdamDistrict Court on the grounds that the bitstream access service does notqualify as special access to our telephone network. Nonetheless, in itsdecision on our objections OPTA upheld its earlier views, whereupon we lodgedan appeal to the Rotterdam District Court and at the same time asked for apreliminary injunction. On October 30, 2003, the President of the RotterdamDistrict Court sustained our claims, referring to the grounds set out in theCourt’s earlier judgment, and ordered OPTA to review its original decision inlight of our objections on the grounds set out in the Court’s judgment.

 

**LEASED LINES**

 

Enacted by order of March 27, 2002, OPTA designatedus as having significant market power in seven market segments, namely thenational markets for national analog leased lines, international analog leasedlines, national leased lines with a capacity smaller than 2 Mb/s, internationalleased lines with a capacity smaller than 2 Mb/s, national leased lines with acapacity of 2 Mb/s, international leased lines with a capacity of 2 Mb/s andnational leased lines with a variable capacity. The designation does not applyto the market segment for leased lines with a capacity greater than 2Mb/s. Wehave lodged an objection against our designation in the distinct markets fornational leased lines with variable capacities and international leased lineswith a capacity of 2 Mb/s. Following a succession of injunctive reliefproceedings, OPTA eventually revoked our designation in the market forinternational leased lines with a capacity of 2 Mb/s, pending the outcome ofits further investigation of geographical demarcation to see whether we possesssignificant market power in the international leased lines market. However,OPTA maintained our designation in the market for national leased lines withvariable capacities. We appealed this ruling and also obtained an injunctionfrom the Rotterdam District Court temporarily suspending our designation in themarket concerned pending the outcome of the appeal proceedings. In its December9, 2003 judgment, the Rotterdam District Court quashed OPTA’s ruling on thegrounds that OPTA had inadequately defined and analyzed the market forPermanent Virtual Circuits and ordered OPTA to take a new decision on ourobjections, taking into account the grounds set out in the Court’s judgment.Furthermore, the Court extended the injunction pending OPTA’s new decision.

 

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**Mobiletelecommunications - General**

 

**INTERNATIONALROAMING**

 

The market for international roaming has been underinvestigation by the European Commission since 1999 with an initial sectorinquiry resulting in a working document in December 2000 and unannouncedinspections of the offices of mobile network operators in the United Kingdomand Germany, including E-Plus, in July 2001. The Commission said it was seekingevidence of collusion or excessive prices in relation to both retail andwholesale roaming charges, and the Commission has subsequently sought, or beenprovided with, additional information about roaming charges. The Commission hasnot yet indicated how, when or if it may proceed in these specific matters orin relation to its general inquiries into the roaming market.

 

One of the markets defined in the Recommendationunder the new European regulatory framework to be investigated by NRAs is thewholesale roaming market. It is currently not clear how the investigations willbe conducted on a national level.

 

**Mobiletelecommunications - Germany**

 

**GENERAL**

 

Sofar, in Germany no operators have been designated as having significant marketpower on the market for mobile public telephone networks and services.

 

**NEWCOMMUNICATIONS ACT**

 

Germany did not meet the deadlineof July 24, 2003 for the implementation of the new regulatory framework. Theofficial draft of the new German Communications Act was released in October2003. The first reading in the Federal Parliament (*Bundestag*) is scheduled forJanuary 2004. It is expected that the *Bundestag*and *Bundesrat* (the second legislative body representing theGerman States at the federal level) will adopt the act in the firsthalf of 2004. In line with the new regulatory framework, the new CommunicationsAct will introduce a number of important changes to the previous regulatoryframework. In December 2003, in accordance with the recommendation of theCommission on relevant markets susceptible to *exante* regulation, the German regulatory authority started theanalysis of the three recommended mobile markets by issuing questionnaires tomarket parties.

 

**UMTS**

 

In November 2003, Germany’s Regulatory Authority for Telecommunications (RegTP)commenced administrative procedures to verify satisfaction of the coverageobligations under the UMTS licenses. At the end of 2003, we met the requirementthat mobile UMTS networks must cover 25% of the population.Asof December 31, 2005, the minimum coverage requirement will increase to 50%.

 

**CONSUMERPROTECTION**

 

In August 2003, an amendment ofthe current Customer Protection Ordinance (TKV) came into force, which aims toreduce the fraudulent use of 0190/0900 premium rate services. Under the newlaw, operators are only permitted to charge more than EUR 2 a minute for aso-called premium rate service if subscribers have given their prior consent.Subscribers can make use of an opt-in procedure to be established by theoperators. Because of an insufficient implementation period (approximately oneyear is needed to launch the required opt-in procedure), E-Plus had to lower itstariffs for certain services.

 

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**BUILDINGPERMIT**

** **

Between 1998 and 2000, several Upper AdministrativeCourts ruled that mobile communication should be designated as a businessenterprise. Therefore, the installation of high-frequency installations on theroofs of residential buildings contravenes the regulations for use exclusivelyas a residential building and consequently requires a building permit, eventhough the antenna is lower than 10 meters (which is the case for the vastmajority of the network). The Upper Administrative Court Munster upheld thedecisions in 2002. Meanwhile, six of the sixteen German States (*Bundesländer*)have amended the respective law to the effect that a change in the use of buildingsdoes not require a building permit. Accordingly, we must obtain permits forsuch installations on all residential buildings as well as commercial buildingsin ten of the German States.

 

**Mobiletelecommunications - the Netherlands**

 

**LICENSES**

 

KPN Mobile The Netherlands B.V. holds licenses forGSM 900, DCS 1800, UMTS and paging (SMF and ERMES). Our Traxys network (atrunking based network for closed user group communication) will be closed downat year-end 2004.

 

Orange instituted civil proceedings against theState of the Netherlands claiming a refund of approximately EUR 270 millionpaid for its DCS 1800 license. According to Orange, the State allowed thecreation of an unbalanced situation in the Dutch mobile market because KPNMobile and Vodafone were not required to pay separate fees for the GSM 900frequencies, whereas the DCS 1800 frequencies were put up for auction at highprices. These claims were rejected in the first instance, but Orange has lodgedan appeal. The Trade and Industry Appeals Tribunal (*College van Beroep voor hetbedrijfsleven*) rejected in highest instance earlier objections onsimilar grounds by Orange on January 30, 2002.

 

Along with the other operators in the Dutch mobilemarket (Vodafone, T-Mobile, Orange and Telfort), KPN Mobile acquired a UMTSlicense on August 7, 2000. Versatel filed complaints about the auctionprocedure and the awarding of the licenses, which were rejected by theRotterdam District Court in November 2002. Versatel has appealed this decision.

 

Under the license, the operators must meet certainrollout obligations for the UMTS networks. As of January 1, 2007, all built-upareas in municipalities with over 25,000 inhabitants, all main roads (car, railand waterways) in between, all motorways to Germany and Belgium and the areasaround the airports of Schiphol, Rotterdam and Maastricht should be covered ata minimum level of 144 Kb/s outdoors.

 

**SIGNIFICANTMARKET POWER**

 

KPN Mobile is designated as an operator withsignificant market power in the market for mobile public telephone networks andservices. As a result of the designation, KPN Mobile is required to meetreasonable requests for special access and to offer interconnection and specialaccess in a non-discriminatory way.

 

**INTERCONNECTIONAND SPECIAL ACCESS**

 

OnDecember 4, 2003 the NMa announced that it has terminated its investigationinto a potential abuse of dominant position in relation to MTA tariffs,following an announced agreement between mobile operators to amend their MTAtariffs according to a schedule published on the same date. As of January 1,2004, the tariffs of KPN Mobile and Vodafone can be no higher than EUR 0.155per minute. On December 1, 2004, this maximum will be EUR 0.130, and onDecember 1, 2005, EUR 0.110. On the same dates, the DCS 1800 operators (Orange,Telfort and T-Mobile) and the virtual

 

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mobile operator (on Telfort’s network) Tele2 Mobiel, must have reducedtheir tariffs to EUR 0.175, EUR 0.147 and EUR 0.124, respectively. OPTA haspublished a new policy on MTA, which includes a two-year adherence to thesetariff reductions. OPTA announced that remaining MTA disputes would be decidedin line with these reductions. For the period after December 1, 2005, OPTAreserves its position.  Based on the newregulatory framework, OPTA will investigate the MTA market(s) and see whetherfurther reductions are required as of that date. In its policy guidelines, OPTAannounced that, based on its current views, it expects to regulate MTA based ona cost allocation system (Long Run Incremental Costs (LRIC)) on or afterDecember 1, 2005. In order to avoid distortion, OPTA expects that it willintroduce a sliding scale to the cost-oriented level in connection with thelast step of the published schedule.

 

KPNMobile must offer interconnection to the networks of other telecommunicationservice providers. All providers are connected with KPN Mobile’s network viathe transit service of KPN Telecom except for Orange that has a directinterconnection with KPN Mobile’s network. UPC has also requested directinterconnection with KPN Mobile’s network. Following a judgment of OPTA on thereasonableness of KPN Mobile’s offer for direct interconnection, KPN Mobile ispreparing an amended offer for this interconnection.

 

Following an original request by Yarosa, a mobileentertainment company, on November 28, 2003, OPTA obliged KPN Mobile on appealto present an offer for access by Yarosa to KPN Mobile’s MSC against a muchlower tariff than originally offered. KPN Mobile appealed to the RotterdamDistrict Court.

 

Atthe end of 1999, WorldCom filed a complaint with the European Commissionagainst what it called the excessively high interconnection prices beingcharged by KPN Mobile and other operators. In March 2002, KPN Mobile received astatement of objections from the European Commission in which it reached thepreliminary conclusion that we have abused our position of power bydiscriminating in relation to the conditions for direct interconnection andsetting unfair prices resulting in a margin squeeze between mobile terminatingaccess and certain services offered to business customers. KPN Mobile hasprovided arguments that refute the preliminary analysis. In the fall of 2002,the Commission asked for further information. It is unclear when the Commissionwill take a final stand, but the Commission may ultimately require KPN Mobileto lower its interconnection prices and could impose a penalty upon us of up to10% of our sales in the year preceding the year the Commission has taken itsfinal stand.

 

**DEALERCOMMISSIONS**

 

Afteran investigation into the reduction of subsidies to mobile handset retailers bythe mobile phone operators in the Netherlands, including KPN Mobile, the DutchAnti-trust Authority (NMa) concluded that all five mobile operators hadcoordinated a decrease of the commissions to their distributors and a decreaseof the handset subsidy for prepaid subscriptions. On December 30, 2002, NMafined KPN Mobile for EUR 31.3 million. KPN Mobile has appealed the decision andin particular the disproportionate level of the fine.

 

**NUMBERS ANDNUMBER PORTABILITY**

 

In late 2001, a change in the number plan fortelephone services took effect, in which short codes were introduced forcertain network-related services. Many of these services currently useoperator-specific reduced numbers. OPTA has been instructed to supervise thenumber changes in the number plan within a reasonable timeframe.

 

OPTA has formulated policy guidelines concerningthe quality of number portability. These policy guidelines set deadlines forrealizing number portability in 95% of cases. OPTA may impose penalties ifoperators fail to meet these targets. As of October 2003, OPTA introduced anamendment to the guidelines requiring operators to port numbers within 10 daysupon a customer’s request,

 

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notwithstanding existing terms of contractduration. KPN Mobile does not agree with the amendment and OPTA imposed apenalty-carrying order of EUR 50,000 per month (with a maximum of EUR 300,000)on us, which we have appealed. Upon our request, on December 18, 2003, thepresident of the Rotterdam District Court granted injunctive relief, on thegrounds that the Telecommunications Act only obliges operators to providenumber portability upon termination of a contract. OPTA will decide upon ourappeal in early 2004.

 

**Mobiletelecommunications - Belgium**

 

**GENERAL**

 

The principle telecommunications regulations inBelgium are contained in the Telecommunications Act of March 21, 1991.

 

To date, the new European regulatory framework fortelecommunications has not been transposed into Belgian law. Nevertheless, inthe course of October 2003 the Belgian telecommunications regulator (BIPT)published several questionnaires on its website relating to the analysis of therelevant telecommunications markets in Belgium.

 

**UMTS**

 

In March 2001, the three existing operators (BASE,Proximus and Mobistar) obtained a UMTS license in the auction organized by theBelgian Government. The license was obtained upon payment of a license fee ofEUR 150 million. The license contains rollout obligations, which so far havebeen met. The future requirements to be met on December 2005, 2006, 2007 and2008 are population coverage of 30%, 40%, 50% and 85%, respectively.

 

**SIGNIFICANTMARKET POWER OF PROXIMUS AND MOBISTAR**

 

In2000, Proximus was designated an operator with significant market power in boththe mobile and interconnection markets and Mobistar in the mobile market. At thebeginning of 2003, Mobistar was also designated as an operator with significantmarket power in the interconnection market. The designation obliges both Proximus and Mobistar, among otherthings, to offer cost-oriented interconnection tariffs. On several occasions,BIPT reduced Proximus’ interconnection rates. Following an advice of BIPT onMobistar’s interconnection rates, Mobistar lowered its interconnection rates asfrom November 1, 2003. The BIPT’s advice is currently being appealed byProximus.

 

**BASEINTERCONNECTION RATES**

 

Asof October 1, 2003, BASE introduced new peak/off-peak windows for theapplication of its interconnection rates, approved by BIPT.

 

**NUMBERPORTABILITY**

 

Mobile number portability was introduced in Belgiumon October 1, 2002.  On October 17, 2003,BIPT determined the cost a donor operator (porting out a customer) might chargeto the recipient operator (porting in the customer). Mobistar is currentlyappealing this decision. The traffic related costs of number portability arestill to be determined.

 

**CLAIM AGAINSTPROXIMUS**

 

OnJune 25, 2003, BASE announced that it lodged a complaint against Proximus withthe Brussels commercial court to end Proximus’ discrimination ofnon-Proximus-subscribers by forcing Proximus to lower its interconnectiontariffs and also to submit the details of its exclusive contracts to theinspection

 

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ofthe Anti-trust Council (‘Raad voor Mededinging’). Furthermore, BASE aims toobtain a compensation for losses it suffered due to Proximus’ restrictions.

 

InNovember 2003, Proximus filed its defense and submitted a counterclaim askingthe court to order the liquidation of BASE subject to article 634 of theBelgian company’s code. Section 634 of the Belgian Company Code entitlesinterested parties to claim the liquidation of a company if its net equityamounts to less than EUR 61,500. As of December 22, 2003, KPN Mobile increasedthe net equity of BASE to an amount above EUR 61,500, thus invalidatingProximus’ claim for liquidation.

 

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**Risk factors**

 

Our business is subject to various risks relating tochanging competitive, economic, political, regulatory, legal, social,industrial, business and financial conditions. These conditions are describedbelow and discussed in greater detail elsewhere in this Annual Report. Thefollowing risk factors could harm our business, financial condition and/oroperating results, adversely affect our revenues and profitability, andpossibly lead to a drop in the trading price of our shares.

 

***The markets in which we operate are highlycompetitive and our principal businesses face significant competition.  If we are unable to compete effectively,this could lead to loss of revenue, reduced margins and loss of market share.***

 

OurFixed division faces heightened competitive pressures as a result of regulatorychanges, such as those allowing for Carrier (Pre-) Select services, numberportability and main distribution frame access, which have increased the easewith which our customers can use the services of other telecommunicationscarriers in preference to our own. These competitive pressures have resulted indeclines in prices and in our market share in the last three years and mayresult in lower revenues and profits from our Fixed division business in thefuture. Furthermore, our Fixed division business may produce lower revenues inthe future as a result of increased competition from both other fixed-lineoperators and from mobile operators due to a shift in usage patterns away fromfixed-line and in favor of mobile usage, as well as from leased line to IPnetworks. Customer care and satisfaction is increasingly important given theincreased competition. If we should not succeed in improving customer satisfaction,we could be at a competitive disadvantage, which would harm our operatingresults.

 

OurMobile division business faces increased competitive pressure from existing andnew market participants in all our markets. Competition based on price, subscriptionoptions offered, coverage and service quality remains intense and we expectpressure on calling rates to remain high as we compete with other operators formarket share. Our traditional mobile markets have become increasinglysaturated. As a result, the focus of competition is shifting from customeracquisition to customer retention and customer satisfaction efforts.Substantial expenses are required for customer retention and satisfactionefforts, and significant customer defections would have an adverse effect onthe results of our operations.

 

Weface competition from a variety of competitors, including, but not limited to,existing fixed and mobile network operators, operators offering new mobilenetwork services such as wireless fidelity services (WiFi), providers of higherspeed xDSL services, and others. Some of these competitors are smaller and maybe more flexible and responsive than us. Other competitors may operate on abroader scale and have more financial resources and capital at their disposal,enabling them to compete more effectively than us, for instance, in terms ofprice, time-to-market with new products and services, network quality andnetwork rollout, and customer care and satisfaction. For example, our mobilesubsidiaries E-Plus in Germany and BASE in Belgium are both the third largestoperator in their respective markets, with the top two operators having asignificantly higher market share and an ability to exert significant influenceover the market and over declining margins. As a result, our subsidiaries maybe at a competitive disadvantage and could rapidly lose market share. Inaddition, our level of indebtedness could adversely affect our competitiveposition and business, make us more vulnerable to adverse economic and industryconditions and limit our ability to respond to changes in our business,especially as compared to competitors with less debt.

 

***The markets in which we operate undergorapid technological changes, requiring us to make substantial investments inour business on an ongoing basis to grow and remain competitive.***

 

Sinceour markets are undergoing rapid technological change, our future successdepends, in part, on our ability to anticipate and adapt in a timely manner tothose technological changes. To remain competitive, we must continually improvethe speed and features of our existing products and services and developattractive new products and services for our customers, such as General PacketRadio Service (GPRS), i-mode and UMTS products and services. We may not succeedin developing,

 

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introducingor improving these items in an economical or timely manner, or at all. Ourcompetitors may be able to improve existing products and services or developand introduce new products and services faster than we are able to. The changesrequire substantial ongoing investments if we are to achieve organic growth andremain competitive. We must also correctly estimate customer demand, and thereis the risk that the new products and services introduced by competitors willbe preferred over our new products and services.

 

***We have made substantial investments inUMTS licenses in our core markets.  Wemay not generate a sufficient return on these investments and our depreciation,amortization and other charges will increase substantially when our UMTSnetworks become operational.***

 

Wehave made substantial investments in UMTS licenses in our core markets. Theremay be significant delays in receiving the requisite number and type ofhandsets and equipment needed for UMTS products and services. The size of themarket for these products and services is as yet unknown and may fall short ofexpectations as UMTS technology may prove not to be superior to existing orother future technologies. For instance, the launch of UMTS services in theUnited Kingdom has so far fallen short of expectations. We cannot be certainthat the demand for UMTS services will justify the related costs. In somelocations, the investments, although required under the licenses, may not becommercially desirable. In addition, we have a number of significantcompetitors in each of our geographic markets. Our competitors may be able tobuild out their UMTS networks more economically or quickly than we can. Thiscould place us at a competitive disadvantage in providing UMTS services in therelevant market. While network sharing is intended to reduce costs, we cannotgive any assurance that this will be the case or that we will be able to makesuch network sharing work commercially or technically. If our UMTS strategy isnot successful, our operating results and financial condition, as well as ourbusiness strategy, are likely to be adversely affected.

 

Sinceour UMTS networks are not yet operational, we have not yet amortized our UMTSlicenses although we have incurred significant impairment charges. We expectour capital expenditure on the rollout of our UMTS networks to amount to EUR1.2 billion during 2004 and 2005. When our UMTS networks become operational, wewill begin to recognize substantial amortization charges with respect to theselicenses and investments. In addition, we expect to incur significant marketingcosts and other costs in relation to the launch of our UMTS services. As aresult, our net income can be expected to decrease except to the extentenhanced earnings from UMTS networks offset such charges.

 

***The ongoing and significant changes in ourbusiness may be disadvantageous for us and may lead to a decline in ouroperating results.***

 

Dueto the introduction of carrier preselection and Internet originating services(whereby Internet service providers can establish a direct billing relationshipwith their customers for Internet usage), the traffic volumes in ourtraditional fixed telephony services are shifting towards our carrier services,IPS and Internet providers, which generate lower revenues and margins.Furthermore, our number of connected households is decreasing as a result ofsubstitutions of fixed lines by mobile connections and increased competitionfrom other fixed-lined operators. However, growth in the traditional mobiletelecommunications industry has slowed significantly. In addition, mobilecustomer retention costs have increased and may continue to increase as thetrend towards more frequent replacement of handsets shortens the payback periodfor handset subsidies. Mobile customers are also migrating towards cheaperservice solutions. Our operating results, which are increasingly dependent onthe mobile business, may be adversely affected if the mobile telecommunicationsmarkets in which we operate do not expand, or we are unable to retain ourexisting customers, stimulate increases in customer usage, control customerretention costs, and maintain or increase prices.

 

Internetrelated traffic volume has shown substantial growth during the last few years.This has led to a situation in which a substantial percentage of our localtraffic is Internet related. Future developments of Internet applications orcontent may cause increased bandwidth demand. As the tariffs for Internetrelated traffic currently are relatively low, future investments in ourinfrastructure to address increased demand may not yield the levels of returnthat we have enjoyed in the past, which could lead to deteriorating margins.

 

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***Changes in markets and our business planshave resulted, and may in the future result in substantial write-downs of thecarrying value of our assets.***

 

Ourregular review of the carrying value of our assets (including our intangible,tangible and financial fixed assets) has resulted in significant impairments,and we may in the future be required to recognize additional impairmentcharges. Events in the technology and telecommunications markets, includingsignificant declines in stock prices, market capitalization and credit ratingsof other participants, as well as the ongoing review and refinement of ourbusiness plans, have resulted, and may in the future result in substantialimpairment write-downs of our intangible or other assets. In addition, we havebeen and may be required in the future, to recognize increased depreciation andamortization charges if we determine that the useful lives of our fixed assetsare shorter than we originally expected.

 

***We depend on our relationship with variouspartners and suppliers and any disruption in these relationships may adverselyaffect our business.***

 

Ourbusinesses depend upon our ability to obtain adequate supplies oftelecommunications equipment and related software, our contractors’ ability tobuild and roll out telecommunications networks on schedule, and our suppliers’ability to deliver dependable technical support. Due to the downturn ineconomic conditions, some of our suppliers may cease to do business. We cannotbe certain that we will be able to obtain quality telecommunications equipmentand support from alternative suppliers, particularly in relation to newtechnologies, on a timely basis if our existing suppliers are unable to satisfyour requirements. This could lead to an interruption in the operation andbuild-out of our networks, which would harm our financial condition and resultsof operations. In addition, as part of our cost reduction program we have solda substantial part of what we considered to be our non-core assets. Asignificant part of the services previously rendered to us by these non-coreassets are now provided to us by new owners of the assets, or other externalsuppliers. We depend on our relationship with these suppliers, especially AtosOrigin, for the continuation of these services, some of which are vital to ourbusiness.

 

***Regulatorydecisions and changes in the regulatory environment could adversely affect ourbusiness.***

 

Inour Fixed division, most of our network activities in the Netherlands aresubject to significant regulatory bodies. These authorities regulate, amongother things, the prices we may charge for many of our services and the extentto which we have to provide services to our competitors. In recent years, theeffect of these authorities has been to compel us to reduce our prices.Regulatory authorities may increase the severity of the pricing controls,extend the range of services to which regulations apply (including any newservices that we may offer in the future), and extend the services that we haveto provide to our competitors. These regulations may adversely affect ourmarket share, the severity of competition and our future profitability.

 

Inour Mobile division, we have to comply with an extensive range of requirementsthat regulate and supervise the licensing, construction and operation of ourmobile networks and services. Decisions by regulators regarding the granting,amendment or renewal of licenses, to us or to third parties, could adverselyaffect our future operations. We cannot provide any assurances that governmentsin these countries will not issue telecommunications licenses to new operatorswhose services will compete with us. In addition, other changes in theregulatory environment concerning the use of mobile phones may lead to areduction in the usage of mobile phones or otherwise adversely affect us.Additionally, decisions by regulators could further adversely affect thepricing for services we offer.

 

***Implementation of new European directivesregarding Open Network Provisions may lead to further regulation of ourbusiness.***

 

Theamendment act implementing the new European directives regarding Open NetworkProvisions, which were to be transposed into Dutch law by July 25, 2003, isexpected to become effective in the spring of 2004. These directives set out aframework within which national regulators may impose *ex ante*regulations on companies with anindividual or collective significant market power in certain relevant markets, suchas the markets for wholesale broadband access (bit-stream) and voice calltermination on individual mobile networks as predefined by the EuropeanCommission. The national

 

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regulatorsmay also define new markets. This may lead to further regulation of ourbusiness and adversely affect us.

 

***Networkinterruptions or service slowdowns caused by local or global system failures,or misuse of our network and related applications as a result of inadequate security,may result in reduced user traffic, reduced revenue and harm to our reputationand business operations.***

 

Our ability to operate our businesses dependssignificantly upon the performance of our technical infrastructure. Failures inpower supply by power companies are increasing in the Netherlands and may harmour technical infrastructure. Although our critical infrastructure equipmenthas power interruption backup facilities, these facilities may prove not to beadequate during a prolonged interruption. Our technical infrastructure is alsovulnerable to damage or interruption by floods, fires, telecommunicationfailures and similar events. It also may be subject to break-ins, sabotage,terrorism, vandalism and similar misconduct. Furthermore, the security of ournetwork and related applications may be inadequate, which may result in accessand misuse by hackers and other unauthorized users and may adversely affect ouroperations. The occurrence of a natural disaster or other unanticipatedproblems at our facilities, or any other damage to, misuse or failure of oursystems, could result in interruptions in our service. System failures,including failure of our network and the networks used by our suppliers, andhardware or software failures or computer viruses, could also affect thequality of our services and cause temporary service interruptions, resulting incustomer dissatisfaction, penalties and reduced traffic volumes and revenue.Any of these factors could harm our business, financial condition and operatingresults.

 

***Our Mobiledivision’s business may be hampered as a result of more stringent regulation ofthe electromagnetic field strengths of mobile transmission equipment andalleged health risks of mobile telephones and transmission equipment.***

 

Our Mobile division’s business is increasingly subjectto more stringent regulation of electromagnetic field strengths of mobiletransmission equipment. Regulators have already imposed restrictions and mayeven impose greater restrictions on the construction of base station towers,the upgrade of networks and the replacement of existing antennae and otherrelated infrastructure. As a result, we are experiencing difficulties anddelays in obtaining building permits for our mobile transmission equipment. Thismay prevent us from completing our network build-outs, providing new servicesand fulfilling UMTS license terms. Any of these factors could harm ourbusiness, financial condition and results of operations and may place us at adisadvantage in relation to our competitors.

 

Furthermore, various reports have alleged that certainradio frequency emissions from wireless handsets and mobile transmissionequipment may be linked to various health concerns and may interfere withvarious electronic devices. We cannot rule out that exposure to electromagneticfields or other emissions originating from wireless handsets will be identifiedas a health risk in the future. Any potential or perceived health risksassociated with mobile communication equipment may result in a lower number ofcustomers, reduced usage per customer or potential litigation or consumerliability for us.

 

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***Future downturns in financial markets mayresult in further shortfalls for our pension funds and additional fundingobligations for us. Any pension funding obligations may adversely affect ouroperating results and financial condition.***

 

We are obliged to fund any shortfall in our pensionfunds if coverage ratios fall below certain thresholds. We estimate that as ofDecember 31, 2003 the total shortfall equaled approximatelyEUR 305 million, which has to be paid in 6 years. In accordance withthe current payment schedule, an amount of EUR 52 million was paid inMay/June 2003. The next pension charge has to be paid in the second quarter of2004 and will be calculated based on the coverage ratio of the pension funds inDecember 2003. We expect that this next pension charge will equal approximatelyEUR 21 million. The actual outcome of the amounts to be paid may differ fromthe estimates we used. Each year, the amount of the pension shortfall isrecalculated taking into account the then applicable coverage. If financialmarkets do not recover in future years and coverage ratios fail to improvesignificantly, then the obligation to fund the shortfall will continue to existand may increase.

 

***The State ofthe Netherlands may sell large blocks of our shares and this couldsignificantly depress the market price of our shares. The State’s interests maydiverge from ours and could hamper our development.***

 

The State of the Netherlands owns 481,966,893 (19.3%)of our outstanding ordinary shares. The State has announced that it intendsultimately to withdraw as a holder of our shares, including the special share,subject to market conditions. Any sale by the State of the Netherlands of asignificant number of our ordinary shares, or the public perception that suchsales could occur, may cause the market price of our ordinary shares to declinesignificantly and may also make it more difficult for us to sell our ordinaryshares in the future. The State of the Netherlands also holds a special share,which gives it significant voting rights relating to the approval offundamental changes in our Group structure.

 

***Our share price hasbeen, and may continue to be, volatile.***

 

Sinceearly 2000, world stock markets have experienced substantial declines andvolatility that has affected the market prices of equity securities of manytelecommunications companies, including our company.  This has led to large swings in trading prices in short periodsof time and has not always been related to the operating performance of thecompanies concerned. The market price or value of our shares has been volatile.

 

Thefactors that have caused, and may cause in the future, these fluctuations, manyof which are beyond our control, include the following:

•                  the general state of the securities markets,with particular emphasis on the European telecommunications sector and theinternational political and economic conditions;

•                  competition, regulatory conditions and thestatus of telecommunications liberalization in Europe;

•                  the build-out of UMTS networks, the developmentof compatible handsets, delays in the roll-out of UMTS services and networks andcosts relating thereto;

•                  competitors’ positions in the market;

•                  changes in the financial estimates bysecurities analysts;

•                  our earnings releases and the earnings releasesof our competitors;

•                  the outcome of legal proceedings;

•                  fluctuations in foreign exchange rates andinterest rates; and

•                  international political and economicconditions.

 

***We areinvolved in several legal proceedings. Such proceedings could eventually leadto payments of claims and damages or otherwise harm us.***

 

OnJuly 10, 2001 a writ of summons was served upon us by one of our shareholders,the corporate monitoring foundation SOBI (*Stichting Onderzoek Bedrijfsinformatie*).SOBI has filed a claim with the Enterprise Chamber (*Ondernemingskamer*) of theAmsterdam Court of Appeal that seeks the annulment of our annual financialstatements for 2000. SOBI believes that the accounting was incorrect withrespect to the transactions with NTT DoCoMo contained therein, in which NTTDoCoMo

 

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acquired15% of KPN Mobile; the transactions with BellSouth, in which KPN Mobileacquired a 77.49% interest in E-Plus; and the valuation of goodwill and thevaluation of the UMTS licenses acquired by KPN Mobile. On November 7, 2002, theEnterprise Chamber issued an interlocutory judgment ordering KPN to provecertain items of its statement of defense. We provided written evidence todefend our views on November 28, 2002. In addition, we provided witnesses fortestimony at the Enterprise Chamber to further support these views. Thewitnesses were heard between March and May 2003. At the end of January 2004, wehad our second pleading. A final judgment by the Enterprise Chamber is expectedin the spring of 2004. This judgment will be subject to appeal before theSupreme Court of the Netherlands. While we do not believe that there is anymerit to SOBI’s claim, a judgment in SOBI’s favor could lead to other claims orconsequences, including restatement of our accounts that could harm our resultsand financial condition.

 

Fora discussion of other legal proceedings, please refer to the section titled‘Commitments, contingencies and legal proceedings’ in our ConsolidatedFinancial Statements.

 

***We may be subjectto additional tax liabilities in the future, including as a result of audits ofour income tax returns.***

 

The tax authorities may audit our tax returns and may disagree with thepositions taken on those returns.  Werecently reached a significant settlement with the Dutch tax authoritiesregarding the tax consequences of the legal restructuring of our German mobileactivities as well as the financial restructuring of KPN Mobile.  For more information please refer to Note[9] of the Consolidated Financial Statements.

 

An adverse outcome resulting from any settlement or future examinationof our tax returns may subject us to additional tax liabilities and mayadversely affect our liquidity and annual effective income tax rate.  In addition, any examination by the taxauthorities could cause us to incur significant legal expenses and divert ourmanagement’s attention from the operation of our business.

 

***If we are not successful in further decreasing our debt or inrefinancing our significant debt maturities, or if we are not able to meetfinancial and other covenants, our business and financial condition may be atrisk.***

 

The timely payment of amounts duein the near and medium term on our outstanding debt requires substantial cashresources. For example, approximately EUR 1 billion matures in 2004,approximately EUR 2.4 billion matures in 2005 and approximatelyEUR 2.1 billion in 2006.

 

We plan to service this debt withour operating cash flow or by refinancing the debt. Financing and refinancingconditions will largely depend on future market conditions, our credit ratings,telecommunications industry ratings in general, and our results of operationsand future prospects, and we cannot be certain that financing will be availableto us on favorable terms, if at all.

 

In April 2003, we enteredinto a EUR 1.5 billion syndicated multi-currency revolving creditfacility, which we maintain as a back-stop facility and that is currentlyundrawn. This facility, with a final maturity in April 2006 (with apossible extension of one year at our discretion if we have a credit rating of atleast BBB with Standard & Poor’s and at least Baa2 with Moody’s, both witha stable outlook), requires ongoingcompliance with financial and other covenants. If we fail to comply with thesecovenants in the future, we may be required to immediately repay outstandingindebtedness, if any, under this facility, or we may be unable to accessfunding under this facility. In addition, a default under this facility maytrigger defaults under certain of our other financing arrangements, requiringus to repay other indebtedness as well.

 

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**OPERATING RESULTS**

 

*Our Financial Statements areprepared in accordance with Dutch GAAP, which varies in certain significantrespects from US GAAP. Information relating to the nature and effect of suchdifferences is presented in ‘Information on US GAAP’ in the Notes to theConsolidated Financial Statements.*

 

**Overview**

 

Following is an overview of our performance, ourgeneral trends and main sources of revenues and expenses. For further detailedinformation on division results, please refer to the separate sections perdivision.

 

**RECENTPERFORMANCE**

 

Thefollowing table presents a three-year summary of our performance:

 

**THREE-YEARPERFORMANCE RECORD**

** **
| **Amounts in millions of euro**     |   | **2003**  |       | **2002**   |       | **2001**   |       |
|-------------------------------------|--------|-----------|------------|------------|------------|------------|------------|
|                                |   |      |       |       |       |       |       |
| Total operating revenues            |   | 12,907    |       | 12,784     |       | 12,859     |       |
| Operating expenses                  |   | 9,799     |       | 18,365     |       | 27,295     |       |
| Operating result                    |   | 3,108     |       | -5,581     |       | -14,436    | * *   |
| Financial income and expense        |   | -862      |       | -1,178     |       | 5,468      |       |
| Profit/(loss)  before taxes         |   | *2,246*   | * *   | *-6,759*   | * *   | *-8,968*   | * *   |
| Taxes                               |   | 257       |       | -983       |       | -11        |       |
| Income from participating interests |   | 161       |       | -1,700     |       | -81        |       |
| Group profit/(loss) after taxes     |   | 2,664     |       | -9,442     |       | -9,060     | * *   |
| Minority interests                  |   | 67        |       | -100       |       | 1,565      |       |
| **Profit/(loss) after taxes**       |   | **2,731** | ** ** | **-9,542** | ** ** | **-7,495** | ** ** |

 

**Operatingrevenues**

 

Athree-year summary of operating revenues by division is provided below:

 
| **Amounts in millions of euro** |   | **2003**   |       | **2002**   |       | **2001**   | ** ** |
|---------------------------------|--------|------------|------------|------------|------------|------------|------------|
|                            |   |       |       |       |       |       |       |
| Fixed division                  |   | 7,399      |       | 7,376      |       | 7,320      |       |
| Mobile division                 |   | 5,379      |       | 5,312      |       | 4,673      |       |
| Other activities  1)            |   | 1,364      |       | 1,264      |       | 2,148      |       |
| Inter-division revenues 2)      |   | -1,235     |       | -1,168     |       | -1,282     |       |
| **Total operating revenues**    |   | **12,907** | ** ** | **12,784** | ** ** | **12,859** | ** ** |

 

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(1)          Includes supplies ofproducts and services by our Other activities to entities outside the Group.

(2)          Includes inter-divisionsupplies of products and services within our divisions.

 

In2003, total operating revenues increased by 1.0% to EUR 12,907 million. Themain developments in operating revenues in 2003 as compared to 2002 were:

 

Operating revenues in the Fixed division increased by0.3% to EUR 7,399 million. This small increasewas achieved despite some loss of market share. The shift from retail volumesto wholesale volumes,

 

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competition fromCarrier (Pre)Select (which allows customers to choose their own carrier),fixed-to-mobile substitution and migration to ADSL led to a decline inrevenues. Furthermore, a decrease was notable in the Fixed division due to thedeconsolidation of SNT Scandinavia and SNT France, lower revenues at our FixedNetwork Operator as a result of fewer services provided to our other units dueto further cost reductions in this unit, and lower revenues from leased lines.  However, these developments were offset by higher wholesale volumes andincreased ADSL subscriptions. The small increase in revenues in the Fixeddivision in 2003 was further strengthened through the completion of theMobirail and Tetraned projects, which generated additional revenues of EUR 128million (completion of the network construction and revenues fromexploitation).

 

The Mobile division reported a growth of 1.3% to EUR5,379 million. Higher traffic revenues (the customer base grew from 13.4million to 14.7 million) and the net consolidation effects (the fullconsolidation of E-Plus as of March 13, 2002 and the deconsolidation of PannonGSM as of February 4, 2002) generated the increase in revenues. In 2003, mobilerevenues also reflected the termination agreementbetween MobilCom and E-Plus (EUR 222 million) and the book gain on the disposalof UMC (EUR 15 million), although these items generated less revenue than the book gain on the saleof Pannon GSM (EUR 335 million), the settlement of Indonesian intermediateholding companies of Telkomsel (EUR 30 million) and the results of the termination agreement between Quam and E-Plus (EUR210 million) in 2002.

 

Operating revenues in Otheractivities increased by 7.9% to EUR 1,364 million. This increase primarilyreflects the book gain on the sale of Directory Services (EUR 435 million) andInmarsat (EUR 26 million) in 2003. This increase was in part offset by thedeconsolidation effects of Network Construction (effectuated in 2002) andDirectory Services in 2003 as well as the book gain on the sale of non-corereal estate (EUR 39 million) in 2002.

 

In 2002, total operatingrevenues decreased by 0.6% to EUR 12,784 million. The main developments in operating revenues in2002 compared to 2001 were:

 

Operatingrevenues in the Fixed division increased by 0.8% to EUR 7,376 million.Increases in revenues resulting from the termination of free internet, theintroduction of Internet-originating services (which caused a shift from retailto wholesale volumes), continuing growth in ADSL in the retail market and the growthin customer contact activities (SNT) more than offset lower traffic revenuesdue to lower volumes at our business unit Fixed Telephony.

 

Operatingrevenues in the Mobile division increased by 13.7% to EUR 5,312 million in2002. The increase reflects the book gain onthe sale of Pannon GSM (EUR 335 million), the settlement of Indonesianintermediate holding companies of Telkomsel (EUR 30 million) and the results of the termination agreement between Quam and E-Plus (EUR210 million) in 2002, offset in part by the sale of Telkomsel in 2001 (EUR 346million). In addition to the increase in airtime revenues and monthlysubscription fees, revenues in 2002 also reflect net consolidation effects,such as the full consolidation of E-Plus as of March 13, 2002, BASE as ofFebruary 7, 2001 and the deconsolidation of Pannon GSM as of February 4, 2002.

 

Other activities reported adecrease of revenues by 41.2% to EUR 1,264 million. This decrease is primarilya result of the net effect of the sale of non-core assets and deconsolidationof KPNQwest as of November 30, 2001. In 2002 the book profit on various assetsales totaled EUR 39 million, compared to the sale of 10% of our share inKPNQwest (EUR 51 million), the sale of Datacenter (EUR 59 million) and the saleof non-core real estate (EUR 41 million) in 2001. Furthermore, KPN EnterCom andXantic reported a decrease in revenues, following a lower level of activitiesand sales.

 

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**Operating expenses**

 

Athree-year summary of operating expenses by division is provided below:

 
| **Amounts in millions of euro** |   | **2003**  |       | **2002**   |       | **2001**   |       |
|---------------------------------|--------|-----------|------------|------------|------------|------------|------------|
|                            |   |      |       |       |       |       |       |
| Fixed division                  |   | 5,686     |       | 6,381      |       | 6,805      |       |
| Mobile division                 |   | 4,332     |       | 11,566     |       | 18,803     |       |
| Other activities  (1)           |   | 1,016     |       | 1,586      |       | 2,969      |       |
| Inter-division expenses (2)     |   | -1,235    |       | -1,168     |       | -1,282     |       |
| **Total operating expenses**    |   | **9,799** | ** ** | **18,365** | ** ** | **27,295** | ** ** |

 

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(1)          Includes supplies ofproducts and services by our Other activities to entities outside the Group.

(2)          Includes inter-divisionsupplies of products and services within our divisions.

 

In 2003, total operating expenses decreased by46.6% to EUR 9,799 million. The main developments in operating expenses in 2003compared to 2002 were:

 

Operating expenses in the Fixed divisiondecreased by 10.9% to EUR 5,686 million. Operating expenses in 2003 included acharge for restructuring activities (EUR 7 million), the loss on the sale ofSNT France (EUR 5 million), a write down of short term receivables (EUR 6million) and impairments on tangible fixed assets (EUR 42 million) and goodwillwithin SNT (EUR 38 million). These items in 2003 were more than offset by thewrite-down of certain assets held for sale and inventories as well as costsrelated to the settlement of various issues due to the bankruptcy of KPNQwest(EUR 100 million), a release of the restructuring provision (EUR 3 million), animpairment of tangible fixed assets of KPN Belgium (EUR 100 million) and an impairment of tangible fixed assets relating to KPNQwest (EUR 87million) in 2002. The decrease inoperating expenses in 2003 also reflected operating costs and workforcereductions, decreased depreciation charges through investment optimizationprograms, as well as improved purchase conditions for maintenance activities.

 

The Mobile division reported a decrease intotal operating expenses of 62.5% to EUR 4,332 million in 2003. This decreasewas heavily impacted by goodwill impairments of E-Plus and BASE (EUR 1,852million), the license impairments of E-Plus and BASE (EUR 5,412 million) andthe capital tax on the conversion of shareholder loans (EUR 77 million) andthe release of the restructuring provision (EUR 2 million) in 2002, further strengthened by the partialreversal of the GSM license impairment of BASE (EUR 103 million), a partialrefund of capital tax paid last year (EUR 33 million) and the release ofthe restructuring provision (EUR 1 million) in 2003. The decrease in expenses was partly offset by increasedexpenses as a result of the net consolidation effects, relating to theacquisition of E-Plus and the disposal of our interest in Pannon GSM, andincreased costs of materials, traffic expenses, marketing and sales expensesand commissions and bonuses. As a consequence of the impairment chargesrecorded in 2002, the decrease of total operating expenses was furtherstrengthened by a decrease of depreciation, amortization and impairmentcharges.

 

Operating expenses in Other activities decreased by 35.9% to EUR 1,016million. The operating expenses in 2003 included a charge for restructuringactivities (EUR 26 million), an impairment on intangible fixed assets (EUR 15million) and an impairment of goodwill within Xantic (EUR 46 million). Theseitems were more than offset by the book loss on sale of Network Construction(EUR 68 million), a charge for restructuring activities (EUR 82 million), animpairment of goodwill KPNQwest (EUR 31 million) and an impairment of tangiblefixed assets relating to KPNQwest (EUR 6 million) in 2002. Operating expensesalso decreased due to reduced retail activities, deconsolidation of thedirectory services and lower depreciation, amortization and impairment charges.

 

In 2002, total operating expenses decreased by 32.7% to EUR 18,365million. The main developments inoperating expenses in 2002 compared to 2001 were:

 

Operating expenses in the Fixed divisiondecreased by 6.2% to EUR 6,381 million. This decrease was caused by an addition to the restructuring provision amounting to EUR 361 million in2001, partially offset by arelease in the restructuring provision (EUR 3 million), the write-down ofcertain assets held for sale and inventories as well as costs related to thebankruptcy of KPNQwest (EUR 100 million), an impairment of tangible fixedassets of KPN Belgium (EUR 100 million) and an impairmentof tangible fixed assets relating to KPNQwest (EUR 87 million) in 2002. Furthermore, the success of costreductions, which started in the second half of 2001, combined with lowerdepreciation charges through investment optimization programs were partiallyoffset by higher purchasing expenses related to the increase in wholesalevolumes.

 

The Mobile division reported a decrease intotal operating expenses of 38.5% to EUR 11,566 million in 2002. In 2001, totaloperating expenses were heavily impacted by goodwill impairments of E-Plus (EUR13,701 million) and Hutchison 3G UK (EUR 135 million) and a charge for therestructuring provision (EUR 18 million), compared to impairment chargesrelating to the goodwill of E-Plus and BASE (EUR 1,852 million) and the UMTSlicense of E-Plus and UMTS/GSM licenses of BASE (EUR 5,412 million) and thecapital tax on the conversion of shareholder loans (EUR 77 million) and therelease of the restructuring provision (EUR 2 million) in 2002. Furthermore,lower costs of handsets, bonuses and commissions paid to dealers, marketingcosts and depreciation, amortization and impairment charges (due to largerimpairments in 2001) contributed to the decrease of total operating expenses,despite offsetting consolidation effects relating to the acquisition of E-Plusand the disposal of Pannon GSM.

 

Operating expenses in Other activities decreased by 46.6% to EUR 1,586million. The 2001 operating expenses included a restructuring provision (EUR326 million) and impairments on PanTel (EUR 57 million) and Český Telecom (EUR 182 million). These items in 2001 were not entirelyoffset by the book loss on sale of Network Construction (EUR 68 million), arestructuring provision (EUR 82 million), an impairment of goodwill KPNQwest(EUR 31 million) and an impairment of tangible fixed assets relating toKPNQwest (EUR 6 million) in 2002. Other important factors contributing to lowertotal operating expenses were the deconsolidation effects of KPNQwest and KPNLease and our reorganization and cost reduction programs.

 

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**Operating result**

 

Thefollowing table is a three-year summary of our operating result by division:

 
| **Amounts in millions of euro** |   | **2003**  |       | **2002**   |       | **2001**    |       |
|---------------------------------|--------|-----------|------------|------------|------------|-------------|------------|
|                            |   |      |       |       |       |        |       |
| Fixed division                  |   | 1,713     |       | 995        |       | 515         |       |
| Mobile division                 |   | 1,047     |       | -6,254     |       | -14,130     |       |
| Other activities                |   | 348       |       | -322       |       | -821        |       |
| **Total operating result**      |   | **3,108** | ** ** | **-5,581** | ** ** | **-14,436** | ** ** |

 

Fora discussion of the factors underlying the developments in operating results,we refer to the above sections on operating revenues and operating expenses.

 

**Financial income and expense**

 

Financial income andexpense is comprised of the balance of our interest and similar income andinterest and similar expense.

 

In2003, net financial expense amounted to EUR 862 million (2002: net financialexpense of EUR 1,178 million). The decrease reflects the regular and earlyredemptions (and the costs associated with these redemptions) of outstandingloans during 2002 and 2003. The costs associated with the early redemptions in2003 amounted to approximately EUR 69 million (2002: EUR 120 million).

 

In 2002, net financialexpenses amounted to EUR 1,178 million (2001: financial income of EUR 5,468million). Financial income in 2001 included the release of BellSouth’s exchangeright (EUR 6,848 million) and the mark-to-market adjustment of our interest ineircom/Eircell (EUR 63 million). The interest expense in 2002 was lower than2001 as a result of the reduction of our interest-bearing debt, partly offsetby costs of approximately EUR 120 million associated with the early redemptionsof several

 

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loans in 2002.

 

**Tax on profit or loss**

 

In 2003, the total tax benefit amounted to EUR 257 million; the effective tax rate was–11.4%. In 2002, the tax chargeamounted to EUR 983 million; the effective tax rate was –14.5%.

 

Thetax charge in 2003 was influenced significantly by the agreement reached withthe Dutch tax authorities. This agreement resulted in a tax benefit of EUR1,080 million, being a tax benefit at Koninklijke KPN of EUR 2,105 million anda tax charge at KPN Mobile of EUR 1,025 million. The main elements of theagreement are discussed below under “Agreement with Dutch tax authorities.”

 

Evenwithout the effects of this agreement, our effective tax rate differssubstantially from the Dutch statutory tax rate of 34.5% as a result of partlyrecognized tax assets in relation to losses carried forward and non-taxablegains and losses. The activities in the Netherlands generate taxable profits,which result in a tax charge on these profits. KPN Mobile is a separate fiscalunit. Within KPN Mobile, the German activities are in a loss-making position.Current tax legislation in Germany provides for an indefinite carry-forwardperiod.

 

We have reduced thevaluation allowance on the deferred tax asset for trade tax losses carriedforward of E-Plus to the extent that trade tax losses can be compensated in theforeseeable future with expected trade tax profits. These expected trade taxprofits are mainly the result of the limitation of the deductibility ofinterest caused by German tax legislation, becoming effective as from January1, 2004. This new legislation in combination with the most recent businesscases resulted in the reduction of the aforementioned valuation allowance byEUR 87 million. In calculating the valuation allowance, we took into accountthe new German tax loss compensation rules, which only limits the annual losscompensation.

 

In 2002, we set upvaluation allowances for previously recognized deferred tax assets for lossescarried forward at E-Plus (EUR 275 million on recognized deferred tax assetsfor trade tax losses carried forward) and BASE (EUR 331 million on recognizeddeferred tax assets for corporate tax losses carried forward) as the mostrecent business cases at that time resulted in uncertainties.

 

In 2002, we waived EUR 300 million of our shareholder loans to KPN Belgiumand BASE, resulting in a tax benefit in the Netherlands of EUR 104 million. Thecorresponding gains in Belgium were offset against prior years’ net operatinglosses and therefore did not result in a tax charge.

 

***Agreement with Dutch tax authorities***

 

For Dutch tax purposes, Koninklijke KPN (owner of themajority of KPN’s fixed activities) and KPN Mobile are separate fiscal unitiesand therefore different taxpayers. In February 2001, we finalized the legalrestructuring of our activities in Germany, which resulted in a Germanpartnership structure that is transparent for German corporate income taxpurposes and in consequence constitutes a permanent establishment of KPN Mobilefor German tax purposes, covering all of KPN Mobile’s German operations,including its 77.49% interest in E-Plus. On March 13, 2002, Bellsouth exercisedits exchange right and Koninklijke KPN acquired the remaining 22.51% interestin E-Plus.

 

In December 2002, we restructured our Mobileactivities in order to arrive at a more transparent financial structure and tostrengthen KPN Mobile’s financial position. This financial restructuring consistedof various steps under which Koninklijke KPN converted EUR 14 billion ofoutstanding shareholder loans into 7 billion newly issued ordinary KPN Mobileshares with a nominal value of EUR 2 per share. In addition, Koninklijke KPNsold its EUR 2.2 billion shareholder loans in E-Plus to KPN Mobile for anamount of EUR 0.6 billion. Subsequently, the financial restructuring led to acapital injection in E-Plus of EUR 1.9 billion, and E-Plus repaid its projectfinancing for the same amount.

 

The tax consequences of the legal and financialrestructuring have been discussed with the Dutch tax authorities. This resultedin an agreement.  The key elements ofthe agreement can be summarized as follows:

 

•      Upon conversion of the EUR 14 billionshareholder loans, Koninklijke KPN realized a loss for tax purposes of EUR 6billion, which can be used to offset profits of 2002 and 2003. The remainingfiscal loss can be carried forward indefinitely to shelter future taxableprofits of Koninklijke KPN. KPN Mobile must recognize a corresponding taxablegain of EUR 6 billion.

 

•      The German partnership structure of E-Plusis transparent for Dutch tax purposes and, as a consequence, KPN Mobile isdeemed to carry on business in Germany through a permanent establishment.

 

•      The interest accruals on the shareholderloans to E-Plus are ignored for Dutch tax purposes. For KPN Mobile EUR 500million of related interest expense on the loan to Koninklijke KPN is not taxdeductible in the Netherlands.

 

•      The fiscal losses incurred by the Germanpermanent establishment were set at EUR 11.5 billion. For Dutch tax purposes,these losses can be used to offset the Dutch operating profits of KPN Mobile.Future profits of the permanent establishment will however be included in thetaxable results in the Netherlands until the entire loss of the Germanpermanent establishment has been recaptured. Thereafter profits of the Germanpermanent establishment are exempt from Dutch taxation. For this purpose, thereversal of the loss of the permanent establishment is computed on the basis ofthe operating results of E-Plus before depreciation, amortization andimpairments, including “exceptional items” if any. Should KPN reverseimpairments on intangible assets of E-Plus, a corresponding gain should be recognizedfor tax purposes up to a maximum of EUR 2 billion, to be included in thetaxable profits of the permanent establishment in five annual installments.Finally, in the currently not anticipated event that KPN disposes of itsinvestment in E-Plus, this could result in a taxable gain for Dutch taxpurposes to the extent prior losses are not fully recaptured at that time.

 

Koninklijke KPN realized a taxable loss for an amountof EUR 6 billion at the end of 2002. For this carry forward loss we haverecognized a deferred tax asset of EUR 2,070 million (34.5% of EUR 6 billion),since we expect to recover the taxable loss within a foreseeable time. Interestreceived on the loans to E-Plus is ignored for Dutch corporate income tax.Since Koninklijke KPN recorded the interest income on its loans to its Germanoperations as taxable income in the past, EUR 35 million tax benefits have beenrecorded following the compromise. Based on this compromise and depending ongeneral economic, market and business developments Koninklijke KPN expects tomove into a taxpaying position not earlier than 2006.

KPN Mobile realized a taxable gain for an amount ofEUR 6 billion at the end of 2002. The tax charge relating to this gain is EUR2,070 million.

 

Interest received on the loans to E-Plus is ignoredfor Dutch corporate income tax purposes. For KPN Mobile EUR 500 million ofrelated interest expense on the loan to Koninklijke KPN is not tax deductiblein the Netherlands. This resulted in a tax charge of EUR 173 million.

 

Since KPN Mobile recorded the interest income on itsloans to its German operations as taxable income in the past, a EUR 1,218million release of the deferred tax liability has been recorded following thecompromise.

 

The net effect from the compromise for KPN Mobile is atax charge of EUR 1,025 million and a deferred tax liability for the sameamount. This tax liability is deferred since the KPN Mobile gain of EUR 6billion is offset by the EUR 11.5 billion tax losses incurred by the Germanbranch of KPN Mobile. KPN Mobile will not pay taxes as long as its accumulatedfiscal losses available for future compensation, including the loss of theGerman branch, exceeds the taxable profits.

 

For the losses of the German permanent establishmentavailable for Dutch tax purposes no deferred tax asset has been accounted forsince it has no permanent character.

 

At December 31, 2003 the accumulated losses of theGerman permanent establishment for Dutch tax purposes amounted to EUR 10,658million.

 

Based on this compromise and depending on generaleconomic, market and business developments KPN Mobile expects to move into ataxpaying position not earlier than 2006.

 

Based on our current estimates we expect thatapproximately 70% of our deferred tax liability has to be paid within fiveyears.

 

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**Income from participating interests**

 

In 2003, income from participating interestsamounted to a profit of EUR 161 million (2002: EUR 1,700 million loss). Thisincome included the reversals of the impairment charges on our investments inHutchison 3G UK (EUR 119 million) and Ceský Telecom (EUR 46 million).

 

In 2002, income from participating interests amounted to a loss of EUR1,700 million (2001: a loss of EUR 81 million). This included the write-down to the expected net realizable value of ourinterest in Hutchison 3G UK (EUR 1,166 million) and Ceský Telecom (EUR 156million) as well as the full write-off of KPNQwest (EUR 270 million). In addition, the operatinglosses of KPNQwest were only included in income from participating interestthrough the first quarter of 2002. 2001included the write-down to expected net realizablevalue of our interest in Hutchison 3G UK (EUR 104 million).

 

**Minority interests**

 

In 2003, minority interest was a profit of EUR67 million (2002: EUR 100 million loss).  The profit in 2003 reflects the minorityinterests’ share in the impairment of goodwill within Xantic (EUR 12 million),the effect of the agreement relating to KPN Mobile with the tax authorities(EUR 23 million), the impairment of goodwill within SNT (EUR 15 million), thereversal of the GSM license impairment of BASE (EUR 2 million loss) and therecognition of the tax losses carry forward regarding E-Plus (EUR 1 millionloss).

 

In 2002, minority interestsamounted to a loss of EUR 100 million (2001: profit of EUR 1,565 million).Because the loss of KPN Mobile in 2001 exceeded the shareholders’ equity of KPNMobile, only EUR 1,555 million of KPN Mobile’s results could be attributed toNTT DoCoMo. In 2002, we converted EUR 14 billion of outstanding shareholderloans to KPN Mobile into equity. As NTT DoCoMo decided not to exercise theiranti-dilution rights, NTT DoCoMo’s interest in KPN Mobile diluted from 15% to2.16%, which resulted in a loss for us of EUR 104 million related to NTTDoCoMo’s minority interest in KPN Mobile.

 

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**TRENDS**

 

In the past decade, we have experienced significantgrowth in our Mobile division and in Internet and data traffic services. Inorder to keep pace with the fast-changing market circumstances and demands, wehave invested heavily in fixed and mobile network infrastructure, acquired UMTSlicenses and acquired or set up new activities and business units in newmarkets and countries. During the last few years, the significant expansion ofour activities and the deterioration of our financial position made usreconsider and revise our strategy and restructure and refinance ouractivities.

 

In addition, the European trend towards deregulationhas led to a number of new entrants in our traditional markets. OPTA, the Dutchtelecommunications regulatory authority, has had and still has a significantimpact on our tariffs and activities in general. Examples are cost-basedtariffs for the wholesale market, unbundled access to our local loop, (local)Carrier (Pre)Select and access to our main distribution frame. In general, OPTAmeasures have had an adverse effect on wholesale prices. More recently, we haveseen OPTA moving towards the regulation of certain tariffs in the mobilemarket.

 

**Fixeddivision**

 

The Fixed division consists of Fixed Networks andBusiness Solutions.

 

**FIXEDNETWORKS**

 

In our traditional Fixed Telephony retail market weare losing market share and volumes due to increased competition caused by,among others, (wholesale) Carrier (Pre)Select services for long-distance callsas well as for local calls, the introduction of wholesale Internet-originatingservices, mobile-only solutions, increased broadband penetration and other newcompetitors such as cable telephony. Our Fixed Telephony unit experiencedsignificant growth in retail volumes up until 2001, which was primarily drivenby increased Internet usage. This growth was reversed in 2002 and 2003 as aresult of the introduction of the internet-originating model whereby ISPsinstead of Fixed Telephony bill customers for Internet minutes. This also ledto a shift from retail to wholesale minutes. Furthermore, total volumes in thefixed telephony market decreased as well, resulting from increasing broadbandpenetration. In 2002, volumes for our Fixed Networks as a whole did notdecrease as minutes shifted from retail to wholesale. However, the retailmarket generally has higher margins than the wholesale market.

 

In 2003, the volume in minutes decreased as comparedto 2002 due to a further decrease in Internet volumes as a result of increasedbroadband penetration (ADSL), the success of the Internet-originating model andincreased competition from other operators and service providers. To addressthese trends, we strengthened our position in the voice market by focusing oncustomer retention and introducing new services for consumers and small andmedium-sized enterprises, such as bundled minute packages and SMS on fixedline. We increased our tariffs for calls, subscriptions and one-off connectionfees in both 2002 and 2003. However, most tariffs remain subject to OPTAapproval, and competition remains fierce in the voice market.

 

Our Carrier Services unit provides wholesale servicesto other operators and ISPs, enabling them to enter the market without theirown network. In 2001, market conditions deteriorated, with downward pressure onprices and volumes; several operators stopped providing services. In addition,OPTA required us to provide services such as Main Distribution Frame (MDF)co-location and MDF access. These services did not develop as expected and ledto higher than anticipated costs. In 2002, OPTA mandated price decreases ofapproximately 5%.

 

In July 2003, OPTA required us to further reduce thetariffs payable by operators for traffic terminating on our network by 5% (forthe period from September 1, 2003 until September 1, 2004), to reduce thewholesale tariffs for calls originating in our fixed network by 10% and toreduce the tariffs for various

 

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unbundled access services by 30% on average (both forthe period from July 1, 2003 until July 1, 2004). We lodged an appeal with thePresident of the Rotterdam District Court in interlocutory proceedings, but on October 9, 2003, the request was dismissed.We now await OPTA’s ruling on our objections. If OPTA’s ruling is upheld, weestimate that the ruling will reduce our revenues and operating result byapproximately EUR 35 million per year. Webelieve our wholesale tariffs for terminating services are among the lowest inEurope. Our wholesale tariffs for originating services equal about the averageof our competitors in Europe. Although the price decreases negatively impactour revenues, the introduction of new services, such as wholesaleInternet-originating services and local Carrier (Pre)Select, has led to highertraffic volumes in our Carrier Services unit. In addition, we aim to optimizeour network capacity by attracting transit volumes and international traffic,which generates a modest margin.

 

Our ISPs (Planet Internet, Het Net and XS4ALL) have astrong position in the Dutch market. During 2002, our ISP Het Net stoppedproviding free Internet and migrated its customers successfully to paidInternet without significant loss of customers. In addition, our ISPs benefitedfrom the increasing penetration of broadband (ADSL), which was the result ofintensified marketing and promotion activities and the introduction of the ADSLpackages Lite, Basic and Extra (names differ per Service Provider), withcustomer options in speed, services and data limits. Also, theInternet-originating services offered by Carrier Services enable our ISPs tocharge their customers for Internet usage and to develop their own marketingand pricing strategy. In the course of 2003, we introduced DirectInternet(direct Internet dial-in, without e-mail, portal and services) at a discountedrate. Moreover, subscriptions at (introductory) discounts are now offered inorder to gain market share. We believe that these developments, together withour strong market position, provide us with a sound basis for future growth.

 

We started a WLAN pilot in December 2003 enabling KPNMobile subscribers in the Netherlands to access the Internet and enterprisenetworks at broadband speeds at more than 200 public hotspots in theNetherlands and others abroad. In addition, Planet Internet’s customers will beable to use over 120 hotspots across the Netherlands as an extension of theirADSL subscription. WLAN combines the speed of the fixed Internet with theconvenience of mobile working.

 

SNT reported a decrease in revenues and net income in2003 as a result of the disposal of SNT’s French and Scandinavian activities.Furthermore, SNT accelerated goodwill amortization due to the sale of theScandinavian and French activities. In February 2003, SNT and Capital One signed an agreement covering along-term collaboration in Europe. Webelieve that the strong position of SNT in the Dutch and other European marketswill provide further growth opportunities for SNT.

 

In 2002, we launched our restructuring program with afocus on operating efficiency, cost control, including work force reductions,and limiting capital expenditures without jeopardizing the quality andreliability of our networks and services. This has led to significant costsavings, specifically within our Fixed Network Operator unit, which is visiblein the improvement of our operating result and operating cash flow in both 2002and 2003. We continue to seek new opportunities to improve our efficiency andto generate additional cost savings.

 

In 2003, we introduced discount packages for theresidential and business markets combining call packages with discounts. Threediscount packages for the residential market offer 100, 200 or 300local/national minutes subject to certain restrictions (in particular, thiscall credit can be used in the evenings and during the weekends) at a flat feeand a discount on calls that are excluded from the package. The discountpackage for the business market gives customers a call credit ranging from EUR20 to EUR 1,000 per month with discounts of up to 25% depending on the callcategory and package. It is expected that the discount packages for thebusiness market will improve our competitiveness and that this will bereflected in higher customer loyalty and potentially an increase in our marketshare.

 

**BUSINESSSOLUTIONS**

 

In the last few years, the demand for broadbandservices increased substantially. However, we have experienced significantprice erosion in this area. KPN EuroRings commenced activities as of

 

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January 2003 and provides internationalconnectivity services. KPN EuroRings’ networks consist of fiber optic networksin the Netherlands, Germany, Belgium and the United Kingdom. KPN EuroRings hasexpanded its network in Europe by obtaining IRUs or lease rights in severalcities and parts of Europe, including the Northern part of France, Lyon,Luxembourg, Vienna, Milan, Barcelona, Madrid, Dublin, Copenhagen, Helsinki,Stockholm, Oslo, Zurich, Geneva, Prague, Bratislava and Budapest.

 

We expect prices to continue to decline in thetransmission market. However, we believe that we will be able to partly offsetthis loss of income by increased revenues from IP Services, following theexpansion of our ADSL portfolio for consumers and business (IP-VPN).Additionally, the one-stop shopping concept of Integrated Solutions has provento be successful in terms of customer retention and satisfaction.

 

We also expect the number of leased lines to continueto decline. Since leased lines have a high penetration in the business market,migration to IPVPN-DSL type connectivity will negatively affect the number ofleased lines. We also expect an ongoing shift in the digital leased line mix tomore bandwidth. Business Solutions has instituted cost reduction programs witha focus on operating efficiency, which we will continue to develop in the future.

 

**Mobile division**

 

We are the market leader in the Netherlands with anestimated market share of 40.2% in a competitive five-operator market. We arethe third largest operator in Germany in a four-operator market and in Belgiumin a three-operator market with estimated market shares of 12.7% and 15.0%,respectively.

 

In 2002, we introduced i-mode, the mobile data servicedeveloped by NTT DoCoMo, and at the end of 2003, we had 868,000 i-modesubscribers in our core markets. The number of i-mode subscribers has grown,particularly in the second half of 2003.

 

In 2001, we began to focus in the Netherlands andGermany more on high value customers (postpaid and business markets) ratherthan solely on market share. In the fourth quarter of 2002 we again began to focuson increasing our customer base in Germany, which resulted in an increase inthe total number of customers, from 7.0 million at the end of the thirdquarter of 2002 to 8.2 million customers at the end of 2003.

 

In 2000, we acquired UMTS licenses in The Netherlandsand Germany. In 2001, we acquired a UMTS license in Belgium. Under theselicenses, we are obliged to meet certain population coverage targets. Webelieve that we will meet the targets for the rollout of our UMTS network.

 

The current status of the competition in the marketsin which we operate, the economic climate and our intention to further grow ourbusinesses in Germany and Belgium may result in pressure on revenue andmargins. For the coming years, however, we believe that we will be able tomaintain our overall market positions and grow our businesses in terms ofrevenues, and that we will be able to benefit from the expected increase indemand for mobile data services. Especially in Germany and Belgium we expect wewill be able to distinguish ourselves in the market by offering a high-quality,competitive network and attractive services to business and other customers. Weaim to gain economies of scale and synergies by managing our internal processesbetter.

 

Regulation is becoming an increasingly important issuefor mobile operators. Telecommunication regulators are now focusing on mobileissues, such as roaming and mobile terminating tariffs, which has led so far toa number of legal proceedings, especially in the Netherlands. The outcome ofthese proceedings remains uncertain. Therefore, the outcome of theseproceedings could have a material adverse impact on the results of our Mobiledivision.

 

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**Sale ofactivities and assets**

 

During the last years, we sold a number of activitiesand assets. The following table sets out the impact on external revenues,operating profit and total assets of the major asset disposals (figures arebased on the last full year of consolidation or, in case of participatinginterests, the moment of disposal):

 
| **Amounts in millions of euro** |   | **Year of  disposal** |   | **Estimated  impact on  external  revenues** |   | **Estimated  impact on  operating  result** |   | **Total assets (5)** |   |
|---------------------------------|--------|-----------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|----------------------|--------|
| KPNQwest 1)                     |   | 2001/2002             |   | 266                                          |   | -80                                         |   | 1,166                |   |
| Pannon GSM                      |   | 2002                  |   | 242                                          |   | 46                                          |   | 246                  |   |
| KPN Netwerk Bouw 2)             |   | 2002                  |   | None                                         |   | N/a                                         |   | 258                  |   |
| Telefoongids Media              |   | 2003                  |   | 122                                          |   | 55                                          |   | 100                  |   |
| KPN Belgium 3)                  |   | 2003                  |   | 69                                           |   | -118                                        |   | 44                   |   |
| Planet Internet Belgium         |   | 2003                  |   | 20                                           |   | -15                                         |   | 18                   |   |
| UMC 4)                          |   | 2003                  |   | None                                         |   | None                                        |   | 36                   |   |
| Ceský Telecom 4)           |   | 2003                  |   | None                                         |   | None                                        |   | 646                  |   |
| Hutchison 3G 4)                 |   | 2003                  |   | None                                         |   | None                                        |   | 119                  |   |
| Inmarsat 4)                     |   | 2003                  |   | None                                         |   | None                                        |   | 56                   |   |
| Eutelsat 4)                     |   | 2004                  |   | None                                         |   | None                                        |   | 36                   |   |

 

----

1)     Sale of a 10% interest and subsequentbankruptcy.

2)     Sale of a 55% interest; we currently hold a45% interest.

3)     Sale of all activities; we currently hold a100% interest.

4)     Accounted for as participating interests.

5)     Equity value in case of participating interests.

 

In addition to the aforementioned sales, we alsooutsourced a number of activities, such as Datacenter, End User Services,Software House (to Atos Origin), KPN Lease (to De Lage Landen), KPN Logisticsand Repair (Logistics to TNT; Repair to Teleplan), and KPN Valley (to TNO). Dueto the fact that these units primarily delivered services to our other unitsand that these outsourced activities will continue to deliver services orproducts to us, the estimated impact on operating profit or loss is limited.

 

**MAIN SOURCESOF REVENUES AND EXPENSES**

 

**Sources ofrevenues**

 

**NET SALES -FIXED DIVISION**

 

TheFixed division generates revenues primarily from retail and wholesale access services on the Dutch fixed network,local, national and international telephone services as well as call servicesto mobile and Internet operators for both the Dutch residential and businessmarkets. Our Fixed division also generates revenue from providing integratedwholesale transmission services. Our fees for both analog and digital servicesare subject to the price-cap formulas stipulated by OPTA, the regulatory body forthe telecommunications industry in the Netherlands. Wholesale tariffs aresubject to regulatory approval by OPTA.

 

Our principal sources of revenue are:

•                  Traffic fees, whichinclude:

•                  Traffic fees withrespect to the fixed switched telephone network. The fees are based on thenumber of seconds spent on the network, increased by a fixed call setup charge.Rates depend on the distance between callers, the time of day and the day ofthe week.

•                  National wholesaleservices. We provide these services to other telecommunications companies. Netsales for these services are primarily based on time spent on our network.

 

61

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•                  Internationalwholesale services. Rates for these services are based on time spent on ourinternational network.

•                  Portal enabling services. These compriseservices for ICM portals and third party portals, including special rateservices for bulk-calling campaigns with net sales based on call time andnumber of calls.

•                  One-off connection feesand monthly subscription fees, which include:

•                  One-off connection feesand monthly subscription fees, charged bi-monthly, for fixed telephony.

•                  Transmission services.Sales revenues include service fees for fixed-network connections, which arebased on prescribed cost-based calculations as stipulated by OPTA. Dataservices are generally provided based on flat fees and monthly subscriptionfees, depending upon capacity provided and, in the case of fixed networkconnections, the length of the connection.

•                  Local loop services.Net sales consist of MDF Access lines sold, monthly rental fees and initialfees paid for MDF Access and Co-location.

•      Other transmission services are, to alarge extent, internal sales, since we charge our Fixed Telephony business unitand other telecommunications companies for the time spent on our local loopnetwork.

•                  Other net sales, whichinclude:

•                  Inbound and outbound call services and e-mailhandling services, as well as sales support services and directory assistanceoffered via SNT. Net sales are generated from rates per call handled, call timeand number of calls.

•                  Internet portalservices and Internet content. Net sales from ISP services are based on monthlysubscription fees (including ADSL), shares in telephone usage revenues andonline advertising income. Portals include our communities and portals, whichare directed at specific groups or market segments.

•                  IP services. Revenues are based on flat feesand monthly subscription fees per connection based on capacity provided. IPDial-In Services are billed at local tariffs based on minutes used.

•                  Integrated solutions. Revenues are generatedbased on fees charged for component parts of services offered (such as datacommunication and private network services) and fees for consulting services.

 

**NET SALES -MOBILE DIVISION**

 

The Mobile division generates revenues primarily fromthe sale and provision of mobile telecommunications services, the majority ofwhich consist of network airtime usage fees.

 

Our principal sources of revenue are:

•                  Traffic fees. These feesare charged at an agreed price for a fixed duration of time or capacity and arerecognized as revenue based upon usage of the mobile network andfacilities.  Airtime rates varydepending upon the customer’s service package (e.g. prepaid or postpaid) and onthe destination and time of the call. Traffic fees include:

•                  Termination fees. Theseare fees charged to other telecommunications companies for calls originating ontheir networks and terminating on our networks.

•                  Roaming fees. These arefees received from other network operators for their clients’ calls placed onour networks.

•                  Value-added service fees.These are fees for our value-added mobile voice and data services such asi-mode, messaging services such as SMS, voice mail and information services.

•                  Traffic bundles, which areoffered in combination with a subscription.

•                  Fixed monthly subscriptionfees. These fees are billed monthly to our post-pay contract customers foraccess to our network and include service fees on the handset, irrespective oftheir actual airtime usage.

•                  Sales of peripheral andother equipment. These include revenues from the sale of SIM cards, handsetsand accessories.

 

62

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**NET SALES -OTHER ACTIVITIES**

 

Fora description of the sources of revenues of Other activities, please refer tothe section titled ‘Information about the Company – Other activities’.

 

**OWN WORKCAPITALIZED**

 

Salaries,cost of materials and other direct costs, interest and indirect costsattributable to the production of property, plant and equipment for own use arecapitalized and depreciated over the useful lives of the assets.

 

**OTHEROPERATING REVENUES**

 

Theseinclude revenues other than net sales, revenues from the sale to orparticipation by third parties in our group companies, joint ventures and otherparticipations or activities.

 

**Operatingexpenses**

 

**FIXEDDIVISION**

 

The principaloperating expenses for our Fixed division are:

•                  **Cost of materials.** These consist primarily of purchases of maintenance materials, spareparts and other materials.

•                  **Costs of work contracted out and other external expenses.**This item includes costs of network maintenance and services by thirdparties and payments to other operators, such as interconnection charges.

•                  **Salaries and social security contributions.** These include all salary and related expenses for the employees of allunits within our Fixed division.

•                  **Depreciation, amortization and impairments.**These include all depreciation and impairment charges on our Fixednetwork.

•                  **Other operating expenses.** This item includes selling and marketingexpenses.

•                  **Inter-division settlements.**These include amounts charged by the Mobiledivision and Other activities for products and services provided to our Fixeddivision.

 

**MOBILEDIVISION**

 

The principaloperating expenses for our Mobile division are:

•                  **Costof materials**. These consist largely of purchase costs of handsets tobe sold to customers and materials used in maintaining our mobile networks.

•                  **Costsof work contracted out and other external expenses**. These includethe cost of access to third-party networks, the cost of network maintenancecarried out by third parties and prospecting expenses, such as fees paid todistributors and other external expenses. We pay network access costs to otherfixed-line or mobile network operators for our customers’ calls terminating ontheir networks.

•                  **Salaries and social security contributions**.These include all salary and relatedexpenses for the employees within our Mobile division.

•                  **Depreciation,amortization and impairments**.These include all depreciation on our Mobile network, amortization onlicenses in use and impairments. Our UMTS licenses are not yet amortized.

•                  **Otheroperating expenses**. These include selling and marketing expenses.

•                  **Inter-divisionsettlements.** These include amounts charged by the Fixed division andOther activities for products and services provided to our Mobile division.

 

63

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**Fixed****division**

 

The table below sets forth a three-year summary ofdevelopments in our Fixed division:

 

**FIXEDDIVISION**

 
| **Amounts in millions of euro**                          |   | **2003**  |       | **2002**  |       | **2001**  |       |
|----------------------------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                                                     |   |      |       |      |       |      |       |
| Total net sales                                          |   | 7,363     |       | 7,322     |       | 7,275     |       |
| Own work capitalized                                     |   | 18        |       | 31        |       | 27        |       |
| Other operating revenues                                 |   | 18        |       | 23        |       | 18        |       |
| **Total  operating revenues**                            |   | **7,399** | ** ** | **7,376** | ** ** | **7,320** | ** ** |
|                                                     |   |      |       |      |       |      |       |
| Cost of materials                                        |   | 173       |       | 224       |       | 164       |       |
| Costs of work contracted out and other external expenses |   | 2,090     |       | 2,038     |       | 2,172     |       |
| Salaries and social security contributions               |   | 975       |       | 1,095     |       | 1,034     |       |
| Depreciation and impairments                             |   | 1,315     |       | 1,604     |       | 1,491     |       |
| Amortization and impairments                             |   | 59        |       | 28        |       | 14        |       |
| Other operating expenses                                 |   | 197       |       | 359       |       | 533       |       |
| Inter-division settlements                               |   | 877       |       | 1,033     |       | 1,397     |       |
| **Total  operating expenses**                            |   | **5,686** | ** ** | **6,381** | ** ** | **6,805** | ** ** |
|                                                     |   |      | ** ** |      | ** ** |      | ** ** |
| **Operating  result**                                    |   | **1,713** | ** ** | **995**   | ** ** | **515**   | ** ** |

 

**Majordevelopments**

 

In 2003, the former Fixed Networks and BusinessSolutions divisions merged into one Fixed division in order to reduce internalcomplexity. For comparative purposes, KPN will continue to separately reportthe operating revenues and operating profits or losses of these formerdivisions. With effect from January 1, 2003, within Fixed Networks, thefollowing organizational changes took place: certain operating activities thatwere part of the unit Carrier Services were transferred to the unit FixedNetwork Operator. The unit Consumer Internet and Media Services – that held theinterests of the ISPs Planet Internet, Het Net and XS4ALL – was dissolved. Alsowith effect from January 1, 2003, within Business Solutions, the internationalactivities of IP Services were transferred to KPN EuroRings. Comparativefigures have been restated to reflect these changes.

 

**FIXEDNETWORKS**

 

Thesubstantial increase in traffic volume that we experienced until 2000 wasmainly driven by the increase in Internet usage. However, the traffic volumegrowth flattened to modest levels in 2001 and 2002 and decreased by 5% in 2003due to various developments. These included the OPTA stipulation in 2001 toincrease the difference between our wholesale and retail tariffs, the furtherreductions in wholesale tariffs, the increased penetration of broadband (ADSL),the fixed-for-mobile substitution and the introduction of local Carrier(Pre)Select in August 2002, which allows customers to choose their own carrierfor local traffic. Additionally, the introduction of Internet-originatingservices by our Carrier Services business unit as of September 1, 2001, led toa decrease in Internet traffic volumes in our Fixed Telephony business unit.This loss of traffic volumes is partly offset by an increase in the trafficvolumes that our own ISPs charge to their customers for their Internet usageand an increase in wholesale traffic volumes in our Carrier Services businessunit, which in general generates lower margins.

 

Inthe fixed telephony market, the business segment is gradually changing andcompetition continues to increase. In addition to the ongoing increase inmarket share of Carrier (Pre)Select operators and rapidly increasingpenetration rates of broadband, mobile-only solutions and ISDN-like offeringsby competitors (based on Voice over DSL concepts) are gaining market share inthe consumer and business markets. This has resulted in a decrease in domesticlocal and long-distance traffic volumes.

 

In line with a reduction by each of the Dutchmobile operators of the terminating access tariffs, we reduced ourfixed-to-mobile tariffs by an average of 17% as from January 2004.

 

The number of customers using ADSL from KPNtotaled 746,000 at the end of 2003. At year-end 2003, ADSL is available to 97%of the households in the Netherlands.

 

64

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The following table shows the development of totaltraffic volumes of Fixed Networks:

 
| **In billions of minutes** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|----------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                       |   |      |       |      |       |      |       |
| Fixed Telephony            |   | 39.42     |       | 50.27     |       | 59.12     |       |
| Carrier Services           |   | 43.52     |       | 37.32     |       | 27.20     |       |
| Intra-division traffic (1) |   | -1.14     |       | -1.27     |       | -1.27     |       |
| **Total traffic volumes**  |   | **81.80** | ** ** | **86.32** | ** ** | **85.05** | ** ** |

 

----

(1)          Intra-division traffic isrelated to Fixed Telephony international retail minutes, which are handled byCarrier Services and charged to Fixed Telephony as international wholesaleminutes.

 

While traffic volumes in 2001 still showed significantincreases, in 2002 total traffic volumes (in minutes) increased at a slowerrate and in 2003 total traffic volumes decreased. Several factors areresponsible for this trend. In addition to increased fixed-line competition andunfavorable economic conditions, mobile operators have also emerged as a moreimportant competitor for domestic voice, reflecting the gradual change incultural usage patterns. We believe that about 8% of Dutch households currentlyuse mobile-only solutions. The most important factor behind this negativetrend, however, is the decline in Internet traffic minutes (handled by FixedTelephony). Both the introduction of Internet-originating business models forour ISPs and external ISPs and the increasing broadband penetration on switchedInternet traffic have had a significant negative impact on network volume.

 

**BUSINESSSOLUTIONS**

 

The broadband market conditions in general and pricesin the transmission market declined further in 2003. Together with a decreasein the number of leased lines, this had an adverse effect on our revenues.

 

We further increased our market share in theDutch broadband market from 29% at the end of 2002 to 39% (including cable) atyear-end 2003. At the end of 2003, we had 746,000 ADSL connections (2002:310,000 ADSL connections). ADSL is now available to 97% of households in theNetherlands and the speed of existing always-on Internet connections has beenincreased. Subscribers who useADSL from KPN (Go, as from January 12, 2004 and Lite, Basic and Extra) receiveextra savings on premium services via the broadband portal and have access toexclusive broadband services. In the secondhalf of 2003, competition between ISPs offering ADSL increased. Subscriptionsat (introductory) discounts are now offered in order to gain market share. Wecurrently offer ADSL through a large number of third party ISPs as well as ourown ISPs (Planet Internet, Het Net and XS4ALL). In February 2004, weincreased the ADSL transmission rate. We also expect to increase the number ofbroadband services via the KPN broadband portal in the first half of 2004.

 

In January 2003, we sold the assets of KPN Belgium toScarlet; for the deconsolidation effects please refer to the section ‘ Sale ofnon-core assets’ under ‘Operating results – General trends’.

 

65

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The table below sets forth a three-year summary ofdevelopments in our operational data:

 

**OPERATIONALDATA**

 
|                                               |   | **December  31, 2003** |   | **December  31, 2002** |   | **December  31, 2001** |   |
|----------------------------------------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|
|                                               |   |                   |   |                   |   |                   |   |
| Number of ADSL connections (*1,000)                |   | 746                    |   | 310                    |   | 138                    |   |
| ADSL coverage in the Netherlands                   |   | 97                     | %      | 85                     | %      | 67                     | %      |
| Market share of consumer broadband                 |   | 39                     | %      | 29                     | %      | 23                     | %      |
| Number of leased lines – analog (*1,000) (1)  |   | 47                     |   | 58                     |   | 68                     |   |
| Number of leased lines – digital (*1,000) (1) |   | 24                     |   | 37                     |   | 34                     |   |
| Customer programs (Integrated Solutions) (2)       |   | 76                     |   | 56                     |   | 43                     |   |

 

----

(1)          As from 2003, only leasedlines with external revenues are included. Comparative figures are restated accordingly.

(2)       As from 2003, thedefinition of customer programs has changed. Comparative figures have beenrestated accordingly.

 

**Operatingrevenues**

 

The table below sets forth a three-year summaryof developments in the operating revenues of our Fixed division:

 
| **Amounts in millions of euro**                              |   | **2003**  |       | **2002**  |       | **2001**  |       |
|--------------------------------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                                                         |   |      |       |      |       |      |       |
| Fixed Telephony:                                             |   |      |       |      |       |      |       |
| •   One-off connection fees and subscriptions |   | 1,643     |       | 1,575     |       | 1,571     |       |
| •   Traffic fees                              |   | 1,982     |       | 2,222     |       | 2,319     |       |
| Total Fixed Telephony                                        |   | 3,625     |       | 3,797     |       | 3,890     |       |
| Carrier Services                                             |   | 2,849     |       | 2,687     |       | 2,716     |       |
| Other units within Fixed Networks                            |   | 1,639     |       | 1,837     |       | 1,699     |       |
| Business Solutions                                           |   | 2,057     |       | 2,044     |       | 2,062     |       |
| Intra-division sales                                         |   | -2,807    |       | -3,043    |       | -3,092    |       |
| **Total net sales**                                          |   | **7,363** | ** ** | **7,322** | ** ** | **7,275** | ** ** |
| Own work capitalized                                         |   | 18        |       | 31        |       | 27        |       |
| Other operating revenues                                     |   | 18        |       | 23        |       | 18        |       |
| **Total operating revenues**                                 |   | **7,399** | ** ** | **7,376** | ** ** | **7,320** | ** ** |

 

**FIXEDTELEPHONY**

 

In 2003, Fixed Telephony’s net sales decreased by 4.5%to EUR 3,625 million (2002: EUR 3,797 million; 2001: EUR 3,890million). One-off connection fees and subscriptions accounted for approximately41% of total Fixed Telephony net sales in 2001 and 2002, while these salesaccounted for 45% in 2003.

 

***One-off connection fees and subscriptions***

 

In 2003, net sales from one-off connection fees andsubscriptions increased by 4.3% to EUR 1,643 million (2002: EUR 1,575million; 2001: EUR 1,571 million) as a result of a 3.5% increase insubscription fees effective July 1, 2003 and an improved PSTN/ISDN mix ascustomers upgraded from analog (PSTN) to digital (ISDN) lines. While the numberof PSTN connections continues to decrease, the number of ISDN lines is stillgrowing, albeit at a lower pace in 2003. ISDN subscription fees exceed thosefor PSTN. This effect was offset by a decreased number of connections due tofierce competition (e.g., mobile-only solutions, cable telephone and ISDN-likeofferings by competitors for small and medium-sized businesses).

 

66

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In 2002, net sales from one-off connection fees andsubscriptions increased slightly to EUR 1,575 million (2001:EUR 1,571 million) due to higher subscription fees by approximately 4.5%with effect from August 1, 2002, and PSTN-to-ISDN substitution, although thiswas partly offset by lower revenues due to the introduction of ISDNdo-it-yourself packages.

 

The following table shows the number of connections toour network at year-end 2003, 2002 and 2001:

 

**NUMBER OFCONNECTIONS**

 
| **In  thousands as of December 31,**                              |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| PSTN (analog) connections                                         |   | 6,120    |   | 6,316    |   | 6,569    |   |
| ISDN (digital) connections                                        |   | 1,557    |   | 1,536    |   | 1,416    |   |
| Total number of connections                                       |   | 7,677    |   | 7,852    |   | 7,985    |   |
|                                                              |   |     |   |     |   |     |   |
| ISDN (digital) basic access lines (2  channels per connection)    |   | 1,533    |   | 1,514    |   | 1,395    |   |
| ISDN (digital) primary access lines (30  channels per connection) |   | 24       |   | 22       |   | 21       |   |

 

Compared to year-end 2002, the number of PSTN linesfell by 3.1% to 6.1 million as of December 31, 2003. Customersswitching from analog to digital lines as well as fixed-to-mobile substitutioncontributed to this decrease. During 2003, the number of ISDN connectionsincreased by 1.4% to 1.6 million as of December 31, 2003.

 

As of December 31, 2002, the number of PSTN linesdecreased by 3.9% to 6.3 million compared to year-end 2001. Conversely,the number of ISDN connections increased by 8.5% to 1.5 million atyear-end 2002.

 

***Traffic fees***

 

The following table shows the development of the totaltraffic volumes of Fixed Telephony:

 
| **In billions of minutes** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|----------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                       |   |      |       |      |       |      |       |
| Domestic, local            |   | 13.67     |       | 17.30     |       | 19.40     |       |
| Domestic, long-distance    |   | 8.27      |       | 9.64      |       | 10.56     |       |
| Internet-related traffic   |   | 13.84     |       | 19.43     |       | 25.30     |       |
| Fixed-to-mobile            |   | 2.51      |       | 2.62      |       | 2.53      |       |
| International              |   | 1.13      |       | 1.28      |       | 1.33      |       |
| **Total traffic volumes**  |   | **39.42** | ** ** | **50.27** | ** ** | **59.12** | ** ** |

 

Total traffic fees decreased by 10.8% toEUR 1,982 million in 2003. The main reason for this decrease was areduction of traffic volumes, partly offset by increased average trafficrevenues per minute. Total traffic volumes dropped from 50.27 billionminutes in 2002 to 39.42 billion minutes in 2003, mostly notable inInternet related traffic (–29%) and domestic traffic (–19%), stemming from theintroduction of new services by our Carrier Services unit, ongoing competitionfrom Carrier (Pre)Select operators in the domestic market, increased ADSLpenetration and fixed-to-mobile substitution. The newly introduced wholesaleservices led to a shift from retail to wholesale volumes. Effective July 1,2003, we increased our retail domestic tariffs, call setup charges andsubscriptions by 3.5%. In August 2002, we raised our retail domestictariffs and call setup charges by up to 4.5%. Furthermore, averageinternational revenues increased due to a more favorable destination mix.

 

In 2002, traffic fees dropped by 4.2% toEUR 2,222 million, due primarily to lower traffic volumes. This decreasewas partly offset by higher average traffic revenues per minute. As discussedabove, the shift from retail to wholesale volumes was also notable in 2002 andwas impacted by increased Internet related traffic and the introduction ofInternet dial-in services in September 2001.

 

67

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The following table showsthe breakdown of revenues by diverse types of traffic for the years 2003, 2002and 2001:

 

**REVENUES FROMCALLS**

 
| **As a %  of total net sales**                       |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Domestic calls (excluding Internet related  traffic) |   | 41       |   | 42       |   | 45       |   |
| Internet related traffic                             |   | 15       |   | 18       |   | 18       |   |
| Fixed-to-mobile calls                                |   | 33       |   | 29       |   | 27       |   |
| International calls                                  |   | 11       |   | 11       |   | 10       |   |

 

A three-year summary of developments in number ofcalls, call duration and rates is provided in the table below:

 

**NUMBER OFCALLS, CALL DURATION AND RATES**

 
|                                                     |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Total calls (in millions)                                |   | 9,662    |   | 11,827   |   | 13,416   |   |
| Average call duration (in seconds)                       |   | 269      |   | 272      |   | 277      |   |
| Call rate (average number of calls per line  per day) 1) |   | 2.81     |   | 3.35     |   | 3.67     |   |
| Average local tariff (EUR/minute) 1)                     |   | 0.026    |   | 0.023    |   | 0.022    |   |
| Average domestic long-distance tariff  (EUR/minute)      |   | 0.042    |   | 0.040    |   | 0.039    |   |
| Average fixed-to-mobile tariff (EUR/minute)              |   | 0.257    |   | 0.250    |   | 0.239    |   |
| Average international tariff (EUR/minute)                |   | 0.197    |   | 0.193    |   | 0.168    |   |

 

----

1)Including ISPs

 

In 2003, total calls decreased by 18.3% to 9.7 billiondue to the aforementioned factors. The decrease in Internet related trafficalso affected the average call duration, which fell by 3 seconds to 269 secondsin 2003; Internet calls generally last longer than voice calls. Average tariffsrose slightly due to the increase in domestic tariffs.

 

In 2002, the number of calls decreased by 11.8% to11.8 billion as compared to 2001. In 2002, the average call duration decreasedby 5 seconds to 272 seconds as a result of increasing ADSL penetration. In2001, OPTA forced us to increase the spread between our wholesale and retailtariffs, which led to a new tariff structure for local calls reducing thecall-setup charge, while increasing the tariff per minute.

 

**CARRIERSERVICES**

 

The following table shows the development of the totaltraffic volumes of Carrier Services:

 
| **In billions of minutes** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|----------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                       |   |      |       |      |       |      |       |
| Terminating                |   | 12.95     |       | 10.34     |       | 8.40      |       |
| Originating voice          |   | 11.39     |       | 8.79      |       | 7.00      |       |
| Originating Internet       |   | 6.47      |       | 6.42      |       | 0.40      |       |
| Transit                    |   | 5.99      |       | 5.58      |       | 5.40      |       |
| International              |   | 6.72      |       | 6.19      |       | 6.00      |       |
| **Total traffic volumes**  |   | **43.52** | ** ** | **37.32** | ** ** | **27.20** | ** ** |

 

In 2003, net sales increased by 6.0% to EUR 2,849million. The introduction of (local) Carrier (Pre)Select andInternet-originating services led to substantially higher traffic volumes inall traffic categories. The increase was partly offset by tariff reductions; inJuly 2003, OPTA required us to reduce wholesale tariffs for calls originatingin our fixed network by 10% and tariffs payable by operators for trafficterminating on our network by 5%. An appeal lodged by us with the RotterdamDistrict Court in interlocutory proceedings was dismissed in October 2003. Wenow await the appeal procedure on the complaint we lodged with OPTA lastsummer, the outcome of which, however, is not expected shortly.

 

68

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Total traffic volumes in 2003 increased by 16.6% to 43.52 billionminutes, mainly due to the introduction of Internet-originating services inSeptember 2001 and (local) Carrier (Pre)Select in August 2002. The latterintroduction had a positive impact on both originating and terminating volumes,since traffic of Carrier (Pre)Select operators usually terminates on ournetwork. Transit and international volumes remained stable in 2003.  Net sales from local loop services rose in 2003compared to 2002, in particular due to an increase in the installed base of MDFaccess.

 

In 2002, net sales decreased by 1.1% to EUR 2,687million as the volume increase in all traffic categories for similar reasonswas more than offset by tariff reductions, partly stipulated by OPTA, for originatingvoice services and terminating services. Lower revenues for local loop servicesalso contributed to the decrease as a result of lower volumes and tariffs.

 

In 2002, traffic volumes usage including internationaltraffic increased by 37.2% to 37.32 billion minutes due to new wholesaleservices introduced in 2001. The rise was supported by increased terminatingservices (reflecting the growing use of mobile telephones) and transit services(more mobile-to-mobile calls through our network). Net sales in internationaltraffic remained fairly stable as higher volumes almost wholly offset lowertariffs.

 

**OTHER UNITSWITHIN FIXED NETWORKS**

 

Net sales of other units within Fixed Networksdecreased by 10.8% to EUR 1,639 million in 2003. Higher revenues from ourISPs – due to more ADSL subscribers, the termination of free Internet by HetNet and the impact of the Internet-originating services – were more than offsetby lower SNT revenues due to the deconsolidation of the French and Scandinavianactivities divested in 2003 and by lower (internal) revenues from our FixedNetwork Operator following the successful renegotiation of maintenancecontracts which resulted in cost reductions in our other units.

 

In 2002, net sales of other units within FixedNetworks increased by 8.1% to EUR 1,837 million, which reflects higher netsales of our ISPs, resulting from a larger ADSL subscriber base, thetermination of free Internet by Het Net and the introduction of theInternet-originating model, and acquisitions made by SNT in France andScandinavia as well as a higher level of activity within SNT.

 

**BUSINESSSOLUTIONS**

 
| **Amounts in millions of euro** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|---------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                            |   |      |       |      |       |      |       |
| Transmission Services           |   | 1,171     |       | 1,248     |       | 1,414     |       |
| IP Services                     |   | 451       |       | 302       |       | 282       |       |
| Integrated Solutions            |   | 394       |       | 263       |       | 176       |       |
| Other                           |   | 424       |       | 526       |       | 594       |       |
| Intra-division sales            |   | -383      |       | -295      |       | -404      |       |
| **Total net sales**             |   | **2,057** | ** ** | **2,044** | ** ** | **2,062** | ** ** |
| Other operating revenues        |   | 5         |       | 3         |       | 6         |       |
| **Total operating revenues**    |   | **2,062** | ** ** | **2,047** | ** ** | **2,068** | ** ** |

 

***Transmission Services***

 

Primarily due to lower rates for transmissionservices, net sales of Transmission Services decreased by 6.2% toEUR 1,171 million in 2003. In addition, a lower number of leased analoglines (from 58,000 at year-end 2002 to 47,000 at year-end 2003) and leaseddigital lines (from 37,000 at year-end 2002 to 24,000 at year-end 2003)negatively affected revenues. The impact of lower volumes was partly offset byhigher tariffs for leased lines.

 

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In2002, net sales fell by 11.7% to EUR 1,248 million as a result of reducedvolumes and tariffs. Lower volumes resulted from a decreased number of analogleased lines (from 68,000 at year-end 2001 to 58,000 at year-end 2002) offsetin part by an increased number of digital leased lines (from 34,000 at year-end2001 to 37,000 at year-end 2002).

 

***IP Services***

 

In 2003, net sales rose by 49.3% to EUR 451million. The installed base grew significantly as the number of ADSLconnections increased by 141% to 746,000 in 2003. ADSL market coverage in theNetherlands increased from 85% in 2002 to 97% in 2003 (2001: 67%).

 

Net sales of IP Services increased by 7.1% toEUR 302 million in 2002 resulting from an increased number of ADSLconnections (2002: 310,000; 2001:138,000) and the introduction of new servicessuch as ADSL Lite.

 

***Integrated Solutions***

 

In2003, Integrated Solutions’ sales increased by 49.8% to EUR 394 million in2003. The improvement in net sales reflects the completion of the design andconstruction of the Tetraned and Mobirail projects as well as an increasednumber of customer programs from 56 at the end of 2002 to 76 at the end of2003. Moreover, average revenues per program increased.

 

Netsales increased from EUR 176 million in 2001 to EUR 263 million in2002 due to a higher number of customer programs (2002: 56; 2001: 43) andhigher average revenues per program.

 

***Other revenues***

 

In 2003, the other revenues decreased by 19.4% toEUR 424 million in 2003. In January 2003, the assets and activitiesof KPN Belgium were sold to Scarlet Telecom, which had a negative impact onOther revenues.

 

Other revenues decreased by 11.4% to EUR 526million in 2002. The bankruptcy of KPNQwest in 2002 had a significant negativeeffect on KPN Belgium’s activities and revenues since we acted as an agent forKPNQwest in Belgium and Luxembourg. Operating revenues from Managed ApplicationServices decreased mainly due to negative market conditions for ICT-relatedsolutions (application and consultancy services) as well as housing andhosting.

 

**Operatingexpenses**

 

The table below sets forth athree-year summary of developments in our total operating expenses in our Fixeddivision:

 

**OPERATINGEXPENSES**

 
| **Amounts in millions of euro** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|---------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                            |   |      |       |      |       |      |       |
| Fixed Networks                  |   | 5,065     |       | 5,537     |       | 5,967     |       |
| Business Solutions              |   | 1,790     |       | 2,147     |       | 2,086     |       |
| Intra-division expenses         |   | -1,169    |       | -1,303    |       | -1,248    |       |
| **Total operating expenses**    |   | **5,686** | ** ** | **6,381** | ** ** | **6,805** | ** ** |

 

In 2003, totaloperating expenses fell by 10.9% to EUR 5,686 million mainly resulting fromcost savings in all units (notably our Fixed Network operator), a substantialreduction in the number of

 

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personnel anddecreased amortization and depreciation charges due to capital expenditurereduction program implemented in 2001.

 

Operating expensesdecreasing by 6.2% to EUR 6,381 million in 2002, primarily reflecting aEUR 361 million restructuring charge recognized in 2001 and theeffect of cost and headcount reductions.

 

**FIXEDNETWORKS**

 

Operating expenses decreased by 8.5% to EUR 5,065million in 2003 reflecting the success of the cost reduction program. Themajority of our units reported lower salary and social security expensesresulting from the significant personnel reduction, which was partly offset byan extra pension charge of EUR 7 million to provide for a shortfall in ourpension funds and an additional charge of EUR 18 million relating to the earlyretirement arrangement. In addition, our Fixed Network Operator and other unitsrealized significant cost savings, which resulted in a substantial reduction ofexternal operational expenses. On the other hand, we faced higher purchasecosts for interconnection, transit services (national and internationaltraffic) and transmission with other telecommunication companies, following theincrease in traffic volumes at Carrier Services and higher costs oftransmission, marketing and modems resulting from the increased broadbandpenetration. Depreciation,amortization and impairment charges for property, plant and equipment andintangible fixed assets totaled EUR 790 million (2002: EUR 874million), reflecting the capital expenditure reduction program implemented in2001.

 

Items affecting the 2003 operating expenses consistedof a EUR 5 million loss on the sale of the French and ScandinavianSNT activities in 2003 and impairment of goodwill at SNT amounting toEUR 38 million. The 2002 operating expenses included a net credit ofEUR 4 million related to restructuring charges (a EUR 36 million release fromthe 2001 restructuring provision offsets a EUR 32 million charge for additionalredundancies at our Fixed Network Operator and CIMS units) and an impairmentcharge for assets related to KPNQwest of EUR 34 million.

 

In 2002, operating expenses decreased by 7.2% toEUR 5,537 million. The majority of units reported lower salaries andsocial security costs resulting from the significant reduction in personnel.This was offset in part by an extra pension charge of EUR 24 million topay for a shortfall in our pension funds. As already started in the second halfof 2001, substantial cost reductions were realized in 2002. Total costs of workcontracted out and other external expenses, costs of materials and otheroperating expenses increased as a result of higher purchase costs forinterconnection, transit services (national and international traffic) andtransmission with other telecommunication companies, following the increase intraffic volumes at Carrier Services.

 

Operating expenses in 2002 included a net credit ofEUR 4 million related to restructuring charges and an impairment charge forassets related to KPNQwest of EUR 34 million. Moreover, the 2001operating expenses included a restructuring charge of EUR 292 million.

 

**BUSINESSSOLUTIONS**

 

Operating expenses decreased by 16.6% toEUR 1,790 million in 2003, primarily due to lower intercompany chargesfrom the Fixed Network Operator unit, the effect of cost and employee reductionprograms, higher variousadditional depreciation charges in 2002 (IP-VPN, international submarine cables,cyber centers) and reduced capital expenditures in 2002 and 2003.

 

Operating expenses for2003 include impairments on tangible fixed assets (EUR 42 million), a write-down of short-term receivables (EUR 6 million) andrestructuring charges (EUR 7 million). The 2002 operating expenses included aEUR 100 million charge for write-downs of assets held for sale plusinventories and the recognition of a provision for settlement ofKPNQwest-related issues and charges in respect of KPN Belgium and impairmentcharges amounting to EUR 153 million for fixed assets related to KPNBelgium and KPNQwest, and a restructuring charge of EUR 1 million.

 

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In 2002, operating expenses increased by 2.9% toEUR 2,147 million. This increase is due to various additional depreciationcharges in 2002 and an increase in depreciation charges due to higher capitalexpenditures in 2001 and 2000 partly offset by lower intercompany charges fromthe Fixed Network Operator unit and the effect of cost reduction and personnelcutback programs.

 

Operating expenses in 2002 included a EUR 100 million charge for write-downsof assets held for sale plus inventories and the recognition of a provision forsettlement of KPNQwest-related issues and charges in respect of KPN Belgium andimpairment charges amounting to EUR 153 million for fixed assetsrelated to KPN Belgium and KPNQwest, and a restructuring charge of EUR 1million. The 2001 operating expensesincluded a EUR 69 million charge related to restructuring charges.

 

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**Mobile**division

 

Thetable below sets forth a three-year summary of developments in our Mobiledivision:

 

**MOBILEDIVISION**

** **
| **Amounts in millions of euro**                          |   | **2003**  |       | **2002**   |       | **2001**    |       |
|----------------------------------------------------------|--------|-----------|------------|------------|------------|-------------|------------|
|                                                     |   |      |       |       |       |        |       |
| Total net sales                                          |   | 4,903     |       | 4,506      |       | 4,104       |       |
| Own work capitalized                                     |   | 146       |       | 123        |       | 141         |       |
| Other operating revenues                                 |   | 330       |       | 683        |       | 428         |       |
| **Total  operating revenues**                            |   | **5,379** | ** ** | **5,312**  | ** ** | **4,673**   | ** ** |
|                                                     |   |      |       |       |       |        |       |
| Cost of materials                                        |   | 626       |       | 515        |       | 638         |       |
| Costs of work contracted out and other external expenses |   | 1,481     |       | 1,383      |       | 1,290       |       |
| Salaries and social security contributions               |   | 382       |       | 391        |       | 378         |       |
| Depreciation and  impairments                            |   | 769       |       | 768        |       | 615         |       |
| Amortization and impairments                             |   | 179       |       | 7,599      |       | 15,002      |       |
| Other operating expenses                                 |   | 268       |       | 365        |       | 373         |       |
| Interdivision settlements                                |   | 627       |       | 545        |       | 507         |       |
| **Total  operating expenses**                            |   | **4,332** | ** ** | **11,566** | ** ** | **18,803**  | ** ** |
|                                                     |   |      | ** ** |       | ** ** |        | ** ** |
| **Operating  result**                                    |   | **1,047** | ** ** | **-6,254** | ** ** | **-14,130** | ** ** |

 

**Major developments**

 

In2003, the Mobile division grew further by increasing its customer base andimproving its customer mix. We continued to increase our customer base in 2003through extra marketing and sales activities, especially in the German marketwhere the customer base increased by 12.9%. Our German subsidiary passed themilestone of eight million customers on October 15, 2003. This landmarkachievement was reached ahead of schedule. At the end of 2003, we had a totalof 14.7 million customers in Germany, the Netherlands and Belgium.

 

Sincethe start of the summer, we have significantly expanded our i-mode offering interms of handsets and services, thus accelerating the influx of new customers.In addition, in August we introduced i-mode for prepaid customers in theNetherlands and in November for E-Plus and Belgium. As of December 31, 2003 wehad approximately 868,000 i-mode customers in these three countries. Based onour growth strategy for i-mode we have incurred extra marketing anddistribution costs and given higher discounts on handsets.

 

Weexpect to invest EUR 1.2 billion in the rollout of UMTS networks in Germany,the Netherlands and Belgium in 2004 and 2005. E-Plus and MobilCom MultimediaGmbH completed the transaction for the sale of MobilCom’s UMTS infrastructureon June 27, 2003. E-Plus acquired 3,727 UMTS sites, of which 942 areequipped.  We are reviewing whichremaining sites we could use in the rollout of our UMTS network. We expect thatthe commercial launch of UMTS services for the Netherlands and Germany will bein the second half of 2004. Upon commercial launch of UMTS services, we willbegin amortizing and depreciating our UMTS assets.

 

Inthe first quarter of 2003, the MobilCom shareholders approved the terminationagreement of the 2.5G roaming agreement with E-Plus in exchange for payingE-Plus EUR 210 million. An amount of EUR 20 million was received in December2002, followed by a receipt of EUR 110 million in February 2003. The remainderof EUR 80 million will be received in cash installments through 2006. France Télécom has

 

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guaranteedthe payments. The total gain resulting from the termination agreement amountedto EUR 222 million, consisting of the discounted value of the settlementpayment of EUR 210 million (which is EUR 202 million), and settlements of upfront payments of EUR 20 million that E-Plus had already received earlier. Thegain of EUR 222 million is included in operating revenues for 2003.

 

OnFebruary 28, 2003, we finalized the sales to Mobile Telesystems (MTS) of our16.33% participation in Ukrainian Mobile Communications (UMC), the leadingmobile operator in the Ukraine, for a purchase price of USD 55 million in cash,which resulted in a book profit of EUR 15 million.

 

OnNovember 7, 2003, we reached an agreement with regard to our shareholding inHutchison 3G UK. Hutchison Whampoa Limited (HWL) bought our shares for GBP 60million and three further planned payments of GBP 10 million each in 2005, 2006and 2007. We retain legal ownership of the shares until the date of the lastpayment, but have renounced all our rights relating to the shares, except forthe right to receive dividends, if any. Due to the outcome of the sale of ourshares, we reversed our former 2002 impairment for EUR 119 million. Thereversal is included in income from participating interests in 2003.

 

In2002, we continued to focus on high value customers (postpaid and businesssegment) in the Netherlands and Germany, resulting in a decline in the totalnumber of customers in our core markets, particularly in the prepaid segment.In the last quarter of 2002, we increased our customer base in the Germanmarket through increased marketing efforts and handset subsidies, resulting ina total customer base in the Netherlands, Germany and Belgium of 13.4 millionat the end of 2002.

 

During2002, general economic developments, and more specifically the developments inthe mobile markets, as well as the decisions of some mobile operators to ceaseor postpone their activities, triggered a critical review of the existingbusiness plans of our mobile activities. This resulted in new business plans,in line with the adjusted forecasts. We reviewed the recoverable value of ourmobile activities, based upon external valuations and discounted future cashflows. For the purpose of the impairment test, we compared this recoverableamount, being the net selling price, with the carrying value of ourinvestments. In total, this resulted in an impairment charge of approximatelyEUR 9 billion, including effects on deferred tax assets.

 

In2001, the significant growth of the mobile telecommunications market in ourmain areas of operations (the Netherlands, Germany and Belgium) came to an endas these markets matured. In 2001, we changed our strategy in the Netherlandsand Germany to target high value customers, which resulted in a change in thecustomer mix. At the end of 2001, the total number of customers in theNetherlands, Germany and Belgium was 13.7 million.

 

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**Operatingrevenues**

 

Thetable below sets forth a three-year summary of the developments in ouroperating revenues at our Mobile division:

 

**MOBILEDIVISION**

** **
| **Amounts in millions of euro**        |                             | **2003**  |       | **2002**  |       | **2001**  |       |
|----------------------------------------|----------------------------------|-----------|------------|-----------|------------|-----------|------------|
|                                   |                             |      |       |      |       |      |       |
| **Germany**                            |                             |      | ** ** |      | ** ** |      | ** ** |
| •                                 | Traffic fees                     |      | 1,921      |      | 1,721      |      | 1,276      |   |
| •                                 | Fixed monthly subscription  fees |      | 180        |      | 144        |      | 101        |   |
| •                                 | Peripheral and other  equipment  |      | 182        |      | 149        |      | 215        |   |
| Total net sales – Germany         |                             | 2,283     |       | 2,014     |       | 1,592     |       |
|                                   |                             |      |       |      |       |      |       |   |
| **The  Netherlands**                   |                             |      | ** ** |      | ** ** |      | ** ** |
| •                                 | Traffic fees                     |      | 2,014      |      | 1,880      |      | 1,687      |   |
| •                                 | Fixed monthly subscription  fees |      | 271        |      | 256        |      | 224        |   |
| •                                 | Peripheral and other  equipment  |      | 41         |      | 78         |      | 116        |   |
| Total net sales – the Netherlands |                             | 2,326     |       | 2,214     |       | 2,027     |       |
|                                   |                             |      |       |      |       |      |       |   |
| **Belgium**                            |                             |      | ** ** |      | ** ** |      | ** ** |
| •                                 | Traffic fees                     |      | 310        |      | 258        |      | 182        |   |
| •                                 | Fixed monthly subscription  fees |      | 7          |      | 6          |      | 7          |   |
| •                                 | Peripheral and other  equipment  |      | 3          |      | 25         |      | 43         |   |
| Total net sales – Belgium         |                             | 320       |       | 289       |       | 232       |       |
|                                   |                             |      |       |      |       |      |       |
| **Other**                              |                             |      | ** ** |      | ** ** |      | ** ** |
| Pannon GSM                             |                             | —    |       | 25        |       | 241       |       |
| Other                                  |                             | -26       |       | -36       |       | 12        |       |
| Total net sales – Other           |                             | -26       |       | -11       |       | 253       |       |
|                                   |                             |      |       |      |       |      |       |
| Total net sales                        |                             | 4,903     |       | 4,506     |       | 4,104     |       |
| Own work capitalized                   |                             | 146       |       | 123       |       | 141       |       |
| Other operating revenues               |                             | 330       |       | 683       |       | 428       |       |
| **Total operating revenues**           |                             | **5,379** | ** ** | **5,312** | ** ** | **4,673** | ** ** |

 

Totaloperating revenues in 2003 increased by 1.3% to EUR 5,379 million dueto a growth in traffic revenues, changes in consolidation and a higher customerbase, offset in part by lower other operating revenues.

 

Theincrease in airtime revenues and revenues from fixed monthly subscription feesmainly resulted from an improvement in our customer base. Our total customerbase grew to 14.7 million at year-end 2003 (2002: 13.4 million), of which 41.7%were postpaid customers (2002: 41.2%). The higher customer base was the effectof an increase in postpaid customers (approximately 0.6 million) and prepaidcustomers (approximately 0.7 million). Increased traffic revenues in theNetherlands, Germany and Belgium were only partly offset by lower equipmentsales.

 

E-Plushas been fully consolidated since March 13, 2002. Before that date, E-Pluswas proportionally consolidated as we shared control of E-Plus with BellSouth.Upon the sale of our interest, Pannon GSM was deconsolidated as fromFebruary 4, 2002. BASE is fully consolidated as of February 7, 2001,after acquiring the remaining 50% in BASE. These changes in consolidationaffected the 2002 operating revenues positively by approximately EUR 440million.

 

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Includedin other operating revenues for 2003 are amounts totalingEUR 237 million consisting of a profit on the termination agreementbetween E-Plus and MobilCom and the book gain on the sale of our 16.33%interest in UMC. The 2002 other operating revenues included items amounting toEUR 575 million, consisting of the book gain on the sale of our 44.66% interestin Pannon GSM, the liquidation of the Telkomsel holding companies and the profiton the termination agreement between E-Plus and Quam.

 

Comparedto 2001, operating revenues rose by 13.7% to EUR 5,312 million in 2002. Theincrease reflects the changes in consolidation and organic growth as well asnon-recurring items. The sale of our interest in Telkomsel was included inother operating revenues of 2001 for an amount of EUR 346 million, whereasnon-recurring items amounting to EUR 575 million were included in 2002.

 

**GERMANY**

 

Weacquired our 77.49% interest in E-Plus on February 24, 2000, and the results ofoperations of this participation were proportionately consolidated as from thatdate. On March 13, 2002, BellSouth and KPN completed the exchange ofBellSouth’s 22.51% interest in E-Plus for KPN ordinary shares. Since that date,E-Plus has been fully consolidated in our Mobile division.

 

Intensemarketing and sales activities in 2003 resulted in an increase of the customerbase by 12.9% to 8.2 million at year-end 2003. The year 2002 ended with a lowercustomer base (7.3 million) than at year-end 2001 (7.5 million). This increasein 2003 is attributable to both postpaid and prepaid customers. The postpaidcustomer base rose 14.1% while the prepaid customer base grew 11.8%. As weachieved better results than the total market, we were able to grow ourestimated market share to 12.7% (2002: 12.3%).

 

In2002, we focused mainly on high-value customers (postpaid, businesssector) resulting in a loss ofmarket share and customers mainly due to a significant fall in the prepaidcustomer base; the customer-mix (postpaid versus prepaid) improved in 2002. In2003, we focused more on profitable growth and, accordingly, had more additionsto and retention of our prepaid customer base.

 

In2003, we also accounted for the cancellation of the national roaming contractbetween E-Plus and MobilCom. As a result, an amount of EUR 222 million isrecorded in the other operating revenues for the cancellation of this contract.

 

Totalnet sales in Germany rose 13.4% to EUR 2,283 million in 2003 due to increasedairtime revenues resulting from the higher customer base and the fullconsolidation of E-Plus. The revenue for peripheral and other equipment alsogrew 22.1% to EUR 182 million in 2003 due to increased sales of handsets.

 

E-Plus’revenues in 2002 were affected by agreements with Quam and MobilCom. In 2001,E-Plus entered into a national roaming agreement and a 3G network sharingagreement with Quam. In addition, E-Plus entered into a roaming agreement withMobilCom in 2001.

 

Under the roaming and network sharing agreementwith Quam, E-Plus received upfront payments of EUR 150 million from Quam, ofwhich EUR 113 million was received in 2001 and the remainder in 2002. Of theseupfront payments, EUR 63 million was recognized in income in 2002(2001: EUR 27 million) either as airtime revenues or other operating revenues.The remaining EUR 60 million was released from deferred revenues at theend of 2002, as E-Plus reached anagreement with Quam on the termination of all existing business relations inGermany. Moreover, we received a cash payment from Quam of EUR 150 million inDecember 2002.

 

***Traffic fees***

 

Atthe end of 2003, the total mobile market penetration reached a level ofapproximately 79% (2002: 72%; 2001: 68%). By the end of 2003, our estimatedmarket share in the German market amounted to 12.7% (2002: 12.3%; 2001: 13.3%).

 

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Thefollowing table is a three-year summary of developments in our German customerbase:

 

**GERMANCUSTOMER BASE DEVELOPMENT**

** **
| **Number of customers in thousands at  December 31** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|------------------------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                                                 |   |      |       |      |       |      |       |
| Postpaid                                             |   | 3,877     |       | 3,398     |       | 3,113     |       |
| Of which i-mode                                      |   | 358       |       | 123       |       | —    |       |
| Prepaid                                              |   | 4,329     |       | 3,871     |       | 4,368     |       |
| Of which i-mode                                      |   | 82        |       | —    |       | —    |       |
| **Total**                                            |   | **8,206** | ** ** | **7,269** | ** ** | **7,481** | ** ** |

 

Thefollowing table is a three-year summary of developments in our gross churnratio, based on management estimates, in Germany. The ratio excludes prepaidcustomers who have not upgraded their call credits in the past 13 months.

 

**CHURN RATIODEVELOPMENT**

** **
| **Ratios at year-end** |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------|--------|----------|--------|----------|--------|----------|--------|
|                   |   |     |   |     |   |     |   |
| Gross churn ratio      |   | 20       | %      | 25       | %      | 25       | %      |

 

Customersdiscontinuing the use of our services include involuntary churn (e.g.,customers we disconnected for non-payment) and voluntary churn (e.g., customerswho stopped using our services because they switched to another operator).

 

Grosschurn decreased to 20% at the end of 2003. The prepaid churn decreased to 19%in 2003, whereas the postpaid churn increased to 20%. At the end of 2002, grosschurn remained stable at 25% compared to 2001. However, gross churn in thepostpaid segment decreased to 19% at the end of 2002 (2001: 38%). This effectwas attributable to our focus on high value customers in conjunction withsuccessful retention activities. Gross churn in our prepaid segment increasedto 30% at the end of 2002 (2001: 16%) due to the stricter disconnection policyin 2002 as well as the effect of the SMS tariff increase in 2001.

 

Thetable below is a three-year summary of E-Plus’ traffic volumes:

 

**GERMANTRAFFIC VOLUMES AND WEIGHTED AVERAGE REVENUE**

** **
| **All figures include international  roaming on the E-Plus network** |     | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------|----------|----------|--------|----------|--------|----------|--------|
|                                                                 |     |     |   |     |   |     |   |
| Total traffic volumes (million of minutes per period)                |     | 7,139    |   | 6,605    |   | 6,034    |   |
|                                                                 |     |     |   |     |   |     |   |
| Weighted average monthly traffic volumes in minutes per customer (1) |     | 77       |   | 76       |   | 68       |   |
| •                                                               | Postpaid |     | 137    |     | 138    |     | 125    |   |
| •                                                               | Prepaid  |     | 26     |     | 27     |     | 28     |   |
|                                                                 |     |     |   |     |   |     |   |   |
| Monthly average revenues per user (in EUR)                           |     | 24       |   | 24       |   | 21       |   |
| •                                                               | Postpaid |     | 42     |     | 42     |     | 39     |   |
| •                                                               | Prepaid  |     | 9      |     | 9      |     | 9      |   |

 

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(1)                                  Weighted monthly average minutes per customerare calculated by taking the weighted average of the monthly average minutesper customer in the 12-month period. The average minutes per customer for eachmonth are calculated by dividing the total number of minutes each month by the averagenumber of customers during that month. Each month is weighted according to theaverage number of customers in that month.

 

In2003, our traffic fees increased by 11.6% to EUR 1,921 million. Total airtimeusage increased by 8.1% to 7,139 million minutes in 2003 due to the largercustomer base and the full consolidation of E-Plus as of March 13, 2002.

 

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In2002, traffic volumes increased by 9.5% to 6,605 million minutes,reflecting the larger postpaid customer base and increased airtime per postpaiduser.

 

Total monthly averagerevenue per user (ARPU) remained stable in 2003 compared to 2002. In 2002, theARPU increased due to an improved customer mix with more high-volume postpaidcustomers.

 

***Fixed monthly subscription fees***

 

In2003, fixed monthly subscription fees totaled EUR 180 million (2002: EUR 144million; 2001: EUR 101 million). The higher postpaid customer base and the fullconsolidation of E-Plus as of March 13, 2002 are the main drivers behindthis increase of 25% in 2003.

 

**THENETHERLANDS**

 

In2003, total net sales grew 5.1% to EUR 2,326 million, reflecting anincrease in traffic revenues due to an increase in traffic volumes percustomer, higher prices and more postpaid customers. Prepaid customers alsoincreased in the third and fourth quarter of 2003, following a clearing of thecustomer base and a decline of approximately 0.4 million prepaid customersbetween July 2002 and June 2003. This clearing was the result of a morestringent disconnection policy that reduced the maximum upgrade period for callcredits from 12 to 6 months. Traffic revenues increased to EUR 2,014million in 2003. This increase in traffic revenues was partly offset by lowerhandset sales as a result of declining handset prices and higher discounts tolarge customers. Equipment sales decreased to EUR 41 million in 2003.

 

Totalnet sales in 2002 increased by 9.2% to EUR 2,214 million primarily due toa growth in average traffic volumes per customer, an improved postpaid/prepaidcustomer mix and higher terminating tariffs. Equipment sales declined as aresult of a decrease in gross additions compared to 2001.

 

***Traffic fees***

 

Wesucceeded in maintaining market leadership in the Netherlands with an estimatedmarket share of 40.2% at the end of 2003 (2002: 41.9%; 2001: 42.8%). Mobilemarket penetration in the Dutch market increased to approximately 80% (2002:75%; 2001: 76%).

 

Inthe first quarter of 2003, the total customer base continued to declinefollowing a clearing of the prepaid customer base; this process was completedin the second quarter of 2003. As a result, the second quarter showed a slightincrease in the customer base compared to the first quarter of 2003. In thethird quarter of 2003, we passed the 5 million customer mark again. In 2003,the prepaid customer base increased by 3.0% to 3.3 million customers. Comparedto December 31, 2002, the total number of postpaid customers increased by4.0% from 1.9 million to 2.0 million.

 

In2002, our customer base declined by approximately 3.7% from 5.2 millioncustomers at the end of 2001 to 5.0 million at year-end 2002. In the thirdquarter of 2002, we introduced a new disconnection policy, causing our prepaidcustomer base to decline by 9.4% to 3.2 million customers. Conversely, weexperienced a growth in postpaid customers during 2002, amounting to 7.9%compared to 4.4% in 2001.

 

Thefollowing table is a three-year summary of developments in our Dutch customerbase:

 

** DUTCH CUSTOMER BASEDEVELOPMENT**

 
| **Number of customers in thousands at  December 31** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|------------------------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                                                 |   |      |       |      |       |      |       |
| Postpaid                                             |   | 1,953     |       | 1,877     |       | 1,739     |       |
| Of which i-mode                                      |   | 240       |       | 111       |       | —    |       |
| Prepaid                                              |   | 3,252     |       | 3,157     |       | 3,486     |       |
| Of which i-mode                                      |   | 163       |       | —    |       | —    |       |
| **Total**                                            |   | **5,205** | ** ** | **5,034** | ** ** | **5,225** | ** ** |

 

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Thefollowing table is a three-year summary of developments in our gross churnratio, based on management estimates in the Netherlands:

 

**CHURN RATIODEVELOPMENT**

 
| **Ratios at year-end** |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------|--------|----------|--------|----------|--------|----------|--------|
|                   |   |     |   |     |   |     |   |
| Gross churn ratio      |   | 22       | %      | 27       | %      | 19       | %      |

 

Thedecrease in the churn ratio in 2003 compared to 2002 reflects the lessstringent disconnection policy introduced for prepaid customers in 2003. In2002, the higher churn ratio was mainly due to an increase in disconnections onprepaid subscriptions caused by a reduction of the maximum upgrade period forcall credits from 12 to 6 months.

 

Ourtraffic fees increased by 7.1% to EUR 2,014 million in 2003. Total airtimeusage increased by 5.0% to 7,806 million minutes in 2003 due to the increase ofthe average monthly traffic volumes per customer. Also, the improved blendedARPU performance affected our traffic fees.

 

Improvedtraffic volumes per customer, more postpaid customers and increased terminatingtariffs resulted in a 11.4% growth of traffic fees to EUR 1,880 million in2002. Total airtime usage increased to 7,434 million minutes in 2002; inparticular, the average monthly traffic volumes of postpaid customers rose to260 minutes in 2002 (2001: 257 minutes).

 

Thefollowing table is a three-year summary of average monthly airtime and monthlyaverage revenues per customer:

 

**DUTCH TRAFFICVOLUMES AND WEIGHTED AVERAGE REVENUE**

** **
| **All figures include international  roaming on our network**        |     | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------|----------|----------|--------|----------|--------|----------|--------|
|                                                                 |     |     |   |     |   |     |   |
| Total traffic volumes (millions of minutes per period)               |     | 7,806    |   | 7,434    |   | 6,951    |   |
|                                                                 |     |     |   |     |   |     |   |
| Weighted average monthly traffic volumes in minutes per customer (1) |     | 131      |   | 121      |   | 114      |   |
| •                                                               | Postpaid |     | 265    |     | 260    |     | 257    |   |
| •                                                               | Prepaid  |     | 46     |     | 47     |     | 46     |   |
|                                                                 |     |     |   |     |   |     |   |   |
| Monthly average revenues per user (in EUR)                           |     | 38       |   | 34       |   | 31       |   |
| •                                                               | Postpaid |     | 74     |     | 72     |     | 69     |   |
| •                                                               | Prepaid  |     | 15     |     | 14     |     | 12     |   |

 

----

(1)                                  Weighted monthly average minutes per customerare calculated by taking the weighted average of the monthly average minutesper customer in the 12-month period. The average minutes per customer for eachmonth are calculated by dividing the total number of minutes each month by theaverage number of customers during that month. Each month is weighted accordingto the average number of customers in that month.

 

In2003, ARPU rose for both postpaid and prepaid customers, reflecting the highertraffic volumes and increased fees contributable to i-mode and price increasesintroduced in the second quarter of 2002. In 2002, the increase in ARPU wasmainly driven by higher revenues from airtime usage due to higher trafficvolumes and prices mainly for mobile terminating traffic and prepaid outgoingtraffic.

 

***Fixed monthly subscription fees***

 

In2003, fixed monthly subscription fees totaled EUR 271 million (2002: EUR 256million; 2001: EUR 224 million). The increased postpaid customer base is themain driver behind this increase of 5.9% in 2003 (2002: + 14.3%). The increasein i-mode subscriptions and the price increases also contributed to the highersubscription fees.

 

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**BELGIUM**

 

Totalnet sales posted for BASE increased by 10.7% to EUR 320 million in 2003due to the combined effect of more customers and higher airtime usage, butpartly offset by lower handset sales. The lower handset sales were due to theoutsourcing of most of the handset distribution activities.

 

InBelgium, the growth in mobile market penetration was only one percentage pointin 2003. By the end of December 2003, the total mobile market penetrationamounted to 79% of the Belgian population (2002: 78%; 2001: 76%).

 

Atthe end of 2003, our customer base in Belgium amounted to 1.3 million customers(2002: 1.1 million; 2001: 1.0 million). Our estimated market share at year-end2003 was 15.0%, compared to 14.4% in 2002 and 13.0% in 2001. BASE’s ARPU roseto EUR 22 in 2003.

 

Thefollowing table is a three-year summary of developments in our Belgian customerbase:

 

**BELGIANCUSTOMER BASE DEVELOPMENT**

 
| **Number of customers in thousands at  December 31** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|------------------------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                                                 |   |      |       |      |       |      |       |
| Postpaid                                             |   | 279       |       | 266       |       | 280       |       |
| Of which i-mode                                      |   | 24        |       | 2         |       | —    |       |
| Prepaid                                              |   | 974       |       | 872       |       | 723       |       |
| Of which i-mode                                      |   | 1         |       | —    |       | —    |       |
| **Total**                                            |   | **1,253** | ** ** | **1,138** | ** ** | **1,003** | ** ** |

 

Thefollowing table is a three-year summary of developments in our gross churnratio, based on management estimates, in Belgium. The ratio excludes prepaidcustomers who have not upgraded their call credits in the past 13 months.

 

**CHURN RATIODEVELOPMENT**

 
| **Ratios at year-end** |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------|--------|----------|--------|----------|--------|----------|--------|
|                   |   |     |   |     |   |     |   |
| Gross churn ratio      |   | 20       | %      | 17       | %      | 21       | %      |

 

Thegross churn ratio in 2003 amounted to 20%. Even though we managed to furtherreduce postpaid churn in 2003 compared to 2002, the churn in prepaid customersincreased as we tightened our disconnection policy.

 

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Thefollowing table is a three-year summary of the effects of the growth in BASE’scustomer base on traffic volumes.

 

**BELGIANTRAFFIC VOLUMES AND WEIGHTED AVERAGE REVENUE**

 
| **All figures include international roaming on our network**         |     | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------|----------|----------|--------|----------|--------|----------|--------|
|                                                                 |     |     |   |     |   |     |   |
| Total traffic volumes (millions of minutes per period)               |     | 1,190    |   | 1,000    |   | 852      |   |
|                                                                 |     |     |   |     |   |     |   |
| Weighted average monthly traffic volumes in minutes per customer (1) |     | 86       |   | 76       |   | 88       |   |
| •                                                               | Postpaid |     | 213    |     | 189    |     | 170    |   |
| •                                                               | Prepaid  |     | 48     |     | 34     |     | 47     |   |
|                                                                 |     |     |   |     |   |     |   |   |
| Monthly average revenues per user (in EUR)                           |     | 22       |   | 21       |   | 23       |   |
| •                                                               | Postpaid |     | 59     |     | 46     |     | 40     |   |
| •                                                               | Prepaid  |     | 11     |     | 10     |     | 14     |   |

 

----

(1)           Weighted monthly averageminutes per customer are calculated by taking the weighted average of themonthly average minutes per customer in the 12-month period. The averageminutes per customer for each month are calculated by dividing the total numberof minutes each month by the average number of customers during that month.Each month is weighted according to the average number of customers in thatmonth.

 

ARPUdecreased during 2002 due to an increase of the prepaid customer base.  In 2003, the volumes increased due toorganic usage growth within both prepaid and postpaid. The increase in postpaidARPU is driven by higher service revenues.

 

**Operatingexpenses**

 

Thetable below sets forth a three-year summary of developments in total operatingexpenses in our Mobile division:

 

**OPERATINGEXPENSES**

 
| **Amounts in millions of euro**           |   | **2003**  |       | **2002**   |       | **2001**   |       |
|-------------------------------------------|--------|-----------|------------|------------|------------|------------|------------|
| Germany                                   |   | 2,562     |       | 8,964      |       | 16,470     |       |
| The Netherlands                           |   | 1,500     |       | 1,438      |       | 1,375      |       |
| Belgium                                   |   | 318       |       | 1,060      |       | 477        |       |
| Other (including intra-division expenses) |   | -48       |       | 104        |       | 481        |       |
| **Total  operating expenses**             |   | **4,332** | ** ** | **11,566** | ** ** | **18,803** | ** ** |

 

In 2003, total operatingexpenses decreased by 62.5% to EUR 4,332 million mainly as a result of theimpairments on goodwill and licenses in 2002. The increase in operatingexpenses due to changes in consolidation as a result of the acquisition of22.51% of E-Plus, the EUR 1 million release from the restructuring provision,higher traffic expenses, increased acquisition costs and access costs were morethan offset by lower depreciation and amortization charges includingimpairments.

 

In2002, total operating expenses decreased by 38.5% to EUR 11,566 millioncompared to 2001. The decrease included the effects of impairments in 2002 and2001. In 2002, EUR 1,852 million was impaired on goodwill of E-Plus and BASEand EUR 5,412 million on licenses of E-Plus and BASE, while in 2001 EUR 13,701million was impaired on goodwill of E-Plus and EUR 135 million on goodwill ofHutchison 3G UK. The decrease also reflected the sale of Pannon GSM, which isoffset by the change in consolidation related to the acquisition of 22.51% ofE-Plus. Included in the 2002 operating expenses is a capital tax charge ofEUR 77 million resulting from the conversion of EUR 14 billionshareholder loans into equity of KPN Mobile.

 

Operatingexpenses also decreased due to lower depreciation and amortization charges,lower costs of handsets as a result of lower gross additions as well as lowersubsidization, a decrease in bonuses and commissions paid to dealers as well aslower marketing and other operating expenses.

 

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Wehave not yet begun amortizing the UMTS licenses acquired in 2000 and 2001, aswe do not yet provide services under these licenses.

 

**GERMANY**

 

In2003, total operating expenses decreased by 71.4% to EUR 2,562 million.The operating expenses decreased primarily due to impairments on goodwill andlicenses in 2002 of EUR 6,643 million, partly offset by the full consolidationof E-Plus during 2002 (which increased expenses by approximately EUR 90million). The cost of materials increased as a result of a higher level ofhandset sales. The costs of work contracted out increased due to higherinterconnection costs in line with higher airtime usage revenues. Furthermore,the fees to distributors increased as a result of the intensified subscriberacquisition. The intensified subscriber acquisition is also reflected in theother operating expenses where the costs for marketing and sales andadvertising increased.

 

In2002, total operating expenses decreased by 45.6% to EUR 8,964 million.Included in the 2001 total operating expenses is a goodwill impairment chargeof EUR 13,701 million and a EUR 18 million restructuring charge.  Operating expenses also decreased due tolower costs of handsets sold and lower commissions and bonuses to dealers,resulting from both a decrease in gross additions, and lower marketing expenses.In the fourth quarter of 2002, we attracted new customers with a new marketingcampaign focused on growth of our customer base. As a result, the cost ofmaterials (primarily handsets) and commissions increased.

 

**THENETHERLANDS**

 

In2003, operating expenses amounted to EUR 1,500 million. The cost ofmaterials increased because of a higher handset sales volume and higher handsetcosts as a result of the accelerated adoption of i-mode. Interconnection costsincreased due to a higher volume (in minutes) against higher prices compensatedby lower roaming costs due to a lower roaming volume and increasing use of ourGerman and Belgian networks by our Dutch customers. The fees for distributorsincreased as a result of higher sales volume and more promotional activities.The other operating expenses decreased, while depreciation and amortizationcharges remained stable compared to 2002.

 

In2002, operating expenses amounted to EUR 1,438 million. Overall operatingexpenses increased as a result of increased expenses for interconnection androaming following higher traffic volumes. These expenses more than offsetdecreased expenses of handsets due to lower gross additions, a decrease inbonuses and commissions paid to dealers as well as decreased marketing andother operating expenses.

 

**BELGIUM**

 

Totaloperating expenses decreased by EUR 742 million to EUR 318 million in 2003primarily due to the reversal of impairments on GSM licenses (EUR 103 million)as a result of positive business developments within BASE in the second half of2003, and impairments of goodwill (EUR 425 million) and licenses (EUR 196million) in 2002. Hardware costs were EUR 14 million lower compared to 2002 dueto the outsourcing of most of the handset distribution activities. The costs ofwork contracted out remained stable. The tariff for access costs dropped as aconsequence of more on-net calling offset by higher traffic volumes. Networkmaintenance costs were lower as a result of efficiency improvements offset byhigher distributors fees. Salaries and wages slightly decreased, while otheroperating expenses increased due to higher marketing expenses offset by loweradditions to provisions.

 

In2002, operating expenses of BASE increased by EUR 583 million toEUR 1,060 million. This increase reflects the impairment charges ofgoodwill (EUR 425 million) and licenses (EUR 196 million), partly offset bycost and headcount reductions.

 

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**Other ac****tivities**

 

Thetable below sets forth a three-year summary of developments in our Otheractivities:

 

**OTHERACTIVITIES**

 
| **Amounts in millions of euro** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|---------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                            |   |      |       |      |       |      |       |
| Total net sales                 |   | 839       |       | 1,128     |       | 1,637     |       |
| Own work capitalized (1)        |   | 1         |       | 12        |       | 275       |       |
| Other operating revenues        |   | 524       |       | 124       |       | 236       |       |
| **Total operating  revenues**   |   | **1,364** | ** ** | **1,264** | ** ** | **2,148** | ** ** |
|                            |   |      | ** ** |      | ** ** |      | ** ** |
| **Operating  expenses**         |   | **1,016** | ** ** | **1,586** | ** ** | **2,969** | ** ** |
|                            |   |      | ** ** |      | ** ** |      | ** ** |
| **Operating  result**           |   | **348**   | ** ** | **-322**  | ** ** | **-821**  | ** ** |

 

----

(1)                                  Salaries, cost of materials and other directcosts, interest and indirect costs attributable to the production of property,plant and equipment for own use are capitalized and depreciated over the usefullives of the assets.

 

**Operatingrevenues**

 

In 2003, total operating revenues amounted to EUR1,364 million (2002: EUR 1,264 million), including EUR 435 million relating tothe sale of Directory Services (‘Telefoongids/Telemedia’) and EUR 26 millionrelating to the sale of Inmarsat. Operating revenues decreased due to thedeconsolidation of our network construction unit KPN Netwerk Bouw as of July31, 2002 and Directory Services as of February 13, 2003, and lower revenuesfrom our retail activities and KPN EnterCom. Our international revenues fromXantic improved, but this was offset by devaluation of the US dollar.

 

In 2002, total operating revenues amounted to EUR1,264 million (2001: EUR 2,148 million including book gains of EUR 51 millionon KPNQwest, EUR 59 million on Datacenter and EUR 41 million on real estate)and comprised EUR 39 million relating to the sale of various assetsincluding the disposal of real estate. The decrease in operating revenues wasprimarily due to the effects of the deconsolidation of KPNQwest, the sale of aninterest of 70% in KPN Lease and lower own work capitalized. The latter is dueto a substantial reduction in capital expenditures and the sale of KPN NetwerkBouw. In addition, KPN EnterCom and Xantic reported a decrease in operatingrevenues, following a lower level of sales and activities.

 

**Operating expenses**

 

In 2003, operating expenses in Other activitiesamounted to EUR 1,016 million (2002: EUR 1,586 million) and includedrestructuring charges of EUR 29 million (including Xantic which restructuredits business to enhance efficiency), impairment charges of EUR 46 millionrelated to Xantic (concerning the goodwill on the former SpecTec business) andimpairments of EUR 15 million on intangible fixed assets. Operating expensesalso decreased as a result of the sale and deconsolidation of DirectoryServices and Netwerk Bouw, as well as cost reduction programs.

 

In 2002, operatingexpenses in Other activities amounted to EUR 1,586 million (2001: EUR2,969 million including a restructuring charge of EUR 326 million andimpairment charges related to PanTel of EUR 57 million and Ceský Telecom of EUR182 million) and included a loss of EUR 68 million related to the disposal ofKPN Netwerk Bouw, restructuring charges of EUR 82 million, impairments of EUR31 million on goodwill of KPNQwest and EUR 6 million related to the impairmentsof tangible fixed assets of KPNQwest. Operating expenses also declined as aresult of the cost reduction programs. Depreciation and amortization chargesdecreased due to the deconsolidation of KPNQwest, KPN Lease and Datacenter aswell as the sale of some real estate, and the termination of a number of activitiesthat were part of our former Internet, Call Center and Media Services segment.

 

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**Liquidity andcapital resources**

 

**Cash flowinformation**

 

Thefollowing table provides a three-year summary of our cash flows for the yearsended December 31, 2003, 2002 and 2001:

 

**NET CASHFLOWS**

 
| **Amounts in millions of euro**                        |   | **2003** |       | **2002**   |       | **2001**  |       |
|--------------------------------------------------------|--------|----------|------------|------------|------------|-----------|------------|
|                                                   |   |     |       |       |       |      |       |
| Net cash flow provided by operating activities         |   | 4,087    |       | 3,975      |       | 2,565     |       |
| Net cash flow used in investing activities             |   | -48      |       | -335       |       | -1,664    |       |
| Net cash flow used in/provided by financing activities |   | -4,853   |       | -8,329     |       | 2,947     |       |
| **Change in cash and cash equivalents**                |   | **-814** | ** ** | **-4,689** | ** ** | **3,848** | ** ** |

 

**OPERATINGACTIVITIES**

 

In 2003, cash flow provided by operating activitiesincreased by EUR 112 million to EUR 4,087 million.

 

Cash flow from operating activities before changesin working capital improved by EUR 1,542 million, mainly as a result of a EUR8,689 million increase in operating result offset by a EUR 7,717 reduction ofdepreciation, amortization and impairment charges. Included in the improvedoperating result are the proceeds from the termination agreement with MobilComof EUR 110 million.

 

Changes in working capital in 2003 had a negativeeffect on cash flow from operating activities of EUR 333 million. In 2002, ourstrong focus on working capital reduction resulted in a positive effect on cashflow of EUR 1,097 million.

 

In 2003, net interest paid amounted to EUR 976million including EUR 72 millionrepresenting differences in future interest expenses resulting from therehedging of our cross-currency swaps. Net corporate taxes received in 2003 amountedto EUR 178 million. Other items included in net cash flow provided by operatingactivities in 2003 were dividends received from Ceský Telecom (EUR 81 million),capital tax paid related to the refinancing of KPN Mobile (EUR 77 million) andthe payment in 2003 of the pension shortfall as calculated in December 2002(EUR 52 million).

 

In 2002, cash flow from operating activities increasedby EUR 1,410 million to EUR 3,975 million. The increase resulted from animproved cash flow of EUR 812 million from operating activities before changesin working capital and EUR 598 million as a result of changes in workingcapital. The net interest paid amounted to EUR 1,213 million and net corporatetaxes received amounted to EUR 103 million.

 

Net cash flow from operations before changes inworking capital improved by 39.3% to EUR 2,878 million in 2002 (2001: EUR 2,066million). The increase in net cash flow from operations before changes inworking capital reflects the improved operating results before depreciation,amortization and impairments. The lower interest expenses also led to animproved cash flow from operations before changes in working capital.

 

The changes in working capital improved from EUR499 million in 2001 to EUR 1,097 million in 2002. This improvement was mainlycaused by lower accounts receivables, tax refunds related to prior years andthe effect of advanced billing of subscription fees by Fixed Telephony. In2001, net interest paid amounted to EUR 1,176 million, whereas the netcorporate taxes paid amounted to EUR 123 million.

 

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**INVESTINGACTIVITIES**

 

Thetable below is a three-year summary of our investments and additions and thereconciliation to the cash flow used in investing activities:

 
| **Amounts in millions of euro**                   |   | **2003**  |       | **2002**  |       | **2001**  |       |
|---------------------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                                              |   |      |       |      |       |      |       |
| Additions to intangible fixed assets              |   | 6         |       | 1,270     |       | 809       |       |
| Additions to property, plant and equipment        |   | 1,499     |       | 1,137     |       | 2,949     |       |
| Additions to financial fixed assets               |   | 107       |       | 88        |       | 407       |       |
| **Total investments and additions**               |   | **1,612** | ** ** | **2,495** | ** ** | **4,165** | ** ** |
|                                              |   |      |       |      |       |      |       |
| Less: non-cash items                              |   | -172      |       | -1,358    |       | -103      |       |
| Less: proceeds from sale of assets                |   | -1,392    |       | -802      |       | -2,398    |       |
| **Total  cash flow used in investing activities** |   | **48**    | ** ** | **335**   | ** ** | **1,664** | ** ** |

 

***Intangible fixed assets***

 

In2003, additions totaled EUR 6 million. Additions in 2002 related mainly to the(non-cash) goodwill of EUR 1,253 million arising from the acquisitionof the remaining 22.51% stake in E-Plus from BellSouth in exchange for234.7 million of our shares. In 2001, investments related primarily to thegoodwill of EUR 508 million on the acquisition of the remaining 50%in BASE as well as the acquisition of a UMTS license in Belgium forEUR 150 million.

 

***Property, plant and equipment***

 

In2003, the additions to tangible fixed assets amounted to EUR 1,499 million(2002: EUR 1,137 million; 2001: EUR 2,949 million). Thisamount included non-cash items such as capitalized asset retirement obligations(EUR 30 million) and lease and dismantling obligations (EUR 48 million)relating to acquired MobilCom assets.

 

***Financial fixed assets***

 

Theadditions in 2003 amounted to EUR 107 million (2002:EUR 88 million; 2001: EUR 407 million), including theadditions for amounts still to be received from Hutchison Whampoa Ltd. (EUR 41million) and MobilCom (EUR 53 million).

 

***Proceeds from the sale of assets***

 

In 2003, total proceeds from sales of assetsamounted to EUR 1,392 million, including the proceeds of the sale of ourDirectory Services (EUR 500 million), our interests in Ceský Telecom (EUR 570million), Hutchison 3G UK (EUR 87 million), Inmarsat (EUR 70 million), UMC (EUR72 million, which includes the redemption of our loan) and Vision CzechRepublic (EUR 55 million) as wellas the proceeds from the sale of various other assets including real estate.

 

In2002, total proceeds from sales of assets amounted toEUR 802 million. These proceeds included EUR 603 million fromthe sale of Pannon GSM as well as the sale of various other assets, includingreal estate.

 

In2001, total proceeds from sales of assets amounted toEUR 2,398 million relating to the disposal of non-core assets,including the sale of our interest in eircom/Eircell(EUR 1,204 million), Telkomsel (EUR 668 million), KPN Lease(EUR 161 million), fixed assets (EUR 100 million),Datacenter activities (EUR 163 million) and the sale of 10% of ourshares in KPNQwest (EUR 102 million).

 

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**FINANCINGACTIVITIES**

 

***2003***

 

In2003, total net cash flow used in financing activities amounted toEUR 4,853 million. During 2003, financing activitiesconsisted mainly of scheduled and early redemptions of debt. These earlyredemptions were made in the context of our strategy to manage and reduce ouroutstanding debt position, to improve our debt maturity profile and to use ourcash and cash equivalents in a prudent manner.

 

In April 2003 we renegotiated a EUR 1.5 billion creditfacility. The term of this facility has been extended to April 2006 (with afurther extension option of one year to April 2007 at our discretion, providedthat we have a credit rating of at least BBB with Standard & Poor’s and atleast Baa2 with Moody’s, both with a stable outlook). Also, the facility contains improved interestmargins and fees and no longer restricts the use of cash consideration foracquisitions or the prepayment of debt.

 

Additionally,in April 2003, we redeemed early the outstanding amount of EUR 1,638million of our subordinated loan facility with BellSouth and this facility wascancelled by us. The money was borrowed early in 2002 following the exchange ofBellSouth’s 22.51% interest in E-Plus for 234.7 million of KPN’s ordinaryshares. The original redemption schedule consisted of EUR 500 million payablein October 2003 and EUR 1,138 million in March 2004.

 

During2003, we also redeemed early EUR 373 million of the Convertible Bondmaturing in 2005, EUR 146 million of the Global Bond (Euro portion)maturing in 2005, EUR 586 million of the Eurobonds maturing in 2006,EUR 5 million of a portion of the Private Loans maturing in 2005,EUR 3 million of a portion of the Private Loans finally maturing in2006, EUR 26 million of the financial leases of E-Plus andEUR 14 million of the long-term portion of the Xantic shareholderloan (Telstra part). Total costs associated with the early redemption of theaforementioned debts amounted to EUR 69 million and were includedunder financial income and expense.

 

Inaddition, we redeemed the full amount of EUR 50 million drawn under thesecuritization program, which remains in place. The total size of thissecuritization program was reduced from EUR 250 million to EUR 200 million.

 

Inaccordance with our regular redemption schedule, we also redeemed EUR 1,042 million ofthe Eurobond maturing in 2003, approximately EUR 258 million being theoutstanding amount of our loans provided by the Dutch State in 1989, EUR 386million of our Syndicated Loan (entered into in 1998 with a group of banks),EUR 73 million of our financial leases and EUR 51 million of other loans. In2003, new long-term financing was limited to EUR 45 million.

 

InJuly and September of 2003, we rehedged the swap related to the USD 1 billionGlobal Bond 2000-2030 in order to continue to protect us from currency raterisk on this bond (since the counter party had indicated that it intended toexercise its right under the original swap transaction to terminate part ofthis transaction against market value as of October 1, 2003). The lower USDrate in the rehedge resulted in a decrease of the euro equivalent of the GlobalBond 2000 – 2030, resulting in a gross debt reduction of EUR 241 million.

 

***2002***

* *

In 2002, total net cash flow used in financing activities amounted toEUR 8,329 million. In 2002, our financing activities consisted mainlyof scheduled and early redemptions of debt.

 

InApril 2002, we redeemed early EUR 332 million of the Eurobondmaturing in 2003 through a public tender offer. Furthermore, in December 2002,we redeemed early

 

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EUR 542 millionof the Global Bond USD maturing in 2005 and EUR 195 million of theGlobal Bond EUR maturing in 2005 through two separate public tenderoffers.

 

Inaddition, during the year 2002, we redeemed early EUR 375 million ofthe Eurobond maturing in 2004 and EUR 116 million of the Eurobondmaturing in 2003 in the open market and redeemed earlyEUR 111 million of a portion of the Private Loans maturing in 2006,EUR 55 million of a portion of the Private Loans maturing in 2005,EUR 64 million of the Zero Coupon Loan maturing in 2005, andEUR 9 million of the Zero Coupon Loan maturing in 2007.

 

InJune 2002, we redeemed early the outstanding amount of our EuropeanInvestment Bank Loan maturing in 2005 for an amount ofEUR 181 million (in addition to a scheduled redemption on this loanin April 2002 for an amount of EUR 46 million), and inDecember 2002 we also redeemed early the E-Plus Project Finance maturing in2007 for an amount of EUR 1,881 million and this facility wascancelled by us.

 

Totalcosts associated with the early redemption in 2002 of the aforementioned debtsamounted to EUR 120 million and were included under financial incomeand expenses.

 

InJanuary 2002 we entered into an agreement with BellSouth under whichBellSouth agreed to exchange its 22.51% interest in E-Plus for234.7 million of our ordinary shares. We assumed approximatelyEUR 2.15 billion (100%) of E-Plus’ shareholder loans from BellSouthby borrowing this amount under the subordinated loan facility between BellSouthand our Company. In December 2002, we redeemed EUR 516 millionof this amount, and in February 2002 we redeemed EUR 483 millionthat was outstanding under the original subordinated loan agreement withBellSouth.

 

In accordance with our regular redemption schedule,we also redeemed EUR 3,325 million of the Eurobond maturing in 2002.

 

***2001***

 

In2001, total cash flow provided by financing activities amounted toEUR 2,947 million, consisting of a cash inflow ofEUR 9,425 million offset by a cash outflow ofEUR 6,478 million.

 

InJanuary 2001, KPNQwest issued a bond, which was proportionallyconsolidated in our accounts (EUR 223 million). InFebruary 2001, we redeemed EUR 235 million of BASE’s bank debtfollowing our acquisition of the remaining interest in BASE. E-Plus redeemed aEUR 1.2 billion credit facility and, in April 2001, entered into a newEUR 2.5 billion credit facility, of which approximately EUR 1.9 billion was drawn (our 77.49%interest at the time amounted to EUR 1.5 billion). In April 2001, weissued approximately EUR 2.3 billionof Eurobonds in two tranches: one tranche of EUR 2.0 billion and onetranche of approximately EUR 280 million(GBP 175 million). In June 2001, we redeemedEUR 2.0 billion of floating rate notes and approximately EUR 1.0 billion notes privatelyplaced in Japan maturing in 2001. In the third and fourth quarter of 2001, weredeemed approximately EUR 1.2 billionof notes, which had been privately placed in Japan. Furthermore, we redeemedearly EUR 175 million of floating rate notes maturing inJune 2002 and EUR 10 million of fixed rate notes maturing inJune 2003. In November 2001, we concluded a securitization program ofup to a maximum amount of EUR 250 million for receivables from retailcustomers, upon which we drew EUR 50 million. On December 12,2001, we issued 1,020,408,163 ordinary shares at a price of EUR 4.90 pershare via a public offering. Total net proceeds to us from the offering amountedto approximately EUR 4,843million.

 

**Credit rating**

 

On June 20, 2003, Moody’s changed our credit ratingfrom Baa2 on review for upgrade to Baa1 with a stable outlook (following anearlier upgrade by Moody’s from Baa3 to Baa2 on April 10, 2003 and a change ofthe outlook from stable to positive on January 22, 2003). On January 29, 2004, Standard & Poor’s raised our creditrating from BBB+ with a positive outlook to A– with a stable outlook (following

 

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an earlier adjustment from BBB with a positiveoutlook to BBB+ with a positive outlook on June 24, 2003 and a change of theoutlook from stable to positive on March 12, 2003).

 

**Commitmentsand contingencies**

 

**CONTRACTUAL OBLIGATIO**NS

 

Thefollowing table sets forth our contractual obligations over the coming years:

 
|                                                             |   | **Amounts due by period** |       |
|------------------------------------------------------------------|--------|---------------------------|------------|
| **Amounts in millions of euro**                                  |   | **Total**                 |       | **Less than 1 year** |   | **1 - 3 years** |   | **3 - 5 years** |   | **More than  5 years** |   |
| Long-term debt obligations (excluding capital lease obligations) |   | 10,076                    |       | 907 |   | 4,458 |   | 1,818 |   | 2,893 |   |
| Capital lease obligations                                        |   | 83                        |       | 45 |   | 38 |   | — |   | — |   |
| **Long-term  debt and capital lease obligations**                |   | **10,159**                | ** ** | **952** | ** ** | **4,496** | ** ** | **1,818** | ** ** | **2,893** | ** ** |
| Capital commitments                                              |   | 266                       |       | 263 |   | 3 |   | — |   | — |   |
| Rental contracts                                                 |   | 1,876                     |       | 278 |   | 459 |   | 950 |   | 189 |   |
| Operating lease obligations                                      |   | 125                       |       | 57 |   | 44 |   | 16 |   | 8 |   |
| Guarantees                                                       |   | 40                        |       | 9 |   | 5 |   | 1 |   | 25 |   |
| Obligations to purchase                                          |   | 1,382                     |       | 583 |   | 470 |   | 268 |   | 61 |   |
| Other                                                            |   | 19                        |       | 11 |   | 8 |   | — |   | — |   |
| **Off-balance  sheet commitments**                               |   | **3,708**                 | ** ** | **1,201** | ** ** | **989** | ** ** | **1,235** | ** ** | **283** | ** ** |
| **Total**                                                        |   | **13,867**                | ** ** | **2,153** | ** ** | **5,485** | ** ** | **3,053** | ** ** | **3,176** | ** ** |

 

There are no off-balancesheet arrangements, other than those disclosed in the sections titled‘Financing – Fair value of Financial Instruments’ and ‘Commitments,contingencies and legal proceedings’, that have or reasonably likely to havecurrent or future effect on our financial condition, changes in financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources that is material to investors.

 

For additional information, please refer to thesections titled ‘Financing - Fair value of Financial Instruments’ and‘Commitments, contingencies and legal proceedings’ in our Consolidated Financial Statements.

 

**Long andshort-term liabilities**

 

**REDEMPTION SCHEDULE OF TOTAL INTEREST-BEARING DEBT**

 

Thefollowing table sets forth the redemption schedule of all our interest-bearingdebt over the coming years:

 
| **Amounts  in  millions of  euro** |   | **Total**  |       | **Convertible  subordinated** |       | **Bond**  |       | **Zero  coupon** |       | **Capital  lease  obligations** |       | **Other** |       |
|------------------------------------|--------|------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|---------------------------------|------------|-----------|------------|
|                               |   |       |       |                          |       |      |       |             |       |                            |       |      |       |
| 2004                               |   | 952        |       | —                        |       | 875       |       | —           |       | 45                              |       | 32        |       |
| 2005                               |   | 2,429      |       | 1,127                         |       | 992       |       | 4                |       | 25                              |       | 281       |       |
| 2006                               |   | 2,067      |       | —                        |       | 2,004     |       | —           |       | 13                              |       | 50        |       |
| 2007                               |   | 38         |       | —                        |       | —    |       | —           |       | —                          |       | 38        |       |
| 2008                               |   | 1,780      |       | —                        |       | 1,780     |       | —           |       | —                          |       | —    |       |
| Subsequent years                   |   | 2,893      |       | —                        |       | 2,893     |       | —           |       | —                          |       | —    |       |
| **Total**                          |   | **10,159** | ** ** | **1,127**                     | ** ** | **8,544** | ** ** | **4**            | ** ** | **83**                          | ** ** | **401**   | ** ** |

 

For more information on our debt profile, pleaserefer to the section titled ‘Financing’ in our Consolidated Financial Statements.

 

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**Availablefinancing sources in 2004**

 

As of December 31, 2003, we had cash and cashequivalents of approximately EUR 1,839 million. In addition to the availablecash and cash equivalents, cash flows from operations and revenues from anyfurther sales of non-core assets, we have the following financing sourcesavailable:

 

***EUR 1.5 billion multi-currency revolving credit facility***

 

On April 14, 2003, we renegotiated our EUR 1.5billion credit facility to replace the EUR 1.75 billion credit facilityconcluded on May 17, 2002. The size of the facility has been further reducedbecause of our improved cash position. We have not drawn any funds under thisfacility. The final termination date for the renewed facility is April 14,2006. At our discretion, thefacility may be extended by one year (through April 2007), provided that we have a credit rating of at least BBB withStandard & Poor’s and at least Baa2 with Moody’s (both with a stableoutlook).

 

The requirements under this facility with respectto our EBITDA levels have been relaxed. EBITDA is defined in the creditagreement as the results of the group (i) before taking into accountextraordinary items and exceptional items, (ii) before deducting taxes, (iii)before deducting amortization of goodwill, financing costs and costs ofacquisitions, (iv) before taking into account interest, (v) after deducting anygain and adding back any loss on disposals and revaluation of assets, (vi)before taking into account provisions against liabilities, (vii) beforededucting depreciation, and (viii) after taking into account dividends andcapital distributions. Our ratio of EBITDA to net interest expense is nowrequired to be equal to or greater than 3.5:1 through December 2003, and isrequired to be equal to or greater than 4.0:1 thereafter. Our ratio of totalconsolidated net borrowings to EBITDA may not exceed 3.5:1 through December2003, and may not exceed 3.0:1 thereafter. These requirements were met in 2003.

 

The facility requires that our fixed-line businessremains wholly owned by us and restricts certain subsidiary borrowings.

 

The facility prohibits us from paying dividends incash on KPN’s ordinary shares, unless we have a credit rating of at least BBBwith Standard & Poor’s and Baa2 withMoody’s (in each case with a stable outlook). KPN’s current rating is A– with Standard& Poor’s (stable outlook) and Baa1 with Moody’s (stable outlook).

 

The facility no longer contains specificrestrictions with respect to the early redemption of public debt or cashacquisitions. However, the facility may not be utilized for the purpose of the(early) redemption of subordinated debt.

 

In addition, the facility provides that we may notenter into a statutory merger (*juridischefusie)* without the prior consent of the lenders representing two-thirdsof the facility amount.

 

If we fail in the future to comply with any of thecovenants contained in the facility, we may be required to immediately repayany outstanding indebtedness under the facility, and we may be unable to accessfunding under the facility. In addition, a default under the facility maytrigger defaults under other financing arrangements, requiring us to repayother indebtedness as well. Likewise, defaults under other financingarrangements may trigger defaults under this facility. The interest ratepayable on drawings under the facility will be EURIBOR (or LIBOR, dependingupon the currency of drawing) plus an applicable margin, which varies dependingupon our long-term (unsecured) debt ratings by Standard & Poor’s and Moody’s.

 

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The margins have been improved and are determinedby the average of the two ratings by the aforesaid rating agencies as follows:

 
| **Rating**            |   | **Margin** |   |
|-----------------------|--------|------------|--------|
|                  |   |       |   |
| A+/A1 or higher       |   | 0.45       | %      |
| A/A2                  |   | 0.50       | %      |
| A-/A3                 |   | 0.60       | %      |
| BBB+/Baa1             |   | 0.80       | %      |
| BBB/Baa2              |   | 1.00       | %      |
| BBB-/Baa3             |   | 1.20       | %      |
| Lower than BBB-/ Baa3 |   | 3.25       | %      |

 

Basedon our current credit ratings, as mentioned above, any drawings under thecredit facility would currently bear interest of EURIBOR (or LIBOR, dependingupon the currency of drawing) plus0.70%, being the average of the A – (Standard & Poor’s) and the Baa1 rating(Moody’s).

 

***Global Medium Term Note Program***

 

The available borrowing capacity as of December 31,2003 under our USD 10 billion Global Medium Term Note (GMTN) program (availablesince April 1997) amounted to EUR 3,746 million. The GMTN program contains nocommitments from investors to provide funding to us.

 

***Securitization Program***

 

We have a securitization program of receivablesfrom retail customers with a maximum amount of EUR 200 million at our disposal(reduced by EUR 50 million compared to 2002). The program is entered into foran unlimited period of time, but can be terminated by us upon one month’snotice. Under this program, we transfer billed and unbilled receivables to avariable interest entity, whose assets and liabilities are fully consolidated.The total available amount depends on the available amount of billed andunbilled receivables. In 2003, we redeemed the EUR 50 million that was drawn underthis program. Accordingly, no sums are currently drawn under the securitizationprogram. The interest rate on this debt is approximately EURIBOR + 0.4%. If ourcredit rating ceases to be BB+/Ba1 or higher, the total available amount willdecrease because KPN will no longer be able to sell unbilled receivables. Ifour credit rating ceases to be BB/Ba2 or higher, the program will beterminated.

 

Webelieve that our cash flow from operating activities together with our cashbalances and the available capacity under our existing facilities, as describedabove, will be sufficient to meet our present working capital needs. We mayneed to incur additional debt or issue new equity shares to implement andexecute our business strategies and to refinance existing debt. Financing andrefinancing conditions will largely depend on future market conditions, ourcredit ratings, the telecommunications industry ratings, and our results ofoperations and future prospects, and we cannot be certain that financing willbe available to us on favorable terms, or at all.

 

**Materialcapital resources covenants**

 

In addition to the restrictions mentioned above,our existing capital resources contain the following material covenants, whichcould trigger additional financial obligations or early redemption of theoutstanding indebtedness.

 

Our Eurobonds 2001–2006 (EUR) and Eurobonds2001–2008 (GBP) contain a rating step-up provision which offers each noteholder a 0.375% increase in the interest rate for each notch downgrade of ourunsecured long-term debt below either Baa2 by Moody’s or BBB by Standard & Poor’s, and a ratingstep-down provision which results in a 0.375% decrease in the interest rate foreach notch upgrade (up to the initial interest rate).

 

Additionally, we may be required to redeem theoutstanding notes early, in the event that

(i) we consolidate with or merge into anotherentity (other than a merger of a subsidiary into KPN in which KPN is acontinuing corporation) or convey, transfer or lease all or substantially allof our properties and assets to another person without the prior approval bythe note holders; and

(ii) the rating assigned to the notes after givingeffect to any such transaction is lower either than Baa3, in the case ofMoody’s, or BBB–, in the case of Standard& Poor’s.

 

As of December 31, 2003, the total outstandingamount under these bonds amounted to EUR 1,849 million (2002: EUR 2,280million).

 

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In addition, many of our capital resources contain acovenant prohibiting our principal subsidiaries or the group as a whole toenter into any amalgamation, demerger, merger, corporate restructuring orreorganization if such event would have a material adverse effect on either theability of the obligors under the facility to perform their obligations underthe facility or on our business or financial condition and that of oursubsidiaries taken as a whole.

 

**Informationabout market risk**

 

As a result of ourinternational operations, we are exposed to various kinds of market risks inthe ordinary course of business. These risks include foreign currency exchangerate risks, interest rate risk, credit risk, legal risks and country risks.

 

We have establishedpolicies that deal with the use of derivative financial instruments in order toreduce foreign currency exposure and to manage our interest rate profile. Ourcentralized Corporate Treasury operations match and manage all intercompany andexternal foreign currency reported by our various business operations and Groupcompanies. Hedges are applied on a full coverage basis, when economicallyfeasible. Our interest rate risk policy is designed to match funding structureswith the risk profile of the underlying assets.

 

Derivative financialinstruments are used solely for the purpose of hedging underlying exposures.Business operations and Group companies are not allowed to enter intoderivative financial instruments for speculative purposes.

 

Credit risk is mitigated bystrict policies on client acceptance and counter party limits. Local managementand our central legal department review legal and country risks on acase-by-case basis.

 

For more information,please refer to the section titled ‘Fair Value of Financial Instruments’ in ourConsolidated Financial Statements.

 

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**CriticalAccounting Policies and Estimates**

 

Thefollowing discussion has been prepared in accordance with accounting principlesgenerally accepted in the Netherlands (Dutch GAAP) and in the United States(US GAAP). Dutch GAAP varies in certain significant respects from US GAAP.The preparation of our financial statements requires us to make estimates,judgments and assumptions that affect the reported amounts in our ConsolidatedFinancial Statements, accompanying Notes and the Information on US GAAP.Where the accounting principles under US GAAP differ significantly fromDutch GAAP, specific to our Critical Accounting Policies and Estimates, we havedescribed the accounting policies and methods used in the preparation of ourConsolidated Financial Statements and the note on ‘Information onUS GAAP’. The general Notes to our Consolidated Financial Statements andInformation on US GAAP describe the significant accounting policies and methodsused in the preparation of the Consolidated Financial Statements andInformation on US GAAP. We base our estimates on historical experience,independent valuations and various other assumptions that we believe arereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. We believe the followingCritical Accounting Policies and Estimates affect our significant estimates,judgments and assumptions used in the preparation of our Consolidated FinancialStatements and Information on US GAAP:

•                  impairments of goodwill and other long-livedassets;

•                  useful lives of long-lived assets and valuationof intangibles;

•                  income taxes;

•                  pensions and other post-retirement benefits;

•                  revenue recognition;

•                  provision for litigation and contingencies.

 

**Impairmentsof goodwill and other long-lived assets**

 

Theinherent management estimates and assumptions used in determining whether animpairment charge should be recognized are as follows:

•                  determining our cash generating units andreporting units;

•                  projecting cash flows for determiningrecoverable amounts of our cash generating units and reporting units; and

•                  determining discount rates.

 

Webelieve that estimates of recoverable amounts are susceptible to change fromone period to the next because they require management to make assumptionsabout future sales, related cost of sales and capital expenditures. Inestimating future revenue, we use our internal projections, which are developedbased on our strategic plan for existing and new product offerings and expectedaverage revenues per user, and customer base growth. Estimates of our futureoperating expenses and capital expenditures are developed based on our expectedlevels of revenue growth, the timing of the building of our UMTS networks andpotential changes in governmental regulations and requirements. The judgmentsunderlying our projections can vary significantly from year to year due toeconomic or market conditions, technological advances, changes in the businessor regulatory environment, or other factors outside our control. If ourprojections of recoverable amounts change as a result of these factors,especially in our business models, our anticipated timeframe of the rollout ofthe UMTS network, communication technology or the regulatory environment, wemay have to recognize additional impairment charges on goodwill, licenses andother long-lived assets.

 

Inaccordance with Dutch and US GAAP, we assess the impairment of intangible fixedassets (such as our licenses and goodwill), property, plant and equipment,financial fixed assets and participating interests. Factors that we considerimportant, which could trigger an impairment review, include the following:

 

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•                  significant declines in the asset market value,more than would be expected as a result of the passage of time or normal usage;

•                  significant changes in the manner of use of theacquired assets or the strategy for our overall business;

•                  significant underperformance relative toexpected historical or projected future operating results;

•                  significant adverse industry or economictrends; and

•                  significant obsolescence or physical damage ofan asset.

 

Whenone or more of the above indicators of impairment exists, we review therecoverability of the carrying value of the assets.

 

UnderDutch GAAP, we recognized the following impairment charges on our goodwill andother fixed assets in the years 2003, 2002 and 2001:

 
| **Amounts in millions of euro**                        |   | **2003**   |       | **2002**   |       | **2001**   |       |
|--------------------------------------------------------|--------|------------|------------|------------|------------|------------|------------|
|                                                   |   |       |       |       |       |       |       |
| Goodwill E-Plus                                        |   | **—** |       | 1,427      |       | 13,701     |       |
| Goodwill BASE                                          |   | **—** |       | 425        |       | **—** |       |
| Goodwill Český Telecom                       |   | **—** |       | **—** |       | 182        |       |
| Goodwill Hutchison 3G UK                               |   | **—** |       | **—** |       | 135        |       |
| Other goodwill                                         |   | 84         |       | 31         |       | 95         |       |
| **Total impairments on goodwill**                      |   | **84**     | ** ** | **1,883**  | ** ** | **14,113** | ** ** |
|                                                   |   |       |       |       |       |       |       |
| Licenses E-Plus                                        |   | **—** |       | 5,216      |       | **—** |       |
| Licenses BASE                                          |   | -103       |       | 196        |       | **—** |       |
| Other licenses                                         |   | 15         |       | **—** |       | **—** |       |
| **Total impairments on licenses**                      |   | **-88**    | ** ** | **5,412**  | ** ** | **—** | ** ** |
|                                                   |   |       |       |       |       |       |       |
| PP&E KPN Belgium                                   |   | **—** |       | 100        |       | **—** |       |
| PP&E acquired from KPNQwest                        |   | **—** |       | 93         |       | **—** |       |
| Other PP&E                                         |   | 124        |       | 117        |       | 196        |       |
| **Total impairments on property, plant and equipment** |   | **124**    | ** ** | **310**    | ** ** | **196**    | ** ** |
|                                                   |   |       |       |       |       |       |       |
| Participating interest Hutchison 3G UK                 |   | -119       |       | 1,166      |       | 104        |       |
| Participating interest in KPNQwest                     |   | **—** |       | 270        |       | **—** |       |
| Participating interest in Český Telecom      |   | -46        |       | 156        |       | **—** |       |
| Devaluation of marketable securities in eircom         |   | **—** |       | **—** |       | 63         |       |
| Loans                                                  |   | **—** |       | **—** |       | 20         |       |
| **Total impairments on financial fixed assets**        |   | **-165**   | ** ** | **1,592**  | ** ** | **187**    | ** ** |
|                                                   |   |       | ** ** |       | ** ** |       | ** ** |
| **Total impairments**                                  |   | **-45**    | ** ** | **9,197**  | ** ** | **14,496** | ** ** |

 

UnderUS GAAP, in addition to assessing goodwill impairment if one of the abovetriggering factors is identified, we also assess impairment on an annual basisin accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Inorder to determine the fair value of the reporting unit, significant managementjudgment with the assistance of a third party valuation specialist is appliedin order to estimate the underlying discounted future cash flows. If the fairvalue is lower than the book value then a hypothetical purchase priceallocation needs to be done to determine the implied fair value of goodwill.This fair value is then compared to the carrying value of goodwill. If theimplied fair value is lower than the carrying value, impairment must berecorded for the difference.

 

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UnderUS GAAP we recognized the following impairment charges on our goodwill andother fixed assets in the years 2003, 2002 and 2001:

 
| **Amounts in millions of euro**                        |   | **2003**   |       | **2002**   |       | **2001**   |       |
|--------------------------------------------------------|--------|------------|------------|------------|------------|------------|------------|
|                                                   |   |       |       |       |       |       |       |
| Goodwill E-Plus                                        |   | —     |       | 15,045     |       | —     |       |
| Goodwill BASE                                          |   | —     |       | 400        |       | —     |       |
| Goodwill Český Telecom                       |   | —     |       | —     |       | 182        |       |
| Goodwill Hutchison 3G UK                               |   | —     |       | 135        |       | —     |       |
| Other goodwill                                         |   | 29         |       | 41         |       | 88         |       |
| **Total impairments on goodwill**                      |   | **29**     | ** ** | **15,621** | ** ** | **270**    | ** ** |
|                                                   |   |       |       |       |       |       |       |
| Licenses E-Plus                                        |   | 5,137      |       | —     |       | —     |       |
| Capitalized interest E-Plus                            |   | 1,840      |       | —     |       | —     |       |
| Licenses BASE                                          |   | —     |       | 77         |       | —     |       |
| Capitalized interest BASE                              |   | —     |       | 9          |       | —     |       |
| Other licenses                                         |   | 15         |       | —     |       | —     |       |
| **Total impairments on licenses**                      |   | **6,992**  | ** ** | **86**     | ** ** | **—** | ** ** |
|                                                   |   |       |       |       |       |       |       |
| PP&E KPN Belgium                                   |   | **—** |       | 100        |       | **—** |       |
| PP&E acquired from KPNQwest                        |   | **—** |       | 93         |       | **—** |       |
| Other PP&E                                         |   | 124        |       | 78         |       | 196        |       |
| **Total impairments on property, plant and equipment** |   | **124**    | ** ** | **271**    | ** ** | **196**    | ** ** |
|                                                   |   |       |       |       |       |       |       |
| Participating interest Hutchison 3G UK                 |   | —     |       | 1,270      |       | —     |       |
| Participating interest in KPNQwest                     |   | —     |       | 270        |       | —     |       |
| Infonet                                                |   | —     |       | 70         |       | 124        |       |
| Loans                                                  |   | —     |       | —     |       | 20         |       |
| **Total impairments on financial fixed assets**        |   | **—** | ** ** | **1,610**  | ** ** | **144**    | ** ** |
|                                                   |   |       |       |       |       |       | ** ** |
| **Total impairments**                                  |   | **7,145**  | ** ** | **17,588** | ** ** | **610**    | ** ** |

 

**Useful livesof long-lived assets and valuation of acquired assets**

 

**USEFUL LIVESOF LONG-LIVED ASSETS**

 

Fixedassets, consisting primarily of property, plant and equipment and intangibles,comprise a significant portion of our total assets. Changes in our intended useof these assets, technological development and market conditions may cause theestimated period of use or the value of these assets to change. We performinternal studies on an annual basis to confirm the appropriateness of ourestimates of the economic useful lives for each category of current property,plant and equipment and other long-lived assets. In determining the initial andremaining estimated useful life of a fixed asset, management estimates(1) the physical life of the asset; (2) the technological life of theasset; (3) the lives for similar productive assets; and (4) theexpected period that benefits will be derived from the asset. The foregoingestimates and assumptions are inherently uncertain and subject to change,including as a result of factors outside our control. If the estimated usefullife is shortened, we depreciate or amortize the remaining value of the assetover the revised remaining life of the asset.

 

Thetotal gains or losses reported on the disposal or retirement of long-livedassets may be an indicator of the accuracy of our estimates.

 

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UnderDutch GAAP, we recognized the following results on disposals or retirement offixed assets:

 
| **Amounts in millions of euro**           |   | **2003** |       | **2002** |       | **2001** |       |
|-------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                      |   |     |       |     |       |     |       |
| Impairments due to retirement of PP&E |   | 58       |       | 140      |       | 72       |       |
| Book gains on sale of PP&E            |   | 12       |       | 27       |       | 55       |       |
|                                      |   |     | ** ** |     | ** ** |     | ** ** |

 

**VALUATION OFASSETS FOR PURCHASE ACCOUNTING**

 

Weallocate the cost of acquired companies to tangible and identifiable intangibleassets and liabilities acquired by reference to their estimated fair values atthe time of acquisition. The remaining amount is recorded as goodwill. Anyvalue assigned to the identifiable assets is determined by reference to anactive market, independent appraisal, or estimated by our management based oncash flow projections which include estimates and judgment regardingexpectations for the economic useful lives of the products and technologyacquired. In the latter situation, where appropriate, third party valuationspecialists are involved.

 

Theallocation of costs to identifiable assets under US GAAP may differ from theallocation under Dutch GAAP. Under Dutch GAAP, certain intangible assets arenot distinguished by us, such as brand name and customer base. Under US GAAP,these elements are recognized as separate intangible assets.

 

**Income taxes**

 

Aspart of the process of preparing our Consolidated Financial Statements, we arerequired to estimate our income taxes in each of the jurisdictions in which weoperate. The estimates are consistently applied under both Dutch and US GAAP.This process involves us estimating our actual current tax exposure togetherwith assessing temporary differences resulting from different treatment ofitems, such as the valuation of our tangible fixed assets and provisions. Thesedifferences result in deferred tax assets and liabilities, which are includedin our Consolidated Balance Sheet. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income, and to theextent we believe that recovery is not likely we recognize valuation allowancesagainst these assets. To the extent the likely recovery of deferred tax assetschanges, we include an expense or a gain within the tax charge on our Statementof Income for the relevant period. Significant management judgment is requiredin determining our provision for income taxes, deferred tax assets andliabilities and the valuation of deferred tax assets. Management reviews allavailable evidence to determine whether, based on the weight of that evidence,a valuation allowance is needed. We consider future taxable income projections,historical results and ongoing tax planning strategies in assessing therecoverability of deferred tax assets. In the event that actual results differfrom these estimates due to future changes in income tax law or results fromfinal review of our tax returns by taxing authorities, we may need to establishan additional valuation allowance, which could materially impact our financialposition and results of operations.

 

Followingan agreement with the Dutch tax authorities in 2004, we recorded a fiscal lossof EUR 6 billion in the Netherlands related to the year ended December 31,2002. We recognized a related deferred tax asset of EUR 2,070 million, based onthe loss at a nominal tax rate of 34.5%. After deducting the taxation on thetaxable income of 2002 and 2003, the related deferred tax asset remaining atDecember 31, 2003 amounted to EUR 1,548 million. We expect a complete recoveryof this asset before the end of 2006.

 

In 2002, we recorded valuation allowances of EUR 275million for previously recognized deferred tax assets for trade tax lossescarried forward at E-Plus and EUR 331 million for previously recognizeddeferred tax assets for corporate tax losses carried forward at BASE. Afterthese allowances, no net deferred tax assets for losses carried forward wererecognized by E-Plus and BASE. We have reduced the valuation allowance onthe deferred tax asset for trade tax losses carried forward of E-Plus to theextent that trade tax losses can be compensated in the foreseeable future withexpected trade tax profits. These expected trade tax profits are mainly theresult of the limitation of the deductibility of interest caused by German taxlegislation, becoming effective as from January 1, 2004. This new legislationin combination with the most recent business cases resulted in the reduction ofthe aforementioned valuation allowance by EUR 87 million, based upon a forecast ofthe amount to be realized within the next seven years. In calculating thevaluation allowance, we took into account the new German tax loss compensationrules, which only limits the annual loss compensation. If we had based ourestimate of recoverability on a five-year forecast, we would have recognized adeferred tax asset equal to EUR 55 million.

 

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**Pensions andother post-retirement benefits**

 

Retirementbenefits constitute a current cost of our normal business operations butrepresent obligations that will not be definitively settled until far in thefuture. We have two pension plans: *Stichting Pensioenfonds KPN*and *StichtingOndernemingspensioenfonds KPN.* We contribute monthly premiums to thepension plans and, in addition, certain pension provisions are recorded in thebalance sheet, such as early retirement benefit provisions.These provisions are based on actuarial assumptions and certain methodscustomary in the Netherlands.

 

**DUTCH GAAP**

 

UnderDutch GAAP, our pension expenses in our Statement of Income relate to thecontributions we pay to our pension funds. Our contributions are based onactuarial valuations and a****dynamicmodel, which includes future expectations of return on assets, the rate ofcompensation increases, and other assumptions. Any refunds received from thesefunds are offset against our pension expenses in our Statement of Income. Inaccordance with Dutch pension law, we are liable for any shortfalls in ourpension funds. Additionally, the funding agreement between KPN and its pensionfunds makes provision for additional pension charges necessary if coverageratios (being the ratio of the fair value of the investments of the pensionfunds to the pension liabilities) are below the desired coverage ratio. Weexpect the total funding shortfall of the *Stichting Pensioenfonds KPN*and the*StichtingOndernemingspensioenfonds* to be EUR 305 million atDecember 31, 2003. Under the current estimates and payment schedule, whichaims at funding the total shortfall over a period of six years, the obligationat year-end 2003 amounts to EUR 21 million. As a result, we haverecognized an additional pension liability for 2003 of EUR 21 million. Ifcapital market conditions decline in the future, we may have to recognizeadditional pension liabilities.

 

Ourearly retirement plan is neither funded nor insured through a third party, butis paid directly by us to our early retirement employees. In accordance withDutch GAAP, we recognize a provision for all benefits that will become apayment obligation within the period of the then prevailing Collective LaborAgreement (as of December 31, 2003, the applicable period wastwo years). Our obligation to fund the early retirement plan terminates in2011. As of December 31, 2003, we recognized under Dutch GAAP a provision ofEUR 361 million (2002: EUR 338 million).

 

Cashcontributions for our defined benefit and contribution plans, the funding ofthe shortfall and payments for early retirements are expected to amount to EUR143 million in 2004.

 

**US GAAP**

 

USGAAP pension accounting differs significantly from Dutch GAAP pensionaccounting. Under US GAAP, pensions are accounted for in accordance with SFASNo. 87, Employers’ Accounting for Pensions. Standardized accounting andactuarial valuations determine the accounting for pension costs. Inherent inthese valuations are various assumptions, which include: employee turnover,mortality, retirement ages, discount rates, expected long-term returns on planassets, and future wage increases, which are usually updated on an annual basisat the beginning of each fiscal year. Actual circumstances may vary from theseassumptions, giving rise to a different pension liability, which would bereflected as an additional gain or loss in our Statement of Income.

 

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Changesin the related pension benefit costs may occur in the future due to changes inassumptions. The key assumptions used in computing our fiscal year 2003 netpension benefit cost were a 5.5% discount rate, a 7.3% expected return on planassets, a 2.0% rate for price inflation and a 3.0% rate of future wageincreases. In 2003, our net periodic pension benefit cost was EUR 189 million,compared to EUR 51 million in 2002. Our net pension benefit cost isexpected to decrease to approximately EUR 109 million during 2004, primarily asa result of higher plan assets and related expected return on plan assets andlower service costs due to a lower number of personnel.

 

**Revenuerecognition**

 

**GENERAL**

 

Thepricing of a number of our services is subject to regulatory oversight by theDutch regulatory authority, OPTA. As a result, some of the services we provideare required to be cost-based. The regulatory oversight also covers services,competition and other public policy matters. Different interpretations of thecosting models we use and rulings on issues or differences of opinion mayresult in adjustments to our pricing and, accordingly, our revenues.Additionally, tariff discrepancies, which are raised by some of our customers,may result in adjustments to our pricing and revenues.

 

**US GAAP**

 

Forthe years ended December 31, 2002 and 2001, we deferred recognition of one-offconnection fees and recognized these over the estimated customer relationshipperiod in accordance with Staff Accounting Bulletin No. 101, RevenueRecognition in Financial Statements (SAB 101). During those periods, we alsodeferred the associated direct costs for an amount equal to or less than theamount of deferred revenues and recognized these over the estimated customerrelationship period.  Any excess directcosts were expensed immediately.

 

On January 1, 2003, we earlyadopted EITF 00-21, Revenue Arrangements withMultiple Deliverables*,* which addresses how to account for arrangements thatmay involve the delivery or performance of multiple products, services and/orrights to use assets.  Accounting formultiple element arrangements requires management to make estimates regardingthe fair values of products and services and estimated customer relationshipperiods.

 

Fairvalues of products and services are required to determine the allocation ofrevenue to each deliverable in the multiple element arrangement.  When we determine fair values based onvendor specific objective evidence (‘VSOE’), if a deliverable is not yet beingsold separately in the market, management must use judgment in establishing aprice that is not expected to change once the deliverable starts being soldseparately.  When we are unable todetermine fair values based on VSOE, we must decide what is the best source ofverifiable objective evidence (‘VOE’). We evaluate factors such as comparability of the product or service,vendor (which may be our direct or indirect competitor) and customer market todetermine fair values based on VOE.  Ifwe determined fair values differently, the allocation of revenue to productsand services may change and affect the timing of revenue recognition.

 

We estimate the customer relationship period foreach type of service offering based on historical information and management’sexpectations regarding known trends or changes.  Our markets continue to evolve rapidly and customer relationshipperiods are constantly changing due to the introduction of new products by ourcompetitors and us.  Customerrelationship periods for older products are generally decreasing and customerrelationship periods for new products may change as more historical informationbecomes available.  The estimatedcustomer relationship period affects the allocation of revenue and timing ofrevenue recognition in multiple element arrangements.  When we determine that the estimated customer relationship periodhas changed, we account for this as a change in estimate and adjust theamortization of deferred revenue and costs on a prospective basis.

 

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**Provision forlitigation and contingencies**

 

Weare a party to lawsuits, claims, investigations, and proceedings, consistingprimarily of commercial matters, which are being handled and defended in theordinary course of business. We review the current status of any pending orthreatened proceedings with our legal counsel on a quarterly basis. Indetermining whether provisions are required with respect to pending orthreatened litigations, management reviews the following (1) period inwhich the underlying cause of the pending or threatened litigation or of theactual or possible claim or assessment occurred; (2) degree of probabilityof an unfavorable outcome; and (3) ability to make a reasonable estimateof the amount of loss. Upon considering the above items and other knownrelevant facts and circumstances, we recognize any loss that we considerprobable and reasonably estimable as of the balance sheet date. Actual resultsmay differ materially from estimates.

 

**RecentAccounting Pronouncements**

 

**DUTCHGUIDELINES**

 

In December 2003, the Dutch Council for Annual Reporting issued the 2003edition of the Guidelines for Annual Reporting. The following changes have beenmade to the guidelines, which may impact the Company’s accounting policies in2004:

•                  An explicit distinction has beenmade between the equity of the statutory and consolidated financial statements(RJ 240); and

•                  Detailed guidance has been providedfor the treatment of intercompany-transactions in the statutory andconsolidated financial statements (RJ 520).

 

We are currently investigating possible effects of the new guidelines onour financial reporting.

 

In addition to the above guidelinesfurther clarification has been given regarding Employee Benefits (RJ 271). Thisguideline is based on IAS 19 Employee Benefits and will not become mandatorybefore January 1, 2005. We will not apply this guideline before that date.

 

**US GAAPACCOUNTING PRONOUNCEMENTS**

 

In January 2003, the FASB issued FASB Interpretation 46, ‘Consolidationof Variable Interest Entities, an Interpretation of ARB 51’ (‘FIN 46’), andamended FIN 46 in December 2003.  FIN 46requires an investor with a majority of the variable Interests (primary beneficiary)in a variable interest entity (VIE) to consolidate the entity and also requiresmajority and significant variable interest investors to provide certaindisclosures.  A VIE is an entity inwhich the equity investors do not have the characteristics of a controllingfinancial interest, or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties.  FIN 46 is effectiveimmediately for all new VIE’s created after January 31, 2003.  For VIEs created prior to February 1, 2003,Fin 46 will be effective for the company as of December 31, 2004.  The disclosure requirements of FIN 46 areeffective for our 2003 financial statements regardless of the date the VIE wascreated.

 

We continue to have significant involvement, with certain purchasers ofnon-core assets, which were disposed of in the past, either through servicelevel agreements or other certain specific guarantees.  We are in the process of reviewing thesearrangements to determine whether the investee is a VIE and if so, if we arethe primary beneficiary.  Our review ofthese disposed entities has not yet identified any VIEs that would requireconsolidation of any significant interest in a VIE that would require disclosureunder FIN 46.  We are also in the processof reviewing our investment portfolio, including associated companies, as wellas other arrangements to determine whether we are the primary beneficiary ofany VIEs.  The review has not yetidentified any VIEs that would require consolidation or any significantexposure to VIEs that would require disclosure.

 

In April 2003, the FASB issued SFAS 149, ‘Amendment of Statement 133 onDerivative instruments and Hedging Activities’ (SFAS 149), SFAS 149 amends andclarifies financial accounting and reporting for derivative instruments byrequiring that contracts with comparable characteristics be accounted forsimilarly and by clarifying when a derivative contains a financing componentthat warrants special reporting in the statement of cash flows.  The guidance in SFAS 149 was effectiveprospectively for contracts entered into or modified and for hedgingrelationships designated after June 30, 2003. The adoption of this statement had no effect on our consolidated financialstatements.

 

In May 2003, the FASB issued SFAS 150, ‘Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity’(SFAS 150).  The statement establishesstandards on how to classify and measure certain financial instruments withcharacteristics of both liabilities and equity and requires additionaldisclosures regarding alternative ways of setting instruments and the capitalstructure of entities, all of whose shares are mandatory redeemable.  SFAS 150 does not apply to obligations understock based arrangements if they are accounted for under APB 25, SFAS 123 orrelated guidance.  The provisions ofSFAS 150 were effective for all financial instruments entered into or modifiedafter May 31, 2003, and otherwise was effective the first interim period beginningafter June 15, 2003.  However, theguidance applying to mandatorily redeemable non-controlling interests has beendeferred.  We are currently assessingthe impact of the adoption of this statement.

 

**INTERNATIONALFINANCIAL REPORTING STANDARDS (IFRS)**

 

The European Commission has decided that, with effectfrom January 1, 2005, all listed companies in Europe shall be required toprepare their financial statements in accordance with International FinancialReporting Standards, or IFRS (formerly known as International AccountingStandards).

 

In 2003, we established a project team consisting ofvarious members of the KPN organization under the responsibility of the Boardof Management, which is responsible for the conversion from Dutch GAAP to IFRS.In the summer of 2003, the project team conducted an analysis of the keydifferences between IFRS and Dutch GAAP and the changes in disclosurerequirements, and performed a first impact analysis of the effect of the newreporting requirements on previously reported figures, accounting and othersystems and procedures and our day-to-day business.

 

After completing the first impact analysis, we decidedon the core set of accounting policies to be applied by us under IFRS,including decisions with regard to the first time application of IFRS. In thisanalysis, we reviewed all relevant IFRS accounting standards and transitionprovisions (as laid down in IFRS 1, First-time adoption) and considered:

•                  consistencywith generally applied accounting practices in the telecommunications industry;

•                  impact oncurrent business and procedures;

•                  degree ofdifficulty of systems conversion;

 

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•                  impact onpreviously reported and future results; and

•                  degree ofconvergence with US GAAP.

 

We are currently in the process of carrying out theactual IFRS conversion and implementation. The conversion and implementationconsist of the rewriting of the accounting manual, adjusting existing reportingand accounting systems or implementing new systems, adapting procedures andbusiness policies where applicable, converting the 2003 opening balance and2003 and 2004 financial statements (as we are listed on the NYSE and we aretherefore subject to SEC requirements and legislation, we have to present twoyears of comparative financial information in our financial statements),preparing an IFRS compliant budgeting process for the year 2005, and trainingand educating all relevant KPN employees.

 

In order to facilitate a smooth transition to IFRS asof January 1, 2005, all our subsidiaries will have to report on a dual basis(Dutch GAAP and IFRS) as from the second half of 2004 for internal reportingpurposes.

 

As we arecurrently in the process of converting the 2003 opening balance sheet andfinancial statements, we are not yet able to provide a quantitative analysis onthe impact on this years’ financial results and balance sheet. We believe,based on the analyses performed so far, that the following IFRS standards andexposure drafts may result in material differences between the Dutch GAAP andIFRS financial statements:

•      Revenue (IAS 18); Under IFRS, we willlikely make a number of changes to our current accounting policies for revenuerecognition under Dutch GAAP. These changes will be primarily driven by thedesire to eliminate differences between IFRS and US GAAP in our financialstatements and the expectation that IFRS and US GAAP will converge in thefuture. As US GAAP does not conflict with the concepts of IAS 18, we are likelyto decide to base our accounting policy for revenue recognition under IFRS asmuch as possible on US GAAP, and more in particular on the policies laid downin SAB 101, Staff Accounting Bulletin 104, Revenue Recognition (SAB 104) andEITF 00-21. We have already included this information on the quantitativeeffect of these accounting policies in our Financial Statements, under‘Information on US GAAP’.

•      Accounting for Business Combinations(ED3): The IASB's current view is that amortization of goodwill over theestimated useful life is no longer required. Instead, the goodwill amountscarried on the balance sheet are subject to annual impairment testing, or morefrequently if events or changes in circumstances indicate that it might beimpaired. As a result, goodwill is carried at cost less any accumulatedimpairment losses. This approach differs from our current accounting policy andwill therefore have an impact on our future results.

•      Employee Benefits (IAS 19); Theimplementation of IAS 19 will lead to changes in the Balance Sheet andaccounting for the costs of pensions in the Income Statements, which is broadlycomparable to SFAS 87, Employers’ Accounting for Pensions. Under IFRS 1, KPN islikely to record all unrecognized gains and losses at January 1, 2003, as an adjustmentto the opening equity.

•      Financial Instruments – Disclosure andPresentation (IAS 32) and Financial Instruments – Recognition and Measurement(IAS 39); The implementation of IAS 32/39 will lead to the inclusion of thefair value of derivatives in our balance sheet, with changes in the fair valuebeing recorded through the Income Statement and more stringent requirementswith regard to the application of hedge accounting. Currently, the derivativesare not recorded separately on our Balance Sheet, and are in some casespresented as part of a financial asset or liability for which a derivative hasbeen concluded.

•      Share-based payments (IFRS 2); IFRS 2specifies the financial reporting for share-based payment transactions whichinclude, among others, share options granted to employees. For share-basedpayment transaction with employees, the fair value of the equity instrumentsgranted shall be recognized as expenses. The fair value of employee optionplans has to be estimated at the grant date and should be expensed on grantdate if the options vest immediately. If, for example, a specified period ofservice has to be completed, the options do not vest immediately and,consequently, the fair value has to be amortized over the vesting period. IFRS2 is comparable to SFAS 123. Under Dutch GAAP, generally no charges associatedwith employee stock option plans are recorded in the Income Statement.

 

Note that the above list is by no means exhaustive andother differences may also exist. Also note that a number of IFRS standards aswell as interpretations still have a draft status while we will have to applythe final versions of these standards and interpretations in our first set ofIFRS financial statements. This concerns for example Exposure Draft 3, BusinessCombinations and Draft Interpretation 3, Determining whether an arrangementcontains a lease. Standards or interpretations such as these may also have asignificant impact on our figures.

 

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**SOCIAL AND ENVIRONMENTALRESPONSIBILITY**

 

We are a company with commitment to thecommunity. Our services contribute significantly to the economy by providingdata and telecommunication to the information society and employmentopportunities as one of the largest private employers in the Netherlands. Theproducts and services we provide are indispensable in the daily life of manypeople and companies. We are conscious of occupying a special position in thecommunity and recognize the expectations that exist in this regard.

 

For 2003, in addition to reporting on theCompany’s environmental policy, we also report on our social policy andcommitment in a Sustainability Report, which will be published on the Internet(www.kpn.com). For more information on our sustainability efforts, please referto this document.

 

**Environmental policy**

 

Our goal is to reduce theeffects of our business on the environment. Our environmentalpolicy for the period 2004–2007 includes the objective of ranking among thebetter-performing companies in the telecommunications industry. We believe wecan achieve this objective within that timeframe. Our environmental policy is focused on reducingwaste, improving energy efficiency, cutting emissions of carbon dioxide andreporting on our compliance with legal requirements. We have (already) madeprogress in each of these fields in 2003.

 

KPN’s foreignaffiliated and associated companies started environmental reporting in 2003.However, an analysis of these results is not yet possible because nocomparative historical data are available.

 

**Social policy**

 

Employees make KPN what it is. They play acrucial role in retaining and strengthening our position in a market wherecompetition continues to grow and employment opportunities are under pressure.We want to stimulate and motivate employees to work in a more result-drivenway. Conditions of employment traditionally of a collective and protectivenature are making way for a policy aligned more to the individual and torewards. We will reward jointly-achieved results and personal contributions tothem.

 

##### **PERFORMANCE REWARD**

More than in the past, our remuneration policyis linked to the Company’s results. Employees in the Netherlands received aone-off bonus, for example, when it was established mid-2003 that the Companyhad successfully moved out of the threatening situation that existed atyear-end 2001.

 

The modernized remuneration policy agreed atyear-end 2003 is built upon introduction of Performance Reward. Groups ofemployees will be rewarded for achieving challenging predefined targets. Thisapproach is designed to stimulate employees to fulfill the shared objectives oftheir part of the company: reduce costs, increase sales and improve customersatisfaction. Bonuses will vary between 0 and 3.5% and may be as much as 5.5%for exceptionally good results. Regular salary will be determined more by anemployee’s functioning. Any general salary increase will be combined with thepersonal increase in salary. The dual increase will depend on how the employeefunctions.

 

##### **SICK LEAVE**

Our ongoing attention to avoiding employeesickness and properly supervising cases of industrial disability has resultedin a decrease in sick leave. Existing employee satisfaction surveys werecontinued in 2003 with the primary focus on employee motivation. The responseto the survey increased and the scores for the main items improved compared to2002.

 

##### **EMPLOYMENT**

Particularly in theNetherlands, employment opportunities at the Company remained under pressure. The total number of employees in theNetherlands decreased with 1,947 (1,884 full-time equivalents) in 2003. Thisdecrease included a net effect of 726 (715 FTEs) through natural attrition. Inall, 503 employees (469 FTEs) left the Company under the Social Plan, a figurethat included supernumeraries and also employees who took advantage of thescheme for voluntary early severance. Another 718 employees (700 FTEs) left thecompany through the outsourcing of non-core activities. We have announced thatin 2004 we will shed another 800 jobs at the Fixed division. Through ourMobility Shop, we are continuing to help supernumeraries find other work. Outof the 3,566 employees declared supernumerary under the 2001 reorganization,approximately 71% had found a new job by year-end 2003, either within oroutside the Company.

 

The Mobility Shop began providing assistancefor the first time in 2003 to employees who voluntarily agreed to employmentmobility. Several parts of the company organized special programs to promotemobility. Large numbers of career interviews were conducted under theseprograms and personal development plans were drawn up for the employeesconcerned.

 

##### **TALENT**

We continue to attach importance to investingin talented employees with a view to filling management positions shortly. Themain focus is demand-driven development of talents. A study was conducted toidentify the talents we will need in the years ahead and the targetedindividual investments that will be required. We have put an emphasis on theimportance of the organization and the personal responsibility that talentedemployees have for their own careers.

 

In 2003, we recruited more young talent.Compared to 2002, there was an increase in the number of graduates of highervocational institutions and universities joining the Company under itsstrategic recruitment program. We provided twice as many places as in 2002 forundergraduates working on (final) projects and dual learners. We remain afavorite employer for young graduates.

 

**Socialcommitment**

A large company likeKPN fulfils numerous roles. Besides being a commercial provider of services, weare an employer and stakeholder in society. KPN wants to contribute to thegrowth of the knowledge economy in the Netherlands. Our offer of free broadbandInternet to schools is an example of this ambition. We feel committed towardspeople with physical limitations who rely heavily on telecommunications forparticipation in society. An example of our commitment is our text telephoneservice, which is adapted to the needs of the deaf and hard of hearing.

As part of ourtraditional year-end gift to staff, all current and retired KPN employees wereable to choose to make a donation to two good causes, ‘*Jantje Beton*’ (children in need) and ‘*Natuurmonumenten*’ (nature conservation).

 

**Code ofConduct**

 

Fora discussion of our Code of Conduct, please refer to the section titled‘Corporate Governance’.

 

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**CORPORATE GOVERNANCE**

 

**Introduction**

 

**DEVELOPMENTSIN 2003**

 

***Corporate Governance Code by the Tabaksblat Committee***

 

In2003, the discussion on corporate governance in the Netherlands was dominatedby the publication of the draft Corporate Governance Code by the TabaksblatCommittee (the Committee) on July 1, 2003, and the publication of the finalcode on December 9, 2003 (the Corporate Governance Code). The Corporate Governance Code isbased on the principle that a company is a long-term form of collaborationbetween the various parties involved. The Board of Management and theSupervisory Board have overall responsibility for considering the interests,generally with a view to ensure the continuity of the enterprise. In doing so,the company endeavors to create long-term shareholder value, and the Board ofManagement and Supervisory Board should take account of the interests of thedifferent stakeholders. OnSeptember 1, 2003, we provided the Committee with our views on the draftCorporate Governance Code. In our comments, we supported the principlesunderlying the draft Corporate Governance Code. At the same time, we submittedthat a governance regime, which allowed Dutch companies to remaininternationally competitive, should strike the right balance betweentransparency of rules and avoidance of bureaucracy caused by excessive detail.Application of sound corporate governance principles is important for a companybut it should not be an aim in itself. The true aim is to achieve and maintaina culture of honesty and integrity. This aim can, ultimately, be achieved onlyif the culture and behavior in a company are in all respects positive andtransparent. Accordingly, in addition to complying with the Code as describedbelow, our Board of Management will make all necessary efforts to ensure thatthe culture at KPN promotes honesty and integrity.

 

The Corporate Governance Code contains 21 principles that are elaboratedin 113 best practice provisions of which 17 do not apply to us. According tothe preamble, the principles may be regarded as reflecting the latest generalviews on good corporate governance and the provisions create a set of standardsgoverning the conduct of Board of Management and Supervisory Board members andshareholders. The Corporate Governance Code will get a statutory basis in Book2 of the Dutch Civil Code.

 

TheCorporate Governance Code expects public companies to devote a separate chapterto corporate governance in their annual report for 2004 and to clarify anyspecific cases of non-application of the best practice provisions as set out inthe Corporate Governance Code. For the purposes of this Annual Report for 2003,we reaffirm our full support for the principles of the Corporate GovernanceCode. We are working on a comprehensive implementation program and expect torestrict cases of non-compliance to a minimum. The following general overview sets out ourcurrent opinion or position towards the principles of the Corporate GovernanceCode and follows its structure. Our point of view towards each best practiceprovision will be made available on our website: www.kpn.com.

 

**I. Compliance**

 

Under the principle in this chapter, the Board of Management and theSupervisory Board are responsible for the corporate governance structure of thecompany and compliance with the Code. They must report on this to theshareholders meeting. We endorse this principle and have scheduled the itemcorporate governance for discussion at our Annual General Meeting ofShareholders on April 15, 2004.

 

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**II.Management**

 

This chapter contains various principles related to the role andprocedures for the Board of Management, its remuneration (includingdetermination and disclosure) and conflict of interests.

 

We agree with the principle that the Board of Management is responsiblefor the company’s aims, strategy, results and managing risks. Our currentcharter of our Board of Management will need some updating to provide for theprinciple and related best practice provisions. As we are subject to theprovisions of the US Sarbanes-Oxley Act as well, we already continue to reviewand enhance our internal controls, thereby complying with the relevant bestpractice provisions. For example, we introduced a whistle blowers procedure inearly 2003. A Remuneration Reportis included in this Annual Report. It demonstrates that on remuneration issues,we will be nearly fully compliant with the basic best practice provisions ofthe Corporate Governance Code, for both Board of Management and SupervisoryBoard members. OurArticles of Association and current charter for the Board of Management dealwith conflict of interest situations, but not that extensively as provided forin the Corporate Governance Code. We will amend the charter to incorporate thebest practice provisions.

 

**III.Supervisory Board**

 

The various principles in thischapter deal with the role and procedures for the Supervisory Board, itsindependence, its expertise and composition, the role of the chairman and thecompany secretary, the composition and role of its committees, conflicts ofinterest and remuneration.

 

The role and procedures for aSupervisory Board as defined in these principles is nearly fully covered by ourarticles of association and current charter of the Supervisory Board. For anumber of years, our Supervisory Board has been discussing its own functioningin a special meeting. Some small amendments to the charter are necessary inorder to make sure that all best practice provisions are covered. Theindependence principle is already laid down in the profile of our SupervisoryBoard as drafted in December 2001. See the paragraph ‘Supervisory Board’ belowfor the independence statement of our Supervisory Board members. The profile ofour Supervisory Board sets guidelines with its expertise and composition. Seethe section titled ‘US Sarbanes-Oxley Act’ for information regarding thefinancial experts on our Supervisory Board.

 

We haven taken several steps in order to comply with the principles andbest practice provisions related to the Chairman and Company Secretary. We havefor example developed an introduction program for new members of ourSupervisory Board and have appointed our Chief Legal Officer, Mr. R. van Rooij,in the position of Company Secretary. See the section titled ‘Expected changesin 2004’ for a discussion of our steps to let the committees of the SupervisoryBoard comply with the Corporate Governance Code. We will amend the charter ofthe Supervisory Board to incorporate all the best practice provisions onconflict of interest, although the current charter addresses conflict ofinterest situations. We fully endorse (and will comply with) the principles andbest practice provisions regarding the remuneration of the Supervisory Boardand, for example, do not grant share options to the members of our SupervisoryBoard.

 

**IV. Shareholdersand Annual General Meeting**

 

The principles in this chapter deal with the powers of the shareholdersand the provision of information to and logistics of the general meeting. Weagree with the principle that good corporate governance requires the fully-fledgedparticipation of shareholders in decision-making in the Annual General Meeting.In 2003, we joined the Dutch Shareholders Communication Channel that givesDutch shareholders the opportunity to vote by proxy and to communicate with allother shareholders. In accordance with some of the best practice provisions wehave scheduled the dividend policy and the resolution to pay a dividend asseparate items on the agenda of our Annual General Meeting on April 15, 2004.

 

**V. Audit ofthe financial reporting, position of the internal auditor function and theexternal auditor**

 

This chapter contains several principles that deal with theresponsibility of the Board of Management for the quality and completeness offinancial reports made publicly available, role of the external and internalauditor and the relationship of the external auditor with the company. Weendorse these principles and agree for example that the Board of Management isresponsible for establishing and maintaining disclosure procedures. See thesection titled ‘Controls and Procedures’ for more information. Exceptions

 

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to principles and best practice provisions will be made only where, in our view,application of certain detailed provisions would be impractical or lead tounnecessary bureaucracy without any visible benefit.

 

***US Sarbanes-Oxley Act***

 

Wecomply with the applicable requirements of the Sarbanes-Oxley Act of 2002,which we are subject to given our listing on the New York Stock Exchange.Pursuant to the Act, we have formed a Disclosure Committee that meets regularlyto review and help implement disclosure controls and procedures (see thesection titled ‘Managerial Measures’ below for more information). We have alsoreviewed our Code of Conduct, our Code of Ethics for our financial managementand our whistle blowers procedure for compliance with the requirements of theSarbanes-Oxley Act (see the section titled ‘Code of Conduct’ below).

 

Inaddition, the Audit Committee has implemented policies and procedures to ensurethe independence of our external auditors and designated two financial expertsas required by the Act; we consider Mr. Eustace and Mr. Streppel to be ourfinancial experts. We also continue to review and enhance our internalfinancial and accounting controls and systems and fraud prevention policies.The reviews and enhancements should ultimately result in our controls andprocedures being based on the COSO framework and our IT controls and procedureson the relevant processes of the COBIT standard.

 

***Increasing transparency***

 

Weattach great value to our relations with our shareholders and other capitalproviders. To this end, we strive for correct, timely and full disclosure ofour activities, financial position and results. The procedures for safeguardingthis level of disclosure are monitored by our Disclosure Committee. Ourfinancial results are released on a quarterly basis. The Chief ExecutiveOfficer is primarily responsible for investor relations.

 

Publiccompanies are being called upon to increase their transparency, not only inrespect of financial information but also with regard to corporate information.In 2003, we answered this call by adding a Corporate Governance chapter to ourwebsite: www.kpn.com. We anticipate a substantial increase in the amount ofcorporate information provided by us in 2004. For example, we plan to disclosethe by-laws and charters of our Supervisory Board, their committees and theBoard of Management, and information on our updated Code of Conduct and theseparate codes applicable to our employees.

 

***Legal structure of the Company***

 

UnderSection 6, Part 4 of Book 2 of the Dutch Civil Code, we qualify as a largecompany. As such, we have a mandatory two-tier management structure, including aSupervisory Board with broad powers. Among the powers vested in the SupervisoryBoard is that of appointing and removing members of the Board of Management andadopting the annual accounts. Some of the resolutions of our Board ofManagement are also subject to the approval of the Supervisory Board.

 

Earlyin 2002, the Dutch Government submitted a proposal to Parliament to amend theregime for large companies in the Netherlands. The purpose of the proposal isto increase the rights of shareholders of large companies. The proposal waspassed by the Lower House of the Dutch Parliament in September 2003 and wassubsequently submitted to the Upper House for ratification. The new regime willprobably come into effect in 2004. As we are governed by the large companiesregime, we expect that we will need to amend our Articles of Associationaccordingly. Under the new legislation, shareholders will be entitled toapprove decisions of the Board of Management that have a company transformingeffect, to approve our remuneration policy and share (option) plans, to appointmembers of the Supervisory Board upon proposal by the Supervisory Board, and todismiss members of the Supervisory Board.

 

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**Management**

 

**SUPERVISORY BOARD**

 

Thecurrent members of our Supervisory Board are Mr. A.H.J. Risseeuw (Chairman),Mr. D.G. Eustace (vice-Chairman), Mr. M. Bischoff, Mr. V. Halberstadt, Mr. D.I.Jager, Ms. M.E. van Lier Lels and Mr. J.B.M. Streppel. For a description of thecurriculum vitae of the current members of our Supervisory Board, refer to thesection titled ‘Report by the Supervisory Board’. The business address of each of the members of the Supervisory Board isMaanplein 55, 2516 CK, The Hague, the Netherlands.

 

TheSupervisory Board oversees strategic and organizational policymaking by theBoard of Management and the way in which it manages and directs our operationsand affiliated/associated companies. It oversees and supervises the Board ofManagement. Under the current regime for large companies, the Supervisory Boardappoints and reappoints its own members. The Annual General Meeting ofShareholders and the Central Works Council can make recommendations fornominating members of the Supervisory Board and make objections againstintended nominations. For a description of the proposed changes to SupervisoryBoard members, please refer to the introductory section regarding the ‘legalstructure of the Company’. According to our Articles of Association, ourSupervisory Board must consist of at least five and not more than nine members.In 2003, our Supervisory Board consisted of seven members. Members of theSupervisory Board resign according to a schedule set by the Supervisory Board.They step down at the first General Meeting of Shareholders following theirfour-year term of office. Under the current profile of the Supervisory Board,they can be reappointed twice, leading to a maximum term of office of twelveyears.

 

TheSupervisory Board drew up a profile in 2001 defining the basic principles forthe composition of the Supervisory Board. According to this profile, theSupervisory Board must be composed in such a way that members of theSupervisory Board are able to operate independently of each other and of theBoard of Management. The Supervisory Board has further adopted other principlesand more rules about its working methods and decision-making. One of thestipulations is that only one former member of the Board of Management may siton the Supervisory Board at any time.

 

Certaindecisions of the Board of Management require the approval of the SupervisoryBoard. These decisions (which are specified by law) include approval of theannual plan and budget, approval of resolutions that exceed certain thresholds,expanding the business materially affecting the existing business and theclosing down of business if this results in a material change for aconsiderable number of employees.

 

In2003, each of the members of the Supervisory Board was independent from theCompany within the meaning of the Corporate Governance Code. This means thatneither the Supervisory Board member concerned nor his/her spouse, registeredpartner or other life companion, foster child or relative by blood or marriageup to the second degree: a) has been an employee or member of the ManagementBoard of the Company (including associated companies as referred to in section1 of the Disclosure of Major Holdings in Listed Companies Act (*WMZ*) 1996) in the five years prior to theappointment; b) receives personal financial compensation from the Company, or acompany associated with it, other than the compensation received for the workperformed as a Supervisory Board member and in so far as this is not in keepingwith the normal course of business; c) has had an important businessrelationship with the Company, or a company associated with it, in the yearprior to the appointment. This includes the case where the Supervisory Boardmember, or the firm of which he is a shareholder, partner, associate oradviser, has acted as adviser to the Company (consultant, external auditor,civil notary and lawyer) and the case where the Supervisory Board member is aManagement Board member or an employee of any bank with which the Company has alasting and significant relationship; d) is a member of the Management Board ofa company in which a member of the Management Board of KPN is a SupervisoryBoard member; e) holds at least ten percent of the shares in the Company(including the shares held by natural persons or legal entities which cooperatewith him under an express or tacit, oral or written agreement); f) was a memberof the Management Board or Supervisory Board - or is a representative in someother way - of a legal entity which holds at

 

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leastten percent of the shares in the Company, unless such entity is a member of thesame group as the Company; or g) has temporarily managed the Company during theprevious twelve months when Management Board members have been absent or unableto discharge their duties.

 

***Committees of the Supervisory Board***

 

In2003, two committees assisted the Supervisory Board: an Audit Committee and aRemuneration & Nomination Committee. The committees assist the SupervisoryBoard in its decision taking and report their findings to the SupervisoryBoard. The committees are not empowered to take decisions. The working of thecommittees is governed by written charters.

 

**Audit Committee**

 

TheAudit Committee consists of three Supervisory Board Members, Mr. Eustace(Chairman), Mr. Streppel and Ms. Van Lier Lels.  The Audit Committee’s task is to supervise the (quality of the)accounting and financial reporting practices, including quarterly and annualreporting, accounting and financial reporting policies and procedures, the(quality of the) internal control system and internal audit function, theindependent external audit of the Financial Statements, and the performance andevaluation of the external auditor. The task of the Audit Committee in the areaof financial reporting and accounting practices is to provide reasonableassurance that the financial disclosures prepared by management adequatelyreflect KPN’s financial condition, results of operations, cash flows and long-termcommitments. As such, it is not the duty or responsibility of the AuditCommittee or its members to conduct ‘field work’ or other types of auditing oraccounting reviews or procedures. We consider Mr. Eustace and Mr. Streppel tobe our financial experts.  For adiscussion of the activities of the Audit Committee in 2003, see the ‘Report bythe Supervisory Board.’ 

 

**Remuneration& Nomination Committee**

 

TheRemuneration & Nomination Committee consisted in 2003 of three SupervisoryBoard Members, Mr. Risseeuw (Chairman), Mr. Halberstadt and Mr. Jager.

 

Thetask of the Remuneration & Nomination Committee is to assist theSupervisory Board on deciding the remuneration of the members of the Board ofManagement for the coming year; the individual bonuses of members of the Boardof Management on the basis of the policy framework for performance related pay,achieved targets and goals; allocation policies for options and the conditionsunder which options are granted; allocation of management options to members ofthe Board of Management and to other KPN senior management and the remunerationof members of the Supervisory Board for submission to the Supervisory Board andto the General Meeting of Shareholders. For a discussion of the activities ofthe Remuneration & Nomination Committee in the year under review, see the‘Report by the Supervisory Board’ below.

 

**Changes in 2004**

 

Inorder to comply with the Corporate Governance Code, the Supervisory Boardallocated the responsibilities of the Remuneration & Nomination Committeeto two separate committees: a Remuneration & Organization DevelopmentCommittee and a Nominating & Corporate Governance Committee. The firstcommittee will be responsible for the development and appropriate applicationof remuneration policies for our Board of Management. The second committee willbe responsible for the nomination of the Board of Management and theSupervisory Board and the oversight of development policies for seniormanagement and corporate governance policies. The members of the Remuneration& Organization Development Committee are: Mr. D.I. Jager (Chairman), Mr. V.Halberstadt, Mr. A.H.J. Risseeuw and Ms. M.E. van Lier Lels. The members of theNominating & Corporate Governance Committee are: Mr. A.H.J. Risseeuw(Chairman), Mr. V. Halberstadt, Mr. D.I. Jager and Ms. M.E. van Lier Lels.

 

**BOARD OFMANAGEMENT**

 

TheBoard of Management, supervised and advised by the Supervisory Board, managesour strategic, financial and organizational matters and appoints seniormanagers. The Supervisory Board appoints and discharges members of the Board ofManagement and establishes their remuneration (see the

 

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‘Remunerationreport’ below for more detailed information on remuneration). Our SupervisoryBoard will submit a proposal regarding the remuneration policy for the Board ofManagement to the Annual General Meeting of Shareholders in 2004.

 

Certaindecisions of the Board of Management, which are defined in greater detail bylaw, in Articles of Association and in the by-laws of the Board of Management,are subject to Supervisory Board approval. The written by-laws govern theresponsibilities and working methods of the Board of Management. They coversuch matters as resolutions to issue shares, major investments, entering intocooperation agreements and undertaking major reorganizations.****In2003, our Board of Management consisted of four members: the Chairman of theBoard, the Chief Financial Officer, the Managing Director of the Fixed divisionand the Managing Director of the Mobile division.

 

Mr.L. Roobol, Managing Director Fixed division, stepped down for health reasons onNovember 10, 2003. Mr. E. Blok is deputizing for Mr. Roobol. A small CorporateCenter supports the Board of Management.

 

**Current Members**

 

Thecurrent members of our Board of Management are:

 
| **Name**          |   | **Date of birth** |   | **Position**                                       |   | **Appointed on** |
|-------------------|--------|-------------------|--------|----------------------------------------------------|--------|------------------|
| A.J. Scheepbouwer |   | July 22, 1944     |   | Chairman  of the Board and Chief Executive Officer |   | November 1, 2001 |
| J.M.  Henderson   |   | April 10, 1948    |   | Member  of the Board and Chief Financial Officer   |   | November 9, 1999 |
| G.J.M.  Demuynck  |   | March 21, 1951    |   | Member  of the Board                               |   | January 1, 2003  |
| L.  Roobol        |   | March 24, 1956    |   | Member  of the Board (until November 10, 2003)     |   | April 27, 2000   |

 

**Mr. A.J. Scheepbouwer** was appointed Chairman of our Board of Managementand Chief Executive Officer on November 1, 2001. From 1976 to 1988, he wasPresident of the Airfreight division of Pakhoed Holding N.V. (Pandair Group).In 1988, he was appointed as Managing Director of PTT Post, then part of theDutch national post and telecommunications operator, Koninklijke PTT NederlandN.V. In 1992, Mr. Scheepbouwer joined the Board of Management ofKoninklijke PTT Nederland N.V. In June 1998, the mail, express andlogistics activities were demerged from Koninklijke PTT Nederland N.V. andincorporated as a separate company, TPG N.V., of which Mr. Scheepbouwerbecame Chief Executive Officer. From June 1998 until September 9,2001, he was a member of our Supervisory Board. He is currently Chairman of theSupervisory Board of KPN Mobile N.V.

 

**Mr. J.M. Henderson** was appointed member of the Board ofManagement on November 9, 1999 and has been the Chief Financial Officersince February 1, 2000. He is former member of the Board of Management andChief Financial Officer of Schmalbach Lubeca A.G., in Germany. Before that, hespent many years working for subsidiaries of the Philips Electronics Group in avariety of roles. His last position was that of member of the Board ofManagement and Chief Financial Officer of Philips Kommunikations Industrie A.G.He is currently a member of the Supervisory Board of KPN Mobile N.V., Chairmanof the Supervisory Board of E-Plus Geschäftsführung GmbH and member of theCommittee of Listed Companies of the Stock Exchange of Amsterdam.

 

**Mr. G.J.M. Demuynck** was appointed member of the Board ofManagement on January 1, 2003 and is responsible for our Mobile division.He joined our Company from Royal Philips Electronics N.V., where he had beenCEO of the Consumer Electronics Division since 2000. He has been with Philipssince 1976 and worked for the company in the USA as Vice-President MarketingAudio, in South Korea as the Chief Executive Officer of Philips ElectronicsSouth Korea, and in Hong Kong as General Manager Business Group Audio. He wasappointed member of the Group Management Committee in April 2000 and wasresponsible for the Division of Consumer Electronics until December 31,2002. He is currently member of the Supervisory Board of E-PlusGeschäftsführung GmbH and Chairman of the Supervisory Board of Xantic.

 

**Mr. L. Roobol** was appointed member of the Board of Management on April 27, 2000. Hewas responsible for our Fixed division, but stepped down for health reasons onNovember 10, 2003. From March 1996, he held various positions within ourCompany, including the position of Director of the Fixed

 

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Telephonybusiness unit and Director of the Rotterdam telecommunications district. Beforejoining our Company, he held the position of Managing Director at NovellBenelux B.V. and WordPerfect Nederland B.V. Mr. Roobol was also managementconsultant with Deloitte & Touche.

 

Mr.E. Blok is acting member of the Board of Management since November 2003 andresponsible for the Fixed division. From 2000 to 2003, he held the position ofSenior Vice President of KPN Fixed Network Operations. Before that, he wasSenior Vice President of KPN Corporate Networks and responsible for KPN’sBenelux data communication activities. From 1996 to 1998, he was Senior VicePresident of KPN Carrier Services. From 1994 to 1996, he was Vice PresidentMarketing & Sales of KPN Carrier Services. Before that, he held severalpositions in the KPN Finance organization.

 

Thebusiness address of each of the members of the Board of Management is Maanplein55, 2516 CK, The Hague, the Netherlands.

 

**MANAGEMENT**

 

Amanaging director, who is also a member of our Board of Management, heads eachof our divisions. In 2003, Mr. Demuynck headed the Mobile division and Mr.Roobol headed the Fixed division until November 10, 2003. Management teamsassist the managing directors. The managing director and his management teamare responsible for achieving targets defined for their divisions and fororganizing, managing and controlling business processes within their division.They are required to observe our codes of conduct governing such matters asfinancial accounting, investment decisions, cash management and internalcontrol. The Fixed division consists of several reporting units, whereas theMobile division primarily consists of our three mobile operators in Germany,Belgium and the Netherlands.

 

**Managerialmatters**

 

**CONTROLSYSTEMS**

 

TheBoard of Management sets the framework for policymaking on internal controlsystems. Within the constraints of this framework, the managing director of thedivision and his management team and the subordinate reporting units areresponsible for managing their control systems. The Board of Management ensuresthat the units operate at all times within the defined framework. The internalaudit department plays an important role in assessing the quality,effectiveness and everyday use of the control systems. The internal auditdepartment conducts systematic and *ad hoc* examinations. Internal auditdiscusses its findings with the managers of the business units concerned andthen with our Board of Management. The internal audit department furtherreports its findings to the Audit Committee of the Supervisory Board. Thecurrent internal control system is designed to obtain a sufficient but notabsolute degree of certainty that business risks are being controlled. Therisks that were identified at the beginning of 2003 have been carefullyfollowed and monitored in a special risk tracing system during 2003. The riskshave also been discussed on a regular basis in the review with the Board ofManagement. In the second half of 2003, a complete risk assessment procedurewas accomplished.

 

**CONTROLS ANDPROCEDURES**

 

Asof the end of the period covered by this report, the Company’s management (withthe participation of its Chief Executive Officer and Chief Financial Officer)conducted an evaluation pursuant to Rule 13a-15, section 302 of theSarbanes-Oxley Act promulgated under the Securities Exchange Act of 1934, asamended (Exchange Act), of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures. Based on this evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded that asof the end of the period covered by this report, such disclosure controls andprocedures were****effective toprovide reasonable assurance that information required to be disclosed by theCompany in reports it files or submits under the Exchange Act is recorded,processed,

 

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summarizedand reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission.

 

**MANAGERIALMEASURES**

 

Thereporting units in the Fixed and Mobile division report their financial andoperational performance on a monthly basis to the relevant managing directorand his management team, with a copy to our CEO and CFO. The management of thereporting units also provides the managing director with a Letter ofRepresentation, thereby representing the accuracy of the reporting andcompliance with prescribed policies. The reports are checked and reviewed bythe control departments of the respective divisions. The managing directorreviews the performance of the reporting units on a monthly basis. The managingdirector, with the assistance of management of the reporting units, discusses(on a monthly basis) the performance of the division with our CEO and CFO. OurCorporate Control department assists our CEO and CFO in these discussions.

 

ADisclosure Committee, established in January 2003, evaluates disclosure andinternal control procedures to ensure that relevant information on the Companyis brought to the attention of the Board of Management. This Committee alsoexamines reports that are to be issued externally to ensure that they arecorrect, timely and complete. The Disclosure Committee advises the Board ofManagement. This committee consists of the directors of Corporate Control,Corporate Treasury & Risk Management, Corporate Legal, Corporate Communicationsand Investor Relations, the Secretary to the Board of Management and thefinance directors of the Fixed division and Mobile division. The committee meton 11 occasions in 2003 and reviewed our disclosure controls and procedures,our internal controls and procedures and our public disclosures.

 

**AUDITOR**

 

Ourexternal auditor is responsible for auditing the Financial Statements. Uponproposal by the Board of Management and the Supervisory Board, the GeneralMeeting of Shareholders appoints the auditor to audit the Financial Statementsof a financial year. The external auditor reports to our Supervisory Board andBoard of Management. The external auditor is present at the meetings of theAudit Committee and the Supervisory Board when our quarterly and annual resultsare being discussed. In 2003, our procedures to ensure the independence of theexternal auditor were made more robust; the by-laws of the Audit Committee wererenewed.

 

Atthe request of the Board of Management and the Audit Committee, the InternalAudit department reviews in advance each service to be provided by the auditorto identify any possible breaches of the auditor’s independence. Final approvalof every engagement of external auditors is made by the Audit Committee.

 

In2003, we received invoices for the following fees from PricewaterhouseCoopers,our external auditor:

 
| **Amounts in millions of euro** |   | **2003** |       | **2002** |       |
|---------------------------------|--------|----------|------------|----------|------------|
| Audit fees                      |   | 8.4      |       | 10.3     |       |
| Audit-related fees              |   | 4.4      |       | 2.6      |       |
| Tax fees                        |   | 1.0      |       | 0.7      |       |
| All other fees                  |   | 0.2      |       | 0.6      |       |
| **Total**                       |   | **14.0** | ** ** | **14.2** | ** ** |

 

The audit fees includethe aggregate fees billed in each of 2003 and 2002 for professional servicesrendered for the audit of our annual Financial Statements and annual statutoryFinancial Statements of subsidiaries or services that are normally provided bythe auditor in connection with the audits and regulatory filings or engagementsfor those financial years.

 

The audit-related feesinclude the aggregate fees billed in each of 2003 and 2002 for assurance andrelated services that are reasonably related to the performance of the audit orreview of our Financial Statements and are not reported under audit services.This includes mainly advice with regard to the IFRS conversion and servicesrelated to Sarbanes-Oxley and revenue assurance projects.  The tax fees mainly relate to tax complianceservices.  Other fees relate topermitted services not included in the above categories.

 

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**Code ofConduct**

 

**CODE OFCONDUCT**

 

Weintroduced a Code of Conduct in 2001 and revised it in 2003. We expect to adoptthe revised code in 2004. The code sets out our standards and values. We areconscious of our social and ethical responsibilities and we wish to ensure thatwork practices across the Company are in strict compliance with the law andconsistent with social and ethical norms. Our key values are: professionalism,innovation, commitment and respect. We can be held accountable for ourperformance in this regard by all of our stakeholders (customers, shareholders,employees, business associates, competitors, environmental organizations,international business relations and the community in the widest sense). TheCode of Conduct is available on our website: www.kpn.com.

 

**SEPARATECODES**

 

Totranslate the Code of Conduct into practical terms for employees, we haveintroduced in recent years a number of separate codes to clarify our rules invarious areas of our operations. These area-specific codes set rules for ouremployees with respect to (i) the use of information regarding our Company;(ii) the use of information and communication tools provided to our employees;(iii) the use of Company property; (iv) additional functions outside ourCompany; (v) business transactions and business gifts; (vi) information aboutcustomers; and (vii) relationships with competitors. We have also adopted rulesto prevent insider trading. In 2002 and 2003, we introduced a Code of Ethicsfor our financial management and a whistleblowers procedure, respectively. TheCode of Ethics for the financial management sets rules to warrant the integrityof our financial management. It applies to our Chief Executive Officer, ChiefFinancial Officer, the director of our Corporate Control Department and allother financial managers. We did not grant any waivers in 2003 under this code.In the spring of 2003, we implemented a whistleblower policy. Pursuant to thispolicy, employees can report questionable accounting or auditing matters orfraud to the Chairman of the Audit Committee. Any reports or complaints byemployees under this code will be dealt with in strictest confidence andinvestigated promptly by management or the Chairman of the Audit Committee, asthe case may be. The separate codes are currently being updated and will becommunicated widely among our employees in 2004 in order to further increaseawareness of these rules. The updated Code of Conduct and the separate codeswill be made available on our website in the course of 2004.

 

**COMPLIANCEWITH THE CODE OF CONDUCT**

 

We encourage our employees toactively report any (suspected) breach of the Code of Conduct or the separatecodes. Our internal Security department plays a key role in this by offeringsupport via a helpdesk, where employees can anonymously report such breachesand also obtain information regarding the principles underlying the codes. Inthe event a breach is reported, our Security department will conduct aninvestigation on a strictly confidential basis. The outcome of theinvestigation is reported to local management.

 

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Wecheck employee awareness of the code each year as part of the Annual EmployeeSatisfaction Survey. In 2003, our Mobile division introduced a program tofurther increase awareness of compliance with competition law. As part of anongoing compliance effort, this program will be extended in 2004 to include theentire corporation.

 

**Shareholders’rights**

 

**SHARE CAPITAL**

 

Ourauthorized capital stock totals EUR 1,920,000,000, divided into 4 billionordinary shares of EUR 0.24 each, one special share of EUR 0.48 and3,999,999,998 Class B preferred shares of EUR 0.24. As of December 31, 2003, atotal of 2,490,996,876 ordinary shares had been issued, plus the special share.The Dutch State holds the special share. The ordinary shares and Class Bpreferred shares carry the right to cast one vote each; the special sharecarries the right to cast two votes. For a description of the preferred shares,please refer to the section titled ‘Foundation for the Protection of KPN’. Theordinary shares are registered or payable to bearer. Shareholders may requestthe Company to convert their bearer shares to ordinary registered shares, andvice versa. The special share is registered. The General Meeting ofShareholders has authorized the Board of Management to issue new shares. Thepresent authorization of the Board of Management is valid until November 12,2004. The Board of Management is authorized to issue new shares up to 10% ofthe issued share capital at the time of issue, plus an additional 10% in theevent of a merger or takeover, with the proviso that the authorization coversall non-issued Class B preferred shares. A resolution to issue shares requiresthe approval of the Supervisory Board and the holder of the special share. Theauthorized capital may be increased through a shareholders’ resolution passedon the recommendation of the Board of Management, approved by the SupervisoryBoard, and through a subsequent amendment of the Articles of Association.

 

Theholders of ordinary shares generally have a priority right on the issue of newordinary shares. The priority rights may be restricted or excluded by a Boardof Management resolution approved by the Supervisory Board and the holder ofthe special share. This present power expires on November 12, 2004.

 

**PURCHASE OFSHARES IN THE COMPANY’S OWN CAPITAL**

 

Theshareholders have authorized our Board of Management to purchase shares in theCompany’s own capital up to November 12, 2004, at a price of not less than EUR0.01 and not more than the stock market price plus 10%. The stock market priceis defined as the average of the closing prices in the five days of tradingpreceding the date of purchase. Any such purchase requires the approval of theSupervisory Board. If the purchase amounts to more than 1% of the total numberof issued shares, the resolution also is subject to the approval of the holderof the special share. Votes may not be cast on purchased shares and they do notcount towards determining the number of votes required at an Annual GeneralMeeting of Shareholders. However, purchased shares do carry a right todividends. We may only purchase shares in our own capital if the shares arefully paid-up and the distributable part of the shareholders’ equity is atleast equal to the purchase price. We may not acquire or hold more shares withan aggregate nominal value exceeding 10% of our issued capital.

 

**ANNUALGENERAL MEETING OF SHAREHOLDERS**

 

Withinsix months of the end of a fiscal year, an Annual General Meeting ofShareholders is held at The Hague, Amsterdam or Groningen, where the discussionof the Annual Report and approval of the Financial Statements are put on theagenda. The Board of Management or the Supervisory Board convenes a meetingsubject to advance notice of at least 15 days. Other General Meetings of

 

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Shareholdersare held as often as the Supervisory Board or Board of Management deemsnecessary. One or more shareholders together representing at least 10% of the subscribedcapital stock may request the Board of Management and the Supervisory Board, inwriting, to convene a General Meeting of Shareholders. If the Boards fail toorganize such a meeting within six weeks, the District Court may authorizethose shareholders to convene a General Meeting of Shareholders.

 

TheBoard of Management and the Supervisory Board determine the agenda of theGeneral Meeting of Shareholders. Shareholders who individually or collectivelyrepresent at least 1% of the issued capital have the right to propose items forthe agenda. Such requests will be met, provided that the requester has a fairinterest in the subject to be discussed, that placing the item on the agenda isnot counter to the proper conduct of the meeting, and that the Company has nopressing reasons preventing the item being placed on the agenda. The requestmust be submitted in writing at least 60 days prior to the date of the meeting.The Chairman of the Supervisory Board chairs the meeting.

 

Everyshareholder has the right to attend a General Meeting of Shareholders in personor through written proxy, to address the meeting and to exercise voting rights.To exercise voting rights, holders of ordinary bearer shares must lodge theirshare certificates in the way specified in the notification convening theGeneral Meeting of Shareholders. Holders of ordinary registered shares mustinform the Board of Management in writing of their intention to attend themeeting.

 

Allresolutions at a General Meeting of Shareholders are passed on a simplemajority of votes, with the proviso that a majority of at least two-thirds ofthe votes cast is required for resolutions to reduce capital or restrict orexclude priority rights, or to designate a Company body with authority to doso, if at the meeting at which less than half the issued capital isrepresented. Some resolutions additionally require the approval of the holderof the special share.

 

**ADOPTION OFFINANCIAL STATEMENTS AND DISCHARGE OF RESPONSIBILITY**

 

Withinfive months of the end of every fiscal year, the Board of Management mustprepare the Financial Statements accompanied by an Annual Report. The GeneralMeeting of Shareholders may extend this period to a maximum of six months inexceptional circumstances. The Financial Statements are submitted to theSupervisory Board for adoption. The Supervisory Board submits the adoptedFinancial Statements to the General Meeting of Shareholders for approvaltogether with the Annual Report for discussion. At the same time, theSupervisory Board submits the adopted Financial Statements to the Central WorksCouncil. Adoption of the Financial Statements does not automatically dischargethe Board of Management or the Supervisory Board from liability. This requiresa separate resolution by the General Meeting of Shareholders.

 

**DIVIDEND**

 

Under the Articles of Association, the special share and Class Bpreferred shares carry preferred dividend rights. After approval by theSupervisory Board, the Board of Management determines how much of the remainingprofit will be allocated to the reserves before dividends are paid out onordinary shares. The Board of Management, with the approval of the SupervisoryBoard, may also allocate the complete profit to reserves. In addition, theBoard of Management may, subject to approval by the Supervisory Board and theholder of the special share, decide to pay out the entire dividend on ordinaryshares in shares instead of in cash. Subject to Supervisory Board approval andcertain legal requirements, the Board of Management may decide to pay outinterim dividends on ordinary shares. Please refer to the section titled ‘Information on the KPN share -Dividend Policy’ for more information.

 

**AMENDMENT OFTHE ARTICLES OF ASSOCIATION; DISSOLUTION; LEGAL MERGER; DEMERGER; REDUCTION OFCAPITAL**

 

TheGeneral Meeting of Shareholders may pass resolutions to effect the merger,split-up or dissolution of the Company or amend its Articles of Associationonly upon a proposal by the Board of Management. The Supervisory Board mustapprove such a proposal. An absolute majority is required to adopt such ashareholders’ resolution. The shareholders’ resolution must be approved by theholder of our special share in case of a merger, split-up, or dissolution andcertain amendments to our Articles of Association.

 

 

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**LIQUIDATION**

 

Inthe event of dissolution or liquidation, the assets remaining after payment ofall debts will be divided among shareholders in the following way: the holderof the special share and holders of issued and outstanding Class B preferredshares will first receive the par value paid for the shares and any amount owedby way of dividend on the shares, in so far as not already paid out in previousyears. Secondly, the remaining amount will be distributed to holders ofordinary shares in proportion to the total number of shares possessed by eachholder.

 

**RESTRICTIONSON NON-DUTCH SHAREHOLDERS’ RIGHTS**

 

Underour Articles of Association, there are no limitations on the rights ofnon-resident or foreign shareholders to hold or exercise voting rights inrespect of our securities, and there are no such restrictions under Dutchcorporate law.

 

**MAJORSHAREHOLDERS AND CONTROL OF THE COMPANY**

 

***General***

 

Thetable below sets forth, as of the period indicated, the number of shares ofeach class of our voting shares held by anyone who owns 5% or more of theseshares. The table also sets out the number of shares of each class beneficiallyowned by the members of our Supervisory Board and our Board of Management.

 
| **Title of class** |   | **Identity of person  or group**                                      |   | **At February 27,  2004** |   | **At December 31,  2003** |   | **At December 31,  2002** |   | **At December 31,  2001** |   |
|--------------------|--------|-----------------------------------------------------------------------|--------|---------------------------|--------|---------------------------|--------|---------------------------|--------|---------------------------|--------|
| Ordinary shares    |   | The  State of the Netherlands                                         |   | 481,966,893               |   | 481,966,893               |   | 781,966,893               |   | 781,966,893               |   |
| (19.3              | %)     | (19.3                                                                 | %)     | (31.39                    | %)     | (34.69                    | %)     |
| Ordinary shares    |   | Current  members of our Board of Management and our Supervisory Board |   | less  than 0.01           | %      | less  than 0.01           | %      | less  than 0.01           | %      | less  than 0.01           | %      |
| Special share      |   | The  State of the Netherlands                                         |   | 1  (100                   | %)     | 1  (100                   | %)     | 1  (100                   | %)     | 1  (100                   | %)     |

 

Asof December 31, 2003, 57 ADR record holders held 6,928,595 ordinary shares inthe form of American Depository Shares.

 

Asof December 31, 2003, 33% of our outstanding ordinary shares was held by Dutchinvestors, including the State of the Netherlands (18%, of the free float, i.e.disregarding the shares held by the State of the Netherlands). These shareswere held by 23 registered shareholders and approximately 272,500 unregisteredshareholders.

 

**THE STATE OFTHE NETHERLANDS**

 

TheState of the Netherlands, referred to hereinafter as the State, represented bythe Ministry of Finance, is a large shareholder in our Company. The Statereduced its shareholding in our Company from 31.39% to 19.3% through the blocksale of 300 million ordinary shares to Citigroup Global Markets Ltd.(Citigroup) on September 19, 2003. Citigroup has informed us that itsubsequently sold these shares into the market. The State undertook not to sellany additional ordinary shares for a period of 365 days after completion of theblock sale without the approval of Citigroup. The State still holds the specialshare that carries the right to approve resolutions causing fundamental changesto the structure of the KPN group and certain additional rights. As part of ourinitial public offering in 1994, the Dutch State undertook not to exercise, noteven in part, its special share privileges to protect our Company fromundesirable shareholder influence. Following amendment of the Enabling Act in2001, the State gave an undertaking to exercise the rights attached to thespecial share only to protect its financial interest as a shareholder. At thattime, the State announced its intention to retain the rights attached to thespecial share until such time as its capital interest in our Company issubstantially reduced. The State has announced that it intends to sell theremainder of its KPN shares, subject to market conditions.

 

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Basedon the judgments of the Court of Justice of the European Union regarding goldenshares, the European Commission formally asked the Dutch State in February2003, to inform the European Commission within two months of the measures thatthe State is planning to take to decrease the rights of the special share. TheDutch State replied to the European Commission that, in its opinion, thespecial share is an ordinary instrument of corporate law and that the rightsattached to the special share are not contrary to the free movement of capitallaid down in Article 56 of the EU Treaty. The European Commission subsequentlytook the view that the special share deters investors from other Member Statesfrom investing in the capital of our Company, given, according to the EuropeanCommission, the major influence these special rights confer on the financialdecision-making as well as the management of our Company. The Commissionbelieves that these special rights are contrary to the free movement of capitallaid down in Article 56 of the EC Treaty and the right of establishment inArticle 43. The Commission has appealed to the European Court of Justice. Theoutcome as well as the timing of this proceeding is uncertain.

 

TheState may not transfer or encumber the special share without the approval of theBoard of Management and the Supervisory Board. The following resolutionsrequire approval of the holder of the special share:

•                  resolutions to issue shares and/or restrict orexclude preemptive rights;

•                  resolutions of the General Meeting ofShareholders to extend the designation of the Board of Management as thecompetent body to issue shares and to restrict or exclude preemptive rights;

•                  resolutions of the General Meeting ofShareholders to authorize a corporate body to issue shares;

•                  resolutions of our Board of Management toacquire or dispose of an amount of ordinary shares exceeding 1% of our issuedcapital of ordinary shares;

•                  resolutions of our Board of Managementmentioned in article 25.3.a of our Articles of Association, i.e. to exercisethe right to vote on shares in KPN Telecom B.V. with respect to a proposal todissolve KPN Telecom B.V.; a legal merger or demerger (splitting up) of KPNTelecom B.V.; acquisition of our own shares by KPN Telecom B.V.; amendment ofthe Articles of Association of KPN Telecom B.V. relating to the competence ofthe General Meeting of Shareholders concerning any of the aforementioned threesubjects and resolutions of our Board of Management to make capitalexpenditures which would reduce our shareholders’ equity below 30% of our totalcapital according to our Consolidated Balance Sheet;

•                  resolutions of our Board of Management to payall or part of the dividends declared in respect of our ordinary shares inshares rather than in cash;

•                  proposals of our Board of Management to chargedistributions to holders of ordinary shares to the distributable part ofShareholders’ equity; and

•                  resolutions of the General Meeting ofShareholders or of our Board of Management to: enter into a legal merger ordemerger; dissolve the Company; amend our Articles of Association if theamendment concerns, among other things: our corporate purpose insofar as itrelates to carrying out the concessions or licenses (Article 4); our authorizedcapital and the classes of shares in so far as it relates to the creation of anew class of shares or profit sharing certificates or other corporate rightswhich entitle the holder to the result and/or the capital of the Company or tothe cancellation of the special share or the preference shares B (Article 5);distributions in shares or distributions charged to our reserves in so far asit relates to the approval of the holder of the special share (Article 36); thetransfer of the special share (Article 17); any amendments which areprejudicial or detrimental to or incompatible with the statutory rightsattached to the special share, such as the approval rights listed above; andArticle 47, paragraph 2, in which these amendments requiring the approval ofthe holder of our special share are listed.

 

Since 1993, the Dutch State and we are party to a Heads of Agreement,subsequently amended by several agreements (in the form of letters). Under thisagreement (and within the boundaries of the law), the Dutch State is requiredto co-ordinate with us any sale of its shareholding in our Company. Theagreement also regulates the principles under which the Dutch State, as holderof the special share, must approve any issuance by us of (preference) shares.Lastly, the agreement requires the Dutch State to support any proposal to ourGeneral Meeting of Shareholder to authorize our Board of Management to issuenew shares. An overview of these arrangements is available in the Dutchlanguage on the website of the Dutch Ministry of Finance: www.minfin.nl.

 

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Atthe time of our incorporation in 1989, the State made two long-term loans tous. One is an ordinary loan of EUR 2.2 billion at 6.4% interest and the otheris a subordinated loan of EUR 0.7 billion at 6.7% interest. We redeemed theoutstanding amounts under these loans in December 2003.

 

TheState is a major customer and purchases our services on normal market terms andconditions. The State may further require us by law to provide certain servicesin connection with national security or the investigation of criminal offences.The services include tapping telephone lines and providing and maintaining aspecial secure network for emergencies.

 

**THEFOUNDATION FOR THE PROTECTION OF KPN (*STICHTINGBESCHERMING KPN*)**

 

TheFoundation for the Protection of KPN ( the “Foundation”) was organized to carefor our interests and those of other interested parties, such as shareholdersand employees, by, among other things, protecting us from influences that maythreaten our continuity, independence and identity. The independent members ofthe Board of the Foundation are Professor S.C.J.J. Kortmann (Chairman),Professor J.M.M. Maeijer (Deputy Chairman), Professor P. Bouw and Mr. J.C.T.van der Wielen. The Chairman of our Supervisory Board, Mr. A.H.J. Risseeuw, isalso a member of the Board of the Foundation. Our Board of Management and themembers of the Board of the Foundation share the view that the Foundation isindependent from us in accordance with Appendix X to the Listing and IssuingRules of the Stock Exchange of Amsterdam.

 

Wehave a put option to place with the Foundation a number of our Class Bpreference shares, which have the same voting rights as ordinary shares, notexceeding the total issued share capital before such issue, or, subject toprior approval by the General Meeting of Shareholders, such larger number asthe parties may agree. In addition, the Foundation has a call option to acquirea number of Class B preference shares from us not exceeding the total issuedamount of ordinary shares and the special share, minus one share and minus anyshares already issued to the Foundation. Upon exercise of the option, only 25%of the nominal value of EUR 0.24 per Class B preference share needs to be paid.The remainder, amounting to EUR 0.18, is payable on call by resolution of ourBoard of Management, subject to the approval of the Supervisory Board. Weanticipate not exercising our put option other than to temporarily protect ourCompany against a hostile take-over bid. We believe that the put option is auseful instrument to enable our management to carefully consider any such offerand potential alternatives.

 

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**REMUNERATION REPORT**

 

This report has been prepared by the Remuneration& Nomination Committee(‘the Committee’) on behalf of the SupervisoryBoard. Further perspective on the Company’s remuneration policy and plans as well ascontractual arrangements with (current and former) members of the Board ofManagement were provided in a shareholders letter dated May 12, 2003.

 

The Remuneration & Nomination Committeeregularly reviews the remunerationpolicy, and if appropriate, proposes changes tothis policy to the full Supervisory Board for adoption by the annual meetingof shareholders. It reviews the plans to ensure that they are aligned with the interests ofthe shareholdersand consistent with the approved policy.

 

The Committee meets at least twice a year, andmore often if so needed. TheCommittee met six times in 2003, and discussed,among others, the potential remuneration plan implications of transitioning from a‘survival’ mode to a going business strategy state, the policy and plan implications of theDutch CorporateGovernance Code, the bonus pay-out proposals for 2002, the targets for 2003 and theplans for 2004. The Committee also discussed and proposed the 2003 managementoptions.

 

It also reviews thesuccession process for Mr. L. Roobol, Member of theBoard of Management,who had to resign for health reasons. The Committee invites the CEO andthe Director Human Resources to attend these meetings to gain their insightson matters coming before them. The CEO is not involved in any decisionrelating to his own remuneration. The Director of Human Resources acts assecretary to the Committee.

 

The Committeeconsists of at least three members of the Supervisory Board,all of whom meet theindependence requirements of the Dutch Corporate Governance Code and the New York Stock Exchange.The Supervisory Board appoints and replaces members of the Committee, whoserve at the pleasure of the Supervisory Board. The Chair of the Committee isappointed by the Board, and serves at its pleasure. 

 

The Committee may use external advice on thelevel and structure of remuneration plans. It used Towers Perrin in 2003, andhad its conclusions reviewed by the Executive Compensation Advisory Group ofErnst & Young LLP (UK).

 

This report has four sections. The firstsection is a summary of our remuneration policy. Second is an outline of the actual2003 compensation in its various components, including audited compensationtables in comparison to the previous year. The third section sets out changeseffectuated in 2004. Finally, there is a summary of the remuneration of themembers of the Supervisory Board.  The auditable partsof this remuneration report comprise ‘Executive remuneration’, ‘Long-termincentives: stock options 2003’, ‘Loans 2003’ and ‘Supervisory BoardRemuneration’. The information in these parts is required under Title 9, Book2 of the Dutch Civil Code and forms an integral part of the financialstatements, which are incorporated in this document on pages 129 - 219.

 

The remuneration policy and remuneration reportof KPN comply with the Dutch Corporate Governance Code. Non-compliance isspecifically addressed and explained.

 

Theremuneration policy will be submitted to the 2004 Annual General Meeting ofShareholders for approval. The Works Council (COR) has had the opportunity togive its opinion on this policy.

 

The Remuneration & Nomination Committee has beenreorganized into twoseparate committees: the Remuneration &Organization Development Committee and the Nominating & Corporate GovernanceCommittee, effective January 1, 2004, which is consistent with the recommendations of theDutch Corporate Governance Code.

 

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**Remunerationpolicy**

* *

Our remuneration policy is designed to create conditions that allow usto attract, motivate and retain talent required to achieve the Company’slong-term business objectives. The specific programs are designed with a clearperformance orientation, with a large portion of the executive compensationbeing ‘at risk’. In pursuing this, the Committee believes that an effectiveprogram must have:

•                  A total remuneration level, bothshort and long-term, that is comparable with levels provided by other Dutch andEuropean companies of similar size and complexity, with specific focus oncompanies in the telecom or IT sector. Historically, a number of factors(internal and external, including independent external compensation surveys)were taken into account in determining appropriate remuneration levels. As from2004, the external reference will be based on the compensation levels of aspecified peer group (please refer to ‘Labor market peer group’).

•                  Strong emphasis on “pay forperformance” both on short as well as long-term results. In 2003, forperformance at target level, 70% of the total remuneration (excluding pensioncontributions) for the CEO was variable (i.e., at risk), and 55% for the othermembers of the Board of Management. In 2003, this could increase to 74% for theCEO and 64% for the other members of the Board of Management at peakperformance (i.e., maximizing on all incentive plans).

•                  Differentiation in base remunerationto reflect the relative size and complexity of, and experience and performancein, the positions held by the members of the Board of Management.

 

**Executiveremuneration**

 

The table belowshows that our remuneration to current and former Members of the Board ofManagement in 2003 totaled EUR 5,638,663, compared to EUR 10,564,527 in 2002.In 2001, this totaled to EUR 9,752,000.

 

**EXECUTIVE REMUNERATION 2003 AND 2002**

 
| **Name and position**     |   |     |       | **Annual Compensation** |       | **Severance** |       | **Pension**   |       |             |       | **Stock**      |       |
|---------------------------|--------|----------|------------|-------------------------|------------|---------------|------------|---------------|------------|------------------|------------|----------------|------------|
| **Amounts in euro**       |   | **Year** |       | **Salary (1)**          |       | **Bonus (4)** |       | **payments**  |       | **Contribution** |       | **Total**      |       | **options** |   |
| A.J. Scheepbouwer         |   | 2003     |       | 853,258                 |       | 1,613,500     |       | —        |       | 18,025           |       | 2,484,783      |       | 319,865 |   |
| Chairman of the Board     |   | 2002     |       | 854,044                 |       | 2,666,667     |       | —        |       | 12,807           |       | 3,533,518      |       | 385,356 |   |
| J.M. Henderson            |   | 2003     |       | 354,048                 |       | 525,000       |       | —        |       | 195,561          |       | 1,074,609      |       | 45,000 |   |
| CFO                       |   | 2002     |       | 354,044                 |       | 143,000       |       | —        |       | 123,425          |       | 620,469        |       | 30,000 |   |
| G.J.M. Demuynck (2)       |   | 2003     |       | 454,048                 |       | —        |       | —        |       | 122,618          |       | 576,666        |       | 195,000 |   |
| Member                    |   | 2002     |       | —                  |       | —        |       | —        |       | —           |       | —         |       | — |   |
| L. Roobol (3)             |   | 2003     |       | 354,048                 |       | 525,000       |       | —        |       | 148,534          |       | 1,027,582      |       | 45,000 |   |
| Member                    |   | 2002     |       | 354,044                 |       | 128,000       |       | —        |       | 91,443           |       | 573,487        |       | 30,000 |   |
| **Total current members** |   | **2003** | ** ** | **2,015,402**           | ** ** | **2,663,500** | ** ** | —        |       | **484,738**      | ** ** | **5,163,640**  | ** ** | **604,865** | ** ** |
|                      |   | **2002** |       | **1,562,132**           | ** ** | **2,937,667** | ** ** | **—**    | ** ** | **227,675**      | ** ** | **4,727,474**  | ** ** | **445,356** | ** ** |
| P. Smits                  |   | 2003     |       | —                  |       | —        |       | —        |       | —           |       | —         |       | — |   |
| Former Member             |   | 2002     |       | 483,330                 |       | —        |       | 2,870,479     |       | 211,357          |       | 3,565,166      |       | — |   |
| M. Pieters                |   | 2003     |       | —                  |       | 388,500       |       | —        |       | 86,523           |       | 475,023        |       | — |   |
| Former Member             |   | 2002     |       | 354,044                 |       | 128,000       |       | 1,681,889     |       | 107,954          |       | 2,271,887      |       | 30,000 |   |
| **Total former members**  |   | **2003** | ** ** | **—**              | ** ** | **388,500**   | ** ** | **—**    | ** ** | **86,523**       | ** ** | **475,023**    | ** ** | **—** | ** ** |
|                      |   | **2002** |       | **837,374**             | ** ** | **128,000**   | ** ** | **4,552,368** | ** ** | **319,311**      | ** ** | **5,837,053**  | ** ** | **30,000** | ** ** |
| **Grand Total**           |   | **2003** | ** ** | **2,015,402**           | ** ** | **3,052,000** | ** ** | **—**    | ** ** | **571,261**      | ** ** | **5,638,663**  | ** ** | **604,865** | ** ** |
|                      |   | **2002** |       | **2,399,506**           | ** ** | **3,065,667** | ** ** | **4,552,368** | ** ** | **546,986**      | ** ** | **10,564,527** | ** ** | **475,356** | ** ** |

 

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1)                                      Salary reflects a 15% reduction in 2002 and2003 as part of a social contract. Restored in January 2004.

2)                                      Mr. Demuynck joined the Company on January 1,2003.

3)                                      Mr. Roobol resigned from the Board ofManagement on November 10, 2003 for reasons of health. The salary of Mr. L.Roobol for the period between November 10, 2003 and December 31, 2003 (EUR49,177) is to be considered as remuneration to former members of the Board.

4)                                      Bonus payments for current and former membersof the Board of Management charged to the Consolidated Statement of Income for2003 relate to 2002 performances. Starting with the 2004 report, we willinclude the (estimated) bonuses earned in the reporting year.

 

For stock options granted to the Board ofManagement we refer to the table containing this overview under the heading‘Long-term incentives: stock options 2003’.

 

We made payments forexpenses to former Board of Management members Mr. W. Dik (EUR 65,000) and Mr.C. Griffioen (EUR 50,000) in 2003. The bonus entitlement for Mr. M. Pieters isbased on his performance during 2002 and was paid in 2003.

 

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**Base salary2003**

 

Basesalaries need to be sufficient to attract, retain and motivate management ofthe caliber needed to achieve our business objectives, strategies and plans.

TheRemuneration Committee also considers the experience and responsibilities ofthe CEO and the members of the Board of Management and their personalperformance during the prior year in the context of its basic strategy andpolicies to ensure they are fully aligned.

 

Due to specific circumstances, and in the context of abroader social contract, the CEO and the Board of Management decreased theirsalaries by 15% in 2003 and 2002 as compared to 2001. These reductions havebeen reversed as from January 2004.

 

The Supervisory Board has decided not to change 2004base salaries, except for the reversal of the aforementioned reduction, due toa variety of internal and external factors.

 

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**Short-termincentive bonus 2003**

 

The short-term (i.e. annual) bonus plan is akey component of the performance driven incentive package. It is designed tohelp achieve the specific goals outlined in the Company’s annual plan. Theperformance targets are primarily based on financial metrics and business“proxies” (such as market share or customer satisfaction). The targets must bechallenging but realistic, since they will otherwise fail to motivate.

 

The 2002 targets were based on cash flow andmargins, whereas the 2003 targets are based on a combination of net incomebefore taxes, customer satisfaction (Fixed division) and market share (Mobiledivision). The measurements are based on the audited Consolidated FinancialStatements (net income before taxes). The customer satisfaction will be basedon independent surveys. The measure for mobile market share will be derivedfrom publicly available data as much as possible in combination with ourrecords and calculations.

 

The definitions of these measures as used by the Company are:

Net Income before Taxes is calculated as profit/(loss) before interest andtaxes, plus or minus financial income and expense, plus or minus income fromparticipating and minority interests, adjusted for predefined elements ofincome and expenses.

 

Customer satisfaction (Fixed division) is calculated byusing a weighted average (based on revenue) of customer satisfaction in theCorporate, Business and Consumer segments. The score per segment is based onquarterly research by an independent research organisation.

 

Market share (Mobile division) is calculated based on the operator’s share ofthe total customer base in the relevant country. The KPN customer base consistsof the number of end-users that use KPN Mobile’s network, whereby each end-userequals one person, which may use more than one SIM card.

 

These performance measures were key items indetermining the remuneration policy for 2003 as they are meant to ensure thefinancial health of the Company and to create a strong business foundation forthe future.

 

The 2003 bonus plan will payout at 100% of base salary at target performance levels and at 150% of basesalary for exceptional performance compared to the target. There will be nobonus when performance does not meet the minimum threshold of performance. OurCEO has the right to receive a guaranteed bonus of EUR 500,000 per hisemployment contract, but– as previously published – this right to a fixed bonushas been waived as of January 1, 2004.

 

**Long-termincentives: stock options 2003**

 

Wehave management and employee stock option programs. The goal of these programsis to encourage long-term value creation by better aligning the interests ofall employees and management to those of our shareholders. Historically, wehave offered a combination of ‘at-the-money’ and ‘out-the-money’ options andstock appreciation rights to reduce tax consequences. All options had five-yearterms.

 

 

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For 2003, we have used estimated competitive practicesand judgment toestablish the level of management options. This levelis below that of the peer group to reflect the greater emphasis on short-termincentives, which will be corrected starting in 2004.

 

Thetable below shows the options granted in 2003 to members of the Board ofManagement. The actual grant took place the day after the Annual GeneralMeeting of Shareholders (May 12, 2003). Please note that options referred tobelow are also included in the table with the total overview of the optionsgranted.

 
|              |   | **Number of  options  granted  in 2003** |       | **% of total  options  granted in  2003** |   | **Exercise  price in  euro** |   | **Granting  date** |   | **Expiration  date** |   |
|-------------------|--------|------------------------------------------|------------|-------------------------------------------|--------|------------------------------|--------|--------------------|--------|----------------------|--------|
|              |   |                                     |       |                                      |   |                         |   |               |   |                 |   |
| A.J. Scheepbouwer |   | 319,865                                  |       | 8                                         | %      | 5.94                         |   | 5-13-03            |   | 5-12-08              |   |
| J.M. Henderson    |   | 45,000                                   |       | 1                                         | %      | 5.94                         |   | 5-13-03            |   | 5-12-08              |   |
| G.J.M. Demuynck   |   | 45,000                                   |       | 1                                         | %      | 5.94                         |   | 5-13-03            |   | 5-12-08              |   |
|              |   | 150,000                                  |       | 4                                         | %      | 7.79                         | (1)    | 1-02-03            |   | 1-01-08              |   |
| L. Roobol         |   | 45,000                                   |       | 1                                         | %      | 5.94                         |   | 5-13-03            |   | 5-12-08              |   |
| **Total**         |   | **604,865**                              | ** ** | **15**                                    | **%**  |                         |   |               |   |                 |   |

 

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(1)                                  The exercise price of this option is EUR 7.79,which equals 125.1% of the market value of the shares on the date of issue. Theother conditions for this grant are the same as those granted to our seniormanagement on April 26, 2002 (refer to Note 3 of the Consolidated FinancialStatements).

 

Options issued in 2003 carry an entitlement to one KPN share.

 

The following table summarizes informationconcerning options exercised by members of the Board of Management during 2003,and unexercised options currently held by them:

 
|              |   | **Number of  underlying  unexercised  options** |   | **Number of  exercisable  options** |       | **Value of  exercisable  options in  euro (1)** |       | **Number of  unexercisable  options** |       | **Granting date** |       | **Expiration  date** |       | **Exercise  price in euro** |       |
|-------------------|--------|-------------------------------------------------|--------|-------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------|------------|-------------------|------------|----------------------|------------|-----------------------------|------------|
|              |   |                                            |   |                                |       |                                            |       |                                  |       |              |       |                 |       |                        |       |
| Current members:  |   |                                            |   |                                |       |                                            |       |                                  |       |              |       |                 |       |                        |       |
| A.J. Scheepbouwer |   | 319,865                                         |   | 319,865                             |       | 57,576                                          |       | —                                |       | 5-13-03           |       | 5-12-08              |       | 5.94                        |       |
|              |   | 385,356                                         |   | 385,356                             |       | —                                          |       | —                                |       | 4-26-02           |       | 4-25-07              |       | 6.49                        |       |
|              |   | 1,567,398                                       |   | —                              |       | —                                          |       | 1,567,398                             |       | 9-13-01           |       | 9-12-06              |       | 3.99                        |       |
|              |   | **2,272,619**                                   |   | **705,221**                         | ** ** | **57,576**                                      | ** ** | **1,567,398**                         | ** ** |              | ** ** |                 | ** ** |                        | ** ** |
| J.M. Henderson    |   | 45,000                                          |   | 45,000                              |       | 8,100                                           |       |                                  |       | 5-13-03           |       | 5-12-08              |       | 5.94                        |       |
|              |   | 30,000                                          |   | 30,000                              |       | —                                          |       |                                  |       | 4-26-02           |       | 4-25-07              |       | 6.49                        |       |
|              |   | 150,000                                         |   | 150,000                             |       | —                                          |       |                                  |       | 12-10-01          |       | 12-09-06             |       | 6.34                        |       |
|              |   | 40,000                                          |   | 40,000                              |       | —                                          |       |                                  |       | 5-03-01           |       | 5-02-06              |       | ATM  14.71                  |       |
| OTM  18.40        |
|              |   | 40,000                                          |   | 40,000                              |       | —                                          |       |                                  |       | 4-28-00           |       | 4-27-05              |       | 71.84                       |       |
| SAR  57.43        |
|              |   | **305,000**                                     |   | **305,000**                         | ** ** | **8,100**                                       | ** ** |                                  | ** ** |              | ** ** |                 | ** ** |                        | ** ** |
| G.J.M. Demuynck   |   | 45,000                                          |   | 45,000                              |       | 8,100                                           |       |                                  |       | 5-13-03           |       | 5-12-08              |       | 5.94                        |       |
|              |   | 150,000                                         |   | 150,000                             |       | —                                          |       |                                  |       | 1-02-03           |       | 1-01-08              |       | 7.79                        | (2)        |
|              |   | **195,000**                                     |   | **195,000**                         | ** ** | **8,100**                                       | ** ** |                                  | ** ** |              | ** ** |                 | ** ** |                        | ** ** |
| L. Roobol         |   | 45,000                                          |   | 45,000                              |       | 8,100                                           |       |                                  |       | 5-13-03           |       | 5-12-08              |       | 5.94                        |       |
|              |   | 30,000                                          |   | 30,000                              |       | —                                          |       |                                  |       | 4-26-02           |       | 4-25-07              |       | 6.49                        |       |
|              |   | 150,000                                         |   | 150,000                             |       | —                                          |       |                                  |       | 12-10-01          |       | 12-09-06             |       | 6.34                        |       |
|              |   | 40,000                                          |   | 40,000                              |       | —                                          |       |                                  |       | 5-03-01           |       | 5-02-06              |       | ATM  14.71                  |       |
| OTM  18.40        |
|              |   | 40,000                                          |   | 40,000                              |       | —                                          |       |                                  |       | 4-28-00           |       | 4-27-05              |       | 71.84                       |       |
| SAR  57.43        |
|              |   | 7,200                                           |   | 7,200                               |       | —                                          |       |                                  |       | 5-03-99           |       | 5-02-04              |       | 19.90                       |       |
|              |   | 2,000                                           |   | 2,000                               |       | —                                          |       |                                  |       | 1-08-99           |       | 1-07-04              |       | 24.78                       |       |
|              |   | **314,200**                                     |   | **314,200**                         | ** ** | **8,100**                                       | ** ** |                                  | ** ** |              | ** ** |                 | ** ** |                        | ** ** |

 

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(1)                                  The value of the exercisable options has beencalculated as the number of the options times the difference between theclosing share price as of December 31, 2003 and the exercise price of theoptions.

(2)                                  For the terms of this option plan we refer tothe previous table with stock options granted in 2003.

 

Theoptions of the former member of the Board Mr. M. Pieters were forfeited in2003. In 2003, no options were exercised by the members ofthe Board of Management.

 

**Pension plans**

 

Membersof the Board of Management have the same basic pension arrangements applicableto all our senior management. The pensions are administered by the StichtingOndernemingspensioenfonds KPN, our pension fund. The pensionable age for theCEO is 65, and 62 for the other members of the Board of Management. There is aprovision for early retirement at the age of 62 for the CEO and the possibilityof early retirement at 60 for other members of the Board of Management, subjectto an actuarial reduction. The CEO receives a pension – and if applicable,early retirement benefits — based on a final pay scheme and on retirementbefore reaching 65, he will receive compensation of EUR 2.5 million if heleaves the Company at 62. For every additional month he remains with theCompany, the compensation will be reduced by 1/36th of this amount.The other members have a pension based on a combination of average pay, and toa larger extent, on available contributions. For information onthe pension contribution to the Board of Management, we refer to the tableunder the heading ‘Executive Remuneration’.

 

**Loans 2003**

 

UntilMay 2001, we provided loans to members of the Board of Management to financethe tax due on unconditional option grants. Since 2001, it is our policy not toprovide any loans to the CEO and other members of the Board of Management. Inaddition, our remuneration policy does not allow for the waiver of any loan.The loans outstanding to members of the Board of Management are as follows:

 
| **Amounts  in euro** |   | **December 31, 2003** |   | **Redemptions** |       | **December 31, 2002** |   |
|----------------------|--------|-----------------------|--------|-----------------|------------|-----------------------|--------|
| J.M. Henderson       |   | 44,400                |   | —          |       | 44,400                |   |
| L. Roobol            |   | 90,506                |   | 3,430           |       | 93,936                |   |
|                 |   | **134,906**           |   | **3,430**       | ** ** | **138,336**           |   |

 

**Employmentcontracts**

 

Theemployment contracts for the CEO and other members of the Board of Managementare entered into for an indefinite period of time and provide for a noticeperiod of three months upon termination by the CEO or other members of theBoard of Management and a notice period of six months upon termination by theCompany.

 

Theemployment contracts provide for compensation in the event of an involuntarytermination of employment. The CEO will receive until the age of 62 acompensation equal to the maximum of his last earned salary, the benefit of theearly retirement provision and continued contributions to his pension plan.There was no pay-out under these exit arrangements in 2003. The exitarrangements of the CEO and other members of the Board of Management have beenbrought in line with Provision II.2.7 of the Dutch Corporate Governance Code asfrom January 1, 2004.

 

In2004, the Supervisory Board will assess the feasibility of the application ofthe Dutch Corporate Governance Code best practice provision II.1.1, whichrecommends re-election of the CEO and members of the Board of Management everyfour years.

 

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**Stockownership**

 

Thetables below show the shares held by current members of our Supervisory Boardand Board of Management.

 

**SUPERVISORYBOARD**

 
| **Number of KPN shares** |   | **December 31,  2003** |       | **December 31,  2002** |       |
|--------------------------|--------|------------------------|------------|------------------------|------------|
| A.H.J. Risseeuw          |   | 34,101                 |       | 34,101                 |       |
| D.G. Eustace             |   | —                 |       | —                 |       |
| M. Bischoff              |   | —                 |       | —                 |       |
| V. Halberstadt           |   | —                 |       | —                 |       |
| D.I. Jager               |   | 22,000                 |       | 10,000                 |       |
| M.E. van Lier Lels       |   | 1,203                  |       | 1,203                  |       |
| J.B.M. Streppel          |   | —                 |       | —                 |       |
| **Total**                |   | **57,304**             | ** ** | **45,304**             | ** ** |

 

**BOARD OFMANAGEMENT**

 
| **Number of KPN shares** |   | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|--------------------------|--------|------------------------|------------|------------------------|------------|
| A.J. Scheepbouwer        |   | 52,147                 |       | 52,147                 |       |
| J.M. Henderson           |   | 7,627                  |       | 7,627                  |       |
| G.J.M. Demuynck          |   | —                 |       | —                 |       |
| L. Roobol                |   | 10,640                 |       | 10,640                 |       |
| **Total**                |   | **70,414**             | ** ** | **70,414**             | ** ** |

 

**SupervisoryBoard Remuneration**

 

TheRemuneration & Nomination Committee has the formal responsibility toreview, and if appropriate, recommend changes in the remuneration of themembers of the Supervisory Board. Any such recommendation is made to the entireSupervisory Board for approval by the General Meeting of Shareholders. In itsrecommendations in 2003, the Remuneration & Nomination Committee consideredthe rapidly expanding demands on and responsibilities of the Supervisory Board,the potential reputation and legal risks and the increased need for highlycapable and motivated members.

 

The current annual remuneration for the chairman ofthe Supervisory Board isEUR 48,000 and for the members EUR 37,000. ForeignCommittee members received a fee of EUR 900 for attending Committee meetings, DutchCommittee members a fee of EUR 700. However, as from May 12, 2003, the attendancefee forthe Audit Committee members has been replaced by a fixed annual fee for the chairman of theAudit Committee of EUR 10,000 and EUR 7,000 for the other AuditCommittee members.

 

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The table below shows that remuneration paid by theCompany to current and former Supervisory Board members in 2003 totaled EUR298,440, compared to EUR 247,455 in 2002 and EUR 267,000 in 2001.

 

**REMUNERATION OF SUPERVISORY BOARD**

 
|                      |   | **2003**                |       | **2002**          |       |
|---------------------------|--------|-------------------------|------------|-------------------|------------|
| **Amounts in euro**       |   | **Fixed  remuneration** |       | **Committee fee** |       | **Total** |   | **Fixed  remuneration** |   | **Committee fee** |   | **Total** |   |
|                      |   |                    |       |              |       |   |   |   |   |   |   |   |   |
| A.H.J. Risseeuw           |   | 48,000                  |       | 4,900             |       | 52,900 |   | 48,000 |   | 2,800 |   | 50,800 |   |
| D.G. Eustace              |   | 37,000                  |       | 10,900            |       | 47,900 |   | 37,000 |   | 3,600 |   | 40,600 |   |
| M. Bischoff 1)            |   | 23,680                  |       | —            |       | 23,680 |   | — |   | — |   | — |   |
| V. Halberstadt            |   | 37,000                  |       | 4,900             |       | 41,900 |   | 37,000 |   | 2,100 |   | 39,100 |   |
| D.I. Jager                |   | 37,000                  |       | 6,300             |       | 43,300 |   | 25,200 |   | 900 |   | 26,100 |   |
| M.E. van Lier Lels        |   | 37,000                  |       | 7,280             |       | 44,280 |   | 37,000 |   | 700 |   | 37,700 |   |
| J.B.M. Streppel 1)        |   | 23,680                  |       | 4,480             |       | 28,160 |   | — |   | — |   | — |   |
| **Total Current members** |   | **243,360**             | ** ** | **38,760**        | ** ** | **282,120** | ** ** | **184,200** | ** ** | **10,100** | ** ** | **194,300** | ** ** |
|                      |   |                    |       |              |       |   |   |   |   |   |   |   |   |
| C.H. van der Hoeven 1)    |   | 13,520                  |       | 2,800             |       | 16,320 |   | 37,000 |   | 2,800 |   | 39,800 |   |
| K. Hubée             |   | —                  |       | —            |       | — |   | 11,955 |   | 1,400 |   | 13,355 |   |
| **Grand total**           |   | **256,880**             | ** ** | **41,560**        | ** ** | **298,440** | ** ** | **233,155** | ** ** | **14,300** | ** ** | **247,455** | ** ** |

 

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1)             Messrs. Bischoff andStreppel were appointed member of the Supervisory Board on May 12,2003, being the date of our Annual General Meeting of Shareholders in 2003. Mr.Van der Hoeven stepped down on the same date.

 

Shareholdingsin the Company held by Supervisory Board members serve as a long-terminvestment in the Company and help align their interest with those of our othershareholders. No Supervisory Board member is granted stock options or shares inthe Company by way of remuneration. No stock options were held by a SupervisoryBoard member in the Company.

 

Asa policy, the Company does not provide loans to its Supervisory Board members.

 

**Plans for2004**

 

There have been a number of changes in 2004both reflecting the recently issued Dutch Corporate Governance Code and thechanging internal and external environments. The employment contracts ofmembers of the Board of Management limit separation compensation to a maximumof one year of pay, while the CEO forfeited his right to a fixed annual bonusof EUR 500,000.

 

The salary reductions of 15%, agreed as part ofthe 2002/03 social contract, have been reversed as of January 1, 2004.

 

It is our plan to move the total remunerationlevel, both short and long-term, to a level that is comparable with levelsprovided by other Dutch and European companies of similar size and complexity,with specific focus on companies in the telecom and IT sectors. A list ofcompanies included in the peer group is included below under ‘Labor market peergroup’. It should be noted that these comparisons are “normalized” (i.e.,scaled to KPN’s size), a technique commonly used by remuneration consultants.

 

It is the intention to bring the fixed salarycomponent to a level that places KPN at the median level of the comparatorcompanies, or just below that. The current fixed salary levels of members ofthe Management Board are well below target, even after reversal of the 15%reduction taken in 2002 and 2003. The Committee aims to bring the salaries tocompetitive levels in future years.

 

The target bonus opportunity for the CEO willnot change in 2004. For the other members of the Board of Management, thetarget bonus opportunity is decreased from 100% to 60% of base salary and, atmaximum performance, the bonus opportunity is decreased from 150% to 100% ofbase salary.

 

The 2004 targets will be based on a combinationof financial performance parameters, customer satisfaction (Fixed division) andnumber of mobile subscribers (Mobile division). As for 2003, the measurementfor the financials will be based on the audited Financial Statements, adjustedfor predefined elements income and expenses. The customer satisfaction will bebased on independent surveys. The measurement for mobile subscribers will bederived from our own records.

 

The unconditional long-term incentive stockoption plan is replaced by a conditional plan where granted options will vestafter three years based on the Company achieving certain levels of TotalShareholder Return (stock appreciation plus dividend pay-out; TSR) relative toa peer group of telecommunications companies with which we compete forshareholder investment. The list of companies included in the peer group isincluded below under ‘Relative total shareholder return peer group’.

 

The number of companies included in the peergroup is fifteen (sixteen companies, including KPN). The number of vested stockoptions will depend on the ranking within this peer group. If KPN is ranked inthe bottom four, no stock options will vest. For ranking from position twelveto nine, 50% of the stock options will vest. All stock options will vest ifranked between eight and fifth position. 200% of the target number of stockoptions will vest if KPN is ranked in the top four. Of note, the Companyrecently ranked one but last among this peer group underlining thevalue-building nature of this metric aligning our management with ourshareholders.

 

The initial option grants will be based on a targetequivalent to 60% of base salary using the Black & Scholes valuationmethod, and an estimate of the historic likelihood that we will reach the TSRrankings that will vest at target pay outs. External consultants will be usedto design and help monitor this program. We plan to use eight-year term optionsto be more in line with international and domestic practice.

 

The specific circumstances forthe CEO have not changed and the contractually agreed-upon stock option planwill apply.

 

In 2004, as part of ourremuneration policy, the Supervisory Board will consider introducing ashare-based incentive arrangement.

 

All changes to currentlong-term incentives or any introduction of new long-term incentives will besubject to shareholder approval.

 

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**LABOR MARKETPEER GROUP**

 

We use a combination of European telecom operators and IT companies andAEX-listed companies as a reference group of companies as a benchmark figurefor the appropriate salary levels. This combination is used for the followingreasons. Our growth strategy extends beyond the Dutch market. To achieve thisgrowth, the Supervisory Board needs to look for top-class talented and seasonedmanagers with experience in, preferably, the European telecom or IT sector.However, we are a Dutch company headquartered in The Netherlands. For thatreason, remuneration decisions need to be taken in light of the developments atother Dutch AEX-listed companies (excluding companies active in the financialindustry sector) and the positions taken by our stakeholders in theNetherlands.

 

The European peer group companies that made up the reference groupinclude:

 
| Atos  Origin              |   | LogicaCMG         |
|---------------------------|--------|-------------------|
| Belgacom                  |   | Portugal  Telecom |
| BT  Group                 |   | TDC               |
| Cap Gemini                |   | Swisscom          |
| Deutsche Telekom          |   | Telenor Group     |
| France  Télécom |   | Teliasonera       |

 

The Dutch peer group companies include:

 
| Akzo Nobel   |   | Reed Elsevier              |
|--------------|--------|----------------------------|
| ASML Holding |   | Royal Ahold                |
| Buhrmann     |   | Royal Dutch/Shell          |
| DSM          |   | Royal Philips  Electronics |
| Getronics    |   | TPG                        |
| Hagemeyer    |   | Unilever                   |
| Heineken     |   | Van der Moolen  Holding    |
| IHC Caland   |   | VNU                        |
| Logica CMG   |   | Wolters Kluwer             |
| Numico       |   |                       |

 

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**RELATIVETOTAL SHAREHOLDER RETURN PEER GROUP**

 

The Supervisory Boardhas decided that our total shareholder return will be compared to the followingpeer group companies:

 
| BT Group                 |   | Swisscom        |
|--------------------------|--------|-----------------|
| Carso Global  Telecom    |   | TDC             |
| Deutsche  Telekom        |   | Telecom Italia  |
| France Télécom |   | Telefónica |
| Mobistar                 |   | Telenor         |
| mmO2                     |   | Teliasonera     |
| NTT DoCoMo               |   | Vodafone Group  |
| Portugal Telecom         |   |            |

 

The peer group used for the determination of theremuneration levels isdifferent from the peer group used for the comparisonof our total shareholder return. The first list reflects the relevant labor marketwhere weexpect to recruit members of the Board of Management. The second reflects the relevant competitive market in which we competefor investor preference. These comparator groups may be changed ifcircumstances no longer deem the individual companies that are part of these groupsrelevant for these purposes. Under no circumstances this will result inmaking the targets easier.

 

Based on this peergroup, we will be ranked on our total return to shareholders. Independentexternal specialists will conduct this analysis to determine the number ofoptions that will vest over a three-year period. The determination of the finalranking (and thus the vesting of stock options) will be audited by the externalauditor at the end of the performance period.

 

Membersof the Remuneration & Nomination Committee:

A.H.J.Risseeuw (Chairman)

D.I. Jager

V. Halberstadt

 

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**REPORT BY THE SUPERVISORY BOARD**

 

**Introduction**

 

In2003, the Supervisory Board met with the Board of Management on six occasions. Throughoutthe year, the Chairman of the Supervisory Board and the individual members werein close contact with the Chief Executive Officer and the Chairman of the AuditCommittee was in close contact with the Chief Financial Officer.

 

**Activities ofthe Supervisory Board during 2003**

 

TheSupervisory Board approved the sale of KPN’s directory services in January. The2002 annual results and the early redemption of the EUR 1,638 millionsubordinated BellSouth loan were approved in February. The Supervisory Boardreviewed the findings of the Disclosure Committee and the certificationsrequired for the Form 20-F. The first quarter results and strategy werediscussed and the management bonuses were approved during two meetings in May.During the August meeting, the results of the second quarter, the remunerationpolicy and the draft code on corporate governance of the Tabaksblat Committeewere discussed. In August, the Supervisory Board also had an informativemeeting during which latest trends and technological developments in thetelecommunications industry were presented and discussed. The results of thethird quarter were discussed in November. In this meeting however, most timewas spent on strategy. The strategy discussion consisted of three main parts:fixed strategy, mobile strategy and financial strategy. The strategy discussionwas continued in the December meeting where the 2004 budget was also discussed,as was the final Dutch corporate governance code of the Tabaksblat Committee.The December meeting was held at the headquarters of E-Plus in Germany.

 

Otherissues discussed throughout the year were the sale of the stake in CeskýTelecom, the funding call of Hutchison 3G UK and the sale of the stake inHutchison 3G UK. The financial position, including the tax position, bondbuy-backs and progress concerning the sale of non-core assets were discussed aswell. Also the topics discussed in Committee meetings were summarized at theSupervisory Board meetings, including for instance regular progress updates onthe Sarbanes-Oxley implementation project and several remuneration topics.

 

TheSupervisory Board met once in the absence of the Board of Management inDecember. During this meeting, the Supervisory Board evaluated its ownperformance and the performance of its Committees. It was decided to split theRemuneration & Nomination Committee into a Remuneration & OrganizationDevelopment Committee and a Nominating & Corporate Governance Committee asof January 1, 2004; the Chairman of the Supervisory Board will not chair theRemuneration & Organization Development Committee.

 

**Committees ofthe Supervisory Board**

 

TheSupervisory Board had two Committees in 2003: the Audit Committee and theRemuneration & Nominating Committee. For information on the tasks of thesecommittees, we refer to the chapter titled ‘Corporate governance’. BothCommittees met separately throughout the year.

 

**AUDITCOMMITTEE**

 

TheAudit Committee consisted in 2003 of three Supervisory Board Members, Mr.Eustace (Chairman), Mr. Streppel and Ms. Van Lier Lels. In 2003, the AuditCommittee held six meetings. During those meetings, the Audit Committeereviewed and discussed the 2002 annual results, the quarterly results, thefinancial position, budgets and projections, and the quarterly reports of theinternal and the

 

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externalauditor. A separate meeting was held to review the annual report on 2002 aswell as the findings regarding disclosure of the Form 20-F, including thereport of the Disclosure Committee. The internal control framework and riskswere discussed as well. In addition, the progress on implementation of theSarbanes Oxley Act and IFRS was monitored throughout the year. Considerableattention was paid to the financial framework and finance policy during thesecond half of the year. PricewaterhouseCoopers’ audit strategy and feeproposal were discussed and a pre-approval procedure was adopted. The Committeeendorsed the whistle blower procedure and the ethical code for the finance function,and revised its Charter. All major conclusions of the Audit Committee werereported to the Supervisory Board. The Committee had a separate meeting withPricewaterhouseCoopers and met separately with KPN’s internal auditor in 2004with respect to the 2003 Consolidated Financial statements.

 

**REMUNERATION& NOMINATION COMMITTEE**

 

TheRemuneration & Nomination Committee consisted of three Supervisory BoardMembers, Mr. Risseeuw (Chairman), Mr. Halberstadt and Mr. Jager. In 2003,the Remuneration & Nomination Committee met six times. Topics discussedincluded the targets for 2003, the bonus proposals for 2002, the managementoptions for 2003, the remuneration policy for 2003, the resignation of Mr. L.Roobol and his replacement and the Remuneration Report for 2003. For furtherdetails, we refer to the Remuneration Report for 2003 elsewhere in thisdocument.

 

**Changes inthe Board of Management**

 

Thecomposition of the Board of Management changed in 2003. Unfortunately, Mr. L. Roobol, responsible for the Fixed division, had to step down due tohealth reasons on November 10, 2003. Mr. Roobol’s knowledge and experience havebeen of great importance to KPN. The Supervisory Board would like to thank Mr.Roobol for his effort and dedication and wishes him strength for the future.Mr. E. Blok has been an acting member of the Board of Management sinceNovember 10, 2003. The Supervisory Board intends to appoint Mr. Blok as memberof the Board of Management as of the closing of the 2004 Annual General Meetingof Shareholders and will inform the AGM on this appointment on April 15, 2004.

 

**Changes inthe Supervisory Board**

 

Thecomposition of the Supervisory Board changed at the 2003 Annual General Meetingof Shareholders. As announced in December 2002, Mr. C.H. van der Hoeven steppeddown at his own request. Dr. M. Bischoff and Mr. J.B.M. Streppel were appointedand Prof. V. Halberstadt reappointed as members of the Supervisory Board. Thenew members of the Supervisory Board attended an introduction program in whichthe Company, its activities and its governance as well as the tasks andresponsibilities of a Supervisory Board member were explained.

 

Mr.D.G. Eustace, Vice Chairman of the Board and Chairman of the Audit Committee,is due to step down from the Supervisory Board, as he will reach the end of hisfour-year term in 2004. He has indicated that he is available forreappointment. In consultation with the Board of Management and the CentralWorks Council, the Supervisory Board intends to reappoint Mr. Eustace at the AnnualGeneral Meeting of Shareholders on April 15, 2004.

 

**Independence**

 

In2003, the members of the Supervisory Board were independent from the Companywithin the meaning of the Dutch Corporate Governance Code. For a more detailedexplanation of the independence, we refer to the section titled ‘CorporateGovernance’.

 

126

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**FinancialStatements**

 

TheFinancial Statements for the year ended December 31, 2003 were prepared by theBoard of Management and adopted by the Supervisory Board. The Report ofIndependent Auditors of PricewaterhouseCoopers Accountants N.V. is included inthe Financial Statements.

 

TheSupervisory Board advises the Annual General Meeting of Shareholders to approvethese Financial Statements including the proposed appropriation of the profitover the financial year 2003 to the distributable portion of Shareholders’Equity, and the proposed cash dividend of EUR 0.12 per share plus the specialdividend of EUR 0.13 to be paid out of the distributable portion ofShareholders’ Equity.

 

Finally,the Supervisory Board would like to thank all shareholders for their trust inthe Company and all employees for their dedication and effort.

 

**The Hague, March 8, 2004**

 

***The Supervisory Board***

 

A.H.J. Risseeuw

 

D.G.Eustace

 

M.Bischoff

 

V. Halberstadt

 

D.I. Jager

 

M.E. van Lier Lels

 

J.B.M. Streppel

 

**Compositionof the Supervisory Board**

 

Thecurrent members of the Supervisory Board are:

 
| **Name**                      |   | **Date of birth** |   | **Start of term**                           |   | **End of term** |
|-------------------------------|--------|-------------------|--------|---------------------------------------------|--------|-----------------|
| A.H.J.  Risseeuw (Chairman)   |   | November 9, 1936  |   | May 2, 2001                                 |   | 2005            |
| D.G.  Eustace (Vice-Chairman) |   | July 3, 1936      |   | April 27, 2000                              |   | 2004            |
| M.  Bischoff                  |   | April 22, 1942    |   | May 12, 2003                                |   | 2007            |
| V.  Halberstadt               |   | June 16, 1939     |   | May 11, 1995, April 29, 1999*; May 12, 2003 | *      | 2007            |
| D.I.  Jager                   |   | April 30, 1943    |   | April 25, 2002                              |   | 2006            |
| M.E. van Lier Lels            |   | October 19, 1959  |   | May 2, 2001                                 |   | 2005            |
| J.B.M.  Streppel              |   | October 11, 1949  |   | May 12, 2003                                |   | 2007            |

 

----

*Re-appointed

 

***A.H.J. Risseeuw(1936)***

 

Mr Risseeuw joined the Supervisory Board in 2001 and histerm expires in 2005. He is the Chairman of theSupervisory Board since September 10, 2001, and he chaired the Remuneration& Nomination Committee in 2003. He has held various management positionswith Dutch international companies and is the former President of GetronicsN.V. He is a member of the supervisory boards of Heineken N.V., Samas-GroepN.V. and AOT N.V. Mr. Risseeuw is a Dutch citizen.

 

127

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***D. G. Eustace (1936)***

 

Mr. Eustace is Member of the Supervisory Board since 2000and his term expires in 2004. Mr. Eustace isthe Vice Chairman of the Supervisory Board since September 10, 2001, and hechairs the Audit Committee. He is the former Vice Chairman of the Board ofManagement and Chief Financial Officer of Royal Philips Electronics N.V. He isthe Chairman of the Board of Smith & Nephew Plc., Chairman of the Board ofSendo Holding Plc., and member of the Supervisory Boards of AEGON N.V., KLMN.V. and Hagemeyer N.V. Mr. Eustace was interim Chief Financial Officer at AholdN.V. part of 2003. Mr. Eustace is a British citizen.

 

***Dr. M. Bischoff (1942)***

 

Dr. M. Bischoff was appointed Member of the Supervisory Boardon May 12, 2003 and his term expires in 2007. He is Chairman of the board of directors of the European AeronauticDefence and Space Company (EADS) N.V. He was a member of the board ofmanagement of DaimlerChrysler AG, member of the board of directors ofMitsubishi Motors Corporation (MMC) and chairman of the supervisory board ofMTU Aero Engines GmbH until the end of 2003. He is a member of the supervisoryboards of Bayerische Hypo- und Vereinsbank AG, Fraport AG, Gerling KonzernVersicherungs-Beteiligungs-AG, Lagardère Sociétés S.A. and  J.M. Voith AG. Dr. Bischoff is a German citizen.

 

***Prof. V. Halberstadt (1939)***

 

Prof. Halberstadt was reappointed Member of the Supervisory Boardon May 12, 2003 and his term expires in 2007. He was a member of the Remuneration & Nomination Committee. He isProfessor of Public Finance at the University of Leiden, Crown Member of the SocialEconomic Council (*SER*),International Advisor of Goldman Sachs Group Inc., non-executive director of PAHolding Ltd. and Chairman of the International Advisory Board ofDaimlerChrysler AG. He is a member of theSupervisory Boards of TPG N.V., DaimlerChrysler AG and Het Concertgebouw N.V.Prof. Halberstadt is a Dutch citizen.

 

***D.I. Jager (1943)***

 

Mr. Jager is Member of the Supervisory Board since 2002and his term expires in 2006. Mr Jager wasmember of the Remuneration & Nomination Committee since May 17, 2002. Heheld various management positions at Procter & Gamble in Europe, Asia andthe United States. He was Chairman of the Board, President and/or ChiefExecutive Officer from January 1995 through June 2000. He currently is anindependent consultant and private investor. Mr Jager also serves on the Boardsof Eastman Kodak Inc., Chiquita Brands International Inc. and Polycom Inc. as anon-executive board member. Mr. Jager is both a US and Dutch citizen andresides in the United States.

 

***M.E. van Lier Lels(1959)***

 

Ms. Van Lier Lels is Member of the Supervisory Board since 2001and her term expires in 2005. Ms Van LierLels was member of the Audit Committee since 2002. She is the Executive VicePresident and Chief Operating Officer of Schiphol Group N.V. She is a member ofthe Supervisory Boards of United Services Group N.V. and Delft University ofTechnology and a member of the Advisory Board of Rabobank Nederland. Ms. VanLier Lels is a Dutch citizen.

 

***J.B.M. Streppel (1949)***

 

Mr.J.B.M Streppel was appointed Member of the Supervisory Board on May 12,2003 and he is also a member of the AuditCommittee. His term expires in2007. He currently is a member of the Executive Board of Aegon N.V. Mr Streppelheld various management positions at Aegon N.V., Labouchere N.V. and FGH BankN.V. He is a member of the Commission for public bids of the NetherlandsAuthority for the Financial Markets (AFM), member of the Committee of ListedCompanies of Euronext (Amsterdam) and Chairman of the ShareholdersCommunication Channel. Mr. Streppel is a Dutch citizen.

 

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FINANCIAL STATEMENTS

 
| Report  of Independent Auditors                                 | 130    |
|-----------------------------------------------------------------|--------|
|                                                            |   |
| Consolidated  Statement of Income                               | 131    |
|                                                            |   |
| Consolidated  Balance Sheet                                     | 132    |
|                                                            |   |
| Consolidated  Cash Flow Statement                               | 134    |
|                                                            |   |
| Statement  of Changes in Shareholders’ Equity              | 135    |
|                                                            |   |
| General  notes to the Consolidated Financial Statements         | 136    |
|                                                            |   |
| Notes  to the Consolidated Statement of Income                  | 143    |
|                                                            |   |
| Notes  to the Consolidated Balance Sheet                        | 155    |
|                                                            |   |
| Notes  to the Consolidated Cash Flow Statement                  | 166    |
|                                                            |   |
| Notes  to the Statement of Changes in Shareholders’ Equity | 170    |
|                                                            |   |
| Financing                                                       | 173    |
|                                                            |   |
| Commitments,  Contingencies and Legal Proceedings               | 182    |
|                                                            |   |
| Related  party transactions                                     | 188    |
|                                                            |   |
| Segment  Reporting                                              | 192    |
|                                                            |   |
| Information  on US GAAP                                         | 197    |
|                                                            |   |
| Corporate  Statement of Income                                  | 214    |
|                                                            |   |
| Corporate  Balance Sheet                                        | 215    |
|                                                            |   |
| General  notes to the Corporate Financial Statements            | 217    |
|                                                            |   |
| Notes  to the Corporate Balance Sheet                           | 218    |

 

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To the Supervisory Boardand theGeneral Meeting of Shareholders ofKoninklijke KPN N.V.

 

**Report of Independent Auditors**

 

***Introduction***

We have audited thefinancial statements of Koninklijke KPN N.V., The Hague, set out on pages 131 -219. These financial statements are the responsibility of the Board ofManagement. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

***Scope***

We conducted our auditsin accordance with auditing standards generally accepted in the Netherlands andin the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallpresentation of the financial statements. We believe that our audits provide areasonable basis for our opinion.

 

***Dutch opinion***

In our opinion, thefinancial statements, set out on pages 131 - 219, present fairly, in allmaterial respects, the financial position of Koninklijke KPN N.V. as ofDecember 31, 2003 and of the result for the year then ended in accordance withaccounting principles generally accepted in the Netherlands and comply with thefinancial reporting requirements included in Part 9 of Book 2 of theNetherlands Civil Code.

 

***United States opinion***

In our opinion, theconsolidated financial statements, set out on pages 131 - 213, present fairly,in all material respects, the financial position of Koninklijke KPN N.V. andits subsidiaries as of December 31, 2003 and 2002, and their results and theircash flows for each of the three years in the period ended December 31, 2003 inconformity with accounting principles generally accepted in the Netherlands.

 

Accounting principlesgenerally accepted in the Netherlands vary in certain significant respects fromaccounting principles generally accepted in the United States of America.  Information relating to the nature andeffect of such differences is presented in the notes to the consolidatedfinancial statements, under the heading ‘Information on US GAAP’.

 

***Emphasis of matter***

Without qualifying ouropinions above, we draw attention to the note to the financial statements‘Legal Proceedings’ which refers to the procedure regarding the 2000 financialstatements of the company.

 

The Hague, March 8, 2004

 

PricewaterhouseCoopersAccountants N.V.

 

130

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**ConsolidatedStatement of Income**

 
| **Amounts  in millions of euro, unless otherwise stated**                                        |   | **2003**   |       | **2002**    |       | **2001**    |       |
|--------------------------------------------------------------------------------------------------|--------|------------|------------|-------------|------------|-------------|------------|
|                                                                                             |   |       |       |        |       |        |       |
| **Net sales**                                                                                    |   | **11,870** | ** ** | **11,788**  | ** ** | **11,734**  | ** ** |
| Own work capitalized                                                                             |   | 165        |       | 166         |       | 443         |       |
| Other operating revenues                                                                         |   | 872        |       | 830         |       | 682         |       |
| **Total operating revenues [1]**                                                                 |   | **12,907** | ** ** | **12,784**  | ** ** | **12,859**  | ** ** |
|                                                                                             |   |       |       |        |       |        |       |
| Cost of materials [2]                                                                            |   | -983       |       | -1,000      |       | -1,159      |       |
| Cost of work contracted out and other  external expenses                                         |   | -3,999     |       | -4,125      |       | -4,608      |       |
| Salaries and social security contributions  [3]                                                  |   | -1,703     |       | -1,975      |       | -2,194      |       |
| Depreciation, amortization and impairments  [4]                                                  |   | -2,535     |       | -10,252     |       | -17,817     |       |
| Other operating expenses [5]                                                                     |   | -579       |       | -1,013      |       | -1,517      |       |
| **Total operating expenses**                                                                     |   | -**9,799** | ** ** | -**18,365** | ** ** | -**27,295** | ** ** |
|                                                                                             |   |       |       |        |       |        |       |
| **Operating result**                                                                             |   | **3,108**  | ** ** | -**5,581**  | ** ** | -**14,436** | ** ** |
|                                                                                             |   |       |       |        |       |        |       |
| Interest and similar income [6]                                                                  |   | 67         |       | 220         |       | 297         |       |
| Release exchange right [7]                                                                       |   | —     |       | —      |       | 6,848       |       |
| Interest and similar expenses [8]                                                                |   | -929       |       | -1,398      |       | -1,677      |       |
| **Financial income and expenses**                                                                |   | -**862**   | ** ** | -**1,178**  | ** ** | **5,468**   | ** ** |
|                                                                                             |   |       |       |        |       |        |       |
| **Profit or loss before taxes**                                                                  |   | **2,246**  | ** ** | -**6,759**  | ** ** | -**8,968**  | ** ** |
|                                                                                             |   |       |       |        |       |        |       |
| Tax on profit or loss [9]                                                                        |   | 257        |       | -983        |       | -11         |       |
| Income from participating interests [10]                                                         |   | 161        |       | -1,700      |       | -81         |       |
|                                                                                             |   |       |       |        |       |        |       |
| **Group profit or loss after taxes**                                                             |   | **2,664**  | ** ** | -**9,442**  | ** ** | -**9,060**  | ** ** |
|                                                                                             |   |       |       |        |       |        |       |
| Minority interests [11]                                                                          |   | 67         |       | -100        |       | 1,565       |       |
|                                                                                             |   |       |       |        |       |        |       |
| **Profit or loss after taxes**                                                                   |   | **2,731**  | ** ** | -**9,542**  | ** ** | -**7,495**  | ** ** |
|                                                                                             |   |       |       |        |       |        |       |
| Profit or loss after taxes per ordinary  share and per ADS in euro [12]                          |   | 1.11       |       | -3.94       |       | -5.88       |       |
| Profit or loss after taxes per ordinary  share and per ADS on a fully diluted basis in euro [12] |   | 1.09       |       | -3.94       |       | -5.88       |       |
| Proposed dividend per ordinary share and  per ADS in euro                                        |   | 0.25       |       | —      |       | —      |       |

 

----

[..]           Bracketednumbers refer to the related Notes to the Consolidated Statement of Income,which are an integral part of these consolidated financial statements.

 

131

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**ConsolidatedBalance Sheet**

 

Beforeappropriation of net result

 

**ASSETS**

 
| **Amounts  in millions of euro**                     |   | **Dec. 31, 2003** |       | **Dec. 31, 2002** |         |
|------------------------------------------------------|--------|-------------------|------------|-------------------|--------------|
|                                                 |   |              |       |              |         |
| **FIXED ASSETS**                                     |   |              |       |              |         |
| ***Intangible  fixed assets [13]***                  |   |              |       |              |         |
| Licenses                                             |   | 4,457             |       | 4,419             |         |
| Goodwill                                             |   | 4,126             |       | 4,484             |         |
| ***Total intangible fixed assets***                  |   | **8,583**         | ** ** | **8,903**         | ** **   |
|                                                 |   |              |       |              |         |
| ***Property,  plant and equipment [14]***            |   |              |       |              |         |
| Land and buildings                                   |   | 881               |       | 984               |         |
| Plant and equipment                                  |   | 7,082             |       | 7,899             |         |
| Other tangible fixed assets                          |   | 431               |       | 571               |         |
| Assets under construction                            |   | 725               |       | 407               |         |
| ***Total property, plant and equipment***            |   | **9,119**         | ** ** | **9,861**         | *** *** |
|                                                 |   |              |       |              |         |
| ***Financial  fixed assets [15]***                   |   |              |       |              |         |
| Participating interests                              |   | 194               |       | 901               |         |
| Loans to participating interests                     |   | 19                |       | —            |         |
| Other loans                                          |   | 119               |       | 103               |         |
| Prepayments and accrued income                       |   | 1,986             |       | 159               |         |
| ***Total financial fixed assets***                   |   | **2,318**         | ** ** | **1,163**         | *** *** |
|                                                 |   |              |       |              |         |
| **Total fixed assets**                               |   | **20,020**        | ** ** | **19,927**        | ** **   |
|                                                 |   |              |       |              |         |
| **CURRENT ASSETS**                                   |   |              |       |              |         |
| Inventory [16]                                       |   | 164               |       | 230               |         |
| Receivables [17]                                     |   | 1,452             |       | 1,601             |         |
| Prepayments and accrued income                       |   | 641               |       | 731               |         |
| Marketable securities and other financial  interests |   | 9                 |       | 15                |         |
| Cash and cash equivalents [18]                       |   | 1,839             |       | 2,657             |         |
|                                                 |   |              |       |              |         |
| **Total current assets**                             |   | **4,105**         | ** ** | **5,234**         | ** **   |
|                                                 |   |              |       |              |         |
| **TOTAL**                                            |   | **24,125**        | ** ** | **25,161**        | ** **   |

 

----

[..]           Bracketednumbers refer to the related Notes to the Consolidated Balance Sheet, which arean integral part of these consolidated financial statements.

 

132

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**LIABILITIES**

 
| **Amounts  in millions of euro**  |   | **Dec. 31, 2003** |       | **Dec. 31, 2002** |       |
|-----------------------------------|--------|-------------------|------------|-------------------|------------|
|                              |   |              |       |              |       |
| **GROUP EQUITY**                  |   |              | ** ** |              | ** ** |
| Shareholders’ equity [19]    |   | 7,163             |       | 4,508             |       |
| Minority interests [20]           |   | 196               |       | 272               |       |
| **Total group equity**            |   | **7,359**         | ** ** | **4,780**         | ** ** |
|                              |   |              |       |              |       |
| **PROVISIONS**                    |   |              | ** ** |              | ** ** |
| Pension provisions [21]           |   | 814               |       | 811               |       |
| Deferred tax liabilities [22]     |   | 2,111             |       | 449               |       |
| Other provisions [23]             |   | 414               |       | 337               |       |
| **Total provisions**              |   | **3,339**         | ** ** | **1,597**         | ** ** |
|                              |   |              |       |              |       |
| **LONG-TERM LIABILITIES**         |   |              | ** ** |              | ** ** |
| Loans [24]                        |   | 9,207             |       | 12,648            |       |
| Accruals and deferred income      |   | 23                |       | 32                |       |
| **Total long-term liabilities**   |   | **9,230**         | ** ** | **12,680**        | ** ** |
|                              |   |              |       |              |       |
| **CURRENT LIABILITIES**           |   |              | ** ** |              | ** ** |
| Other debts [25]                  |   | 2,107             |       | 3,769             |       |
| Accruals and deferred income [26] |   | 2,090             |       | 2,335             |       |
| **Total current liabilities**     |   | **4,197**         | ** ** | **6,104**         | ** ** |
|                              |   |              |       |              |       |
| **TOTAL**                         |   | **24,125**        | ** ** | **25,161**        | ** ** |

 

----

[..]           Bracketednumbers refer to the related Notes to the Consolidated Balance Sheet, which arean integral part of these consolidated financial statements.

 

133

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**Consolidated Cash Flow Statement**

 
| **Amounts  in millions of euro**                                                              |                                                  | **2003**       |       | **2002**       |       | **2001**       |       |
|-----------------------------------------------------------------------------------------------|-------------------------------------------------------|----------------|------------|----------------|------------|----------------|------------|
|                                                                                          |                                                  |           | ** ** |           | ** ** |           | ** ** |
| **Profit or loss after taxes**                                                                |                                                  | **2,731**      | ** ** | **-****9,542** | ** ** | **-****7,495** | ** ** |
| Minority interests                                                                            |                                                  | -67            |       | 100            |       | -1,565         |       |
| Depreciation, amortization and impairments                                                    |                                                  | 2,535          |       | 10,252         |       | 17,817         |       |
| Changes in provisions                                                                         |                                                  | 1,598          |       | 172            |       | 531            |       |
| Changes in deferred tax assets                                                                |                                                  | -1,797         |       | 605            |       | 32             |       |
| Income from participating interests                                                           |                                                  | -161           |       | 1,700          |       | 81             |       |
| Dividends received                                                                            |                                                  | 81             |       | —         |       | 25             |       |
| Release of exchange right                                                                     |                                                  | —         |       | —         |       | -6,848         |       |
| Results from sale of assets, operations and  participating interests                          |                                                  | -500           |       | -409           |       | -512           |       |
| **Net cash flow provided by/used in operating activities  before changes in working capital** |                                                  | **4,420**      | ** ** | **2,878**      | ** ** | **2,066**      | ** ** |
|                                                                                          |                                                  |           |       |           |       |           |       |
| Changes in working capital:                                                                   |                                                  |           |       |           |       |           |       |
| •                                                                                        | Inventory                                             |           | 65         |           | 97         |           | -2         |   |
| •                                                                                        | Trade receivables                                     |           | 114        |           | 390        |           | 152        |   |
| •                                                                                        | Other current assets                                  |           | -48        |           | 517        |           | -150       |   |
| •                                                                                        | Current liabilities (excluding short-term  financing) |           | -464       |           | 93         |           | 499        |   |
| **Net cash flow provided by/used in changes in working  capital**                             |                                                  | **-****333**   | ** ** | **1,097**      | ** ** | **499**        | ** ** |
|                                                                                          |                                                  |           |       |           |       |           |       |
| **Net cash flow provided by/used in operating activities [27]**                               |                                                  | **4,087**      | ** ** | **3,975**      | ** ** | **2,565**      | ** ** |
|                                                                                          |                                                  |           |       |           |       |           |       |
| Group companies/joint ventures acquired                                                       |                                                  | —         |       | —         |       | -758           |       |
| Group companies/joint ventures sold                                                           |                                                  | 499            |       | 640            |       | 265            |       |
| Investments in intangible fixed assets                                                        |                                                  | -6             |       | -4             |       | -226           |       |
| Disposals of intangible fixed assets                                                          |                                                  | —         |       | —         |       | 10             |       |
| Investments in property, plant and  equipment                                                 |                                                  | -1,421         |       | -1,137         |       | -2,949         |       |
| Disposals of property, plant and equipment                                                    |                                                  | 64             |       | 117            |       | 319            |       |
| Changes in other financial fixed assets                                                       |                                                  | 816            |       | 49             |       | 1,675          |       |
| **Net cash flow provided by/used in investing activities [28]**                               |                                                  | **-****48**    | ** ** | **-****335**   | ** ** | **-****1,664** | ** ** |
|                                                                                          |                                                  |           |       |           |       |           |       |
| Net proceeds from shares issued by KPN                                                        |                                                  | —         |       | —         |       | 4,843          |       |
| Shares purchased for option plans                                                             |                                                  | -8             |       | —         |       | -98            |       |
| Shareholder loans to E-Plus                                                                   |                                                  | —         |       | —         |       | -148           |       |
| Long-term loans contracted                                                                    |                                                  | 45             |       | 48             |       | 4,437          |       |
| Redemption of long-term loans                                                                 |                                                  | -4,821         |       | -8,400         |       | -6,232         |       |
| Changes in interest-bearing current  liabilities                                              |                                                  | -69            |       | 23             |       | 145            |       |
| **Net cash flow provided by/used in financing activities [29]**                               |                                                  | **-****4,853** | ** ** | **-****8,329** | ** ** | **2,947**      | ** ** |
|                                                                                          |                                                  |           |       |           |       |           |       |
| **Changes in cash and cash equivalents**                                                      |                                                  | **-****814**   | ** ** | **-****4,689** | ** ** | **3,848**      | ** ** |
|                                                                                          |                                                  |           |       |           |       |           |       |
| **Cash and cash equivalents at beginning of year**                                            |                                                  | **2,657**      | ** ** | **7,343**      | ** ** | **3,583**      | ** ** |
| Cash and cash equivalents in group  companies and joint ventures acquired and sold            |                                                  | -2             |       | 3              |       | -88            |       |
| Exchange rate differences                                                                     |                                                  | -2             |       | —         |       | —         |       |
| Changes in cash and cash equivalents                                                          |                                                  | -814           |       | -4,689         |       | 3,848          |       |
|                                                                                          |                                                  |           |       |           |       |           |       |
| **Cash and cash equivalents at end of year**                                                  |                                                  | **1,839**      | ** ** | **2,657**      | ** ** | **7,343**      | ** ** |

 

----

[..]           Bracketednumbers refer to the related Notes to the Consolidated Cash Flows Statement,which are an integral part of these consolidated financial statements.

 

134

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**Statement of Changes in Shareholder’s Equity**

 

Amounts in millions of euro except for shares andper-share information 

 
|                                                                                   |   | **Number of  subscribed  shares** |       | **Par value  per share  (EUR)** |       | **Subscribed  capital  stock** |       | **Additional  paid-in  capital** |       | **Statutory  and other  restricted  reserves** |       | **Other  reserves  (including  net result  for the  period)** |       | **Total**  |       |
|----------------------------------------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|------------|--------------------------------|------------|----------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|
|                                                                                   |   |                              |       |                            |       | [30]                           |       | [31]                             |       | [32]                                           |       |                                                          |       |       |       |
| **Balance as of January 1, 2001**                                                      |   | **1,203,652,643**                 | ** ** | **0.24**                        | ** ** | **289**                        | ** ** | **8,111**                        | ** ** | **3,198**                                      | ** ** | **3,047**                                                     | ** ** | **14,645** | ** ** |
|                                                                                   |   |                              | ** ** |                            | ** ** |                           | ** ** |                             | ** ** |                                           | ** ** |                                                          | ** ** |       | ** ** |
| Exchange rate  differences on participating interests                                  |   |                              |       |                            |       |                           |       |                             |       | 93                                             |       |                                                          |       | 93         |       |
| Share issue                                                                            |   | 1,020,408,163                     |       |                            |       | 245                            |       | 4,755                            |       |                                           |       |                                                          |       | 5,000      |       |
| Shares purchased for  option plans                                                     |   |                              |       |                            |       |                           |       |                             |       |                                           |       | -98                                                           |       | -98        |       |
| Issue of shares  purchased for option plans                                            |   |                              |       |                            |       |                           |       |                             |       |                                           |       | 1                                                             |       | 1          |       |
| Dividend in shares                                                                     |   | 30,087,000                        |       |                            |       | 7                              |       | -7                               |       |                                           |       |                                                          |       | —     |       |
| Changes in retained  earnings of participations and cumulative translation differences |   |                              |       |                            |       |                           |       |                             |       | -248                                           |       | 248                                                           |       | —     |       |
| Other changes (1)                                                                      |   |                              |       |                            |       |                           |       | 2,180                            |       | -2,338                                         |       |                                                          |       | -158       |       |
| Profit or loss after  taxes                                                            |   |                              |       |                            |       |                           |       |                             |       |                                           |       | -7,495                                                        |       | -7,495     |       |
|                                                                                   |   |                              | ** ** |                            | ** ** |                           | ** ** |                             | ** ** |                                           | ** ** |                                                          | ** ** |       | ** ** |
| **Balance as of December 31, 2001**                                                    |   | **2,254,147,806**                 | ** ** | **0.24**                        | ** ** | **541**                        | ** ** | **15,039**                       | ** ** | **705**                                        | ** ** | **-4,297**                                                    | ** ** | **11,988** | ** ** |
|                                                                                   |   |                              |       |                            |       |                           |       |                             |       |                                           |       |                                                          |       |       |       |
| Exchange rate  differences on participating interests                                  |   |                              |       |                            |       |                           |       |                             |       | 26                                             |       |                                                          |       | 26         |       |
| Share issue                                                                            |   | 234,700,000                       |       |                            |       | 56                             |       | 1,197                            |       |                                           |       |                                                          |       | 1,253      |       |
| Bonus shares                                                                           |   | 2,149,071                         |       |                            |       | 1                              |       |                             |       |                                           |       |                                                          |       | 1          |       |
| Changes in retained  earnings of participations and cumulative translation differences |   |                              |       |                            |       |                           |       |                             |       | -260                                           |       | 260                                                           |       | —     |       |
| Other changes (1)                                                                      |   |                              |       |                            |       |                           |       | 32                               |       | -11                                            |       | 761                                                           |       | 782        |       |
| Profit or loss after  taxes                                                            |   |                              |       |                            |       |                           |       |                             |       | -138                                           |       | -9,404                                                        |       | -9,542     |       |
|                                                                                   |   |                              | ** ** |                            | ** ** |                           | ** ** |                             | ** ** |                                           | ** ** |                                                          | ** ** |       | ** ** |
| **Balance as of December 31, 2002**                                                    |   | **2,490,996,877**                 | ** ** | **0.24**                        | ** ** | **598**                        | ** ** | **16,268**                       | ** ** | **322**                                        | ** ** | **-12,680**                                                   | ** ** | **4,508**  | ** ** |
|                                                                                   |   |                              |       |                            |       |                           |       |                             |       |                                           |       |                                                          |       |       |       |
| Change in accounting  principles                                                       |   |                              |       |                            |       |                           |       |                             |       |                                           |       | -6                                                            |       | -6         |       |
| **Balance  as of January 1, 2003**                                                     |   | **2,490,996,877**                 | ** ** | **0.24**                        | ** ** | **598**                        | ** ** | **16,268**                       | ** ** | **322**                                        | ** ** | **-12,686**                                                   | ** ** | **4,502**  | ** ** |
|                                                                                   |   |                              |       |                            |       |                           |       |                             |       |                                           |       |                                                          |       |       |       |
| Exchange rate  differences on participating interests                                  |   |                              |       |                            |       |                           |       |                             |       | -46                                            |       |                                                          |       | -46        |       |
| Shares purchased for  option plans                                                     |   |                              |       |                            |       |                           |       |                             |       |                                           |       | -25                                                           |       | -25        |       |
| Changes in retained earnings  of participations and cumulative translation differences |   |                              |       |                            |       |                           |       |                             |       | -167                                           |       | 167                                                           |       | —     |       |
| Other changes (1)                                                                      |   |                              |       |                            |       |                           |       |                             |       |                                           |       | 1                                                             |       | 1          |       |
| Profit or loss after  taxes                                                            |   |                              |       |                            |       |                           |       |                             |       | -12                                            |       | 2,743                                                         |       | 2,731      |       |
|                                                                                   |   |                              | ** ** |                            | ** ** |                           | ** ** |                             | ** ** |                                           | ** ** |                                                          | ** ** |       | ** ** |
| **Balance as of December 31, 2003**                                                    |   | **2,490,996,877**                 | ** ** | **0.24**                        | ** ** | **598**                        | ** ** | **16,268**                       | ** ** | **97**                                         | ** ** | **-9,800**                                                    | ** ** | **7,163**  | ** ** |

 

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[..]           Bracketednumbers refer to the related Notes to the Statement of Changes in Shareholders’Equity, which are an integral part of these consolidated financial statements.

 

(1) Other changes include repricing effects ofoptions (EUR 12 million) and the tax effect related to VisionNetworks (EUR –11 million)

 

135

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**General Notes to the Consolidated Financial Statements**

 

**General**

 

The financial statements of Koninklijke KPN N.V.(‘KPN’ or ‘we’) for the year ended December 31, 2003, have been prepared inaccordance with the provisions of Book 2 of the Dutch Civil Code and accountingprinciples generally accepted in the Netherlands.

 

Accounting principles generally accepted in theNetherlands (‘Dutch GAAP’) vary in certain significant respects from generallyaccepted accounting principles in the United States of America (‘US GAAP’). Theapplication of the latter would have affected the determination of consolidatedshareholders’ equity and profit or loss after taxes.  For further information on US GAAP, we refer to the sectionInformation on US GAAP. KPN’s domicily seat and principal place of business isThe Hague, the Netherlands.

 

All per-share information, the number of KPNshares, the number of KPN share options and exercise prices have been restatedin order to reflect the two-for-one share split of June 2000.

 

**Consolidation Principles**

 

The financial information of KPN and its groupcompanies is fully consolidated in the consolidated financial statements.Subsidiaries in which KPN and any other party have joint control under a jointventure agreement (provided that KPN has a significant shareholding) areconsolidated proportionally. Group companies are those companies with which KPNforms an organizational and economic unit and in which KPN has a controllinginterest. Minority interests in group equity and results are disclosedseparately in the consolidated financial statements.

 

The accounting principles of KPN apply to KPN’sBalance Sheet and Statement of Income and to the group companies, jointventures and participating interests. Any significant intra and inter-divisionbalances, supplies and results have been eliminated in consolidation.

 

A complete list of subsidiaries and participatinginterests is available for inspection at the offices of the Commercial Registerof the Chamber of Commerce in The Hague. This list has been prepared inaccordance with the provisions of Sections 379 and 414, Book 2 of the DutchCivil Code.

 

Following is an overview of the most importantchanges in consolidated group companies, participating interest and activitiesin the past three years.

 

**2003**

 

On December 29,2003, we sold our remaining 30% interest in KPN Lease to De Lage Landen, whichwas accounted for as a participating interest.

 

On December 1,2003, Xantic (owned for 65% by us and for 35% by Telstra of Australia) sold itsshare in Inmarsat. Inmarsat was accounted for as a participating interest.

 

OnNovember 7, 2003, Hutchison Whampoa Limited (HWL) and KPN Mobile entered intoagreements whereby the Hutchison 3G UK shares are placed with an independentescrow agent pending completion of the transfer of the shares. KPN Mobileagreed not to exercise its voting rights on the 3G shares until the end of2007. On September 21, 2000, weacquired a 15% participating interest in Hutchison 3G UK Holdings Limited,which indirectly owns a UMTS license in the UK.  In August 2002, we announced that we nolonger considered Hutchison 3G UK a strategic participation and, accordingly,we wrote off our investment at that time, based on an analysis of therecoverable value.

 

On November 1, 2003, we sold our repair activities toTeleplan International NV.

 

On June 25, 2003, SNT, in which we have a 50.78%interest, announced and transferred the control of its activities inScandinavia. On July 3, 2003, SNT announced and transferred the control of itsactivities in France. Until these respectivedates the Scandinavian and French activities were fully consolidated.

 

On June 16, 2003, we sold our 6.48% direct interest inthe Czech telecommunications provider Ceský Telecom to Credit Suisse FirstBoston. On December 8, 2003, we completed the sale of our 13.8% indirectinterest. Ceský Telecom was accounted for as a participating interest.

 

On May 5, 2003, we acquired 51% of WiFi providerHubHop. On December 31, 2003, we acquired the remaining 49%. HubHop offers fastwireless Internet connections in public venues in the Netherlands.

 

On April 25, 2003, we finalized the sale of KPNBelgium’s activities and of our Belgian Internet provider, Planet InternetBelgium, to Scarlet Telecom. Planet Internet Belgium was fully consolidated.

 

On February 28, 2003, we sold our 16.33%participation in Ukrainian Mobile Communications, which was accounted foras a participating interest.

 

On February 13, 2003, we sold our telephonedirectory business, Telefoongids Media B.V., formerly known as TeleMediaNederland B.V., to a syndicate led by 3i Group plc and Veronis SulherStevenson.

 

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**2002**

 

In December 2002, werestructured our Mobile activities in order to arrive at a more transparentfinancial structure and to strengthen KPN Mobile’s financial position. In thefinancial restructuringRoyal KPN convertedoutstanding shareholder loans into newly issued ordinary KPN Mobile shares. NTTDoCoMo, which held a 15% interest in KPN Mobile since August 4, 2000, decidednot to exercise its anti-dilution rights. This resulted in a dilution of NTTDoCoMo’s share and voting interest in KPN Mobile from 15% to 2.16%.

 

On October 8, 2002, theSupervisory Board of Vision Networks ceased its activities, as the sale of allof the material cable assets of Vision Networks was completed. As a result wehave full control as of that date and accordingly Vision Networks is fullyconsolidated. In 1997, Royal PTT Nederland decided to eliminate its cableactivities from its core business following an earlier decision by the DutchGovernment. As a consequence, Vision Networks, a wholly owned subsidiary thatheld interests in cable activities, was deconsolidated after an internal legaldemerger in 1998.

 

On August 19, 2002, we soldour Software House activities to Atos Origin, the French IT service provider.

 

On June 4, 2002, we sold a55% interest in KPN Netwerk Bouw BV, our network contruction unit, toKoninklijke Volker Wessels Stevin (KVWS). As of that date, Netwerk Bouw isaccounted for as a participating interest. It is expected that KVWS willacquire the remaining 45% on January 1, 2005.

 

At January 1, 2001, ourinterest in the proportionally consolidated joint venture KPNQwest was 44.3%.On November 30, 2001, we sold 10% of our interest in KPNQwest to Qwest. As aresult KPNQwest was deconsolidated as of that date and was accounted for as aparticipating interest. Our interest in KPNQwest on December 31, 2001, was39.9%.

On May 31, 2002, KPNQwestfiled for bankruptcy. In order to ensure that the networks remained operationalwe formed the foundation ‘Customer support KPNQwest’, which continued tofacilitate services to customers while they migrated to other suppliers. Thisfoundation was discontinued on July 11, 2002.

 

On March 13, 2002,BellSouth converted its 22.51% indirect interest in E-Plus into 234.7 millionof our ordinary shares (which BellSouth subsequently sold) and we have fullcontrol of E-Plus as of that date. In February 2000, we completed theacquisition of a 77.49% indirect interest in E-Plus. In the period

 

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February 24, 2000, to March13, 2002, we have proportionally consolidated our 77.49% share in E-Plus. As ofMarch 13, 2002, E-Plus is fully consolidated.

 

On February 5, 2002, wesold our End User Services activities to Atos Origin.

 

On February 4, 2002, wecompleted the sale of our 44.66% proportionally consolidated interest in PannonGSM, the Hungarian mobile operator, to Telenor SA.

 

**2001**

 

On December 11, 2001, KPNMobile sold its 22.28% interest in the Indonesian mobile operator Telkomsel toSingapore Telecommunications. Until that date, Telkomsel was accounted for as aparticipating interest.

 

In November 2001, we soldour 21% interest in the Irish telecom operator eircom to Valentia. eircom wasaccounted for as a marketable security.

 

On September 28, 2001, wesold our data center activities to Atos Origin.

 

On May 14, 2001, Vodafonebought our share in Eircell, the mobile operator of eircom (Ireland). Wereceived approximately 220 million shares in Vodafone, which we disposed of inJune 2001.

 

On February 7, 2001, we,through KPN Mobile, acquired the remaining 50% of the joint venture BASE. As ofthat date BASE is fully consolidated.

 

**Change of accounting principles**

 

As from January 1, 2003, the accounting principlefor asset retirement obligations was changed. As from that date, the assetretirement costs are provided for, capitalized as part of the carrying amountof tangible fixed assets and expensed as either depreciation over the asset’sestimated useful life or impairment charges. The asset retirement obligation isstated at net present value using a discount rate equal to the credit-adjustedrisk-free interest rate. Prior to January 1, 2003, provisions for assetretirement obligations were built up during the estimated useful life of theassets concerned, using the linear method.

 

This change of accounting principle would have hadthe following impact on our balance sheet as of the year ended December 31,2002: a provision for asset retirement obligations of EUR 72 million would havebeen recognized, of which EUR 66 million would have been added to Tangiblefixed assets and the remaining EUR 6 million as a direct movement inShareholders’ equity. We have not adjusted the comparative figures.  This adjustment would have had a positiveimpact on the loss after tax for 2002 of EUR 4 million (2001: nil).

 

**Accounting principles**

 

**BALANCE SHEET**

 

***General***

 

The accounting principles are based on historicalcost principles.

 

***Intangible fixed assets***

 

Licenses are valued at the lower of historical costless amortization and permanently lower value. Amortization is calculatedaccording to the straight-line method and is incorporated as from the date thatservices are actually being offered under the license. The terms of these licensesare used as amortization periods. Licenses have a permanently lower value ifthe recoverable amount falls below the book value of the asset concerned.Impairments based on a permanently lower value are reversed if and to theextent that the impairment no longer exists. The recoverable amount is definedas the higher of an asset’s net selling price and its value in use.

 

Goodwill arisingfrom acquisitions is valued at the lower of historical cost less amortizationand permanently lower value. Amortization is calculated according to thestraight-line method based on the estimated useful life; the maximumamortization period is 20 years. Goodwill has a permanently lower value if therecoverable amount is lower than the book value of the asset concerned. Therecoverable amount is defined as the higher of an asset’s net selling price andits value in use.

 

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***Property, plant and equipment***

 

Property, plant and equipment are valued athistorical cost or manufacturing price less depreciation, or permanently lowervalue. The manufacturing price includes direct costs (materials, direct laborand work contracted out), as well as part of the indirect costs and interestattributable to this asset.  Property,plant and equipment are depreciated using the straight-line method, based onthe estimated useful life, taking into account residual value. Land is notdepreciated. Property, plant and equipment have a permanently lower value ifthe recoverable amount falls below the book value of the asset concerned.Impairments based on a permanently lower value are reversed if and to theextent that the impairment no longer exists. The recoverable amount is defined as the higher of an asset’s netselling price and its value in use.

 

Asset retirement costs are capitalized as part ofthe historical cost of tangible fixed asset's and expensed as eitherdepreciation over the asset’s estimated useful life or as impairment charges.

 

***Participating interests***

 

Participating interests in which KPN directly orindirectly has significant influence are valued at KPN’s direct or indirectshare in the net asset value, as determined under KPN’s accounting principles,or lower expected net realizable value.

 

Participating interests in which KPN does not havesignificant influence are carried at cost less any provisions deemed necessary.

 

***Prepayments and accrued income***

 

Prepayments and accrued income presented under bothfinancial fixed assets and current assets include amounts to be invoiced, recognizedtax assets and deferred costs which, according to the matching principle,relate to future years. Prepayments and accrued income are valued at nominalvalue.

 

***Inventory***

 

Inventories of resources, parts, tools andmeasuring instruments as well as finished goods are valued at the lower ofcost, less an allowance for obsolescence, and market value. Cost is based onweighted average prices. Work in progress and resources manufactured in-houseare valued at the cost of materials, costs of work contracted out and staffcosts plus a surcharge for allocable indirect costs and interest.

 

***Accounts receivable***

 

Accounts receivable are stated at nominal value,net of an allowance for doubtful accounts.

 

***Marketable securities and other financial interests***

 

Marketable securities and other financial interestsare stated at the lower of cost and net realizable value.

 

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***Provisions***

 

Pension provisions are stated at net present valuebased on actuarial principles.

 

The asset retirement obligation is stated at netpresent value using a discount rate equal to the credit-adjusted risk-freeinterest rate.

 

Other provisions, including the provision forrestructuring and redundancies, are valued at nominal value.

 

***Deferred taxes***

 

Deferred tax assets and liabilities arising fromtiming differences between the value of assets and liabilities for financialreporting purposes and for tax purposes are stated at nominal value and arecalculated on the basis of current corporate income tax rates. Deferred taxassets are recognized if it may be assumed that they can be offset againsttaxes payable in the future within a reasonable period of time. Deferred taxassets and liabilities with the same terms and relating to the same fiscal entitiesare netted.

 

***Other assets and liabilities***

 

All other Balance Sheet items are carried atnominal value, unless otherwise stated.

 

***Foreign currency translation***

 

Assets and liabilities denominated in foreigncurrencies are converted at the exchange rates prevailing at the Balance Sheetdate or, if the exchange risk was hedged, at the forward exchange rate. Anydifferences resulting from movements in exchange rates are recognized in theStatement of Income under financial income and expense. Exchange ratedifferences resulting from the translation into euro of the value of foreignparticipating interests and financing transactions related to theseparticipating interests are taken directly to shareholders’ equity.

 

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**STATEMENT OFINCOME**

 

***General***

 

Income is recognized in the year in which the goodsare delivered or services are rendered. Losses are recognized as soon as they are foreseeable.

 

***Net sales***

 

Net sales represent the revenue from goods deliveredand services rendered to third parties, less discounts and sales taxes. Revenue is recognized when it is probable thatfuture economic benefits will flow to us and these benefits can be measuredreliably. Revenue is measured at the fair value of the consideration receivedor receivable.

 

Our net sales are derived from telecommunicationservices and products and comprise the following sources:

•                  Traffic fees

•                  Subscription fees

•                  One-off connectionfees and other initial fees

•                  Sales of peripheraland other equipment

•                  Other

 

Traffic fees are charged at an agreed price for afixed duration of time or capacity and are recognized as revenue based uponusage of our network and facilities. Subscription fees generally consist ofperiodic charges and are recognized as revenue over the associated subscriptionperiod.  One-off connection fees andother initial fees are generally charged and recognized at the outset of aservice contract upon connecting the customer to the network.

Sales of peripheral and other equipment arerecognized when all significantrisks and rewards of ownership of the goods are transferred to the buyer, whichis normally at the date the equipment is delivered to and accepted by thecustomer.

Other sales, including consulting and other fees, arerecognized as revenue when services are rendered. We recognize net sales grossof costs when we act as the principal in the arrangement and net of costs whenwe act as agent.

 

***Other operating revenues***

 

Other operating revenues include revenues other thannet sales, profits generated by public offerings of group companies, jointventures and participating interests and profits on the sale of participatinginterests (or parts thereof), assets and operations.

 

***Operating expenses***

 

Operating expenses are determined based on theaforementioned valuation principles and are allocated to the year to which theyrelate. Research expenses are expensed as incurred in the reporting year.Depreciation and amortization are calculated using the straight-line method,based on the estimated useful lives taking into account any residual value.Tangible and intangible fixed assets are depreciated or amortized as from thedate of actual usage.

 

***Income from participating interests***

 

Income from participating interests in which wehave significant influence is based on the equity method according to ouraccounting principles. Income from participating interests acquired during thefiscal year is recognized effective from the date of acquisition. Whenparticipating interests are sold, income is recognized up to the date of thesale.

 

***Tax on profit***

 

The corporate income tax charge recognized in theStatement of Income is based on the income for financial reporting purposes inaccordance with the prevailing provisions and rates taking into accountpermanent differences between income for tax purposes and income for financialreporting purposes and the valuation of deferred tax assets.

 

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***Foreign currency translation***

 

In the Statement of Income, all transactionsdenominated in foreign currencies are converted into euro at the rateprevailing at the date of the transaction, or, if a hedging contract wasconcluded, the prevailing forward exchange rate. An exception to this rule isthe conversion of transactions of participating interests with functionalcurrencies other than the euro; these are converted into euro at the averageexchange rate of the year. Differences between the rates applied for theconversion of the Balance Sheet and the rates applied for the conversion of theStatement of Income, are taken directly to shareholders’ equity.

** **

**FINANCIALINSTRUMENTS**

 

Financial instruments recognized in the BalanceSheet are carried at face value unless otherwise stated. For financial derivatives,the accounting principles are determined based on the hedged item. Gains orlosses from derivatives are recognized simultaneously in the profit and lossaccount with gains and losses from underlying hedged positions.

The derivative financial instruments used are includedin the section titled“Quantitative and Qualitative disclosures about market risk”.

 

Changes in the value of forward foreign exchangecontracts are recognized in the results in the same period as changes in thevalues of the assets and liabilities they are intended to hedge. Interest gainsand losses arising from interest rate derivatives such as swaps and forwardrate agreements are matched to those arising from underlying positions.

 

Payments made or received in respect of the early terminationof derivative financial instruments are spread over the original life of theinstrument so long as the underlying exposure continues to exist.

 

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**Notes to the Consolidated Statement of Income**

** **

**Generalnote**

 

For the segmented information, please refer to the section titled‘Segment Reporting’.

 

**[1]Total operating revenues**

 

Other operating revenues in 2003 include EUR 222 million regarding thetermination of the roaming agreement with MobilCom, the book gain of EUR 15million on the sale of UMC, the book gain on the sale of Inmarsat by Xantic ofEUR 26 million and the book gain of EUR 435 million on the sale of ourDirectory Services.

 

Other operating revenues in 2002 include the book gain of EUR 335million on the sale of Pannon GSM, EUR 210 million regarding the termination ofthe national roaming agreements and the joint rollout of the UMTS network withQuam, the settlement of Indonesian intermediate holding companies of Telkomselamounting to EUR 30 million, and book gains of EUR 39 million on the sale ofvarious assets, including real estate.

 

Other operating revenues in 2001 included the book gain of EUR 346million relating to the sale of our 22.28% stake in Telkomsel, a EUR 51 millionbook gain reflecting the sale of 10% of our share in KPNQwest, a EUR 59 millionbook gain on the sale of KPN Datacenter and a EUR 41 million book gain on thesale of real estate.

 

**[2]Cost of materials**

 

In 2002, a write-down of assets held for sale and inventories wasincluded in costs of materials for EUR 53 million related to IndefeasibleRights of Use.

 

**[3]Salaries and social security contributions**

 
| **Amounts in millions of euro** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|---------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                            |   |      |       |      |       |      |       |
| Salaries and  wages             |   | 1,302     |       | 1,543     |       | 1,813     |       |
| Pension  charges                |   | 217       |       | 226       |       | 146       |       |
| Social  security charges        |   | 184       |       | 206       |       | 235       |       |
| **Total**                       |   | **1,703** | ** ** | **1,975** | ** ** | **2,194** | ** ** |

 

##### **BOARD OF MANAGEMENT AND THE SUPERVISORY BOARD**

 

The Remuneration Report, included elsewhere in this document on pages115 through 124, includes the auditable parts which comprise “Executiveremuneration”, “Long-term incentives: stock options 2003”, “Loans 2003” and“Supervisory Board Remuneration”.  Theinformation in these parts is required under Title 9, Book 2 of the Dutch CivilCode and forms an integral part of these financial statements.

 

##### **PENSIONS**

 

We must fund any shortfall in our pension funds if coverage ratios (orfunding level, being the ratio of the fair value of the investments of ourpension funds to our pension liabilities) fall below certain thresholds. InDecember 2002, the Boards of our main pension funds approved fundingagreements. These funding agreements, which remain subject to final approval bythe Regulatory Body for pension funds in the Netherlands (*Pensioen- en Verzekeringskamer,*or*PVK*), provide for the determination ofand payment schedules for any shortfall in our pension funds.

 

The coverage ratios of our two main pension funds (BPF and OPF), whichare used in the calculation of the total shortfall, amounted to 109.7% and 117.6% respectively. The estimate of the total shortfall at theend of 2003 based on the latest information available, amounted toapproximately EUR 305 million (2002:EUR 385 million). Under the current estimates and payment schedule, which aimsat funding the total shortfall over a period of six years, the obligation atyear-end 2003 (leading to a cash outflow in 2004) amounts to EUR 21 million (2002: EUR 52 million), of whichEUR 9 million is reported in Fixed division(2002: EUR 32 million), EUR 1 millionin Mobile division (2002: EUR 5 million) and EUR 11 million in Other activities (2002: EUR 15 million), which hasbeen charged to income in 2003.

 

Under the current payment schedule, and assuming that market conditionsand coverage ratios do not change, the difference between the actual coverageratio and the minimum reserve level (which is derived from the strategic assetmix and expected long term interest rate, and amounted to 110% at the end of2003) has to be funded in one year. The next step will be that the totalshortfall between the actual coverage ratio and the desired coverage ratio(119.3% and 128.0% respectively at the end of 2003) has to be funded in fiveyears.

 

It should be noted that thefinal calculation of the shortfall as of December 31, 2003 and the amount to bepaid will only become available in May 2004. The actual outcome of the amountsto be paid may differ from the estimates we used (in 2003 the actual outcomediffered approximately EUR 1 million from the estimates). Additionally, foreach following year-end a new calculation will be made for determining therequired payment, taking into account the then applicable coverage (actual anddesired coverage ratios). If financial markets recover and the coverage ratioimproves in future years, the obligation to fund the shortfall will eitherdecline or cease to exist. However, if share prices fall further, the shortfallcould increase.

 

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##### **MANAGEMENT SHARE OPTION PLAN (INCLUDING OPTIONS OF THEBOARD)**

 

In 1997, a share option plan was introduced which provided for theissue of a maximum of 4.4 million options, which could be exercised within fiveyears.  Another plan, implemented in2000, provides for the issue of a maximum of 5.4 million share options or shareappreciation rights (SARs).  Uponexercise of the option, the SAR lapses and vice versa.  The options allocated can be exercisedimmediately; the SARs after a three-year period.  Both lapse after a five-year period. The exercise price of ashare option is 125.1% of the market value of a share on the date it wasissued. The exercise price of a SAR is equal to the market value of a share onthe date the SAR was issued. 

 

On May 3, 2001, we granted 2,268,700 share option combinations (bothout-of-the-money (OTM) and at-the-money (ATM) combinations).  Each option gives the right to one ordinaryshare per option. Upon exercise of the OTM share option, the ATM share optionwill lapse and vice versa. The OTM share options are directly exercisable onthe date of grant and expire five years after the date of grant. The ATM shareoptions become exercisable three years after the date of grant and expire fiveyears after the date of grant.

 

On September 13, 2001, we granted 1,567,398 options to our ChiefExecutive Officer, Mr. Scheepbouwer. These options become exercisable threeyears after the date of grant and expire five years after the date of grant.

 

In connection with our Social Plan and upon acceptance of a salaryreduction, we granted 3,175,000 options on December 10, 2001 to the members ofour Board of Management, excluding Mr. Scheepbouwer, and to approximately 130key members of our senior management team. These options are exercisable immediatelybut the proceeds, if any, from any exercise prior to the third anniversary ofthe issue date will be held in escrow until the third anniversary of the issue,at which time such proceeds will be released to the relevant individuals,provided that these individuals are still employed by the Company at that time.The expiry date for these options is five years from the date of

 

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issue. The exercise price of these options was initially set at theopening share price of KPN as of December 10, 2001, being EUR 5.61, multipliedby a factor of 125.1%, resulting in an exercise price of EUR 7.02. Afterdiscussions with the Dutch tax authorities, the value of these options was setat EUR 5.07. Therefore, the exercise price of these options, including thefactor of 125.1%, is adjusted to EUR 6.34. On February 28, 2003, theSupervisory Board approved this adjustment. As a result of the optionrepricing, we recognized in 2003 and will recognize in future periods thecompensation expenses under salaries and social security expenses and anopposite direct movement in other reserves for the same amount at the end ofeach reporting period subsequent to February 28, 2003 (the date of therepricing), until they are exercised, cancelled or forfeited withoutreplacement. The amount of stock-based compensation expense recorded in the2003 Statement of Income for these options was zero as the closing stock priceat December 31, 2003 (EUR 6.12) was below the adjusted option price of EUR 6.34. In subsequent periods, additionalstock-based compensations will be recognized and are determined based on thedifference of the closing stock price of that period and the previous closingstock price or the adjusted option price, whichever is the higher. Stock-basedcompensation expense related to the repricing of these options will be reducedin subsequent periods for decreases in the quoted market value of the stock,but shall not be adjusted below zero on a cumulative basis.

 

On December 10, 2001 we granted 1,191,190 options in connection withour Social Plan and, upon acceptance of a salary reduction or no increase inoverall salary in 2002 and 2003, to the rest of our senior management as well.These options are exercisable, assuming that these individuals remain employedby the Company, commencing three years after the date of issue and will expirefive years from the date of issue. The exercise price of these options wasinitially set at the opening share price of KPN on December 10, 2001, being EUR5.61. After discussions with the Dutch tax authorities, the value of theseoptions was set at EUR 5.07. Therefore, the exercise price of these options isadjusted to EUR 5.07. On February 28, 2003, the Supervisory Board approved thisadjustment. As a result of the option repricing, we recognized in 2003 and willrecognize in future periods the compensation expenses under salaries and socialsecurity expenses and an opposite direct movement in other reserves for thesame amount at the end of each reporting period subsequent to February 28,2003, the date of the repricing, until they are exercised, cancelled orforfeited without replacement. The amount of stock-based compensation expenserecorded in the 2003 Statement of Income was the excess of the closing stockprice at December 31, 2003 or date of exercise, cancellation or forfeiture overthe adjusted option price of EUR 5.07 in the period as from repricing. Insubsequent periods, additional stock-based compensations will be recognized andare determined based on the difference of the closing stock price of thatperiod and the higher of the previous closing stock price or the adjustedoption exercise price. Stock-based compensation expense related to therepricing of these options will be reduced in subsequent periods for decreasesin the quoted market value of the stock, but shall not be adjusted below zeroon a cumulative basis.

 

On April 26, 2002, we granted a total of 1,952,456 out-of-the-moneyshare options to the members of the Board of Management and to the seniormanagers of KPN, E-Plus and BASE. For the management of KPN, the exercise priceis EUR 6.49, which is equal to 125.1% of the market value of a share on thedate of issue. Each option gives the right to one ordinary share per option.The options are exercisable immediately but the profits, if any, from anyexercise prior to the third anniversary of the date of issue will be held inescrow until the third anniversary of the issue, at which time such profitswill be released to the relevant individuals, provided that the individualsremain employed by KPN. The options expire five years from the date of issue.The number of options granted under these conditions is 1,697,656. For themanagement of E-Plus, the exercise price is EUR 6.49, which is equal to 125.1%of the market value of a share on the date of issue. Each option gives theright to one ordinary share per option. The options are exercisable as of April26, 2005. The options expire five years from the date of issue. The number ofoptions granted under these conditions is 236,400. For the management of BASE,the exercise price is EUR 6.23, which is equal to 120% of the market value of ashare on the date of issue. Each option gives the right to one ordinary shareper option. The options are exercisable as of January 1, 2006. The optionsexpire five years from the date of issue. The number of options granted underthese conditions is 18,400.

 

On January 2, 2003, 150,000 share options were granted to Board ofManagement member Mr. Demuynck. The exercise price is EUR 7.79, which isequal to 125.1% of the market value of a share on the date of issue. Theexpiration date is January 1, 2008. The other conditions for this grant are thesame as those granted to the senior management of KPN on April 26, 2002.

 

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On May 13, 2003, we granted a total of 1,690,815 share options to themembers of our Board of Management and to the senior managers of KPN, E-Plusand BASE. The management of KPN could choose for an at-the-money (ATM) shareoption with an exercise price equal to the market value of a share on the dateof issue, or for an out-of-the-money (OTM) share option with an exercise priceof 125.1% of the market value of a share on the date of issue. The choice isaffected by the income tax rate, which is lower for OTM options than for ATMoptions. Each option gives the right to one ordinary share per option. Theoptions are exercisable immediately but the profits, if any, from any exercise priorto the third anniversary of the date of issue will be held in escrow until thethird anniversary of the issue, at which time such profits will be released tothe relevant individuals, provided that the individuals remain employed by theCompany. The options expire five years from the date of issue. The number ofoptions granted under these conditions is 1,617,115. Of this number, 1,292,765share options have an exercise price of EUR 5.94 and 324,350 share options havean exercise price of EUR 7.43. For the management of E-Plus, the exerciseprice is equal to the market value of a share on the date of issue (EUR 5.94).Each option gives the right to one ordinary share per option. The options areexercisable as of May 13, 2006. The options expire five years from the date ofissue. The number of options granted under these conditions is 57,600. For themanagement of BASE, the exercise price is equal to the market value of a shareon the date of issue (EUR 5.94). Each option gives the right to one ordinary shareper option. The options are exercisable as of January 1, 2007. The optionsexpire five years from the date of issue. The number of options granted underthese conditions is 16,100.

 

On August 1, 2003, 10,000 share options were granted to a senior managerof KPN. The exercise price is EUR 6.09, which is equal to the market value of ashare on the date of issue. The expiration date is July 31, 2008. The otherconditions for this grant are the same as those of the May 13, 2003 grant tothe senior management of KPN.

 

As at December 31, 2003 we had 12,902,879management options outstanding. Of these options, 2,352,030 were vested andexercisable with an aggregate unrealized intrinsic value of EUR 0.2 million.

 

##### **MANAGEMENT OPTIONS ISSUED IN 1998 (1)**

 

The number of outstanding management options as of December 31, 2003,can be broken down as follows:

 
|           |   | **Issued** |       | **Balance at    12-31-2003** |       | **Balance at  12-31-2002** |       | **Balance at  12-31-2001** |       | **Exercise  price in euro** |       | **Exercise  period up to  and incl.** |       |
|----------------|--------|------------|------------|------------------------------|------------|----------------------------|------------|----------------------------|------------|-----------------------------|------------|---------------------------------------|------------|
| **Issue date** |   |       | ** ** |                         | ** ** |                       | ** ** |                       | ** ** |                        | ** ** |                                  | ** ** |
| 04-14-1998     |   | 1,553,620  |       | —                       |       | 1,095,820                  |       | 1,127,520                  |       | 22.78                       |       | 04-13-2003                            |       |

 

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(1)                                  Exercisingtwo options entitles the holders to two KPN shares and one TPG share.  In 2003, 1,085,260 management options issuedin 1998 expired and 10,560 forfeited.

 

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**MANAGEMENTOPTIONS ISSUED IN 1999, 2000, 2001, 2002 AND 2003**

 

The number of outstanding management options as of December 31, 2003can be broken down as follows:

 
|           |   | **Issued**     |       | **Balance at  12-31-2003** |       | **Balance at  12-31-2002** |       | **Balance at  12-31-2001** |       | **Exercise  price in euro** |       | **Exercise  period up to  and incl.** |       |
|----------------|--------|----------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|-----------------------------|------------|---------------------------------------|------------|
| **Issue date** |   |           | ** ** |                       | ** ** |                       | ** ** |                       | ** ** |                        | ** ** |                                  | ** ** |
| 01-08-1999     |   | 36,000         |       | 22,000                     |       | 24,000                     |       | 26,000                     |       | 24.78                       |       | 01-07-2004                            |       |
| 05-03-1999     |   | 1,427,840      |       | 1,036,780                  |       | 1,062,260                  |       | 1,145,100                  |       | 19.90                       |       | 05-02-2004                            |       |
| 04-28-2000     |   | 1,685,550      |       | 1,283,250                  |       | 1,353,750                  |       | 1,473,750                  |       | 71.84                       |       | 04-27-2005                            |       |
|           |   |           |       |                       |       |                       |       |                       |       | 57.43 (SAR                  | )          |                                  |       |
| 05-03-2001     |   | 2,268,700      |       | 1,828,350                  |       | 1,986,950                  |       | 2,100,750                  |       | 18.40 (OTM                  | )          | 05-02-2006                            |       |
|           |   |           |       |                       |       |                       |       |                       |       | 14.71 (ATM                  | )          |                                  |       |
| 09-13-2001     |   | 1,567,398      |       | 1,567,398                  |       | 1,567,398                  |       | 1,567,398                  |       | 3.99                        |       | 09-12-2006                            |       |
| 12-10-2001     |   | 3,175,000      |       | 2,645,000                  |       | 2,950,000                  |       | 3,175,000                  |       | 6.34                        |       | 12-09-2006                            |       |
| 12-10-2001     |   | 1,191,190      |       | 841,730                    |       | 968,730                    |       | 1,191,190                  |       | 5.07                        |       | 12-09-2006                            |       |
| 04-26-2002     |   | 1,952,456      |       | 1,847,356                  |       | 1,912,656                  |       | —                     |       | 6.49                        |       | 04-25-2007                            |       |
| 01-02-2003     |   | 150,000        |       | 150,000                    |       | —                     |       | —                     |       | 7.79                        |       | 01-01-2008                            |       |
| 05-13-2003     |   | 1,366,465      |       | 1,346,665                  |       | —                     |       | —                     |       | 5.94                        |       | 05-12-2008                            |       |
| 05-13-2003     |   | 324,350        |       | 324,350                    |       | —                     |       | —                     |       | 7.43                        |       | 05-12-2008                            |       |
| 08-01-2003     |   | 10,000         |       | 10,000                     |       | —                     |       | —                     |       | 6.09                        |       | 07-31-2008                            |       |
|           |   |           |       |                       |       |                       |       |                       |       |                        |       |                                  |       |
| **Total**      |   | **15,154,949** | ** ** | **12,902,879**             | ** ** | **11,825,744**             | ** ** | **10,679,188**             | ** ** |                        | ** ** |                                  | ** ** |

 

In 2003, no management options issued in 1999, 2000, 2001, 2002 or 2003were exercised. In 2003, 773,680 management options issued in 1999, 2000, 2001,2002 or 2003 forfeited.

 

**MANAGEMENTAND EMPLOYEE OPTION PLANS**

 

Summary of stock option activity under all option plans excluding SARsand the out of the money options of tandem option plans is as follows:

 
|                             |   | **Options outstanding** |       |
|----------------------------------|--------|-------------------------|------------|
|                             |   | **Number of shares**    |       | **Weighted average  exercise price per  share in euro** |   |
| **Balance at January 1, 2001**   |   | 8,821,304               |       | 32.78 |   |
| Options  granted                 |   | 26,659,388              |       | 7.73 |   |
| Options  exercised               |   | -196,840                |       | 15.90 |   |
| Options  expired                 |   | —                  |       | — |   |
| Options  forfeited               |   | -301,010                |       | 19.14 |   |
| **Balance at January 1, 2002**   |   | 34,982,842              |       | 13.92 |   |
| Options  granted                 |   | 4,075,456               |       | 5.81 |   |
| Options  exercised               |   | -424,280                |       | 15.43 |   |
| Options  expired                 |   | -22,800                 |       | 15.43 |   |
| Options  forfeited               |   | -4,684,335              |       | 7.85 |   |
| **Balance at January 1, 2003**   |   | 33,926,883              |       | 13.78 |   |
| Options  granted                 |   | 4,101,565               |       | 6.13 |   |
| Options  exercised               |   | —                  |       | — |   |
| Options  expired                 |   | -1,085,260              |       | 22.78 |   |
| Options  forfeited               |   | -2,167,712              |       | 16.91 |   |
| **Balance at December 31, 2003** |   | **34,775,476**          | ** ** | **12.32** | ** ** |

 

147

----

 

The total of options exercisable at the end of the year are:

 
|   |   | **Options exercisable** |   |
|--------|--------|-------------------------|--------|
|   |   | **Number of shares**    |   | **Weighted average  exercise price per  share in euro** |   |
|   |   |                    |   |   |   |
| 2001   |   | 8,758,180               |   | 15.82 |   |
| 2002   |   | 9,184,136               |   | 14.05 |   |
| 2003   |   | 11,926,763              |   | 21.18 |   |

 

The weighted average fair values and weighted average exercise pricesper share at the date of grant for options granted were as follows:

 
|                                                                                                                                  |   | **Years  ended December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
| **In euro**                                                                                                                           |   | **2003**                      |   | **2002** |   | **2001** |   |
| Weighted average fair value of options granted with  exercise prices equal to the market value of the stock at the date of grant      |   | 3.19                          |   | 2.91 |   | 4.47 |   |
| Weighted average exercise price of options granted  with exercise prices equal to the market value of the stock at the date of  grant |   | 5.94                          |   | 5.19 |   | 7.56 |   |
| Weighted average fair value of options granted with  exercise prices above the market value of the stock at the date of grant         |   | 2.91                          |   | 2.64 |   | 2.48 |   |
| Weighted average exercise price of options granted  with exercise prices above the market value of the stock at the date of grant     |   | 7.54                          |   | 6.49 |   | 6.02 |   |

 

The fair value of each option is estimated at the date of grant using abinomial model with the following weighted average assumptions:

 
|                     |   | **2003**  |   | **2002**  |   | **2001**  |   |
|--------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
| Risk-free  interest rate |   | 2.8       | %      | 4.5       | %      | 4.3       | %      |
| Expected  dividend       |   | 0         | %      | 0         | %      | 0         | %      |
| Option lives             |   | 3.8 years |   | 3.8 years |   | 3.8 years |   |
| Expected  volatility     |   | 71.1      | %      | 72.7      | %      | 73.2      | %      |

 

The following table summarizes information about options outstanding atDecember 31, 2003:

 
|                                  |   | **Options outstanding** |       | **Options exercisable**                                        |       |
|---------------------------------------|--------|-------------------------|------------|----------------------------------------------------------------|------------|
| **Range of  exercise price  in euro** |   | **Number of  shares**   |       | **Weighted  average  remaining  contractual life  (in years)** |       | **Weighted  average  exercise price  per share in  euro** |   | **Number of  shares** |   | **Weighted  average  exercise price  per share in  euro** |   |
| 3.99 – 7.79                      |   | 23,309,684              |       | 3.24                                                           |       | 5.45 |   | 6,031,071 |   | 6.39 |   |
| 14.71 –  24.78                   |   | 8,974,680               |       | 0.58                                                           |       | 17.78 |   | 3,404,580 |   | 20.86 |   |
| 57.43                                 |   | 2,491,112               |       | 1.33                                                           |       | 57.43 |   | 2,491,112 |   | 57.43 |   |
| **Total**                             |   | **34,775,476**          | ** ** | **2.65**                                                       | ** ** | **12.35** | ** ** | **11,926,763** | ** ** | **21.18** | ** ** |

 

148

----

 

**MANAGEMENTSTOCK APPRECIATION RIGHTS**

 

Summary of stock appreciation right (SAR) activity under all plans isas follows:

 
|                              |   | **SARs outstanding** |       |
|-----------------------------------|--------|----------------------|------------|
|                              |   | **Number of SARs**   |       | **Weighted average  exercise price per SAR  in euro** |   |
| Balance at January 1, 2001        |   | 1,582,500            |       | 57.43 |   |
| SARs forfeited                    |   | -108,750             |       | 57.43 |   |
|                              |   |                 |       |   |   |
| Balance at January 1, 2002        |   | 1,473,750            |       | 57.43 |   |
| SARs forfeited                    |   | -120,000             |       | 57.43 |   |
|                              |   |                 |       |   |   |
| Balance at January 1, 2003        |   | 1,353,750            |       | 57.43 |   |
| SARs forfeited                    |   | -70,500              |       | 57.43 |   |
|                              |   |                 |       |   |   |
| **Balance at December  31, 2003** |   | **1,283,250**        | ** ** | **57.43** | ** ** |

 

No additional SARs were granted in 2001, 2002 and 2003. All SARs areexercisable from April 28, 2003, expire on April 27, 2005 and have an exerciseprice per SAR of EUR 57.43. No SARs were exercised in 2003.

 

The SARs were granted in 2000 with an exercise price equal to themarket value of the stock at the date of grant. The fair value at the date ofgrant was EUR 26.47.

 

**TANDEMPLANS**

 

Tandem plansgrant options to employees with two components, in one plan the out of themoney options and at the money options and in another plan the out of the moneyoptions and stock appreciation right. Exercising one kind of the options cancels the other.

Options that are part of a tandem option plan and are not disclosed inthe foregoing are as follows:

 
|                              |   | **Number of shares** |       | **Weighted average  exercise price per  share in euro** |       |
|-----------------------------------|--------|----------------------|------------|---------------------------------------------------------|------------|
| Balance at January 1, 2001        |   | 1,582,500            |       | 71.84                                                   |       |
| Options granted                   |   | 2,169,300            |       | 18.40                                                   |       |
| Options forfeited                 |   | -263,400             |       | 40.46                                                   |       |
|                              |   |                 |       |                                                    |       |
| Balance at January 1, 2002        |   | 3,488,400            |       | 40.98                                                   |       |
| Options forfeited                 |   | -233,800             |       | 45.83                                                   |       |
|                              |   |                 |       |                                                    |       |
| Balance at January 1, 2003        |   | 3,254,600            |       | 40.63                                                   |       |
| Options forfeited                 |   | -185,400             |       | 38.72                                                   |       |
|                              |   |                 |       |                                                    |       |
| **Balance at December  31, 2003** |   | **3,069,200**        | ** ** | **40.74**                                               | ** ** |

 

149

----

 

These options were excluded from the above disclosures and from thecalculation of compensation expenses as management does not believe thesecomponents of the tandem grants are most likely to be exercised.

 

**EMPLOYEESHARE OPTION PLAN**

 

The number of employee share options outstanding as of December 31,2003, as well as the exercise price in euro, are shown in the following table:

 
| **Issue date** |   | **Number of  options  issued** |   | **Expiration  date** |   | **Number of  options  outstanding  as of  December  31, 2003** |   | **Exercise  price in  euro** |   |
|----------------|--------|--------------------------------|--------|----------------------|--------|----------------------------------------------------------------|--------|------------------------------|--------|
| 01-04-1999     |   | 2,834,200                      |   | 01-03-2004           |   | 2,345,800                                                      |   | 21.25                        |   |
| 04-28-2000     |   | 2,908,224                      |   | 04-27-2005           |   | 2,491,112                                                      |   | 57.43                        |   |
| 05-03-2001     |   | 3,741,750                      |   | 05-02-2006           |   | 3,741,750                                                      |   | 14.71                        |   |
| 12-10-2001     |   | 14,715,350                     |   | 12-09-2006           |   | 10,203,435                                                     |   | 5.07                         |   |
| 04-26-2002     |   | 2,123,000                      |   | 04-25-2007           |   | 2,123,000                                                      |   | 5.19                         |   |
| 05-13-2003     |   | 2,250,750                      |   | 05-12-2008           |   | 2,250,750                                                      |   | 5.94                         |   |
| Total          |   | 28,573,274                     |   |                 |   | 23,155,847                                                     |   |                         |   |

 

In 2003, no employee share options were exercised (2002: nil). In 2003,1,453,972 employee share options forfeited (2002: 3,963,455).

 

**[4]Depreciation, amortization and impairments**

 
| **Amounts in millions of euro**                      |   | **2003**  |       | **2002**   |       | **2001**   |       |
|------------------------------------------------------|--------|-----------|------------|------------|------------|------------|------------|
|                                                 |   |      |       |       |       |       |       |
| Intangible fixed assets                              |   | 413       |       | 7,685      |       | 15,344     |       |
| Property, plant and equipment                        |   | 2,225     |       | 2,567      |       | 2,473      |       |
| **Total depreciation, amortization and impairments** |   | **2,638** | ** ** | **10,252** | ** ** | **17,817** | ** ** |
| Reversal of impairment of  intangible fixed assets   |   | –103 |       | —     |       | —     |       |
| **Total**                                            |   | **2,535** | ** ** | **10,252** | ** ** | **17,817** | ** ** |

 

 

Amortization of intangible fixed assets relates to goodwill andlicenses. Depreciation relates to property, plant and equipment. Impairmentsrelate to goodwill, licenses and property, plant and equipment.

 

**IMPAIRMENTSON GOODWILL AND LICENSES (INCLUDING REVERSALS)**

 
| **Amounts in millions of euro** |   | **2003** |       | **2002**  |       | **2001**   |       |
|---------------------------------|--------|----------|------------|-----------|------------|------------|------------|
|                            |   |     |       |      |       |       |       |
| Goodwill E-Plus                 |   | —   |       | 1,427     |       | 13,701     |       |
| Goodwill BASE                   |   | —   |       | 425       |       | —     |       |
| Licenses E-Plus                 |   | —   |       | 5,216     |       | —     |       |
| Licenses BASE                   |   | -103     |       | 196       |       | —     |       |
| Goodwill KPNQwest               |   | —   |       | 31        |       | —     |       |
| Goodwill Ceský Telecom     |   | —   |       | —    |       | 182        |       |
| Goodwill Hutchison 3G UK        |   | —   |       | —    |       | 135        |       |
| Goodwill PanTel                 |   | —   |       | —    |       | 57         |       |
| Goodwill within SNT             |   | 38       |       | —    |       | —     |       |
| Goodwill within Xantic          |   | 46       |       | —    |       | —     |       |
| Other                           |   | 15       |       | —    |       | 38         |       |
| **Total**                       |   | **-4**   | ** ** | **7,295** | ** ** | **14,113** | ** ** |

 

150

----

 

**DEPRECIATIONAND IMPAIRMENTS OF PROPERTY, PLANT AND EQUIPMENT**

 
| **Amounts in millions of euro** |   | **2003**  |       | **2002**  |       | **2001**  |       |
|---------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                            |   |      |       |      |       |      |       |
| By category:                    |   |      |       |      |       |      |       |
| Land and buildings              |   | 141       |       | 149       |       | 166       |       |
| Plant and equipment             |   | 1,787     |       | 1,969     |       | 1,830     |       |
| Other tangible fixed assets     |   | 297       |       | 449       |       | 477       |       |
| **Total**                       |   | **2,225** | ** ** | **2,567** | ** ** | **2,473** | ** ** |
|                            |   |      |       |      |       |      |       |
| By nature:                      |   |      |       |      |       |      |       |
| Ordinary depreciation           |   | 2,101     |       | 2,257     |       | 2,277     |       |
| Impairments                     |   | 124       |       | 310       |       | 196       |       |
| **Total**                       |   | **2,225** | ** ** | **2,567** | ** ** | **2,473** | ** ** |

 

Various impairment charges totaling EUR 124 million were recognized in2003. These impairments resulted from updated business cases and retirements ofcertain assets. Included in the impairment charge of 2003 is an amount of EUR42 million of certain assets in Business Solutions.

 

In 2002, various impairment charges totaling EUR 310 million wererecognized resulting from impairments and retirements of assets purchased fromKPNQwest (EUR 93 million), the fixed assets of KPN Belgium (EUR 100 million)and other fixed assets.

 

In 2001, impairment charges totaling EUR 196 million were recorded inall divisions resulting from impairments because of retirements and updatedbusiness cases resulting in lower values.

 

**[5]Other operating expenses**

 

In 2003, other operating expenses included a net addition of EUR 35million to the restructuring provision, a loss of EUR 5 million on the sale ofthe French SNT activities, a write-down of EUR 6 million of short-termreceivables at Business Solutions and a refund of EUR 33 million of the totalcapital tax of EUR 77 million on the conversion of shareholder loans in 2002based on the agreement with the tax authorities.

 

In 2002, other operating expenses included a net addition of EUR 77million to the restructuring provision, a capital tax expense of EUR 77 millionresulting from the conversion of outstanding shareholders loans from KPN intoKPN Mobile equity, a book loss of EUR 68 million on the sale of KPN NetwerkBouw, a write-down of certain assets held for sale and inventories of EUR 53million and a provision of EUR 47 million for settlement and issues related toKPNQwest and charges related to KPN Belgium.

 

In 2001, a charge of EUR 676 million for the costs associated with therestructuring in the Netherlands and a charge of EUR 29 million relating to thetermination of Planet Internet Germany were included under Other operatingexpenses.

 

**COSTOF RESEARCH**

 

Cost of research is included in Other operating expenses and amountedto EUR 23 million in 2003 (2002: EUR 32 million; 2001: EUR 46 million).

 

**[6]Interest and similar income**

 
| **Amounts in millions of euro** |   | **2003** |       | **2002** |       | **2001** |       |
|---------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                            |   |     |       |     |       |     |       |
| Interest                        |   | 67       |       | 220      |       | 287      |       |
| Dividend distributed by eircom  |   | —   |       | —   |       | 7        |       |
| Exchange rate differences       |   | —   |       | —   |       | 3        |       |
| **Total**                       |   | **67**   | ** ** | **220**  | ** ** | **297**  | ** ** |

 

151

----

 

**[7]Release exchange right**

 

On March 13, 2002, BellSouth exercised its exchange right. BellSouthreceived 234.7 million KPN shares in exchange for its 22.51% interest inE-Plus. Consequently, the final valuation of the exchange right was knownbefore the 2001 financial statements were finalized. For this reason, theexchange right as of December 31, 2001 was valued at its settlement value ofEUR 712 million. The difference between the original valuation of EUR 7,560million and the settlement value of EUR 712 million, amounting to EUR 6,848million, was released in the 2001 Statement of Income.

 

**[8]Interest and similar expenses**

 
| **Amounts in millions of euro**                 |   | **2003** |       | **2002**  |       | **2001**  |       |
|-------------------------------------------------|--------|----------|------------|-----------|------------|-----------|------------|
|                                            |   |     |       |      |       |      |       |
| Interest on debts                               |   | 876      |       | 1,359     |       | 1,576     |       |
| Interest added to provisions                    |   | 42       |       | 35        |       | 18        |       |
| Devaluation of marketable securities in  eircom |   | —   |       | —    |       | 63        |       |
| Devaluation of loans                            |   | —   |       | —    |       | 20        |       |
| Exchange rate differences                       |   | 11       |       | 4         |       | —    |       |
| **Total**                                       |   | **929**  | ** ** | **1,398** | ** ** | **1,677** | ** ** |

 

In 2003, the costs associated with early redemptions of several loansamounted to EUR 69 million (2002: EUR 120 million) and are included in theinterest on debts.

 

Capitalized interest in 2003 amounted to EUR 21 million (2002: EUR 20million; 2001: EUR 38 million).  In2003, we have used an interest rate of 6.0%.

 

**[9]Tax on profit or loss**

 

The tax benefit on the profit before tax amounted to EUR 257 million in2003 (2002: tax charge of EUR 983 million on loss before tax; 2001: tax chargeof EUR 11 million on loss before tax).

The effective tax rate in 2003amounted to –11.4% (2002: –14.5%; 2001: –0.1%).

 

In 2003, the tax charge was influenced significantly by the agreementreached with the Dutch tax authorities. This agreement resulted in a taxbenefit of EUR 1,080 million, being a tax benefit at Koninklijke KPN of EUR2,105 million and a tax charge at KPN Mobile of EUR 1,025 million.

 

For Dutch tax purposes, KoninklijkeKPN (owner of the majority of KPN’s fixed activities) and KPN Mobile areseparate fiscal unities and therefore different taxpayers. In February 2001, wefinalized the legal restructuring of our activities in Germany, which resultedin a German partnership structure that is transparent for German corporateincome tax purposes and in consequence constitutes a permanent establishment ofKPN Mobile for German tax purposes, covering all of KPN Mobile’s Germanoperations, including its 77.49% interest in E-Plus. On March 13, 2002,Bellsouth exercised its exchange right and Koninklijke KPN acquired theremaining 22.51% interest in E-Plus.

 

In December 2002, we restructuredour Mobile activities in order to arrive at a more transparent financial structureand to strengthen KPN Mobile’s financial position. This financial restructuringconsisted of various steps under which Koninklijke KPN converted EUR 14 billionof outstanding shareholder loans into 7 billion newly issued ordinary KPNMobile shares with a nominal value of EUR 2 per share. In addition, KoninklijkeKPN sold its EUR 2.2 billion shareholder loans in E-Plus to KPN Mobile for anamount of EUR 0.6 billion. Subsequently, the financial restructuring led to acapital injection in E-Plus of EUR 1.9 billion, and E-Plus repaid its projectfinancing for the same amount.

 

The tax consequences of the legaland financial restructuring have been discussed with the Dutch tax authorities.This resulted in an agreement. The key elements of the agreement can besummarized as follows:

 

•     Upon conversion of the EUR 14billion shareholder loans, Koninklijke KPN realized a loss for tax purposes ofEUR 6 billion, which can be used to offset profits of 2002 and 2003. Theremaining fiscal loss can be carried forward indefinitely to shelter futuretaxable profits of Koninklijke KPN. KPN Mobile must recognize a correspondingtaxable gain of EUR 6 billion.

 

•      The German partnership structure of E-Plusis transparent for Dutch tax purposes and, as a consequence, KPN Mobile isdeemed to carry on business in Germany through a permanent establishment.

 

•      The interest accruals on the shareholderloans to E-Plus are ignored for Dutch tax purposes. For KPN Mobile EUR 500million of related interest expense on the loan to Koninklijke KPN is not taxdeductible in the Netherlands.

 

•      The fiscal losses incurred by the Germanpermanent establishment were set at EUR 11.5 billion. For Dutch tax purposes,these losses can be used to offset the Dutch operating profits of KPN Mobile. Futureprofits of the permanent establishment will however be included in the taxableresults in the Netherlands until the entire loss of the German permanentestablishment has been recaptured. Thereafter profits of the German permanentestablishment are exempt from Dutch taxation. For this purpose, the reversal ofthe loss of the permanent establishment is computed on the basis of theoperating results of E-Plus before depreciation, amortization and impairments,including ‘exceptional items’ if any. Should KPN reverse impairments onintangible assets of E-Plus, a corresponding gain should be recognized for taxpurposes up to a maximum of EUR 2 billion, to be included in the taxableprofits of the permanent establishment in five annual installments. Finally, inthe currently not anticipated event that KPN disposes of its investment inE-Plus, this could result in a taxable gain for Dutch tax purposes to theextent prior losses are not fully recaptured at that time.

 

Koninklijke KPN realized a taxableloss for an amount of EUR 6 billion at the end of 2002. For this carry forwardloss we have recognized a deferred tax asset of EUR 2,070 million (34.5% of EUR6 billion), since we expect to recover the taxable loss within a foreseeabletime. Interest received on the loans to E-Plus is ignored for Dutch corporateincome tax. Since Koninklijke KPN recorded the interest income on its loans toits German operations as taxable income in the past, EUR 35 million taxbenefits have been recorded following the agreement. Based on this agreementand depending on general economic, market and business developments KoninklijkeKPN expects to move into a taxpaying position not earlier than 2006.

 

KPN Mobile realized a taxable gainfor an amount of EUR 6 billion at the end of 2002. The tax charge relating tothis gain is EUR 2,070 million.

 

Interest received on the loans toE-Plus is ignored for Dutch corporate income tax purposes. For KPN Mobile EUR500 million of related interest expense on the loan to Koninklijke KPN is nottax deductible in the Netherlands. This resulted in a tax charge of EUR 173million.

 

Since KPN Mobile recorded theinterest income on its loans to its German operations as taxable income in thepast, a EUR 1,218 million release of the deferred tax liability has beenrecorded following the agreement.

 

The net effect from the agreementfor KPN Mobile is a tax charge of EUR 1,025 million and a deferred taxliability for the same amount. This tax liability is deferred since the KPNMobile gain of EUR 6 billion is offset by the EUR 11.5 billion tax lossesincurred by the German branch of KPN Mobile. KPN Mobile will not pay tax aslong as its accumulated fiscal losses available for future compensation,including the loss of the German branch, exceeds the taxable profits.

 

For the losses of the Germanpermanent establishment available for Dutch tax purposes no deferred tax assethas been accounted for since it has no permanent character.

 

At December 31, 2003 theaccumulated losses of the German permanent establishment for Dutch tax purposesamounted to EUR 10,658 million. Based on this agreement and depending ongeneral economic, market and business developments KPN Mobile expects to moveinto a taxpaying position not earlier than 2006. Based on our current estimateswe expect that approximately 70% of our deferred tax liability has to be paidwithin five years.

 

**EFFECTIVETAX RATE**

 
| **Amounts in millions of euro**                                                                                       |   | **2003**       |       | **2002**        |       | **2001**        |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------|------------|-----------------|------------|-----------------|------------|
|                                                                                                                  |   |           |       |            |       |            |       |
| **Profit or loss before taxes**                                                                                       |   | **2,246**      | ** ** | **–6,759** | ** ** | **–8,968** | ** ** |
|                                                                                                                  |   |           |       |            |       |            |       |
| Reconciling items:                                                                                                    |   |           |       |            |       |            |       |
| •   Release exchange right                                                                             |   | —         |       | —          |       | –6,848     |       |
| •   Tax base differences                                                                               |   | 273            |       | –332       |       | 147             |       |
| •   Amortization of goodwill                                                                           |   | 75             |       | 1,414           |       | 6,406           |       |
| •   Foreign operations                                                                                 |   | –119      |       | –437       |       | –248       |       |
| •   Other reconciling items                                                                            |   | –784      |       | –39        |       | –138       |       |
| **Adjusted  basis of taxation**                                                                                       |   | **1,691**      | ** ** | **–6,153** | ** ** | **–9,649** | ** ** |
| Statutory tax rate in the Netherlands                                                                                 |   | 34.5           | %          | 34.5            | %          | 35.0            | %          |
| **Tax at  nominal rate**                                                                                              |   | **–583**  | ** ** | **2,123**       | ** ** | **3,377**       | ** ** |
| •   Impact agreement with Dutch  tax authorities                                                       |   | 1,080          |       | —          |       | —          |       |
| •   Tax rate differences                                                                               |   | 71             |       | 618             | ** ** | 714             | ** ** |
| •   Recognition and  de-recognition of prior years deferred tax assets for tax losses carried  forward |   | 87             |       | –606       |       | —          |       |
| •   De-recognition of current year deferred tax  assets for tax losses carried forward                 |   | –398      |       | –3,118     | ** ** | –4,102     | ** ** |
| **Tax on profit or loss**                                                                                             |   | **257**        | ** ** | **–983**   | ** ** | **–11**    | ** ** |
| **Effective  tax rate**                                                                                               |   | **–11.4** | ** ** | **–14.5**  | ** ** | **–0.1**   | ** ** |

 

The reconciling item ‘Tax base differences’ relates to adjustments fornon-deductibility of permanent differences, such as the partial deductibilityof interest for German trade tax purposes as well as the deductibility ofGerman trade tax for German corporate income tax purposes.

 

The remaining reconciling itemsthat adjust the basis of taxation primarily relate to goodwill that isnon-deductible for tax purposes and non-taxable results due to application ofthe participation exemption. Included in ‘Other reconciling items’ is the bookgain of EUR 435 million on the sale of our Directory Services, as this gain istax-exempt.

 

We have reduced the valuationallowance on the deferred tax asset for trade tax losses carried forward ofE-Plus to the extent that trade tax losses can be compensated in theforeseeable future with expected trade tax profits. These expected trade taxprofits are mainly the result of the limitation of the deductibility of interestcaused by German tax legislation, becoming effective as from January 1, 2004.This new legislation in combination with the most recent business casesresulted in the reduction of the aforementioned valuation allowance by EUR 87million. In calculating the valuation allowance, we took into account the newGerman tax loss compensation rules, which only limits the annual losscompensation.

 

‘De-recognition of current year deferred tax assets for tax lossescarried forward’ relates primarily to corporate income tax losses of E-Plus andcorporate income tax losses of BASE. As in prior years we recognized a fullvaluation allowance against current year losses available for compensation as aresult of the uncertainties regarding the realization and the timing ofsettlements of the tax losses carried forward.

 

The reconciling item ‘Tax rate differences’ relates mainly todifferences between the statutory tax rate in the Netherlands and the statutorytax rates in Germany and Belgium. The corporate income tax rate in Germanyamounts to 25% and in Belgium approximately 34%. Trade tax in Germany amountsto approximately 18%.

 

In 2002, we set up valuation allowances for previously recognizeddeferred tax assets for losses carried forward at E-Plus (EUR 275 million onpreviously recognized deferred tax assets for trade tax losses carried forward)and BASE (EUR 331 million on previously recognized deferred tax assets forcorporate tax losses carried forward) as the most recent business cases at thattime resulted in uncertainties regarding the realization and the timing ofsettlements of the tax losses carried forward.

In 2002, ‘De-recognition of current year deferred tax assets for taxlosses carried forward’ relates primarily to corporate income tax and trade taxof E-Plus and corporate income tax of BASE. We did not recognize a deferred taxasset for these tax losses carried forward as a result of the uncertaintiesregarding the realization and the timing of settlements of the tax lossescarried forward.

In 2002, we waived EUR 300 million of our shareholder loans to KPNBelgium and BASE, resulting in a tax benefit in the Netherlands of EUR 104million. The corresponding gains in Belgium were offset against prior years’net operating losses and therefore did not result in a tax charge.

 

In 2001, we reported a reconciling item for the release of the exchangeright, as this income is tax exempt. ‘De-recognition of current year deferredtax assets for tax losses carried forward’ relates primarily to Germancorporate income tax of E-Plus. We set up a valuation allowance for thedeferred tax asset as a result of uncertainties regarding the realization andthe timing of settlements of the tax losses carried forward.

 

**RECOGNIZEDTAX ASSETS AND DEFERRED TAX LIABILITIES**

 
| **Amounts in millions of euro**                                                              |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|----------------------------------------------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                                                         |   |               |       |               |       |
| Differences between the valuation for  financial reporting purposes and for tax purposes of: |   |               |       |               |       |
| •   Provisions                                                                |   | –50           |       | –73           |       |
| •   Property, plant and equipment                                             |   | 168                |       | 99                 |       |
| •   Tax losses carried forward at  Koninklijke KPN                            |   | 1,659              |       | 101                |       |
| •   Tax losses carried forward at  E-Plus                                     |   | 87                 |       | —             |       |
| •   Other differences                                                         |   | 43                 |       | –16           |       |
| **Recognized tax assets**                                                                    |   | **1,907**          | ** ** | **111**            | ** ** |
| •   Deferred tax liabilities (at  KPN Mobile)                                 |   | –2,096        |       | –449          |       |
| •   Other deferred tax  liabilities                                           |   | –15           |       | —             |       |
| **Recognized tax assets and liabilities**                                                    |   | **–204**      | ** ** | **–338**      | ** ** |

 

The deferred tax asset related to tax losses carried forward atKoninklijke KPN increased by EUR 1,558 million, which was mainly caused by theagreement with the Dutch tax authorities. This agreement resulted in a fiscalloss of EUR 6 billion at Koninklijke KPN in the year 2002. This loss hasresulted in an increase of the deferred tax asset of EUR 2,070 million. Basedupon the taxable results of 2002 and 2003 and prepayments of tax, KoninklijkeKPN initially had recorded a current tax payable of EUR 592 million. Based uponthe agreement this amount has been deducted from the deferred tax assetrecognized.

 

The deferred tax liability at KPN Mobile increased by EUR 1,647million, of which EUR 1,025 million was directly attributable to the agreementwith the Dutch tax authorities. The remaining amount relates to deferral ofDutch income tax payable as a result of temporarily offset of profits of mobileoperations in the Netherlands with losses incurred by mobile operations inGermany (E-Plus).

 

As this deferred tax liability related to KPN Mobile cannot be offsetagainst the net deferred tax assets related to Koninklijke KPN N.V., thisdeferred tax liability is shown separately in the Balance Sheet.

 

The recognized deferred tax assets of EUR 1,907 million (2002: EUR 111million) are reported under:

 

**RECOGNIZEDDEFERRED TAX ASSETS**

 
| **Amounts in millions of euro** |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|---------------------------------|--------|--------------------|------------|--------------------|------------|
|                            |   |               |       |               |       |
| Financial fixed assets          |   | 1,849              |       | 68                 |       |
| Current assets                  |   | 58                 |       | 43                 |       |
| **Total recognized tax assets** |   | **1,907**          | ** ** | **111**            | ** ** |

 

Depending on the taxableresults of Koninklijke KPN in 2004, part of the deferred tax assets relating totax losses carried forward accounted for under ‘Financial fixed assets’ can beconsidered a ‘Current asset’.

 

**TAX CHARGEON PROFIT OR LOSS ON NORMAL OPERATIONS**

 
| **Amounts in millions of euro**                   |   | **2003**      |       | **2002** |       | **2001** |       |
|---------------------------------------------------|--------|---------------|------------|----------|------------|----------|------------|
|                                              |   |          |       |     |       |     |       |
| Current tax                                       |   | –123     |       | 186      |       | 84       |       |
| Changes in deferred taxes                         |   | –134     |       | 797      |       | –73 |       |
| **Taxes on  profit or loss on normal operations** |   | –**257** | ** ** | **983**  | ** ** | **11**   | ** ** |

 

**TAX LOSSESCARRIED FORWARD AND RELATED RECOGNIZED TAX ASSETS**

 
|                            |   | **Dec. 31,  2003**              |       | **Dec. 31,  2002**          |       |
|---------------------------------|--------|---------------------------------|------------|-----------------------------|------------|
| **Amounts in millions of euro** |   | **Tax losses  carried forward** |       | **Recognized  tax  assets** |       | **Tax losses  carried forward** |   | **Recognized  tax  assets** |   |
|                            |   |                            | ** ** |                        | ** ** |   | ** ** |   | ** ** |
| Koninklijke KPN corporate tax   |   | 4,993                           |       | 1,659                       |       | 349 |   | 101 |   |
| BASE corporate tax              |   | 772                             |       | —                      |       | 794 |   | — |   |
| E-Plus trade tax                |   | 7,131                           |       | 87                          |       | 6,812 |   | — |   |
| E-Plus corporate tax            |   | 25,502                          |       | —                      |       | 25,681 |   | — |   |
| Other                           |   | 427                             |       | 25                          |       | 109 |   | 27 |   |
|                            |   |                            |       |                        |       |   |   |   |   |
| **Total**                       |   | **38,825**                      | ** ** | **1,771**                   | ** ** | **33,745** | ** ** | **128** | ** ** |

 

Tax losses carried forwardreflect our current best estimate. Note that tax losses carried forward aresubject to the assessment of the tax authorities.

 

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**[10]Income from participating interests**

 

In 2003, KPN Mobile agreed to sell its participating interest inHutchison. The legal transfer will take place at the latest on December 31,2007. As the sale was fixed in November 2003, the write-down of our interest tonil in 2002, has been reversed for the net selling price of EUR 119 million.Upon the sale of our 20.3% interest in Ceský Telecom we have also reversed animpairment charge of EUR 46 million.

 

In 2002, impairment charges of EUR 1,166 million and EUR 156 millionrelated to Hutchison 3G UK and Ceský Telecom respectively were charged toincome from participating interests. Furthermore, as a result of the bankruptcyof KPNQwest the net asset value of KPNQwest (EUR 270 million) was written downin 2002.

Other income from participating interests amounted to a loss of EUR 108million, reflecting the inclusion of the operating losses of KPNQwest.

 

In 2001, an impairment charge of EUR 104 million was included in incomefrom participating interests related to our interest in Hutchison 3G UK.

 

**[11]Minority interests**

 

Minority interests in 2003 represent, among other, minority stakes ofNTT DoCoMo in KPN Mobile (2.16%), of Telstra in Xantic (35.0%) and variousthird parties in SNT (49.22%) and Pantel (24.81%). In 2003, the minorityinterests included the minority’s share of the impairments on goodwill withinSNT (EUR 15 million) and within Xantic (EUR 12 million), the effect of theagreement with the Dutch tax authorities (EUR 23 million), the reversal of theimpairment charge on UMTS licenses of BASE (EUR 2 million loss) and therecognition of the tax losses carry forward regarding E-Plus (EUR 1 millionloss).

 

In 2002, KPN converted EUR 14 billion of its outstanding shareholderloans to KPN Mobile into equity.  As NTTDoCoMo decided not to exercise their anti-dilution rights, this resulted in adilution of NTT DoCoMo from 15% to 2.16%, and a loss for us of EUR 104 millionrelating to NTT DoCoMo’s minority interest in KPN Mobile.

 

As the loss of KPN Mobile in 2001 exceeded the shareholders’ equitybefore appropriation of the result of KPN Mobile, in 2001 only EUR 1,555million of KPN Mobile’s results could be attributed to NTT DoCoMo.

 

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**[12]Earnings per share**

 

The following table shows theaverage number of subscribed ordinary shares and calculates the weightedaverage number of subscribed ordinary shares/weighted average number ofsubscribed ordinary shares taking into account the dilution effect.

 
| **Number of shares**                                                                              |   | **2003**          |       | **2002**          |       | **2001**          |       |
|---------------------------------------------------------------------------------------------------|--------|-------------------|------------|-------------------|------------|-------------------|------------|
|                                                                                              |   |              |       |              |       |              |       |
| Weighted average number of subscribed  ordinary shares issued                                     |   | 2,490,996,877     |       | 2,445,242,811     |       | 1,277,205,468     |       |
| Treasury stock                                                                                    |   | -22,318,451       |       | -21,321,745       |       | -2,710,296        |       |
| **Weighted  average number of subscribed ordinary shares outstanding**                            |   | **2,468,678,426** | ** ** | **2,423,921,066** | ** ** | **1,274,495,172** | ** ** |
| Dilution effects:                                                                                 |   |              |       |              |       |              |       |
| Options issued for option plans                                                                   |   | 3,116,877         |       | 442,607           |       | 3,609,054         |       |
| Exchange right                                                                                    |   | —            |       | 111,158,230       |       | 104,983,370       |       |
| Bonus shares                                                                                      |   | —            |       | —            |       | 2,149,071         |       |
| Convertible bonds                                                                                 |   | 67,187,110        |       | 74,478,649        |       | 70,028,011        |       |
| Adjustment due to loss after taxes                                                                |   | —            |       | -186,079,486      |       | -180,769,506      |       |
| **Weighted average number of subscribed ordinary shares outstanding  including dilution effects** |   | **2,538,982,413** | ** ** | **2,423,921,066** | ** ** | **1,274,495,172** | ** ** |

 

Due to our net loss for 2002 and 2001, the number of weighted averageshares outstanding used to calculate net earnings per ordinary share on a fullydiluted basis is identical to that used in the basic per share calculation****as inclusion of potential common shares wouldbe anti-dilutive**.**

 

The following table contains thebasis for the earnings per share calculations:

 
| **Amounts in millions of euro**                           |   | **2003**  |       | **2002**   |       | **2001**   |       |
|-----------------------------------------------------------|--------|-----------|------------|------------|------------|------------|------------|
|                                                      |   |      |       |       |       |       |       |
| **Profit or loss after taxes**                            |   | **2,731** | ** ** | **-9,542** | ** ** | **-7,495** | ** ** |
| Adjustment: net interest expenses, convertible bond       |   | 31        |       | N/A        |       | N/A        |       |
| **Profit or loss after taxes including dilution effects** |   | **2,762** | ** ** | **-9,542** | ** ** | **-7,495** | ** ** |

 

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## **Notes tothe Consolidated Balance Sheet**

##  

**Generalnote**

 

For the segment information, please refer to the section titled‘Segment Reporting’.

 

**FIXEDASSETS**

 

**[13] Intangible fixed assets**

 

**STATEMENTOF CHANGES IN INTANGIBLE FIXED ASSETS**

 
| **Amounts in millions of euro**      |   | **Licenses** |       | **Goodwill** |       | **Total** |       |
|--------------------------------------|--------|--------------|------------|--------------|------------|-----------|------------|
|                                 |   |         |       |         |       |      |       |
| Amortization rate in %               |   | 2-10         |       | 5-20         |       |      |       |
|                                 |   |         |       |         |       |      |       |
| Historical cost                      |   | 10,025       |       | 21,954       |       | 31,979    |       |
| Accumulated amortization/impairments |   | -5,606       |       | -17,470      |       | -23,076   |       |
|                                 |   |         |       |         |       |      |       |
| **Balance at December 31, 2002**     |   | **4,419**    | ** ** | **4,484**    | ** ** | **8,903** | ** ** |
|                                 |   |         |       |         |       |      |       |
| ***Changes  in 2003***               |   |         |       |         |       |      |       |
| Investments                          |   | —       |       | 6            |       | 6         |       |
| Disposals                            |   | -3           |       | -1           |       | -4        |       |
| Changes in consolidations            |   | 1            |       | -2           |       | -1        |       |
| Amortization                         |   | -41          |       | -273         |       | -314      |       |
| Impairments                          |   | -15          |       | -84          |       | -99       |       |
| Reversal of impairments              |   | 103          |       | —       |       | 103       |       |
| Exchange rate differences            |   | -7           |       | -4           |       | -11       |       |
| **Total changes**                    |   | **38**       | ** ** | **-358**     | ** ** | **-320**  | ** ** |
|                                 |   |         |       |         |       |      |       |
| Historical cost                      |   | 9,981        |       | 21,787       |       | 31,768    |       |
| Accumulated amortization/impairments |   | -5,524       |       | -17,661      |       | -23,185   |       |
| **Balance at December 31, 2003**     |   | **4,457**    | ** ** | **4,126**    | ** ** | **8,583** | ** ** |

 

**LICENSES**

##### ** **

On December 31, 2003, our licenses mainly related to mobile frequenciesin Germany for EUR 3,410 million (2002: EUR 3,434 million), the Netherlands forEUR 805 million (2002: EUR 815 million) and Belgium for EUR 209 million (2002:EUR 111 million).

The total book value of our UMTS licenses amounted to EUR 3,220 millionin Germany (2002: EUR 3,220 million), EUR 711 million in the Netherlands (2002:EUR 711 million) and EUR 73 million in Belgium (2002: EUR 73 million).

 

In 2003, we have reversed EUR 103 million of impairment charges of theGSM license as a result of positive business developments within BASE. As noservices are currently offered under the UMTS licenses in Germany, theNetherlands and Belgium, we have not yet started to amortize these licenses.Amortization will be calculated according

 

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to the straight-line method and is recognized as from the date thatservices are actually being offered under the license. The terms of theselicenses are used as amortization periods. The German UMTS license expires onMarch 31, 2020, while the Dutch license expires on December 31, 2016. TheBelgian license expires on March 15, 2021.

Currently we anticipate starting rendering services under the UMTSlicenses in Germany and the Netherlands in 2004.

 

When performing an impairment test on the carrying value of licenses,we estimate their recoverable amount, which is defined as the higher of anasset’s net selling price and its value in use. The methodology utilized fordetermining the value in use of the UMTS licenses was a variation of the IncomeApproach, the “Jefferson Pilot method”.

 

The Income Approach applies the discounted cash flow (‘DCF’) valuation.This involves the use of projections of revenues and expenses and other sourcesand uses of cash. Factors which form the basis for expected future financialperformance include: historical growth, business plans for the asset,anticipated needs for working and fixed capital and historical and expectedlevels of operating profitability. In addition, the asset’s ability to generatecash flows beyond the forecast horizon is captured in the terminal value. Thesefuture cash flows and the terminal value are then discounted to the present ata rate of return that is commensurate with the asset’s inherent risk.

 

Within the Income Approach the “Jefferson Pilot method” attempts toisolate the income that is properly attributable to the license (i.e., apartfrom tangible and other identified intangible assets, and goodwill). In orderto leave out goodwill elements, the “Jefferson Pilot method” assumes that theentity would hypothetically obtain a license and build a new operation withsimilar attributes from scratch (“greenfield”).

 

Our mobile operators are building their UMTS service capability on thefoundation of their existing DCS networks, and would operate both at the sametime for the foreseeable future. That is, the new UMTS license and network willbe incremental to, not replacing, the existing DCS license and network.  As a result, the UMTS build-up model issuperimposed on an existing DCS platform going business (rather than treated asa true “greenfield”).  Therefore, withinthe “Jefferson Pilot method”, the cash flow projections for the entirereporting units are separated into the respective DCS and UMTS businesses.

 

For determining the net selling price, we generally use marketinformation and may use other methods if they appear to be appropriate giventhe specific facts and circumstances.

 

For a discussion of VAT claimed by KPN on UMTS licenses in theNetherlands (and our involvement regarding the same VAT issue in othercountries), please refer to the section titled ‘Contingent Assets’.

 

**GOODWILL**

##### ** **

On December 31, 2003, our goodwill amounted to EUR 4,026 million forE-Plus (2002: EUR 4,270 million), EUR 28 million for BASE (2002: EUR 30million) and EUR 72 million for other activities (2002: EUR 184 million).

 

Regular amortization of goodwill on E-Plus and BASE is calculatedaccording to the straight-line method based on the estimated useful life of 20years.  The amotization period is inline with the terms of the UMTS licenses.

 

When determining the value of goodwill for impairment purposes, wegenerally utilize the Income Approach as described under licenses.

 

Consideration is also given to the facts and circumstances of thesituation. For example, when a buyer would be willing to pay a strategicpremium to the seller because of the synergistic benefits achieved through theassimilation of the acquired reporting unit within the buyer’s portfolio. Uponcompletion of the DCF analysis, we have reviewed market data and information(including multiples) to check the reasonableness of the outcome.

 

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**[14]Property, plant and equipment**

 

**STATEMENTOF CHANGES IN PROPERTY, PLANT AND EQUIPMENT**

 
| **Amounts in millions of euro**          |   | **Land and  buildings** |       | **Plant and  equipment** |       | **Other  tangible  fixed  assets** |       | **Fixed  assets  under construction** |       | **Total** |       |
|------------------------------------------|--------|-------------------------|------------|--------------------------|------------|------------------------------------|------------|---------------------------------------|------------|-----------|------------|
|                                     |   |                    |       |                     |       |                               |       |                                  |       |      |       |
| **Depreciation rate in %**               |   | **0-10**                | ** ** | **5-33**                 | ** ** | **10-33**                          | ** ** |                                  | ** ** |      | ** ** |
| Historical cost                          |   | 1,796                   |       | 15,719                   |       | 1,421                              |       | 407                                   |       | 19,343    |       |
| Accumulated depreciation/impairments     |   | -812                    |       | -7,820                   |       | -850                               |       | —                                |       | -9,482    |       |
|                                     |   |                    | ** ** |                     | ** ** |                               | ** ** |                                  | ** ** |      | ** ** |
| **Balance at December 31, 2002**         |   | **984**                 | ** ** | **7,899**                | ** ** | **571**                            | ** ** | **407**                               | ** ** | **9,861** | ** ** |
| Change of  accounting principles         |   | 13                      |       | 53                       |       | —                             |       | —                                |       | 66        |       |
| **Adjusted Balance at  January 1, 2003** |   | **997**                 | ** ** | **7,952**                | ** ** | **571**                            | ** ** | **407**                               | ** ** | **9,927** | ** ** |
|                                     |   |                    |       |                     |       |                               |       |                                  |       |      |       |
| ***Changes  in 2003***                   |   |                    |       |                     |       |                               |       |                                  |       |      |       |
| Additions/transfers                      |   | 61                      |       | 945                      |       | 170                                |       | 323                                   |       | 1,499     |       |
| Disposals                                |   | -33                     |       | -14                      |       | -4                                 |       | —                                |       | -51       |       |
| Changes in consolidations                |   | —                  |       | -7                       |       | -6                                 |       | -4                                    |       | -17       |       |
| Depreciation                             |   | -103                    |       | -1,708                   |       | -290                               |       | —                                |       | -2,101    |       |
| Impairments                              |   | -38                     |       | -79                      |       | -7                                 |       | —                                |       | -124      |       |
| Exchange rate differences                |   | -3                      |       | -7                       |       | -3                                 |       | -1                                    |       | -14       |       |
| **Total changes**                        |   | **-116**                | ** ** | **-870**                 | ** ** | **-140**                           | ** ** | **318**                               | ** ** | **-808**  | ** ** |
|                                     |   |                    |       |                     |       |                               |       |                                  |       |      |       |
| Historical cost                          |   | 1,774                   |       | 15,729                   |       | 1,240                              |       | 725                                   |       | 19,468    |       |
| Accumulated depreciation/impairments     |   | -893                    |       | -8,647                   |       | -809                               |       | —                                |       | -10,349   |       |
| **Balance at December 31, 2003**         |   | **881**                 | ** ** | **7,082**                | ** ** | **431**                            | ** ** | **725**                               | ** ** | **9,119** | ** ** |

 

Property, plant and equipment primarily concerns assets located in theNetherlands

(2003: approx. 73%; 2002: approx. 77%) and Germany (2003: approx. 22%;2002: approx. 18%).

 

The change in accounting principle as of January 1, 2003 for assetretirement obligations has resulted in an addition to Tangible fixed assets ofEUR 66 million.

 

Included in the additions/transfers are non-cash items amounting to EUR78 million (2002: nil). These non-cash additions relate to capitalized assetretirement obligations of EUR 30 million and dismantling obligations for assetsacquired from MobilCom. No cash consideration was paid, but we took overMobilcom’s lease and dismantling commitments. As not all sites will beintegrated in our network, we estimated the amount of dismantling expenses forthese sites at EUR 48 million, which amount has been capitalized as part of thecosts of the sites that will be integrated.

 

The impairments during 2003 amounted to EUR 124 million (2002: EUR 310million). For further details we refer to note [4].

 

The book value of the property, plant and equipment of which we are thebeneficial owner under financial lease programs totaled EUR 68 million (2002:EUR 105 million).  For details on thefinancial leases, we refer to the section Financing.

 

We have entered into a qualified technical equipment lease arrangement,by means of which certain network equipment with a total book value at December31, 2003 of EUR 33 million (2002: EUR 49 million) is leased to a US Owner Trustand subsequently leased back. This lease arrangement ends in 2017.

 

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The value of property, plant and equipment under current valueaccounting is not significantly different than the value of these assets basedon historical cost accounting.

 

**[15]Financial fixed assets**

 

**STATEMENTOF CHANGES IN FINANCIAL FIXED ASSETS**

 
| **Amounts in millions of  euro**        |   | **Participating  interests** |       | **Loans to  participating  interests** |       | **Other  loans** |       | **Prepayments  and accrued  income** |       | **Total** |       |
|-----------------------------------------|--------|------------------------------|------------|----------------------------------------|------------|------------------|------------|--------------------------------------|------------|-----------|------------|
| **Balance as of December 31, 2002**     |   | **901**                      | ** ** | **—**                             | ** ** | **103**          | ** ** | **159**                              | ** ** | **1,163** | ** ** |
|                                    |   |                         |       |                                   |       |             |       |                                 |       |      |       |
| ***Changes  in 2003***                  |   |                         | ** ** |                                   | ** ** |             | ** ** |                                 | ** ** |      | ** ** |
| Acquisitions/increases                  |   | 1                            |       | 11                                     |       | 95               |       | —                               |       | 107       |       |
| Disposals                               |   | -780                         |       | —                                 |       | —           |       | —                               |       | -780      |       |
| Changes in consolidations               |   | 5                            |       | 8                                      |       | -17              |       | —                               |       | -4        |       |
| Withdrawals/redemptions                 |   | —                       |       | —                                 |       | -63              |       | -17                                  |       | -80       |       |
| Income (including reversed impairments) |   | 161                          |       | —                                 |       | —           |       | —                               |       | 161       |       |
| Dividend                                |   | -81                          |       | —                                 |       | —           |       | —                               |       | -81       |       |
| Other changes                           |   | 16                           |       | —                                 |       | —           |       | 1,847                                |       | 1,863     |       |
| Exchange rate differences               |   | -29                          |       | —                                 |       | 1                |       | -3                                   |       | -31       |       |
| **Total changes**                       |   | **-707**                     | ** ** | **19**                                 | ** ** | **16**           | ** ** | **1,827**                            | ** ** | **1,155** | ** ** |
|                                    |   |                         |       |                                   |       |             |       |                                 |       |      |       |
| **Balance as of December 31, 2003**     |   | **194**                      | ** ** | **19**                                 | ** ** | **119**          | ** ** | **1,986**                            | ** ** | **2,318** | ** ** |

 

**PARTICIPATINGINTERESTS**

 

On December 31, 2003, our participating interests mainly relate to ourshare in Infonet Services Inc. and our participations in Eutelsat and Intelsat.

 

In 2003, we have sold among others our interests in Hutchison 3G UK, CeskýTelecom, UMC and our indirect interest in Inmarsat.

 

In September 2000, KPN Mobile acquired a 15% participating interest inHutchison 3G UK Holdings Limited (“Hutchison 3G UK”), a UMTS license holder inthe UK, for an amount of approximately EUR 1.5 billion. KPN Mobile had certainrights to management representation, as well as certain obligations to provideadditional capital upon request. In 2002, Hutchison 3G UK was no longerconsidered a strategic participation. As a result, Hutchison 3G UK was valuedagainst net realizable value estimated at nil.

 

In the spring of 2003, KPN Mobile disputed the validity of a fundingcall under the shareholders agreement between KPN Mobile and Hutchison WhampoaLimited (‘HWL’). The dispute was settled in November 2003. KPN Mobile and HWLagreed that HWL acquires, or procures the acquisition of, KPN Mobile’s 15%shareholding in Hutchison 3G UK for an aggregate purchase price of GBP 90million (EUR 128 million).  Net ofcosts, the proceeds total EUR 119 million. For this amount, we reversed priorimpairments.  GBP 60 million (EUR 87million) was received in cash on November 7, 2003; the remaining balance of EUR41 million, recognized as a loan, will be received in three equal installmentsof GBP 10 million each payable on the last day of 2005, 2006 and 2007 (the ‘DueDates’) or earlier upon HWL’s request.

 

If HWL fails to pay or procures the payment of an installment of thepurchase price on, or within 21 business days, of any of the Due Dates, weshall have the right to put shares to HWL (or its 

 

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nominee(s)) for the then outstanding balance of the purchase price plusaccrued interest thereon up to the date of payment. The put option isexercisable during the period from July 1 to December 31 in the year after therelevant Due Date. Completion of the transfer of the shares will take place onthe final payment date. HWL and KPN Mobile also entered into other documentswhereby, (i) the shares and related documents are placed under an escrowarrangement with an independent escrow agent who will hold the same to theorder of HWL pending release in accordance with the terms of the escrowagreement; and (ii) HWL will take security, in accordance with the terms of ashare mortgage, over (but not the voting rights attached to, or right todividends arising from holding of) the shares pending completion of thetransfer of the shares. KPN Mobile agreed not to exercise any voting rights onthe shares during the period that they are held in escrow.

 

The sale of our stake in Ceský Telecom has resulted in a reversal of animpairment of EUR 46 million. In 2003, we have received dividends from CeskýTelecom for an amount of EUR 81 million.

 

**OTHERLOANS**

##### ** **

On December 31, 2003, our other loans include receivables on HWL (EUR41 million), as mentioned under Participating Interests, and MobilCom (EUR 53million).

 

E-Plus reached an agreement with MobilCom onthe termination of their national 2.5G roaming agreement for an amount of EUR210 million. An amount of EUR 20 million was paid in December 2002,followed by a payment of EUR 110 million in February 2003. The remainder of EUR80 million will be received in cash in installments through 2006. Of this EUR80 million an amount of EUR 53 million has been recognized under financialfixed assets as a loan. The short-term part of EUR 27 million is part of thecurrent assets. France Télećomguarantees this loan.

 

We provided a long-term loan to *Stichting Werknemersaandelen KPN/TPG,*which held shares in KPN*.*In 2003, the Articles of Association of *Stichting Werknemersaandelen KPN/TPG* wereamended. Further to this amendment we regained management control, obliging****us to consolidate *Stichting Werknemersaandelen KPN/TPG*.This consolidation has resulted in a repurchase of our own shares for EUR 17million, in exchange for giving up the remainder of the outstanding loan fromus to *StichtingWerknemersaandelen KPN/TPG*foran equal amount. For further details we refer to the Notes to thestatement of changes in shareholders’ equity.

 

In 2003, our loans to UMC and Vision Czech Republic were fullyredeemed.

 

**PREPAYMENTSAND ACCRUED INCOME**

##### ** **

Prepayments and accrued income includes the long-term part of thedeferred tax assets for an amount of EUR 1,849 million (2002: EUR 68 million).See also Note [9], ‘Tax on profit or loss on normal operations’.

 

We rehedged the fixed euro rate cross-currency swap on the USD 1billion Global Bond 2000 – 2030, which resulted in a total cash outflow ofapproximately EUR 313 million, of which EUR 72 million represents differencesin future interest expenses. The amount of EUR 72 million has been capitalizedand will be amortized to interest expense over the remaining lifetime of theGlobal Bond.

 

The current value of our financial fixed assets does not materiallydeviate from the book value.

 

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**CURRENTASSETS**

 

**[16]Inventory**

 
| **Amounts in millions of euro**                    |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|----------------------------------------------------|--------|--------------------|------------|--------------------|------------|
| Work in progress                                   |   | 20                 |       | 77                 |       |
| Resources, parts, tools and measuring  instruments |   | 62                 |       | 84                 |       |
| Finished goods                                     |   | 82                 |       | 87                 |       |
| Other inventory                                    |   | 30                 |       | 20                 |       |
| Total inventory, gross                             |   | **194**            | ** ** | **268**            | ** ** |
| Allowance for obsolescence                         |   | -30                |       | -38                |       |
| **Total inventory, net**                           |   | **164**            | ** ** | **230**            | ** ** |

 

**[17]Receivables**

 
| **Amounts in millions of euro** |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|---------------------------------|--------|--------------------|------------|--------------------|------------|
|                            |   |               |       |               |       |
| Trade receivables               |   | 1,268              |       | 1,445              |       |
| Deferred tax assets             |   | 58                 |       | 43                 |       |
| Corporate taxes                 |   | 61                 |       | 68                 |       |
| Other receivables               |   | 65                 |       | 45                 |       |
|                            |   |               |       |               |       |
| **Total**                       |   | **1,452**          | ** ** | **1,601**          | ** ** |

 

Trade receivables are stated net of an allowance of EUR 264 million forbad debts (2002: EUR 322 million).

 

**[18]Cash and cash equivalents**

#### ** **

Cash and cash equivalents relate to cash at bank and in hand, as wellas temporarily employed cash equivalents with an original term of less thanthree months.

 
| **Amounts in millions of euro**                                   |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|-------------------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                              |   |               |       |               |       |
| Cash equivalents with an original term of  less than three months |   | 1,562              |       | 2,429              |       |
| Cash at bank                                                      |   | 276                |       | 226                |       |
| Cash in hand                                                      |   | 1                  |       | 2                  |       |
|                                                              |   |               |       |               |       |
| **Total**                                                         |   | **1,839**          | ** ** | **2,657**          | ** ** |

 

Cash and cash equivalents at December 31,2003 are denominated in euro (97%), US dollar (2%) and other currencies (1%).

 

At December 31, 2003, our total outstandingbank guarantees amounted to EUR 116 million (2002: EUR 190 million).

 

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**GROUPEQUITY**

 

**[19] Shareholders’ equity**

 

For a breakdown of shareholders’ equity, please refer to the Statementof Changes in Shareholders’ Equity and the separate section titled ‘Movementsin Shareholders’ equity’.

 

**[20]Minority interests**

 
| **Amounts in millions of euro** |   | **2003** |       | **2002** |       |
|---------------------------------|--------|----------|------------|----------|------------|
|                            |   |     | ** ** |     | ** ** |
| **Balance as of year-end 2002** |   | **272**  | ** ** | **184**  | ** ** |
|                            |   |     |       |     |       |
| Result for the year             |   | -67      |       | 100      |       |
| Exchange rate differences       |   | -9       |       | -12      |       |
| **Balance as of year-end 2003** |   | **196**  | ** ** | **272**  | ** ** |

 

This item pertains in particular to minority shareholdings in KPNMobile, Xantic, SNT and PanTel.

 

NTT DoCoMo’s share in KPN Mobile diluted from 15% to 2.16% as aconsequence of the conversion in December 2002 of EUR 14 billion shareholderloans from KPN to KPN Mobile. This conversion resulted in a loss for us of EUR104 million in 2002.

 

**PROVISIONS**

 

**[21] Pension provisions**

 
| **Amounts in millions of euro**     |   | **Early  retirement** |       | **Restructuring  and redundancy** |       | **Other** |       | **Total** |       |
|-------------------------------------|--------|-----------------------|------------|-----------------------------------|------------|-----------|------------|-----------|------------|
| **Balance as of December 31, 2000** |   | **351**               | ** ** | **75**                            | ** ** | **9**     | ** ** | **435**   | ** ** |
| Withdrawals                         |   | -52                   |       | -21                               |       | -5        |       | -78       |       |
| Additions                           |   | 45                    |       | 491                               |       | 3         |       | 539       |       |
| Interest                            |   | 14                    |       | 3                                 |       | 1         |       | 18        |       |
| Releases                            |   | -50                   |       | -1                                |       | —    |       | -51       |       |
| Changes in consolidation            |   | -4                    |       | —                            |       | —    |       | -4        |       |
| **Balance as of December 31, 2001** |   | **304**               | ** ** | **547**                           | ** ** | **8**     | ** ** | **859**   | ** ** |
| Withdrawals                         |   | -59                   |       | -73                               |       | -2        |       | -134      |       |
| Additions                           |   | 80                    |       | —                            |       | 5         |       | 85        |       |
| Interest                            |   | 12                    |       | 22                                |       | 1         |       | 35        |       |
| Releases                            |   | —                |       | -35                               |       | —    |       | -35       |       |
| Changes in consolidation            |   | 1                     |       | —                            |       | —    |       | 1         |       |
| **Balance as of December 31, 2002** |   | **338**               | ** ** | **461**                           | ** ** | **12**    | ** ** | **811**   | ** ** |
| Withdrawals                         |   | -73                   |       | -88                               |       | -1        |       | -162      |       |
| Additions                           |   | 83                    |       | 59                                |       | 3         |       | 145       |       |
| Interest                            |   | 14                    |       | 21                                |       | —    |       | 35        |       |
| Releases                            |   | —                |       | -14                               |       | —    |       | -14       |       |
| Changes in consolidation            |   | -1                    |       | —                            |       | —    |       | -1        |       |
| **Balance as of December 31, 2003** |   | **361**               | ** ** | **439**                           | ** ** | **14**    | ** ** | **814**   | ** ** |

 

Pension provisions are based on actuarial principles and stated at netpresent value, using an average discount rate of 4.5% (2002: 4.5%).  Of these provisions, EUR 101 million has aterm of less than one year, of which EUR 26 million relates to the provisionfor early 

 

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retirement, EUR 74 million to the restructuring and voluntarydepartures and EUR 1 million to other provisions. Of these provisions, anamount of EUR 413 million has a term longer than one year but less than 5years. The remaining portion has a term longer than 5 years.

 

The provision for early retirement relates to commitments by virtue ofpre-pension payments and commitments by virtue of future payments to employeeswho wish to take early retirement.

 

Of the provision for restructuring and redundancy, EUR 417 millionrelates to the costs for employees who have voluntarily left or will leave theCompany in 2004 under the Social Plan that was agreed with the trade unions andWorks Council in 2001, which provides for the reduction of our workforce in theNetherlands by at most 5,280 employees. Approximately 2,300 employees of age 55or older were offered an early retirement scheme under conditions similar tothe existing early retirement plan. The release from the provision relates toemployees who found a new job within KPN or elsewhere. The remainder of theprovision for restructuring and redundancy relates to the entitlement toredundancy pay of employees who worked as civil servants for Netherlands Postaland Telecommunications Services (PTT) before January 1, 1989 and becameredundant before January 1, 1996.

 

**[22]Deferred tax liabilities**

 

For information on deferred tax liabilities we refer to note [9]Taxation.

 

**[23]Other provisions**

 
| **Amounts in millions of euro**     |   | **Restructuring  and  redundancy** |       | **Other** |       | **Total** |       |
|-------------------------------------|--------|------------------------------------|------------|-----------|------------|-----------|------------|
| **Balance as of December 31, 2000** |   | **62**                             | ** ** | **63**    | ** ** | **125**   |       |
| Withdrawals                         |   | -61                                |       | -1        |       | -62       |       |
| Additions                           |   | 264                                |       | 7         |       | 271       |       |
| Releases                            |   | -15                                |       | -31       |       | -46       |       |
| **Balance as of December 31, 2001** |   | **250**                            | ** ** | **38**    | ** ** | **288**   | ** ** |
| Withdrawals                         |   | -115                               |       | -11       |       | -126      |       |
| Additions                           |   | 130                                |       | 76        |       | 206       |       |
| Release                             |   | -18                                |       | -30       |       | -48       |       |
| Changes in consolidations           |   | 1                                  |       | 16        |       | 17        |       |
| **Balance as of December 31, 2002** |   | **248**                            | ** ** | **89**    | ** ** | **337**   | ** ** |
| Change of  accounting principles    |   | —                             |       | 72        |       | 72        |       |
| **Balance as of January 1, 2003**   |   | **248**                            | ** ** | **161**   | ** ** | **409**   | ** ** |
| Withdrawals                         |   | -104                               |       | -13       |       | -117      |       |
| Additions                           |   | 74                                 |       | 127       |       | 201       |       |
| Interest                            |   | —                             |       | 7         |       | 7         |       |
| Release                             |   | -59                                |       | -23       |       | -82       |       |
| Exchange rate differences           |   | -2                                 |       | -2        |       | -4        |       |
| **Balance as of December 31, 2003** |   | **157**                            | ** ** | **257**   | ** ** | **414**   | ** ** |

###### *** ***

###### ***Restructuring and redundancyprovision***

 

In 2000, the restructuring plan Vision thatfocused on the improvement of our infrastructure, business processes and thequality of our services was launched. The main objective of this plan was toreduce cost where possible and to enhance the efficiency of operations. One ofthe key elements of Vision was the reduction of the workforce by approximately8,000 employees.

 

The restructuring and redundancy provision at December 31, 2001 relatesto the redundancy costs associated with the Social Plan that was concluded in2001 with the Works Council and trade unions, which provides for the reductionof our workforce in the Netherlands by at most 5,280 employees. The planresulted in approximately 2,300 redundancies under a voluntary early retirementscheme, for which a provision was set up that is included under pensionprovisions as a provision for restructuring and redundancy, and 2,900compulsory layoffs.

 

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At the end of 2001, a restructuring provision of EUR 159 million wasincluded for the costs related to the above-mentioned compulsory layoffs, suchas severance payments, incentives and supplements to unemployment benefits, andan additional EUR 76 million for other costs associated with the restructuring,such as legal fees, termination fees and penalties for rentals and contractswith suppliers.

 

During 2002, approximately 1,000 redundant employees found a new jobwithin KPN due to a higher than anticipated natural attrition rate. This led tothe release of EUR 18 million from the provision for restructuring andredundancies.

 

In the last quarter of 2002, approximately 450 redundancies wereidentified at our KPN EnterCom unit under the 2001 Social Plan. During 2003,189 have left the Company, while 273 employees were appointed elsewhere  within KPN. This resulted in a release ofthe provision at KPN EnterCom in 2003 of EUR 13 million.

 

We reached agreement with the Works Council on a voluntary personnelreduction plan in the fourth quarter of 2002. This new plan was applicable fora four-month period starting November 2002 in certain areas of KPN and providedfor financial incentives for employees that voluntarily would leave KPN. Duringthis period, no compulsory redundancies could be made in those areas covered bythe Social Plan that was concluded with the trade unions and works council in 2001.In line with this new plan and due to the ongoing restructuring of operations,a number of departments and positions were appointed that would becomeredundant in 2003. A number of 650 redundancies were appointed at the Fixeddivision. A substantial part of these redundancies were employed within theCompany, which led to a release of the provision of EUR 9 million.

 

As a result, we recognized a restructuring charge of EUR 77 million inDecember 2002 for the costs associated with the reductions under the 2001Social Plan and the voluntary reduction plan for the 1,100 employees involved,and a restructuring charge of EUR 53 million for the costs associated with thesignificant reduction in office space, such as termination fees and penaltiesfor rental contracts.

 

At the end of 2003, Xantic identified approximately 250 employees whichwill be made redundant the coming three years. Consequently, EUR 13 million wasrecognized as a restructuring provision. At SNT, 250 employees were maderedundant, of which 145 will be forced to leave in the first quarter of 2004.During 2003, the further reduction in office space as a result of therestructuring continued. Due to the deteriorated real estate market for officebuildings KPN was not able to find new renters for all vacant buildings. As aresult, a charge of EUR 47 million was recognized in 2003.

 

Of the totalprovision for restructuring and redundancy, approximately EUR 79 million has aterm of less than one year. It is anticipated that the remainder has a term ofless than 5 years.

 

***Other provisions***

 

Other provisions relate to various risks and commitments such as assetretirement obligations, guarantees, claims and litigation and dismantlingobligations for assets acquired from MobilCom. The asset retirement obligationsat December 31, 2003 amount to EUR 152 million, of which EUR 62 million has aterm of less than five years. The dismantling obligations for assets acquiredfrom MobilCom amount to EUR 48 million at December 31, 2003. Most otherprovisions have a term of less than five years.

 

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**LONG-TERM LIABILITIES**

 

**[24]Loans**

 
| **Amounts in millions of  euro**      |   | **Convertible  subordinated** |       | **Sub-  ordinated** |       | **Bonds** |       | **Zero  coupon** |       | **Other   (including  capital  lease  obligations)** |       | **Total**  |       |
|---------------------------------------|--------|-------------------------------|------------|---------------------|------------|-----------|------------|------------------|------------|------------------------------------------------------|------------|------------|------------|
|                                  |   |                          | ** ** |                | ** ** |      | ** ** |             | ** ** |                                                 | ** ** |       | ** ** |
| **Balance as of December 31, 2002**   |   | **1,500**                     | ** ** | **1,138**           | ** ** | **9,517** | ** ** | **3**            | ** ** | **490**                                              | ** ** | **12,648** | ** ** |
|                                  |   |                          |       |                |       |      |       |             |       |                                                 |       |       |       |
| Short-term portion of opening balance |   | —                        |       | 612                 |       | 1,042     |       | —           |       | 637                                                  |       | 2,291      |       |
| New loans                             |   | —                        |       | —              |       | —    |       | —           |       | 45                                                   |       | 45         |       |
| Redemptions                           |   | -373                          |       | -1,750              |       | -1,774    |       | —           |       | -683                                                 |       | -4,580     |       |
| Exchange rate differences             |   | —                        |       | —              |       | —    |       | —           |       | -7                                                   |       | -7         |       |
| Other                                 |   | —                        |       | —              |       | -241      |       | 1                |       | —                                               |       | -240       |       |
| Short-term portion of closing balance |   | —                        |       | —              |       | -875      |       | —           |       | -75                                                  |       | -950       |       |
|                                  |   |                          | ** ** |                | ** ** |      | ** ** |             | ** ** |                                                 | ** ** |       | ** ** |
| **Balance as of December 31, 2003**   |   | **1,127**                     | ** ** | **—**          | ** ** | **7,669** | ** ** | **4**            | ** ** | **407**                                              | ** ** | **9,207**  | ** ** |

 

For further details on our financing position, please refer to thesection titled “Financing”.

 

**CURRENTLIABILITIES**

 

**[25] Other debts**

 
| **Amounts in millions of euro**             |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|---------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                        |   |               |       |               |       |
| Short-term portion of long-term liabilities |   | 950                |       | 2,291              |       |
| Bank overdraft                              |   | 2                  |       | 69                 |       |
| Accounts payable, trade                     |   | 970                |       | 990                |       |
| Taxes and social security contributions     |   | 161                |       | 285                |       |
| Other current liabilities                   |   | 24                 |       | 134                |       |
| **Total**                                   |   | **2,107**          | ** ** | **3,769**          | ** ** |

 

The short-term portion of long-term liabilities contains, among otherliabilities, the Eurobonds 1999-2004 for an amount of EUR 875 million.

 

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**[26]Accruals and deferred income**

 

Accruals and deferred income concerns amounts received in advance forrevenues that will be recognized in future years, outstanding invoices andother amounts payable.

 

Accruals and deferred income also contains an amount of EUR 211 millionin interest payable (2002: EUR 307 million).

 

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**Notesto the Consolidated Cash Flow Statement**

 

**General principles**

 

The Cash Flow Statement was prepared according to the indirect method.Cash flows denominated in currencies other than the euro were translated at averageexchange rates. Cash flows****relatingto interest and taxes on profits are included in the cash flow from operatingactivities. The cost of newly acquired group companies and participatinginterests, insofar as paid for in cash, is included in the cash flow frominvesting activities. Cash flows resulting from group companies acquired ordisposed of are disclosed separately.

 

**[27]Net cash flow provided by/used in operating activities**

 

In 2003, the cash flow provided by operating activities increased byEUR 112 million to EUR 4,087 million.

 

The cash flow from operating activities before changes in workingcapital improved by EUR 1,542 million compared to 2002, mainly as a result of aEUR 8,689 million increase in operating result offset by a EUR 7,717 millionreduction of depreciation, amortization and impairment charges. Included in theimproved operating result are the proceeds from the termination agreement withMobilCom of EUR 110 million.

 

Changes in working capital in 2003 had a negative contribution on cashflow from operating activities of EUR 333 million. In 2002, our strong focus onworking capital reduction resulted in a positive cash flow of EUR 1,097million.

 

In 2003, the net interest paid amounted to EUR 976 million including apayment of EUR 72 million representing differences in future interest expensesresulting from our rehedge of our cross-currency swaps. Net corporate taxesreceived in 2003 amounted to EUR 178 million. Other items included in net cashflow provided by operating activities in 2003 were dividends received fromCeský Telecom (EUR 81 million), capital tax paid related to the refinancing ofKPN Mobile (EUR 77 million) and the payment in 2003 of the pension shortfall ascalculated in December 2002 (EUR 52 million).

 

The agreement with the Dutch tax authorities has not resulted in a cashflow, however has had an effect within cash flow provided by/used in operatingactivities. The increase in deferred tax assets amounted to EUR 2,105 million,the increase in the provision for deferred tax liabilities amounted to EUR1,025 million, together equaling the net effect of EUR 1,080 million on netresult.

The agreement also led to a offsetting of EUR 592 million of currenttax payables with deferred tax assets mentioned above, because Koninklijke KPNcan use the tax-losses carried forward of EUR 6 billion to offset the currenttax payable. This led to a negative change in working capital.

 

In 2002, cash flow from operating activities increased by EUR 1,410million to EUR 3,975 million. The increase resulted from an improved cash flowof EUR 812 million from operating activities before changes in working capitaland EUR 598 million as a result of changes in working capital. The net interestpaid amounted to EUR 1,213 million and net corporate taxes received amounted toEUR 103 million.

 

Net cash flow from operations before changes in working capitalimproved by 39.3% to EUR 2,878 million in 2002. The increase in net cash flowfrom operations before changes in working capital reflects the improvedoperating results before depreciation, amortization and impairments. The lowerinterest expenses also led to an improved cash flow from operations beforechanges in working capital.

 

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The changes in working capital improved from EUR 499 million in 2001 toEUR 1,097 million in 2002. This improvement was mainly caused by lower accountsreceivables, tax refunds related to prior years and the effect of advancedbilling of subscription fees by Fixed Telephony. In 2001, the net interest paidamounted to EUR 1,176 million, whereas the net corporate taxes paid amounted toEUR 123 million.

 

**[28]Net cash flow provided by/used in investing activities**

 

The table below is a three-year summary of our investments andadditions and reconciliation to the cash flow used in investing activities:
| **Amount in millions of euro**                               |   | **2003**   |       | **2002**   |       | **2001**   |       |
|--------------------------------------------------------------|--------|------------|------------|------------|------------|------------|------------|
|                                                         |   |       |       |       |       |       |       |
| Additions  to intangible fixed assets                        |   | -6         |       | -1,270     |       | -809       |       |
| Additions  to property, plant and equipment                  |   | -1,499     |       | -1,137     |       | -2,949     |       |
| Additions  to financial fixed assets                         |   | -107       |       | -88        |       | -407       |       |
| **Total investments and additions**                          |   | **-1,612** | ** ** | **-2,495** | ** ** | **-4,165** | ** ** |
| Less:  non-cash items                                        |   | 172        |       | 1,358      |       | 103        |       |
| Less:  proceeds from sale of assets                          |   | 1,392      |       | 802        |       | 2,398      |       |
| **Total cash flow provided by/used in investing activities** |   | **-48**    | ** ** | **-335**   | ** ** | **-1,664** | ** ** |

###### *** ***

###### ***Additions to intangible fixed assets***

###### *** ***

In 2003, investments totaled to EUR 6 million. Additions in 2002related mainly to the (non-cash) goodwill of EUR 1,253 millionarising from the acquisition of the remaining 22.51% stake in E-Plus fromBellSouth in exchange for 234.7 million of our shares. In 2001,investments related primarily to the goodwill of EUR 508 million onthe acquisition of the remaining 50% in BASE as well as the acquisition of aUMTS license in Belgium for EUR 150 million.

 

###### ***Additions to property, plant andequipment***

###### *** ***

In 2003, the additions to tangible fixed assets amounted to EUR 1,499million (2002: EUR 1,137 million; 2001: EUR 2,949 million).This amount included non-cash items such as capitalized asset retirementobligations (EUR 30 million) and lease and dismantling obligations (EUR 48million) relating to acquired MobilCom assets.

 

###### ***Additions to financial fixed assets***

###### *** ***

The additions in 2003 amounted to EUR 107 million (2002: EUR 88 million;2001: EUR 407 million); included in the additions are amounts stillto be received from Hutchison Whampoa Ltd. (EUR 41 million) and MobilCom (EUR53 million). These additions have been adjusted for the cash flow used ininvesting activities.

 

###### ***Proceeds from sale of assets***

###### *** ***

In 2003, total proceeds from sales of assetsamounted to EUR 1,392 million; these included the proceeds of the sale of ourDirectory Services (EUR 500 million), our interests in Ceský Telecom (EUR 570million), Hutchison 3G UK (EUR 87 million), Inmarsat (EUR 70 million), UMC (EUR72 million, which includes the redemption of our loan) and Vision CzechRepublic (EUR 55 million) as well as the proceeds from the saleof various other assets including real estate.

 

In 2002, total proceeds from sales of assets amounted toEUR 802 million. These proceeds included EUR 603 million fromthe sale of Pannon GSM as well as the sale of various other assets, includingreal estate.

 

In 2001, total proceeds from sales of assets amounted to EUR 2,398 millionrelating to the disposal of non-core assets, including the sale of our interestin eircom/Eircell (EUR 1,204 million), Telkomsel(EUR 668 million), KPN Lease (EUR 161 million), fixedassets (EUR 100 million), Datacenter activities (EUR 163 million)and the sale of 10% of our shares in KPNQwest (EUR 102 million).

 

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**[29]Net cash flow provided by/used in financing activities**

 
| **Amounts in millions of euro**                             |   | **2003**   |       | **2002**   |       | **2001**  |       |
|-------------------------------------------------------------|--------|------------|------------|------------|------------|-----------|------------|
|                                                        |   |       |       |       |       |      |       |
| Net proceeds from shares issued by KPN                      |   | —     |       | —     |       | 4,843     |       |
| Shares purchased for option plans                           |   | -8         |       | —     |       | -98       |       |
| Eurobonds                                                   |   | -1,628     |       | -823       |       | 2,280     |       |
| Global bonds                                                |   | -387       |  1)   | -737       |       | —    |       |
| Project financing E-Plus facility 2001                      |   | —     |       | -1,881     |       | 1,458     |       |
| Project financing E-Plus                                    |   | —     |       | —     |       | -1,166    |       |
| Floating Rate Notes                                         |   | —     |       | -3,325     |       | -2,175    |       |
| Private Notes Japan                                         |   | —     |       | —     |       | -2,193    |       |
| European Investment Bank loan                               |   | —     |       | -227       |       | —    |       |
| (Subordinated) BellSouth loan                               |   | -1,638     |       | -999       |       | —    |       |
| Subordinated convertible bond                               |   | -373       |       | —     |       | —    |       |
| (Subordinated) State loans                                  |   | -258       |       | —     |       | —    |       |
| Other (net)                                                 |   | -561       |       | -337       |       | -2        |       |
| **Net cash flow  provided by/used in financing activities** |   | **-4,853** | ** ** | **-8,329** | ** ** | **2,947** | ** ** |

 

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1) including EUR 241 million related to the rehedge of cross currencyswaps

 

###### ***2003***

 

In 2003, total net cash flow used in financing activities amounted toEUR 4,853 million. During 2003, financing activities consisted mainly ofscheduled and early redemptions of debt.

 

In 2003, we repurchased 1.5 million of our outstanding shares for an amount of EUR 8 millionto cover part of our obligations under our share option plans.

 

In accordance with our regular redemption schedule we redeemed EUR1,042 million of the Eurobondmaturing in 2003. We also redeemed early EUR 586 million of theEurobonds maturing in 2006.

 

Additionally, we redeemed early EUR 146 million of the Global****Bond(Euro portion) maturing in 2005. In July and September of 2003, we rehedged theswap related to the USD 1 billion Global Bond 2000 – 2030 in order to continueto protect us from currency rate risk on this bond. Because of the negativemarket value of the original swap, the rehedge resulted in a cash outflow ofEUR 313 million. The lower USD rate in the rehedge resulted in a decrease ofthe euro equivalent of the Global Bond 2000 – 2030, resulting in a gross debtreduction of EUR 241 million. The remaining cash outflow of EUR 72 millionrepresents differences in future interest expenses and is recognized as part ofthe net cashflow provided by/used in operating activities.

 

In April 2003, we redeemed early the outstanding amount of EUR1,638 million of our Subordinated LoanFacility with BellSouth and this facility was cancelled by us. Theoriginal redemption schedule consisted of EUR 500 million payable in October2003 and EUR 1,138 million in March 2004.

 

Furthermore, we redeemed early EUR 373 million of the Convertible Bond maturing in 2005.

 

In accordance with our regular redemption profile we also redeemedapproximately EUR 258 million of our loans provided by the Dutch State in 1989.

 

Finally, the category other in2003 included the redemption of EUR 386 million of our Syndicated Loan(scheduled redemption) and of the full amount of EUR 50 million drawn under thesecuritization program

 

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(early redemption). In 2003, new long-term financing was limited to EUR45 million.

 

###### ***2002***

 

In 2002 we redeemed early EUR 448 million of the Eurobond maturing in2003 and EUR 375 million of the Eurobond maturing in 2004. On ourGlobal Bonds maturing in 2005 we redeemed early EUR 737 million.

 

We also redeemed early the E-Plus Project Finance maturing in 2007 foran amount of EUR 1,881 million and cancelled this facility.

 

Also, in 2002, we redeemed EUR 3,325 million of the FloatingRate Notes in accordance with our regular redemption schedule.

 

Furthermore, we redeemed early the outstanding amount of our EuropeanInvestment Bank loan maturing in 2005 for an amount ofEUR 181 million (in addition to a scheduled redemption on this loanfor an amount of EUR 46 million).

 

In January 2002 we entered into an agreement with BellSouth underwhich BellSouth agreed to exchange its 22.51% interest in E-Plus for234.7 million of our ordinary shares. The original shareholder loans fromBellSouth to E-Plus amounting to EUR 2,154 million were assumed by KoninklijkeKPN by borrowing this amount under the subordinated loan facility betweenBellSouth and us. In December 2002 we redeemed EUR 516 millionunder the loan facility with BellSouth. In February 2002, we redeemed EUR 483 millionthat was outstanding under the original subordinated loan agreement withBellSouth.

 

Finally, the category other in 2002 includedredemptions of EUR 111 million of a portion of the Private Loans maturingin 2006, EUR 55 million of a portion of the Private Loans maturing in2005, EUR 64 million of the Zero Coupon Loan maturing in 2005 andEUR 9 million of the Zero Coupon Loan maturing in 2007.

 

###### ***2001***

 

In December 2001, weissued 1,020,408,163 ordinary shares at a price of EUR 4.90 per share via apublic offering. Total net proceeds to us from the offering amounted toEUR 4,843 million.

 

In 2001, we repurchased sharesfor an amount of EUR 98 million to cover part of our obligations under ourshare option plans.

 

Additionally, we issued Eurobonds in two tranches: one tranche of EUR2,000 million and one tranche of EUR 280 million (GBP 175 million).

 

E-Plus redeemed EUR 1,166 million of its credit facility and enteredinto a new EUR 2.5 billion credit facility, of which approximatelyEUR 1.9 billion was drawn (our 77.49% interest at the time amountedto EUR 1,458 million).

 

Additionally, we redeemed EUR 2,175 million of Floating Rate Notes (ofwhich EUR 175 million was an early redemption) and approximately EUR 2.2billion of notes, which had been privately placed in Japan.

 

Finally, the category other in 2001 included a drawdown on oursecuritization program of EUR 50 million and an early redemption of EUR 10million on our Eurobond maturing in June 2003.

 

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## **Notes tothe Statement of Changes in Shareholders’ Equity**

##  

In 2003, our shareholders’ equity increased to EUR 7,163 million.  The changes in our shareholders’ equityrelated to the profit for the period (EUR 2,731 million), the effect resultingfrom changes in accounting principles (EUR -6 million), purchases of own shares(EUR - 8 million), the consolidation of *Stichting Werknemersaandelen KPN/TPG* (EUR -17 million),  a corporate tax effect related to VisionNetworks (EUR -11 million), the reversal of the profit and loss charge relatedto the repricing of our management and employee options (EUR 12 million) andexchange rate differences on participating interests (EUR -46 million).

 

In 2002, our shareholders’ equity decreased by EUR 7,480 million to EUR4,508 million at December 31, 2002. Major changes in our shareholders’ equitywere related to the loss for the period (EUR 9,542 million), the positiveeffect of the share issue to BellSouth resulting from the exchange agreement(EUR 1,253 million) and the effect of the consolidation of Vision Networks (EUR745 million).

 

On February 24, 2000, KPN Mobile acquired a 77.49% interest in E-Plus.The acquisition price for the 77.49% interest in E-Plus amounted to EUR 19.0billion and consisted of the following elements:

•                  a cash paymentof EUR 9.1 billion by KPN to BellSouth;

•                  KPN grantedBellSouth the option to exchange its remaining 22.51% interest in E-Plus intoeither 200,000,000 shares in KPN or 499,631,269 shares in KPN Mobile (exchangeright) or, in certain circumstances, for cash. The exchange right was valued atEUR 7.6 billion in KPN’s consolidated balance sheet, being the fair marketvalue of the exchange right at February 24, 2000. The fair market value of theexchange right was based on the expected price of the KPN shares and thediscounted cash flows of KPN Mobile and E-Plus, taking into account potentialvolatility in prices and cash flows;

•                  KPN issued awarrant to BellSouth, allowing it to acquire 92,634,066 ordinary shares in KPNfor a cash payment and/or in settlement of the outstanding amounts under thesubordinated loan facility KPN agreed with BellSouth. The value of the warrantwas set at EUR 2.3 billion, being the fair value of the warrant at February 24,2000.

 

On January 30, 2002, KPN reached agreement with BellSouth on theexchange of their 22.51% interest in E-Plus for 234.7 million newly issuedordinary KPN shares. The transaction was completed on March 13, 2002.

 

The share price prevailing at the date of closing of the transactionwas EUR 5.34 per share, resulting in a total value of EUR 1,253 million for the234.7 million shares delivered.

 

The transaction with BellSouth has impacted KPN’s equity as follows:

•                  On March 13,2002, BellSouth surrendered its existing warrant on our shares. As this wasknown before the 2001 financial statements were finalized an amount of EUR2,338 million, representing the original value of the warrant held byBellSouth, was transferred from statutory and other restricted reserves toadditional paid-in capital (unrestricted equity) in 2001;

•                  EUR 6,848million was released to income; this amount is the difference between theestimated fair value of the exchange right of EUR 7,560 million on the date ofissue and the value of the exchange right at settlement date. As the finalvaluation of the exchange right was known before the 2001 financial statementswere finalized, the difference between the original valuation of EUR 7,560million and the settlement value of EUR 712 million was released in the 2001 Statementof Income;

•                  the issue of the234.7 million shares with a value of EUR 1,253 million was accounted for inshareholders’ equity in 2002.

 

On January 18, 2002, we issued 2,149,071 ordinary shares under thebonus share program that was part of the equity offering of November 2000.

 

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In anticipation of a possible sale, in 1998 KPN demerged its cableactivities to an independent entity, Vision Networks. Vision Networks wasfinancially independent and operated without guarantees or financial supportfrom us. We did recognize Vision Networks at cost in our financial statements.

 

In 2002, Vision Networks signed letters of intent with respect to thesale of its remaining interests in Poland and the Czech Republic. Consequently,the Supervisory Board of Vision Networks resigned on October 8, 2002, whereuponwe, as the sole shareholder, regained financial control. We revalued our stakein Vision Networks to net asset value. This resulted in an increase of EUR 745million in our shareholders’ equity, consisting of EUR 697 million as aconsequence of the valuation at net asset value and EUR 48 million as anadjustment for corporate taxes related to Vision Networks.

 

**[30]Subscribed capital stock**

 

***Share capital***

 

Our authorized capital stock totals EUR 1,920,000,000, divided into 4billion ordinary shares of EUR 0.24 each, one special share of EUR 0.48 and3,999,999,998 Class B preferred shares of EUR 0.24. At December 31, 2003, atotal of 2,490,996,876 ordinary shares had been issued, plus the special share.The Dutch State holds the special share and 19.35% of our ordinary shares as ofDecember 31, 2003 (2002: 31.39%). The ordinary shares and Class B preferredshares carry the right to cast one vote; the special share carries the right tocast two votes. The ordinary shares are registered or payable to bearer.Shareholders may request the Company to convert their bearer shares to ordinaryregistered shares and vice versa. The special share is registered.

 

***Treasury shares***

 

Due to the demerger of TPG N.V. from our Company, the management shareoptions and the convertible bonds for employees existing at the time of thedemerger entitled the holders to both a share in KPN and a share in TPG. Tocover these options and convertible bonds, a foundation was incorporated on May29, 1998 (*StichtingWerknemersaandelen KPN/TPG*). This foundation covered all commitmentsrelated to these options and convertible bonds by purchasing shares.

 

We provided a long-term loan to *Stichting Werknemersaandelen KPN/TPG*,which loan was partly

 

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funded by a loan from TPG to us. Pursuant to the Articles ofAssociation and agreements made with TPG regarding the management of *StichtingWerknemersaandelen KPN/TPG* and its temporary nature, the foundationwas not consolidated.

 

In 2003, *Stichting Werknemersaandelen* KPN/TPG sold its remaining TPGshares. The funds were used to partly redeem the outstanding loan to us.

 

On December 23, 2003 the Articles of Association of *StichtingWerknemersaandelen KPN/TPG* were amended. Further to this amendmentwe regained management control, obliging us to consolidate *Stichting Werknemersaandelen KPN/TPG*.The KPN shares held by *Stichting Werknemersaandelen KPN/TPG*, wererecorded as a repurchase of own shares and deducted from the other reserves forEUR 17 million, being equal to the amount of the remaining loan from us to.

 

**Stichting Werknemersopties KPN**

 

The options, we granted to our management and our employees as from1998, are partially covered by another foundation (*Stichting Werknemersopties KPN*),which acquired 20 million of our shares in our share offering of December 2001.We provided a loan of EUR 98 million to *Stichting Werknemersopties KPN* to financethe purchase of these shares. *Stichting Werknemersopties KPN* is fullyconsolidated. The aforesaid amount of EUR 98 million has been deducted fromOther reserves as repurchased own shares. We may use these shares to cover ourliabilities under the convertible subordinated notes issued by KPN in November2000. In the event that over 20 million options or convertible subordinatednotes are exercised, we anticipate providing for shares through the issuance ofnew shares or the purchase of shares in the market.

 

**TREASURYSHARES**

 

Number of shares
| Balance at January 1, 2002   |   | 21,533,885 |   |
|------------------------------|--------|------------|--------|
| Converted                    |   | -424,280   |   |
|                         |   |       |   |
| Balance at December 31, 2002 |   | 21,109,605 |   |
| Purchased                    |   | 1,500,000  |   |
| Other                        |   | 1,254      |   |
|                         |   |       |   |
| Balance December 31, 2003    |   | 22,610,859 |   |

 

**[31]Additional paid-in capital**

 

The additional paid-in capital is exempt from Dutch tax up to an amountof EUR 14,825 million (2002: EUR 14,817 million).

 

**[32]Statutory and other restricted reserves**

 

These reserves relate to accumulated translation differences and netprofit from participating interests, which cannot be distributed freely.

 

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**Financing**

 

**Long-termdebt**

 

**OUTSTANDINGLONG-TERM LOANS (INCLUDING SHORT-TERM PORTION)**

 
| **Amounts in millions of euro**                                                                                                              |   | **December  31, 2003** |       | **December  31, 2002** |       | **Interest  rate   as of December  31, 2003** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|------------------------|------------|-----------------------------------------------|------------|
| **Convertible subordinated**                                                                                                                 |   |                   |       |                   |       |                                          |       |
| •                  Convertible  bond 2000-2005     |   | **1,127**              | ** ** | **1,500**              |       | 3.5                                           |       |
|                                                                                                                                         |   |                   |       |                   |       |                                          |       |
| **Subordinated**                                                                                                                             |   |                   |       |                   |       |                                          |       |
| •                  BellSouth                       |   | **—**             | ** ** | **1,138**              |       | —                                        |       |
|                                                                                                                                         |   |                   |       |                   |       |                                          |       |
| **Bonds**                                                                                                                                    |   |                   |       |                   |       |                                          |       |
| •                  Eurobond 1996 - 2006            |   | 435                    |       | 590                    |       | 6.5                                           |       |
| •                  Eurobond 1998 - 2008            |   | 1,500                  |       | 1,500                  |       | 4.8                                           |       |
| •                  Eurobond 1999 - 2004            |   | —                 |       | 875                    |       | —                                        |       |
| •                  Eurobond 2001 - 2006            |   | 1,569                  |       | 2,000                  |       | 7.3                                           |       |
| •                  Eurobond 2001 - 2008 GBP 1)     |   | 280                    |       | 280                    |       | 7.9                                           |       |
| •                  Global bond  2000 - 2005        |   | 659                    |       | 805                    |       | 6.3                                           |       |
| •                  Global bond  2000 - 2005 USD 1) |   | 333                    |       | 333                    |       | 6.3                                           |       |
| •                  Global bond  2000 - 2010 USD 1) |   | 2,002                  |       | 2,002                  |       | 7                                             |       |
| •                  Global bond  2000 - 2030 USD 1) |   | 891                    |       | 1,132                  |       | Floating                                      |       |
|                                                                                                                                         |   | **7,669**              |       | **9,517**              | ** ** |                                          | ** ** |
|                                                                                                                                         |   |                   |       |                   |       |                                          |       |
| **Zero coupon**                                                                                                                              |   | **4**                  | ** ** | **3**                  |       | 8.1                                           |       |
|                                                                                                                                         |   |                   |       |                   |       |                                          |       |
| **Other**                                                                                                                                    |   |                   |       |                   |       |                                          |       |
| •                  Capital lease obligations       |   | 38                     |       | 79                     |       | —                                        |       |
| •                  Private loans                   |   | 66                     |       | 87                     |       | 7.5                                           |       |
| •                  Syndicated  loan                |   | 204                    |       | 204                    |       | 5.0                                           |       |
| •                  Other                           |   | 99                     |       | 120                    |       | —                                        |       |
|                                                                                                                                         |   | **407**                |       | **490**                | ** ** |                                          | ** ** |
|                                                                                                                                         |   |                   |       |                   |       |                                          |       |
| **Total long-term debt (excluding short-term  portion)**                                                                                     |   | **9,207**              | ** ** | **12,648**             | ** ** |                                          | ** ** |
|                                                                                                                                         |   |                   | ** ** |                   | ** ** |                                          | ** ** |
| Short-term portion of long-term debt                                                                                                         |   |                   | ** ** |                   | ** ** |                                          | ** ** |
| •                  Eurobond 2000  - 2003           |   | —                 |       | 1,042                  |       | —                                        |       |
| •                  Eurobond 1999  - 2004           |   | 875                    |       | —                 |       | 4.0                                           |       |
| •                  State Loan A  and State Loan B  |   | —                 |       | 258                    |       | —                                        |       |
| •                  BellSouth  (subordinated)       |   | —                 |       | 500                    |       | —                                        |       |
| •                  Syndicated  loan                |   | —                 |       | 386                    |       | —                                        |       |
| •                  Private Loans                   |   | 13                     |       | 14                     |       | 7.5                                           |       |
| •                  Capital lease  obligations      |   | 45                     |       | 81                     |       | —                                        |       |
| •                  Other                           |   | 17                     |       | 10                     |       | —                                        |       |
| Total short term portion of long-term debt                                                                                                   |   | **950**                | ** ** | **2,291**              | ** ** |                                          | ** ** |
|                                                                                                                                         |   |                   | ** ** |                   | ** ** |                                          | ** ** |
| Bank overdraft                                                                                                                               |   | **2**                  | ** ** | **69**                 | ** ** |                                          | ** ** |
|                                                                                                                                         |   |                   | ** ** |                   | ** ** |                                          | ** ** |
| **Total debt**                                                                                                                               |   | **10,159**             | ** ** | **15,008**             | ** ** |                                          | ** ** |

 

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1)                                      Formore information on the cross-currency swaps related to our foreign currencydenominated bonds, please refer to the Cross-Currency Swaps within thissection.

 

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**REDEMPTION SCHEDULE OFTOTAL INTEREST-BEARING DEBT**

 
| **Amounts in  millions of  euro** |   | **Total**  |       | **Convertible  subordinated** |       | **Bonds** |       | **Zero  coupon** |       | **Capital  lease  obligations** |       | **Other** |       |
|-----------------------------------|--------|------------|------------|-------------------------------|------------|-----------|------------|------------------|------------|---------------------------------|------------|-----------|------------|
|                              |   |       |       |                          |       |      |       |             |       |                            |       |      |       |
| 2004                              |   | 952        |       | —                        |       | 875       |       | —           |       | 45                              |       | 32        |       |
| 2005                              |   | 2,429      |       | 1,127                         |       | 992       |       | 4                |       | 25                              |       | 281       |       |
| 2006                              |   | 2,067      |       | —                        |       | 2,004     |       | —           |       | 13                              |       | 50        |       |
| 2007                              |   | 38         |       | —                        |       | —    |       | —           |       | —                          |       | 38        |       |
| 2008                              |   | 1,780      |       | —                        |       | 1,780     |       | —           |       | —                          |       | —    |       |
| 2009 and subsequent years         |   | 2,893      |       | —                        |       | 2,893     |       | —           |       | —                          |       | —    |       |
| **Total**                         |   | **10,159** | ** ** | **1,127**                     | ** ** | **8,544** | ** ** | **4**            | ** ** | **83**                          | ** ** | **401**   | ** ** |

 

***Convertible subordinated loan***

 

In 2000, we issued a EUR 1.5 billion convertible subordinated bondmaturing in 2005, which is subordinated to any of our outstanding indebtedness.The conversion price was set at EUR 21.42, which has been adjusted to EUR 20.14as a consequence of the share issue in December 2001. Convertible bondholderscan exchange their bonds for KPN shares until November 24, 2005. As of November24, 2002, we are allowed to redeem the bonds early for 100% of the principalvalue plus accrued interest (subject to the condition that the share trades onthe stock exchange for 30% above the conversion price for a period of 30consecutive days). During 2003, we redeemed early EUR 373 million ofthis convertible bond.

 

***Subordinated loan - BellSouth***

 

In connection with BellSouth’s exercise of its exchange right in 2002,we agreed to assume EUR 2.15 billion of E-Plus’ shareholder loans (100%) fromBellSouth by borrowing under the USD 3.0 billion subordinated loan facilitybetween BellSouth and us. During 2003, we redeemed early the outstanding amountof EUR 1,638 million of this subordinated loan facility and cancelled it. Theoriginal redemption schedule consisted of EUR 500 million payable in October2003 and EUR 1,138 million payable in March 2004.

 

***Bonds***

 

In 1996, we issued a Eurobond of EUR 590 million, maturing in 2006; weredeemed early EUR 155 million of this bond in 2003.

 

In April 2001, we issued approximately EUR 2.3 billion of Eurobonds intwo tranches: one tranche of EUR 2.0 billion maturing in 2006 and one trancheof EUR 280 million (GBP 175 million) maturing in 2008. In 2003, we redeemedearly EUR 431 million of the Eurobond maturing in 2006.

 

We issued a multi-tranche Global Bond of approximately EUR 5 billion in2000. This bond consisted of four tranches with fixed interest (USD 750 millionmaturing in 2005, EUR 1 billion maturing in 2005, USD 1.75 billion maturing in2010 and USD 1.0 billion maturing in 2030). In 2003, we redeemed earlyEUR 146 million of the Global bond (Euro portion) maturing in 2005.

 

We used a financial instrument (fixed euro rate cross-currency swap) tohedge the foreign currency exposure related to the Global bond of USD 1 billionmaturing in 2030. In July and September of 2003

 

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this swap was rehedged with various counter parties (into a floatingeuro rate cross-currency swap), as the original counter party had indicatedthat it intended to exercise its put right to terminate part of the swaptransaction against market value on October 1, 2003. The lower USD rate in theserehedges resulted in a decrease of the euro equivalent of the outstandingamount of this Global bond 2000 - 2030 by EUR 241 million (from EUR 1,132million to EUR 891 million).

 

Finally, in accordance with our regular redemption schedule, weredeemed EUR 1,042 million of the Eurobond maturing in 2003 (issued in 2000).

 

***Other loans (including capital leaseobligations)***

 

As of December 31, 2003, the outstanding amount under the capital leaseobligations of E-Plus and SNT amounted to EUR 83 million. The net present valueof the total of these obligations amounts to EUR 79 million as of December 31,2003.

 

During 2003, we redeemed early EUR 5 million of some of the PrivateLoans maturing in 2005 and EUR 3 million of some of the Private Loans finallymaturing in 2006. In accordance with our regular redemption schedule, we alsoredeemed EUR 14 million of these private loans.

 

Furthermore, during the year we redeemed – in accordance with ourregular redemption schedule – EUR 386 million of our Syndicated Loan (enteredinto in 1998 with a group of banks) and the outstanding amounts of our StateLoans (approximately EUR 258 million). Following this, we no longer have anydebt outstanding provided by the Dutch State.

 

As of January 22, 2003, PanTel entered into an amendment agreement tothe existing EUR80 million multi-currency facility, under which new covenants for revenues,EBITDA, capex and maximum debt are defined. We and the other shareholders havedeposited the PanTel shares as a collateral to the syndicate of banks. Asof December 31, 2003, the outstanding amount under the PanTel facility amountedto EUR 68 million.

 

Finally, in October 2003, Xantic redeemed theamounts outstanding under the USD working capital loan facility from TelstraCorporation Ltd, which facility no longer is in place. On December 31, 2003,Xantic also redeemed its shareholder loan facility with Telstra for theoutstanding amount of USD 26 million.

 

**Availablefinancing sources in 2004**

 

As of December 31, 2003, we had cash and cash equivalents of EUR 1,839million. In addition to the available cash and cash equivalents, cash flowsfrom operations and revenues from any further sales of non-core assets, we havethe following financing sources available:

 

***EUR 1.5 billion multi-currency revolvingcredit facility***

 

On April 14, 2003, we renegotiated our EUR 1.5 billion credit facilityto replace the EUR 1.75 billion credit facility concluded on May 17, 2002. Thesize of the facility has been further reduced because of our improved cashposition. We have not drawn any funds under this facility. The finaltermination date for the renewed facility is April 14, 2006. At our discretion,the facility may be extended by one year (through April 2007), provided that wehave a credit rating of at least BBB with Standard & Poor’s and at leastBaa2 with Moody’s (both with a stable outlook).

 

The requirements under this facility with respect to our EBITDA levelshave been relaxed. EBITDA is defined in the credit agreement as the results ofthe group (i) before taking into account extraordinary items and exceptionalitems, (ii) before deducting taxes, (iii) before deducting amortization ofgoodwill, of financing costs and of costs of acquisitions, (iv) before takinginto account interest, (v) after deducting any gain and adding back any loss ondisposals and revaluation of assets, (vi) before taking into account provisionsagainst liabilities, (vii) before deducting depreciation, and (viii) aftertaking into account dividends and capital distributions. Our ratio of EBITDA tonet interest 

 

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expense is now required to be equal to or greater than 3.5:1 throughDecember 2003, and is required to be equal to or greater than 4.0:1 thereafter.Our ratio of total consolidated net borrowings to EBITDA may not exceed 3.5:1through December 2003, and may not exceed 3.0:1 thereafter. These requirementswere met in 2003.

 

The facility requires that our fixed-line business remains wholly ownedby us and restricts certain subsidiary borrowings.

 

The facility prohibits us from paying dividends in cash on KPN’sordinary shares, unless we have a credit rating of at least BBB with Standard& Poor’s and Baa2 with Moody’s (in each case with a stable outlook). KPN’scurrent rating is A– with Standard & Poor’s (stable outlook) and Baa1 withMoody’s (stable outlook).

 

The facility no longer contains specific restrictions with respect tothe early redemption of public debt or cash acquisitions. However, the facilitymay not be utilized for the purpose of the (early) redemption of subordinateddebt.

 

In addition, the facility provides that we may not enter into astatutory merger (*juridische fusie)*without the prior consent of the lenders representing two-thirds of thefacility amount.

 

If we fail in the future to comply with any of the covenants containedin the facility, we may be required to immediately repay any outstandingindebtedness under the facility, and we may be unable to access funding underthe facility. In addition, a default under the facility may trigger defaultsunder other financing arrangements, requiring us to repay other indebtedness aswell. Likewise, defaults under other financing arrangements may triggerdefaults under this facility. The interest rate payable on drawings under thefacility will be EURIBOR (or LIBOR, depending upon the currency of drawing)plus an applicable margin, which varies depending upon our long-term(unsecured) debt ratings by Standard & Poor’s and Moody’s. The margins havebeen improved and are determined by the average of the two ratings by theaforesaid rating agencies as follows:

 
| **Rating**            |   | **Margin** |   |
|-----------------------|--------|------------|--------|
|                  |   |       |   |
| A+/A1 or higher       |   | 0.45       | %      |
| A/A2                  |   | 0.50       | %      |
| A-/A3                 |   | 0.60       | %      |
| BBB+/Baa1             |   | 0.80       | %      |
| BBB/Baa2              |   | 1.00       | %      |
| BBB-/Baa3             |   | 1.20       | %      |
| Lower than BBB-/ Baa3 |   | 3.25       | %      |

 

Based on our current credit ratings as mentioned above, any drawingsunder the credit facility would currently bear interest of EURIBOR (or LIBOR,depending upon the currency of drawing) plus 0.70%, being the average of the A–(Standard & Poor’s) and the Baa1 (Moody’s) rating.

 

***Global Medium Term Note Program***

 

The available borrowing capacity as of December 31, 2003 under our USD10 billion Global Medium Term Note (GMTN) program (available since April 1997)amounted to approximately EUR 3,746 million. The GMTN program contains nocommitments from investors to provide funding to us.

 

***Securitization program***

 

We have a securitization program of receivables from retail customerswith a maximum amount of EUR 200 million at our disposal (reduced by EUR 50million compared to 2002). The program is entered into for an unlimited periodof time, but can be terminated by us upon one month’s notice. Under thisprogram, we transfer billed and unbilled receivables to a variable interestentity, whose assets and liabilities are fully consolidated. The totalavailable amount depends on the available amount of billed and unbilledreceivables. In 2003, we redeemed the EUR 50 million that was drawn under thisprogram. Accordingly, no sums are currently drawn under the securitization 

 

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program. The interest rate on this debt is approximately EURIBOR +0.4%. If our credit rating ceases to be BB+/Ba1 or higher, the total availableamount will decrease because KPN will no longer be able to sell unbilledreceivables. If our credit rating ceases to be BB/Ba2 or higher, the programwill be terminated.

 

***Material Capital Resources Covenants***

 

In addition to the restrictions mentioned above, our existing capitalresources contain the following material covenants, which could triggeradditional financial obligations or early redemption of the outstandingindebtedness.

 

Our Eurobonds 2001-2006 (EUR) and Eurobonds 2001-2008 (GBP) contain arating step-up provision which offers each note holder a 0.375% increase in theinterest rate for each notch downgrade of our unsecured long-term debt beloweither Baa2 by Moody’s or BBB by Standard & Poor’s, and a rating step-downprovision which results in a 0.375% decrease in the interest rate for each notchupgrade (up to the initial interest rate).

 

Additionally, we may be required to redeem the outstanding notes early,in the event that:

(i) we consolidate with or merge into another entity (other than amerger of a subsidiary into KPN in which KPN is a continuing corporation) orconvey, transfer or lease all or substantially all of our properties and assetsto another person without the prior approval by the note holders; and

(ii) the rating assigned to the notes after giving effect to any suchtransaction is lower either than Baa3, in the case of Moody’s, or BBB–, in thecase of Standard & Poor’s.

 

As of December 31, 2003, the total outstanding amount under these bondsamounted to EUR 1,849 million (2002: EUR 2,280 million).

 

In addition, many of our capital resources contain a covenantprohibiting our principal subsidiaries or the group as a whole to enter intoany amalgamation, demerger, merger, corporate restructuring or reorganizationif such event would have a material adverse effect on either the ability of theobligors under the facility to perform their obligations under the facility oron our business or financial condition and that of our subsidiaries taken as awhole.

 

***Credit Rating***

 

On June 20, 2003, Moody’s changed our credit rating from Baa2 on reviewfor upgrade to Baa1 with a stable outlook (following an earlier upgrade byMoody’s from Baa3 to Baa2 on April 10, 2003 and a change of the outlook fromstable to positive on January 22, 2003). On January 29, 2004, Standard &Poor’s raised our credit rating from BBB+ with a positive outlook to A– with astable outlook (following an earlier adjustment from BBB with a positiveoutlook to BBB+ with a positive outlook on June 24, 2003 and a change of theoutlook from stable to positive on March 12, 2003).

 

**Quantitativeand qualitative disclosures about market risk**

 

**GENERAL**

 

Our Corporate Treasury department manages our market risk exposures andthereby aims to reduce our risk profile. In addition, our treasury departmentprovides cash management and funding services to Group companies.

 

As a result of our international activities, we are exposed to marketrisk resulting from changes in foreign currency exchange rates relative to theeuro. In order to reduce exposure, our treasury policy provides for the use ofderivative financial instruments, including forward exchange contracts,currency swap transactions and the use of foreign exchange options.Furthermore, the treasury policy provides for the use of interest rate swaps,forward rate agreements and cross-currency interest rate swaps to manage ourinterest rate profile.

 

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Derivative financial instruments in order to cover foreign currencyexchange rate risk and interest rate risk are used solely for the purpose ofhedging underlying exposures. Contracts related to derivative financialinstruments are entered into for periods consistent with the underlyingexposures (when economically feasible) and do not constitute positionsindependent of these exposures. None of these financial instruments areleveraged, used for trading purposes or taken as speculative positions.

 

In addition to market risks arising from foreign currency and interestrate exposure, we face other risks, including legal risks, country risk andcredit risk. Local management and our central legal department review legal andcountry risks on a case-by-case basis. The credit risk is minimized by a strictpolicy as to the choice of potential counter parties. Pursuant to that policy,we set strict limits for maximum positions per counter party and investmentperiods. Separate limits were set for counter parties with certain creditratings, for Dutch government institutions and for a number of well-known Dutchinstitutions. We update these limits on a regular basis. These risks are notpresented in this analysis.

 

**FOREIGNCURRENCY EXCHANGE RATE RISK**

 

Given our activities, we have exposure to foreign exchange rates ofcurrencies outside the euro zone. Foreign currency exchange rate exposuremainly results from settlement of international telecommunications traffic,purchase of goods and equipment in other countries and funding denominated inother currencies.

 

Group companies are obliged to report foreign currency exposures to ourCorporate Treasury department, which matches and manages all intercompany andexternal exposures. In order to reduce the exposures, and after taking accountof natural hedges provided by other balance sheet items, hedges are generallyapplied on a full coverage basis. Non-freely convertible currencies are hedgedif and when prevailing market conditions allow us to do so. It is our generalpolicy only to consider transactional exposures of firm commitments for hedgingpurposes (on a case-by-case basis only anticipated transactions may also beconsidered); whereas translation exposures are only hedged when feasible via anatural hedge and if there are no constraints.

 

As of December 31, 2003 we performed a sensitivity analysis withregard to our operational foreign currency exchange exposure. The analysisincluded, all other things being equal, a 10% adverse change in the value ofthe euro compared with the currencies relevant for us as of December 31,2003. According to this analysis, such an adverse change would not result in amaterial hypothetical loss on the fair value of our foreign exchangerate-sensitive exposure.

 

All our foreign currency denominated bonds are fully hedged withcross-currency swaps (fixed foreign exchange conversion rate and both fixed andfloating interest rates) in order to cover the underlying currency exposure.See also under the section titled Cross-Currency Swaps.

 

**INTERESTRATE RISK**

 

We incur debt to support business operations, including capitalexpenditures. Our interest rate risk policy is to match funding structures withthe risk profile of the underlying assets. Adjustments of the interest rateprofile or lower interest rates given a certain risk profile can be achieved byuse of forward rate agreements and interest rate swaps.

 

Excess available cash is invested in money market instruments, wherebycredit risk is mitigated by strict policies on counter party limits, asmentioned above.

 

In 2003 we redeemed early a material part of our interest-bearing debtwith a variable interest profile (i.e.**the Subordinated Bellsouth Loan and theSyndicated Loan). On the other hand, we entered into a rehedge (to continue toreduce our foreign currency exposure on the USD 1 billion Global bond 2000 –2030) consisting of a floating interest rate cross-currency swap (as opposed toa fixed interest rate on the original cross-currency swap). As a result, atDecember 31, 2003, 89% of interest-bearing debts are subject to fixedinterest rates.

 

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As of December 31, 2003, we carried out a sensitivity analysiswith regard to our interest rate risk on interest-bearing assets andliabilities. The analysis included, without a change in circumstances, anadverse change of 100 basis points. For the debt with a variable interestprofile, this analysis would hypothetically result in EUR 11 millionhigher interest costs for 2003 (December 31, 2002: EUR 20 million).For cash and cash equivalents, consisting of EUR 1,839 million as ofDecember 31, 2003, this adverse change would hypothetically result in EUR18 million higher interest income for 2003 (December 31, 2002:EUR 27 million).

 

The adverse change in the total interest-bearing net debt analysiswould thus hypothetically result in EUR 7 million higher interest incomefor 2003 (2002: EUR 7 million), since the total amount of cash and cashequivalents is higher than the total amount of debt with a variable interestprofile as of December 31, 2003.

 

**Fairvalue of Financial Instruments**

 
| **Amounts in millions of euro**                      |   | **Book value  at Dec. 31,  2003** |   | **Fair value  at  Dec. 31, 2003** |   | **Book value  at Dec. 31,  2002** |   | **Fair value  at Dec. 31, 2002** |   |
|------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|---------------------------------------|--------|
| Marketable securities and other financial  interests |   | 9                                 |   | 9                                 |   | 15                                |   | 15                                    |   |
| Interest-bearing current liabilities                 |   | 952                               |   | 960                               |   | 2,360                             |   | 2,829                                 |   |
| Interest-bearing long-term liabilities               |   | 9,207                             |   | 8,868                             |   | 12,648                            |   | 12,473                                |   |

 

The book values of the financial instruments not referred to in thistable do not materially differ from their fair values. Current liabilitiesinclude short-term debts to banks and short-term loans contracted withinstitutions other than banks.

 

The fair value of the interest-bearing long-term liabilities isestimated by calculating the net present value of the loans based on anestimated yield curve appropriate to the terms of the contracts in effect atthe end of the year. The estimated yield curve is the interpolated zero couponyield curve of the German Government bond plus the market credit spread forKPN.

 

**FORWARDEXCHANGE CONTRACTS AND INTEREST RATE SWAPS**

 

For a number of receivables and payables denominated in foreigncurrencies, forward exchange contracts and interest rate swaps were concluded.On December 31, 2003, 74% of the forward exchange contracts related to 2004.
| **Amounts in millions of euro**   |   | **Contract  volume 2003** |       | **Estimated  market value  2003** |       | **Contract  volume 2002** |       | **Estimated  market value  2002** |       |
|-----------------------------------|--------|---------------------------|------------|-----------------------------------|------------|---------------------------|------------|-----------------------------------|------------|
| Forward exchange contracts        |   |                      |       |                              |       |                      |       |                              |       |
| Term shorter than 1 year          |   | 117                       |       | 7                                 |       | 277                       |       | 4                                 |       |
| Term longer than 1 year           |   | 41                        |       | 1                                 |       | —                    |       | —                            |       |
|                              |   |                      | ** ** |                              | ** ** |                      | ** ** |                              | ** ** |
| Forward extra option transaction: |   |                      |       |                              |       |                      |       |                              |       |
| Term shorter than 1 year          |   | —                    |       | —                            |       | 19                        |       | 1                                 |       |
| Term longer than 1 year           |   | **—**                | ** ** | **—**                        | ** ** | **—**                | ** ** | **—**                        | ** ** |
| **Total**                         |   | **158**                   | ** ** | **8**                             | ** ** | **296**                   | ** ** | **5**                             | ** ** |
|                              |   |                      |       |                              |       |                      |       |                              |       |
| Interest rate swaps:              |   |                      |       |                              |       |                      |       |                              |       |
| Term shorter than 1 year          |   | —                    |       | —                            |       | 386                       |       | -6                                |       |
| Term longer than 1 year           |   | 204                       |       | -7                                |       | 204                       |       | -9                                |       |
| **Total**                         |   | **204**                   | ** ** | **-7**                            | ** ** | **590**                   | ** ** | **-15**                           | ** ** |
|                              |   |                      |       |                              |       |                      |       |                              |       |
| Cross currency swaps              |   |                      |       |                              |       |                      |       |                              |       |
| Term shorter than 1 year          |   | —                    |       | —                            |       | —                    |       | —                            |       |
| Term longer than 1 year           |   | 3,506                     |       | -925                              |       | 3,746                     |       | -490                              |       |
| **Total**                         |   | **3,506**                 | ** ** | **-925**                          | ** ** | **3,746**                 | ** ** | **-490**                          | ** ** |

 

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The estimated market value represents the amount payable or receivablein exchange for termination of the contracts as of the balance sheet datewithout any further obligations.

 

**CROSSCURRENCY SWAPS**

 

All our foreign currency denominated bonds are fully hedged withcross-currency swaps (fixed foreign exchange conversion rate and both fixed andfloating interest rates) in order to cover the underlying currency exposure.Only the swaps mentioned below include break clauses (early termination option)where both our counter parties and we have the right to terminate thetransaction on previously agreed settlement payment dates (PUT date). Afterexpiry of the PUT date, early termination is possible on the same date with acertain interval (mostly one year). When early termination occurs, the partieswill settle a positive or negative market value.

 

Upon early termination in 2003 by the counter party of the fixed eurorate cross-currency swap on the USD 1 billion Global Bond 2000 – 2030 (and inorder to continue to protect us from currency rate risk), we rehedged the totalamount of USD 1 billion on July 22, 2003 (USD 500 million) and on September 9,2003 (USD 500 million) with other counter parties. The lower USD rate in therehedge resulted in a decrease of the euro equivalent of the Global Bond 2000 –2030, resulting in a gross debt reduction of EUR 241 million. Because of thenegative market value of the original swap, the rehedge resulted in a cashoutflow of approximately EUR 313 million and a net debt increase of EUR 72million, which amount will be amortized over the remaining lifetime of theGlobal Bond.

The estimated negative market value below represents the amount payablein exchange for termination of the contracts on the balance sheet date withoutany further obligations. However, in line with our hedging policy, we aim tomitigate the exposure in the event of an early termination by rolling over thecross-currency swap.

 

**ACTIVECROSS-CURRENCY SWAPS WITH BREAK CLAUSE**

 
| **Foreign  currency** |   | **Notional  amount in  foreign  currency (in  millions)** |       | **First PUT  date**                                              |       | **Termination  date  of swap contract** |       | **Market  value as of  December 31, 2003, in  millions of euro** |       |
|-----------------------|--------|-----------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------------------|------------|
|                  |   |                                                      |       |                                                             |       |                                    |       |                                                             |       |
| GBP                   |   | 59                                                        |       | April 12, 2006                                                   |       | April 11, 2008                          |       | -16.5                                                            |       |
| GBP                   |   | 58                                                        |       | April 12, 2006                                                   |       | April 11, 2008                          |       | -17.1                                                            |       |
| GBP                   |   | 58                                                        |       | April 12, 2006                                                   |       | April 11, 2008                          |       | -16.0                                                            |       |
| USD                   |   | 250                                                       |       | October 1, 2010 for  $250 million (yearly thereafter        | )          | October 1, 2030                         |       | -31.6                                                            |       |
| USD                   |   | 250                                                       |       | October 1, 2010 for  $250 million (every 7 years thereafter | )          | October 1, 2030                         |       | -30.9                                                            |       |
| USD                   |   | 500                                                       |       | October 1, 2008 for  $500 million (yearly thereafter        | )          | October 1, 2030                         |       | -56.4                                                            |       |
| **Total**             |   |                                                      | ** ** |                                                             | ** ** |                                    | ** ** | **-168.5**                                                       | ** ** |

 

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If we had not hedged our exposure via cross-currency swaps, the bondsdenominated in foreign currency would have been valued against the currencyrates on the balance sheet date. In that case, the USD and GBP bond book valueswould have been valued as follows:

 
| **Bond**                  |   | **Bond book  value against  hedge rate as of December 31,  2003,  in millions of euro** |       | **Bond book  value against  currency rates as of December  31, 2003, in millions of euro** |       |
|---------------------------|--------|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| Global Bond 2000-2005 USD |   | 333                                                                                     |       | 226                                                                                        |       |
| Eurobond 2001-2008 GBP    |   | 280                                                                                     |       | 248                                                                                        |       |
| Global Bond 2000-2010 USD |   | 2,002                                                                                   |       | 1,389                                                                                      |       |
| Global Bond 2000-2030 USD |   | 891                                                                                     |       | 794                                                                                        |       |
| **Total**                 |   | **3,506**                                                                               | ** ** | **2,657**                                                                                  | ** ** |

 

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## **Commitments****, contingencies and legalproceedings**

 

**COMMITMENTS**

 
| **Amounts in millions of euro**                                                                                                               |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                                                                                                          |   |               |       |               |       |
| Commitments by virtue of:                                                                                                                     |   |               |       |               |       |
| •                  Capital  expenditure commitments |   | 266                |       | 114                |       |
| •                  Rental  contracts                |   | 1,876              |       | 1,751              |       |
| •                  Operational  lease contracts     |   | 125                |       | 103                |       |
| •                  Guarantees                       |   | 40                 |       | 65                 |       |
| •                  Purchasing  commitments          |   | 1,382              |       | 1,896              |       |
| •                  Other  commitments               |   | 19                 |       | 54                 |       |
| **Total**                                                                                                                                     |   | **3,708**          | ** ** | **3,983**          | ** ** |

 

Of these commitments, EUR 1,201 million are of a short-term nature(2002: EUR 1,141 million).

EUR 283 million is due after five years (2002: EUR 998 million).

 

***Capital expenditure commitments***

 

Of these commitments, EUR 263 million are of a short-term nature (2002:EUR 71 million). The remaining part has a term between 1 and 5 years.

 

***Rental and lease contracts***

 

Of these commitments, EUR 335 million are of a short-term nature (2002:EUR 298 million).

EUR 197 million is dueafter five years (2002: EUR 750million).

 

The costs of operating leases (including rental charges) in 2003totaled EUR 189 million (2002: EUR 291 million).

 

These operating lease and rental commitments mainly relate to tangiblefixed assets.

 

***Guarantees***

 

These mainly consist of concern-guarantees, in which we guarantee thefinancial obligations of group companies under certain contracts.

 

***Purchasing commitments***

 

Of these commitments, EUR 583 million are of a short-term nature (2002:EUR 708 million).

EUR 61 million is dueafter five years (2002: EUR 201million).

 

As part of the disposal of our non-core assets we sold our Datacenterand End User Services to Atos Origin in 2001 and 2002 respectively. We haveguaranteed a level of revenues to Atos Origin. The guarantees provide for a specifiedannual level of revenues through 2007 and require us to make up a specifiedportion of the shortfall in any year. In case of a shortfall with respect to theguaranteed revenue

 

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levels regarding Datacenter, weincur a penalty equal to (i) 50 % of the amount of the shortfall in 2004, and(ii) 25 % of the amount of the shortfall in each of the years 2005, 2006 and2007.

 

In case of a shortfall withrespect the guaranteed revenue levels regarding End User Services, we incur apenalty equal to (i) 25 % of the amount of the shortfall in 2004, and (ii) 50%of the amount of the shortfall in each of the years 2005, 2006 and 2007. Theguaranteed level of revenues declines each year and the level of commitments asof December 31, 2003 amounted to EUR 771 million (2002: EUR 1,031 million).

 

On January 1, 2003, the Dutch Organization for Applied ScientificResearch (TNO) took over KPN Valley, which encompassed our research anddevelopment activities. We have annual purchase commitments towards TNO endingDecember 31, 2006, which commitments decline each year. As of December 31,2003, the commitments amount to EUR 68 million in total.

 

On February 13, 2003, wetransferred (through our subsidiary KPN Directory Services B.V.) all of ourshares in Telefoongids Media B.V. to a syndicate led by 3i Group (3i) andVeronis Suhler Stevenson (VSS) for approximately EUR 500 million cash. The coreportfolio of Telefoongids Media B.V. includes commercial telephone directoriesin printed form and telephone directories in electronic form, like thetelephone directories on CD-ROMS and on the Internet. We have a statutoryobligation to make universal telephone directories available to the public inthe Netherlands until one year after the date on which we notify the competentauthority that we will no longer do this. Our universal telephone directory hasa printed form and consists of standard listings of telephone subscribers ofthe various telephone operators in the Netherlands.  We agreed that our universal telephone directory shall be printedand distributed by Telefoongids Media B.V. Telefoongids Media B.V. is entitledto combine its commercial telephone directory in printed form with ourdirectory in printed form. Our total commitments amount to EUR 126 million.

 

**REQUIREMENTSUNDER THE UMTS LICENSE AGREEMENTS IN GERMANY, THE NETHERLANDS AND BELGIUM**

 

***Germany***

 

On August 31, 2000, we acquired one of six UMTS licenses in Germany forEUR 8.4 billion. Under this license, the operators have rollout obligations forthe UMTS networks.

 

In November 2003,Germany’s Regulatory Authority for Telecommunications (RegTP) commencedadministrative procedures to verify satisfaction of the coverage obligationsunder the UMTS licenses. At the end of 2003, the mobile UMTS networks mustcover 25% of the population. This obligation has been met. As of December 31, 2005,the minimum coverage requirement will increase to 50%.

 

***The Netherlands***

 

Along with the other operators in the Dutch mobile market (Vodafone,T-Mobile, Dutchtone and Telfort (formerly known as O2)), KPN Mobileacquired a UMTS license on August 7, 2000.

Under the license, the operators must meet certain rollout obligationsfor the UMTS networks. As of January 1, 2007, all built-up areas inmunicipalities with over 25,000 inhabitants, all main roads (car, rail andwaterways) in between, all motorways to Germany and Belgium and the areasaround the airports of Schiphol, Rotterdam and Maastricht should be covered ata minimum level of 144 Kb/s outdoors.

 

***Belgium***

 

In March 2001, the three existing operators,BASE, Proximus and Mobistar obtained UMTS licenses in the auction organized bythe Belgian government. Our license was obtained upon payment of a license feeof EUR 150 million. The license contains rollout obligations,which so far have been met.

 

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The future requirements to be met on December 31, 2005, 2006, 2007 and2008 is a population coverage of 30%, 40%, 50% and 85%, respectively.

 

**CONTINGENCIES**

 

***Contingent assets***

 

At this moment, a number of European operators (including KPN) are ofthe opinion that the purchase prices of UMTS licenses should have included VATand therefore KPN Mobile would be entitled to reclaim the VAT charge regardingthe acquisition of the license.

 

We believe that the VAT amount included in the acquisition price of theUMTS license in the Netherlands amounts to EUR 106 million. Consequently, wehave requested the Ministry of Economic affairs to issue a VAT invoice. Aformal request in this regard has been denied.

 

Based on the above, we are of the opinion that the VAT amount forE-Plus and BASE exceeds EUR 1 billion. We are currently reviewing our position.

 

On June 25,2003, BASE announced that it lodged a complaint against Proximus with theBrussels commercial court to end Proximus’ discrimination ofnon-Proximus-subscribers by forcing Proximus to lower its interconnectiontariffs and also to submit the details of its exclusive contracts to theinspection of the Anti-trust Council (‘*Raadvoor Mededinging’*). Furthermore, BASE aims to obtain a compensationfor losses it suffered due to Proximus’ restrictions. In November 2003,Proximus filed its defense.

 

***Contingent liabilities***

 

On June 4, 2002, KPN sold 55% of its shares in KPN Netwerk Bouw B.V.(KPN’s construction unit) to VWS Telecom B.V. for EUR 13.75 million. Theconstruction unit was renamed Volker Wessels Netwerk Bouw B.V. (‘VWNB’). VWSTelecom B.V. will acquire the remaining 45% at year-end 2004 for a purchaseprice between EUR 8.55 million and EUR 25.65 million. The final price willdepend on various factors, including the results of VWNB****in 2003 and 2004.

KPN and VWNB have entered into a Service Framework Agreement regardingthe design and construction of fixed telecommunication infrastructure. KPN isrequired to order from VWNB 90% of its design and construction work for itsfixed telecommunication infrastructure in 2003-2005. The sale agreement alsocontains customary representations, warranties and indemnifications. Under theagreement, KPN is to indemnify VWNB up to a maximum aggregate amount of EUR 10million.

 

As part of the sale of KPN Softwarehouse to Atos Origin, KPN has givenAtos Origin a guarantee that it will use the services of certain employees whowere transferred to Atos Origin for a minimum number of hours per year (73.2%of their time). This guarantee ends on August 1, 2004. In the event of KPN notmeeting this minimum utilization, KPN will be required to compensate AtosOrigin with at most EUR 16.5 million for the period ending August 1, 2004.

 

Additionally, the sale agreements with Atos Origin contain customaryrepresentations, warranties and indemnifications for which KPN is liable up toa maximum aggregate amount of EUR 40 million.

 

KPN’s wholly owned subsidiary, KPN Satcom B.V., and Telstra CorporationLtd. (Telstra) entered into a joint venture and a shareholder agreementregarding Xantic B.V. Under this agreement, Telstra has a put option withrespect to its 35% shareholding in Xantic, which is exercisable as from May2002. Telstra can only exercise the put option after determination of the fairmarket value of Xantic by an independent third party and in accordance with thejoint venture and shareholder agreement. In the event the put option isexercised, KPN Satcom may purchase the shares against the determined fairmarket or alternatively to start a joint sale process. In the joint saleprocess, KPN Satcom and Telstra may jointly sell their shareholding in Xanticto a third party.

 

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Through our subsidiary XS4ALL, we aim tooffer all Dutch schools free broadband Internet access for three years,starting in 2004. We consider development of advanced learning methods drivenby the latest telecommunications technologies to be of great importance tosociety. By making this offer, we also aim to contribute to the growth of theknowledge-driven economy in the Netherlands. A well-educated labor force isgood for the long-term competitive position of the Netherlands. Similarly, itis in our interests that our future employees and customers are able to takefull advantage of ICT at work and at home.

 

The offer is open to primary schools,secondary schools and institutes providing vocational and adult education. Oneof our competitors has started legal proceedings about this offer and in aninterim injunction it was decided that we are not allowed to offer freebroadband internet access to Dutch schools. We have appealed this decision.

 

Within the scope of the sale of cable activities by Vision Networks,KPN stands surety for potential obligations towards the buyers with a maximumof EUR 363 million until June 15, 2004.

 

**LEGALPROCEEDINGS**

 

We are involved in several legal proceedings, most of which areprimarily related to regulatory or other ordinary course of business issues. Wedo not expect these proceedings to result in liabilities that have a materialeffect on our financial position. Where it is probable that the outcome of thelegal proceedings will be unfavorable for us, and the financial outcome ofthese proceedings can be reliably estimated, a provision has been accounted forin the (consolidated) financial statements.

 

***SOBI***

 

On July 10, 2001 a writ of summons was served upon us by one of ourshareholders, the corporate monitoring foundation SOBI (*Stichting Onderzoek Bedrijfsinformatie*,or Foundation for the Research of Business Information). SOBI has filed a claimwith the Enterprise Chamber (*Ondernemingskamer*) of the Amsterdam Courtof Appeal that seeks the annulment of our annual financial statements for 2000because it believes that the accounting was incorrect with respect to thetransactions with NTT DoCoMo contained therein, in which NTT DoCoMo acquired15% of KPN Mobile; the transactions with BellSouth, in which KPN Mobileacquired a 77.49% interest in E-Plus; and the valuation of goodwill and thevaluation of the UMTS licenses acquired by KPN Mobile. On November 7, 2002 theEnterprise Chamber gave an interlocutory judgment ordering KPN to prove certainitems of its statement of defense.

The outcome of the Enterprise Chamber’s interlocutory judgment can besummarized as follows:

•                  The gain of EUR2,312 million resulting from the sale of KPN’s share in KPN Mobile in thetransaction with NTT DoCoMo has been correctly recorded in the profit and lossaccount. However, in the Enterprise Chamber’s view, the gain should have beenpresented on a separate line item in the profit and loss account and not aspart of other operating revenues. KPN disagrees with this view and accordinglydid not change the presentation in its financial statements.

•                  The fair valueof the warrant and exchange rights that were granted to BellSouth as part ofthe acquisition of a 77.49% interest in E-Plus has been correctly treated aspart of the acquisition price on February 24, 2000. However, in the EnterpriseChamber’s view the exchange right should have been presented in the balancesheet as part of shareholders’ equity rather than as a hybrid form of equityand debt. KPN disagrees with this view and accordingly did not change thepresentation in its financial statements.

•                  The EnterpriseChamber stated that, for determining whether there is an impairment on goodwillor intangible fixed assets (UMTS licenses), KPN should not have compared thesum of the undiscounted cash flows to the book value of the assets concerned.KPN disagrees with this view and believes that there is no impairment on eitherof the dates of acquisition of E-Plus and the UMTS licenses and as of December31, 2000.

•                  The EnterpriseChamber stated that more insight should have been given in the valuationmethodology of both the exchange rights and the warrant. KPN believes that thedisclosure was adequate.

 

We provided written evidence to defend our views on November 28, 2002.In addition, we provided witnesses for testimony at the Enterprise Chamber tofurther support these views. The witnesses were

 

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heard between March and May 2003. At the end of January 2004 we had oursecond pleading. A final judgment by the Enterprise Chamber is expected in thespring of 2004. This judgment will be subject to appeal before the SupremeCourt of the Netherlands. While we do not believe that there is any merit to SOBI’sclaim, a judgment in SOBI’s favor could lead to other claims or consequences,including restatement of our accounts that could harm our results and financialcondition.

 

***KPNQwest***

 

We are involved in a legal proceeding with a consortium of banks towhich KPNQwest has transferred claims against us for a total amount ofapproximately EUR 21 million. While we believe that we are entitled to set offa portion of this amount against claims we had against KPNQwest, a judgment infavor of this bank could lead to a cash payment by us.

 

On January 9, 2004, KPN was named as a defendant in an amended classaction complaint in an action pending in the United States District Court forthe Southern District of New York brought by former shareholders of KPNQwest(the “KPNQwest Securities Action”). The KPNQwest Securities Action originallywas filed against a former officer of KPNQwest. The amended complaint addedseveral additional defendants, including, among others, KPN and three currentand former officers of KPN who had served on the Supervisory Board of KPNQwest.The amended complaint alleges that, from the time of its initial publicoffering in November 1999 through April 24, 2002, KPNQwest overstated itsreported revenues and profits by entering into capacity swap transactions withthird parties, including Qwest and Global Crossing, and improperly accountingfor those transactions. The amended complaint seeks to hold KPN liable both asa direct participant in the alleged fraud and as an alleged controlling personof KPNQwest based on its ownership of KPNQwest stock and ability to appointcertain members of the KPNQwest Supervisory Board. KPN was served with theamended complaint on February 26, 2004. 

 

***WorldCom***

 

Towards the end of 1999, WorldCom lodged a complaint with the EuropeanCommission against what it called the excessively high interconnection pricesbeing charged by KPN Mobile and other operators. In March 2002, KPN Mobilereceived a statement of objections from the European Commission in which itreached the preliminary conclusion that we have abused our position of power,among other things by discriminating in relation to the conditions for directinterconnection and setting unfair prices resulting in a margin squeeze betweenmobile terminating access and certain services offered to business customers.KPN Mobile has provided arguments that refute the preliminary analysis. In theautumn of 2002 the Commission asked for further information. It is unclear whenthe Commission will take a final stand, but the Commission may ultimatelyrequire KPN Mobile to lower its interconnection prices and could impose apenalty upon us of up to 10% of our sales in the year preceding the year thatthe Commission has taken a final stand.

 

***Dealer Commissions***

 

After an investigation into the reduction of subsidies to mobilehandset retailers by the mobile phone operators in the Netherlands, includingKPN Mobile, the Dutch Anti-trust Authority (NMa) concluded that all five mobileoperators had coordinated a decrease of the commissions to their distributorsand a decrease of the handset subsidy for prepaid subscriptions. On December30, 2002, NMa fined KPN Mobile for EUR 31.3 million. KPN Mobile has objected tothe decision and in particular to the disproportionate level of the fine.

 

***BT Ignite***

 

KPN is engaged in a dispute with BT Ignite on the level of calltermination fees that KPN owes for handling telephone calls from KPN’s fixednetwork terminating on the networks of this operator. OPTA 

 

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ruled that this operator might set its own fees, provided that theseare reasonable. A consequence of this ruling is that KPN must pay this operatorfor services KPN had to purchase from it in the past and can no longer pass onthis amount to end-users for telephone calls that terminate on their network.We have lodged an appeal.

 

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## **Related party transactions**

##  

Our material related party transactions, including our materialintra-group agreements, are briefly summarized below.

 

**Agreementswith KPN Mobile on the use of our intellectual property rights**

 

As part of the demerger of our mobile activities to KPN Mobile in 1999,we and KPN Mobile entered into three agreements on the use by KPN Mobile ofcertain registered and unregistered trademarks, trade names, patents and otherdesigns and know-how that relate to its mobile telecommunications services. Forefficiency reasons, all future trademarks will be registered in our name, butKPN Mobile can at all times instruct us to request registration on its behalf.

 

***Relationship with NTT DoCoMo regarding KPNMobile***

 

In August 2000, KPN Mobile issued new shares to NTT DoCoMo as a resultof which NTT DoCoMo held a 15% interest in KPN Mobile. In December 2002 wefinancially restructured KPN Mobile, which resulted in NTT DoCoMo’s interestbeing diluted to 2.16%. As a result, NTT DoCoMo lost all its minorityprotection rights, being (i) the right to make a binding nomination to appointnominees to the Supervisory Board of KPN Mobile; (ii) the right of access toKPN Mobile’s management, facilities and business information; (iii) the rightto sell shares in KPN Mobile together with us (‘tag-along right’); (iv) theright to maintain its relative shareholding upon the occurrence of a dilutiveevent (‘top-up right’); and (v) the right of first refusal.

 

A standstill restriction on NTT DoCoMo is not terminated, whichprohibits NTT DoCoMo, until August 2, 2004, to acquire shares in us without ourprior written consent, or to acquire shares in KPN Mobile which represent morethan 15% of the total number of votes exercisable at a General Meeting of KPNMobile’s Shareholders, without KPN Mobile’s prior written consent. We, KPNMobile and NTT DoCoMo remain parties to a registration rights agreement weentered into on August 2, 2000, pursuant to which NTT DoCoMo may require KPNMobile, subject to various limitations and conditions, to take all necessarysteps to effect the registration of all or a specified number of NTT DoCoMo’sshareholdings in KPN Mobile so that such shares can be publicly sold in theUnited States of America and listed in the Netherlands (if not already listed).

 

***License agreementon the use of i-mode type technology and i-mode trademarks between KPN Mobile andNTT DoCoMo***

* *

On November 7, 2001, KPN Mobile entered into a license agreementwith NTT DoCoMo for the use of i-mode type technology and i-mode trademarkswithin the Netherlands and Belgium. The licensed technology includes all newversions and releases of the licensed technology during the term of theagreement which are (i) solely owned by NTT DoCoMo (or which NTT DoCoMohas the right to license); (ii) compatible with UMTS standards; and(iii) are launched by NTT DoCoMo in Japan or licensed to any other mobileoperator or service provider for use in Europe.

 

The license agreement is for a period of ten years, endingDecember 31, 2011. Either party may terminate the agreement if the otherparty commits a material breach of the agreement, if the other party isdeclared bankrupt or if the shareholder agreement between KPN Mobile and NTTDoCoMo is terminated. In addition, NTT DoCoMo may terminate the agreement(i) if KPN Mobile disputes either the validity of the trademarks or NTTDoCoMo’s ownership of them; (ii) at any time subsequent to NTT DoCoMoowning less than 7.5% of the shares in KPN Mobile;(iii) at any timesubsequent to the date on which we both cease to hold the single largest votinginterest in KPN Mobile and (other than in connection with a takeover by us of,or merger with, a third party (whether a legal or statutory merger or anythingwhich is similar in commercial substance thereto)) cease to hold the C Share ofKPN Mobile;

 

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and (iv) following a change of control in KPN Mobile. Upontermination, KPN Mobile may still use the licensed technology for a period ofthree years and the licensed trademark for a period of 15 months.

 

Use of the i-mode technology is non-exclusive. The use of the i-mode trademarksis exclusive in that NTT DoCoMo has agreed not to license such marks to othermobile operators or to portal service providers for mobile portals in theNetherlands and Belgium.

 

KPN Mobile and NTT DoCoMo have agreed that further developments of thei-mode technology will be co-owned between the parties if such developments arethe result of cooperation between the parties, either because confidentialinformation of either party was used or because employees of both parties wereinvolved in the further development.

 

Royalties for the license are calculated on the basis of revenuestreams generated by i-mode type services.

 

***License agreementon the use of i-mode technology and i-mode trademarks between E-Plus and NTTDoCoMo***

On February 18, 2002, E-Plus and NTT DoCoMo entered into a licenseagreement for the use of i-mode technology and i-mode trademarks. This licenseagreement is based on, but in some respects deviates from, the licenseagreement entered into between KPN Mobile and NTT DoCoMo on November 7,2001. In addition to any of the reasons for termination included in the KPNMobile-NTT DoCoMo license agreement, NTT DoCoMo may terminate the E-Plus-NTTDoCoMo license agreement at any time subsequent to the date of a change ofcontrol in E-Plus. Following the dilution of NTT DoCoMo’s share in KPN Mobileto 2.16%, during a period of 6 months following the dilution on December 18,2002, NTT DoCoMo was also entitled to terminate the E-Plus license agreement.This term elapsed without NTT DoCoMo terminating the license agreement. Upontermination, E-Plus may still use the licensed technology for a period of threeyears and the licensed trademarks for a period of 15 months.

 

***License agreementon the use of DoJa technology between KPN Mobile and NTT DoCoMo and betweenE-Plus and NTT DoCoMo***

In December 2002, we entered into a license agreement with NTTDoCoMo for the use and distribution of DoJa technology. DoJa technology is aproprietary Java variant developed by Docomo and Sun. This software allows forthe implementation of applications (games, banking services) on mobilehandsets.

 

**Serviceprovider agreement between KPN Mobile The Netherlands and Albert Heijn B.V.**

 

On October 22, 2002, KPN Mobile The Netherlands entered into anagreement with Albert Heijn B.V., a wholly owned subsidiary of Royal AholdN.V., pursuant to which Albert Heijn provides prepaid services on KPN Mobile’snetwork. KPN Mobile provides certain support services, including prepaidbilling of Albert Heijn’s customers. The agreement was entered into for anindefinite term with a minimum of two years. Mr. Eustace, one of ourSupervisory Board members, served in 2003 as the interim CFO of Royal AholdN.V. The agreement was entered into in the ordinary course of business and onan at arm’s length basis.

 

**Jointventure agreement between KPN Telecom and Schiphol Group N.V.**

 

In 1992, KPN Telecom entered into a joint venture with Schiphol GroupN.V. and KLM, which, after KLM’s withdrawal in 2001, became a 50/50 jointventure between KPN Telecom and Schiphol Group N.V. for an indefinite period.Under the terms of this joint venture, Schiphol Telematics provides InformationTechnology and Communication services to parties located on the SchipholAirport site. KPN Telecom supplies services to Schiphol Telematics. One of themembers of our Supervisory Board, Ms. Van Lier Lels, serves as the ChiefOperating Officer of Schiphol Group N.V. The agreement was entered into in the ordinary course of business and onan at arm’s length basis.

 

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**Frameworkagreement between E-Plus and DaimlerChrysler AG**

 

On October 10,1999, E-Plus entered into a framework agreement with DaimlerChrysler AG (DC)concerning the sale and supply of terminal devices and accessories, as well asthe supply of mobile telecommunication services on the E-Plus network. Relatedto this framework agreement, DC and agreed third party beneficiaries of DC(i.e. debis) are entitled to conclude individual agreements. A total of 224mobile telephone cards have currently been registered for DC and beneficiariesof DC. The framework agreement is for an unlimited period. One of the membersof our Supervisory Board, Mr. Bischoff, was****a member of the Board of Management of DaimlerChrysler AG.The agreement was entered into in the ordinary course of business and on an atarm’s length basis.

 

**Frameworkagreement between E-Plus and Toll Collect**

 

On April 1, 2003, E-Plus entered into an open-ended framework agreementwith the Toll Collect consortium, applying for the introduction of highwaytolls. Toll Collect consists of DaimlerChrysler AG (DC), Deutsche Telekom AGand Cofiroute SA. The subject matter of the framework agreement is the sale andsupply of terminal devices and accessories, as well as the supply of mobiletelecommunication services on the E-Plus network from E-Plus to Toll Collect. Atotal of 29,300 mobile telephone cards have currently been provided to TollCollect. The aforementioned framework agreement may be superseded by a globalproject agreement, which is currently under negotiation between Toll Collectand E-Plus. One of the members of our Supervisory Board, Mr. Bischoff, wasa member of the Board of Management of DaimlerChrysler AG. The agreement wasentered into in the ordinary course of business and on an at arm’s lengthbasis.

 

**Agreementsrelated to TKP B.V.**

 

As per January 1, 2003, KPN and TPG N.V. sold to Aegon Nederland N.V.our interest in the 50:50 joint venture TKP B.V. TKP handles the pensionadministration of our pension funds. Our pension funds and TKP have enteredinto administration agreements with a five-year term, starting January 1, 2003.One of the members of our Supervisory Board, Mr. Streppel, is a member of theBoard of Management of Aegon N.V., the holding company of Aegon Nederland N.V.The agreement was entered into in the ordinary course of business and on an atarm’s length basis.

 

**Agreementsrelated to the sale of Netwerk Bouw**

 

On July 31, 2002 we sold 55% of our shares of KPN Netwerk BouwB.V. (our construction unit) to VWS Telecom B.V. for EUR 13.75 million.The construction unit was subsequently renamed Volker Wessels Netwerk Bouw B.V.(VWNB). We expect that VWS Telecom B.V. will acquire the remaining 45% atyear-end 2004 for a purchase price between EUR 8.55 million andEUR 25.65 million. The final price will depend on various factors,including the results of VWNB in 2003 and 2004.

 

KPN and VWNB have entered into a service framework agreement regardingthe design and construction of fixed telecommunication infrastructure. We arerequired to order from VWNB 90% of our design and construction work in2003-2005 for our fixed telecommunication infrastructure.

 

**Cooperationagreement between KPN Telecom, Infonet Nederland and Infonet ServicesCorporation**

 

We have entered into a cooperation agreement and a Sales representativesign-up agreement with Infonet Services Corporation (ISC), in which we have a17.7% shareholding. We are authorized by ISC to sell Infonet services under theconditions of the Infonet Sales Representative Agreement of December 27, 1989between ISC and Infonet Nederland B.V. to entities located in areas in which Infonet Nederland then has theright to sell Infonet services. ISC has notified Infonet Nederland B.V. that ithas determined not to renew the Infonet Sales Representative Agreement ofDecember 27, 1989. Therefore, the Sales Representative Agreement of December27, 1989 will terminate at

 

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December 27, 2004. As fromJanuary 2003 we will not enter into any new relationship (other than ISC)for the distribution of global managed data network services that ISC providesto Infonet Nederland. We are not obliged to comply with this condition in theevent that ISC is unable to provide the global managed data network services tous in conformity with our request. The cooperation agreement is for a term ofthree years. We are not bound by the above-mentioned restriction if (i) weare required from time to time, on an infrequent basis, to contract non-Infonetprovided global managed data network services to comply with customercontracts; or (ii) we acquire a company or business or establish a jointventure which provides global managed network services.

 

**AGREEMENTBETWEEN KPN MOBILE AND SENDO HOLDING PLC**

 

On April 25, 2002, KPN Mobileand Sendo Holding Plc entered into a supply agreement concerning the supply bySendo of mobile phones to KPN Mobile. One of the members of our Supervisory Board, Mr. D.G. Eustace, is Chairmanof the board of Sendo. The agreement was entered into in the ordinary course ofbusiness and on an at arm's length basis.

 

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**SegmentReporting**

 

In 2003, our three segments contained the two divisions Fixed andMobile and Other activities.

 

**Fixed division**

 

Our Fixed division comprises Fixed Networks and Business Solutions.

 

***Fixed Networks***

*** ***

This comprises domestic, fixed-to-mobile and outbound internationaltelephony traffic on KPN’s fixed Dutch network for both residential andbusiness customers (Fixed Telephony business unit). KPN also offers wholesaletraffic, or services to other telecommunications operators. This mainlyconcerns domestic access and interconnect services and international networkaccess (Carrier Services business unit). Internet and media activities(Consumer Internet and Media Services, or CIMS), Fixed network operations andthe external distribution and kpn.com sales channels are also part of FixedNetworks. Lastly, Fixed Networks comprises KPN’s 50.78% participating interestin SNT, a call center company listed on Euronext (Amsterdam).

 

***Business Solutions***

 

This comprises transmission services (including leased lines), IPservices (such as DSL and private network services), Integrated Solutions andmanaged application services. Customers are mainly large business customers,other telecommunications operators and independent service providers. BusinessSolutions also comprises the distribution channel for sales to the businessmarket (KPN Sales).

 

In 2002, KPN formed a new business unit for international data/IPservices, called KPN EuroRings, which commenced activities in 2003. The dataactivities of KPN Belgium were sold in January 2003.

 

**Mobile division**

 

This division comprises our mobile activities in Germany, the Netherlandsand Belgium. Since the end of 2002, KPN owns 97.84% of KPN Mobile N.V.

 

**Otheractivities**

 

Other activities mainly comprise activities other than those of theFixed and Mobile division including various international participations, suchas our 65.0% interest in the satellite communications company Xantic.Furthermore, it comprises the activities of KPN EnterCom (businesscommunication solutions) and the retail distribution channel (Primafoons andbusiness centers). The results of KPN Services (general services) and CorporateCenter (headquarters) are also included in Other activities.

 

During 2003, a number of other activities were sold, such asTelefoongids Media, Český Telecom and Xantic’s participation in Inmarsat.

 

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**INCOMESTATEMENT ITEMS**

** **

**TOTALOPERATING REVENUES**

** **
| **Amounts in millions of euro** |   | **2003**   |       | **2002**   |       | **2001**   |       |
|---------------------------------|--------|------------|------------|------------|------------|------------|------------|
|                            |   |       |       |       |       |       |       |
| Fixed                           |   | 7,399      |       | 7,376      |       | 7,320      |       |
| Mobile                          |   | 5,379      |       | 5,312      |       | 4,673      |       |
| Other activities                |   | 1,364      |       | 1,264      |       | 2,148      |       |
| Inter-division revenues         |   | -1,235     |       | -1,168     |       | -1,282     |       |
| **Total**                       |   | **12,907** | ** ** | **12,784** | ** ** | **12,859** | ** ** |

 

There were no major customers, which represent a significant part ofoperating revenues.

 

**TOTALOPERATING REVENUES BY GEOGRAPHICAL AREA**

 
|             |   | **2003**        |   | **2003**          |   | **2002**        |   | **2002**          |   | **2001**        |   | **2001**          |   |
|------------------|--------|-----------------|--------|-------------------|--------|-----------------|--------|-------------------|--------|-----------------|--------|-------------------|--------|
|             |   | **Netherlands** |   | **International** |   | **Netherlands** |   | **International** |   | **Netherlands** |   | **International** |   |
| Fixed            |   | 97              | %      | 3                 | %      | 97              | %      | 3                 | %      | 98              | %      | 2                 | %      |
| Mobile           |   | 44              | %      | 56                | %      | 48              | %      | 52                | %      | 52              | %      | 48                | %      |
| Other activities |   | 91              | %      | 9                 | %      | 92              | %      | 8                 | %      | 81              | %      | 19                | %      |
| **Total**        |   | **76**          | **%**  | **24**            | **%**  | **76**          | **%**  | **24**            | **%**  | **78**          | **%**  | **22**            | **%**  |

 

The basis for geographicaldetermination is the location of the entity providing the service. Theinternational revenues of the Mobile division mainly relate to Germany. 

 

**DEPRECIATION,AMORTIZATION AND IMPAIRMENT CHARGES**

** **
| **Amounts in millions of euro** |   | **2003**  |       | **2002**   |       | **2001**   |       |
|---------------------------------|--------|-----------|------------|------------|------------|------------|------------|
|                            |   |      |       |       |       |       |       |
| Fixed                           |   | 1,374     |       | 1,632      |       | 1,505      |       |
| Mobile 1)                       |   | 948       |       | 8,367      |       | 15,617     |       |
| Other activities                |   | 213       |       | 253        |       | 695        |       |
| **Total**                       |   | **2,535** | ** ** | **10,252** | ** ** | **17,817** | ** ** |

 

----

1)     In2003, the depreciation, amortization and impairment charges within the Mobiledivision include the reversal of an impairment of EUR 103 million.

 

**IMPAIRMENTSON GOODWILL AND LICENSES**

 
| **Amounts in millions of euro** |   | **2003** |       | **2002**  |       | **2001**   |       |
|---------------------------------|--------|----------|------------|-----------|------------|------------|------------|
|                            |   |     |       |      |       |       |       |
| Fixed                           |   | 38       |       | —    |       | 10         |       |
| Mobile 1)                       |   | -103     |       | 7,264     |       | 13,843     |       |
| Other activities                |   | 61       |       | 31        |       | 260        |       |
| **Total**                       |   | **-4**   | ** ** | **7,295** | ** ** | **14,113** | ** ** |

----

1) In 2003, impairments ongoodwill and licenses consist of the reversal of an impairment of EUR 103million.

** **

**OPERATINGPROFIT OR LOSS**

** **
| **Amounts in millions of euro** |   | **2003**  |       | **2002**   |       | **2001**    |       |
|---------------------------------|--------|-----------|------------|------------|------------|-------------|------------|
|                            |   |      |       |       |       |        |       |
| Fixed                           |   | 1,713     |       | 995        |       | 515         |       |
| Mobile                          |   | 1,047     |       | -6,254     |       | -14,130     |       |
| Other activities                |   | 348       |       | -322       |       | -821        |       |
| **Total**                       |   | **3,108** | ** ** | **-5,581** | ** ** | **-14,436** | ** ** |

 

**INCOMEFROM PARTICIPATING INTERESTS**

 
| **Amounts in millions of euro** |   | **2003** |       | **2002**   |       | **2001** |       |
|---------------------------------|--------|----------|------------|------------|------------|----------|------------|
|                            |   |     |       |       |       |     |       |
| Fixed                           |   | —   |       | —     |       | —   |       |
| Mobile                          |   | 121      |       | -1,169     |       | -87      |       |
| Other activities                |   | 40       |       | -531       |       | 6        |       |
| **Total**                       |   | **161**  | ** ** | **-1,700** | ** ** | **-81**  | ** ** |

 

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**BALANCESHEET ITEMS**

 

**LICENSES**

 
| **Amounts in millions of euro** |   | **2003**  |       | **2002**  |       |
|---------------------------------|--------|-----------|------------|-----------|------------|
|                            |   |      |       |      |       |
| Fixed                           |   | 2         |       | 2         |       |
| Mobile                          |   | 4,424     |       | 4,360     |       |
| Other activities                |   | 31        |       | 57        |       |
| **Total**                       |   | **4,457** | ** ** | **4,419** | ** ** |

** **

**GOODWILL**

** **
| **Amounts in millions of euro**     |   | **Fixed** |       | **Mobile** |       | **Other activities** |       | **Total**  |       |
|-------------------------------------|--------|-----------|------------|------------|------------|----------------------|------------|------------|------------|
|                                |   |      |       |       |       |                 |       |       |       |
| **Balance as at December 31, 2000** |   | **94**    | ** ** | **19,960** | ** ** | **458**              | ** ** | **20,512** | ** ** |
| Investments                         |   | 74        |       | 544        |       | 22                   |       | 640        |       |
| Disposals                           |   | —    |       | -194       |       | -37                  |       | -231       |       |
| Changes  in consolidations          |   | —    |       | —     |       | -17                  |       | -17        |       |
| Amortization                        |   | -33       |       | -1,125     |       | -10                  |       | -1,168     |       |
| Impairments                         |   | -9        |       | -13,843    |       | -261                 |       | -14,113    |       |
| **Balance as at December 31, 2001** |   | **126**   | ** ** | **5,342**  | ** ** | **155**              | ** ** | **5,623**  | ** ** |
| Investments                         |   | 10        |       | 1,253      |       | 4                    |       | 1,267      |       |
| Disposals                           |   | —    |       | -137       |       | —               |       | -137       |       |
| Changes  in consolidations          |   | 3         |       | —     |       | —               |       | 3          |       |
| Amortization                        |   | -38       |       | -286       |       | -4                   |       | -328       |       |
| Impairments                         |   | —    |       | -1,852     |       | -31                  |       | -1,883     |       |
| Exchange  rate differences / Other  |   | —    |       | -20        |       | -41                  |       | -61        |       |
| **Balance as at December 31, 2002** |   | **101**   | ** ** | **4,300**  | ** ** | **83**               | ** ** | **4,484**  | ** ** |
| Investments                         |   | 6         |       | —     |       | —               |       | 6          |       |
| Disposals                           |   | —    |       | —     |       | -1                   |       | -1         |       |
| Changes  in consolidations          |   | —    |       | —     |       | -2                   |       | -2         |       |
| Amortization                        |   | -21       |       | -245       |       | -7                   |       | -273       |       |
| Impairments                         |   | -38       |       | —     |       | -46                  |       | -84        |       |
| Exchange  rate differences / Other  |   | —    |       | —     |       | -4                   |       | -4         |       |
| **Balance as at December 31, 2003** |   | **48**    | ** ** | **4,055**  | ** ** | **23**               | ** ** | **4,126**  | ** ** |

 

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The following table sets forththe accumulated impairments at year-end:

 
| **Amounts in millions of euro** |   | **Fixed** |   | **Mobile** |   | **Other activities** |   | **Total** |   |
|---------------------------------|--------|-----------|--------|------------|--------|----------------------|--------|-----------|--------|
| 2001                            |   | -9        |   | -13,843    |   | -261                 |   | -14,113   |   |
| 2002                            |   | -9        |   | -15,687    |   | -288                 |   | -15,984   |   |
| 2003                            |   | —    |   | -15,552    |   | -141                 |   | -15,693   |   |

 

**ADDITIONSTO PROPERTY, PLANT AND EQUIPMENT**

 
| **Amounts in millions of euro** |   | **2003**  |       | **2002**  |       |
|---------------------------------|--------|-----------|------------|-----------|------------|
|                            |   |      |       |      |       |
| Fixed                           |   | 532       |       | 558       |       |
| Mobile                          |   | 914       |       | 519       |       |
| Other activities                |   | 53        |       | 60        |       |
| **Total**                       |   | **1,499** | ** ** | **1,137** | ** ** |

 

KPN’s additions to property, plant and equipment in the Fixed divisionmainly comprise additions in the Netherlands. In our Mobile division, 70%(2002: 62%) of our additions were in Germany and 11% (2002: 28%) in Belgium.

 

**PARTICIPATINGINTERESTS**

 
| **Amounts in millions of euro** |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|---------------------------------|--------|--------------------|------------|--------------------|------------|
|                            |   |               |       |               |       |
| Fixed                           |   | 6                  |       | 6                  |       |
| Mobile                          |   | 1                  |       | 36                 |       |
| Other activities                |   | 187                |       | 859                |       |
| **Total**                       |   | **194**            | ** ** | **901**            | ** ** |

 

**TOTALASSETS**

 
| **Amounts in millions of euro** |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|---------------------------------|--------|--------------------|------------|--------------------|------------|
|                            |   |               |       |               |       |
| Fixed                           |   | 7,168              |       | 8,151              |       |
| Mobile                          |   | 13,321             |       | 12,977             |       |
| Other activities                |   | 3,636              |       | 4,033              |       |
| **Total**                       |   | **24,125**         | ** ** | **25,161**         | ** ** |

 

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**NUMBEROF EMPLOYEES**

 

**AVERAGENUMBER OF FULL-TIME EQUIVALENTS**

 
|             |   | **2003**   |       | **2002**   |       | **2001**   |       |
|------------------|--------|------------|------------|------------|------------|------------|------------|
|             |   |       |       |       |       |       |       |
| Fixed            |   | 19,245     |       | 23,871     |       | 23,924     |       |
| Mobile           |   | 5,869      |       | 6,617      |       | 6,916      |       |
| Other activities |   | 6,153      |       | 9,707      |       | 14,880     |       |
| **Total**        |   | **31,267** | ** ** | **40,195** | ** ** | **45,720** | ** ** |

 

**NUMBEROF EMPLOYEES AT END OF PERIOD**

 
|             |   | **2003**   |       | **2002**   |       | **2001**   |       |
|------------------|--------|------------|------------|------------|------------|------------|------------|
|             |   |       |       |       |       |       |       |
| Fixed            |   | 20,479     |       | 24,441     |       | 28,005     |       |
| Mobile           |   | 6,111      |       | 6,051      |       | 7,388      |       |
| Other activities |   | 6,146      |       | 7,626      |       | 13,728     |       |
| **Total**        |   | **32,736** | ** ** | **38,118** | ** ** | **49,121** | ** ** |

 

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**Information on US GAAP**

** **

**INTRODUCTION**

** **

The consolidated financial statements are prepared in accordance withaccounting principles generally accepted in the Netherlands (Dutch GAAP), whichvaries in certain significant respects from accounting principles generallyaccepted in the United States of America (US GAAP). The main differences arisein the following areas:

•                  goodwill andother long-lived assets;

•                  accounting forbusiness combinations;

•                  restructuring;

•                  pension andother post-retirement benefits;

•                  revenuerecognition;

•                  BellSouth’sexchange right;

•                  capitalization ofinterest charges for UMTS licenses.

 

The following statements summarize the adjustments to our profit aftertaxes and total shareholders’ equity that would have to be made if we were toreport under US GAAP.

 

**RECONCILIATION OF PROFIT OR LOSSAFTER TAXES TO US GAAP**

 
| **Note** |   | **Amounts in millions of euro**                                                         |       | **2003**  |       | **2002**   |       | **2001**   |       |
|----------|--------|-----------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|------------|------------|
|     |   | **Profit or loss after taxes under Dutch GAAP**                                         | ** ** | **2,731** | ** ** | **-9,542** | ** ** | **-7,495** | ** ** |
|     |   | Adjustments  for:                                                                       |       |      |       |       |       |       |       |
| A        |   | •   Impairment  of goodwill                                         |       | 55        |       | 441        |       | 13,843     |       |
| A        |   | •   Goodwill  difference on sale of subsidiaries                    |       | -3        |       | —     |       | —     |       |
| A        |   | •   Impairment  of goodwill on transition to SFAS 142               |       | —    |       | -14,179    |       | —     |       |
| A        |   | •   Impairment  of licenses                                         |       | -7,096    |       | 5,326      |       | —     |       |
| A        |   | •   Impairment  of tangible fixed assets                            |       | -23       |       | 39         |       | —     |       |
| A        |   | •   Impairment  of financial fixed assets                           |       | -119      |       | —     |       | —     |       |
| A        |   | •   Amortization  of goodwill                                       |       | 272       |       | 328        |       | 34         |       |
| B        |   | •   Amortization  of brand name                                     |       | -58       |       | -54        |       | -42        |       |
| B        |   | •   Amortization  of customer base                                  |       | -92       |       | -81        |       | -64        |       |
| B        |   | •   Amortization  of other intangible fixed assets                  |       | -6        |       | -6         |       | -4         |       |
| B        |   | •   Rebranding  expenses                                            |       | 6         |       | -34        |       | —     |       |
| C        |   | •   Employee  and reorganization provisions                         |       | -7        |       | -191       |       | 160        |       |
| D        |   | •   Pension  charges                                                |       | 41        |       | 185        |       | 61         |       |
| D        |   | •   Curtailment  gain                                               |       | 7         |       | 182        |       | 197        |       |
| E        |   | •   Revenue  recognition                                            |       | 23        |       | 126        |       | -52        |       |
| E        |   | •   Cumulative  effect of adoption of EITF 00-21 on January 1, 2003 |       | 26        |       | —     |       | —     |       |
| F        |   | •   BellSouth’s  exchange right                                |       | —    |       | -53        |       | -5,472     |       |
| G        |   | •   Capitalization  of interest charges for UMTS licenses           |       | 599       |       | 627        |       | 555        |       |
| H        |   | •   Derivative  financial instruments                               |       | 7         |       | 90         |       | 32         |       |
| H        |   | •   Minority  participating interests                               |       | -105      |       | -84        |       | 181        |       |
| H        |   | •   Minority  interests                                             |       | 80        |       | 1,744      |       | -1,892     |       |
| H        |   | •   Write-down  of capitalized software/software produced in-house  |       | —    |       | —     |       | 3          |       |
| H        |   | •   Consolidation  of Vision Networks Holdings B.V.                 |       | -11       |       | 62         |       | 7          |       |
| H        |   | •   Investments  grant to replace *WIR* allowances                  |       | 7         |       | 6          |       | 8          |       |
| H        |   | •   Self-insurance                                                  |       | —    |       | —     |       | -31        |       |
| H        |   | •   Cumulative  effect of adoption of SFAS 143 on January 1, 2003   |       | -6        |       | —     |       | —     |       |
| H        |   | •   Share  based compensation expense                               |       | **-**22   |       | -37        |       | -45        |       |
| H        |   | •   Other                                                           |       | 7         |       | —     |       | —     |       |
|     |   | •   Realized  cumulative translation difference                     |       | -15       |       | —     |       | —     |       |
|     |   | •   Tax  effect of adjustments                                      |       | -48       |       | -39        |       | -214       |       |
|     |   | **Profit or loss after taxes under US GAAP**                                            | ** ** | -3,750    | ** ** | -15,144    |       | -230       | ** ** |

 

The 2002 and 2001 reconciliation of profit or loss after tax has beenrestated for the retroactive adoption of SFAS 123, ‘Accounting for Stock-BasedCompensation’ (SFAS 123), as discussed in note H.

 

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**PROFITOR LOSS AFTER TAXES PER ORDINARY SHARE UNDER US GAAP**

 
| **Amounts in euro**                                                                                   |   | **2003**  |       | **2002**  |       | **2001**  |       |
|-------------------------------------------------------------------------------------------------------|--------|-----------|------------|-----------|------------|-----------|------------|
|                                                                                                  |   |      | ** ** |      | ** ** |      | ** ** |
| Profit or loss after taxes per ordinary  share and per ADS, basic and diluted:                        |   |      |       |      |       |      |       |
| -        Continuing  operations                               |   | -1.70     |       | -0.43     |       | -0.06     |       |
| -        Discontinued  operations                             |   | 0.18      |       | 0.04      |       | -0.07     |       |
| -        Cumulative  effect of change in accounting principle |   | 0.01      |       | -5.85     |       | -0.05     |       |
| **-        Total**                                            |   | **-1.52** | ** ** | **-6.25** | ** ** | **-0.18** |       |

 

**RECONCILIATIONOF SHAREHOLDERS’ EQUITY TO US GAAP**

 
| **Note** |   | **Amounts in millions of euro**                                               |       | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|----------|--------|-------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
|     |   |                                                                          |       |               |       |               |       |
|     |   | **Shareholders’ equity under Dutch GAAP**                                | ** ** | **7,163**          | ** ** | **4,508**          | ** ** |
|     |   |                                                                          |       |               |       |               |       |
|     |   | Adjustments  for:                                                             |       |               |       |               |       |
| A        |   | •   Goodwill                                              |       | -734               |       | -1,058             |       |
| A        |   | •   Impairments  on licenses                              |       | 78                 |       | 5,326              |       |
| A        |   | •   Impairments  on tangible fixed assets                 |       | 16                 |       | 39                 |       |
| A        |   | •   Impairment  of financial fixed assets                 |       | -119               |       | —             |       |
| B        |   | •   Brand  name                                           |       | 947                |       | 1,005              |       |
| B        |   | •   Customer  base                                        |       | 82                 |       | 174                |       |
| B        |   | •   Other  intangible fixed assets                        |       | 50                 |       | 56                 |       |
| B        |   | •   Rebranding                                            |       | -28                |       | -34                |       |
| C        |   | •   Employee  and reorganization provisions               |       | 24                 |       | 31                 |       |
| D        |   | •   Pension  liabilities                                  |       | -673               |       | -721               |       |
| E        |   | •   Revenue  recognition                                  |       | -114               |       | -176               |       |
| G        |   | •   Capitalization  of interest charges for UMTS licenses |       | 112                |       | 1,361              |       |
| H        |   | •   Derivative  financial instruments                     |       | -84                |       | 122                |       |
| H        |   | •   Minority  participating interests                     |       | -3                 |       | 121                |       |
| H        |   | •   Minority  interests                                   |       | -36                |       | -116               |       |
| H        |   | •   Foundation  *Stichting  Werknemersaandelen KPN/TPG*   |       | —             |       | -18                |       |
| H        |   | •   Investment  grants to replace *WIR*allowances         |       | -33                |       | -40                |       |
|     |   | •   Deferred  taxes                                       |       | 257                |       | 245                |       |
|     |   |                                                                          |       |               |       |               |       |
|     |   | **Shareholders’ equity under US GAAP**                                   | ** ** | **6,905**          | ** ** | **10,825**         | ** ** |

 

In addition to the reconciliation of Dutch GAAP to US GAAP for profitafter taxes, US GAAP requires that a statement of comprehensive income bepresented in accordance with SFAS 130, ‘Reporting Comprehensive Income’.Comprehensive income reflects all changes in shareholders’ equity during acertain period, with the exception of payments by and distributions toshareholders.

 

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**STATEMENTOF CHANGES IN SHAREHOLDERS’ EQUITY UNDER US GAAP**

** **

Amounts in millions of euro except for shares and per-share information

 
|                                                         |   |                           |       |                             |       |                   |       | **Accumulated Other Comprehensive income or  loss** |       |                                                    |       |
|--------------------------------------------------------------|--------|--------------------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------|------------|
|                                                         |   | **Subscribed  capital  stock** |       | **Additional  paid-in  capital** |       | **Retained  earnings** |       | **Currency  translation  differences**              |       | **Change  in  valuation  of Infonet  to market  value** |       | **Derivative  financial  instruments (FAS  133)** |   | **Total** |   | **Total  shareholder’s  equity** |   |
|                                                         |   |                           |       |                             |       |                   |       |                                                |       |                                                    |       |   |   |   |   |   |   |
| **Balance as of January 1, 2001**                            |   | **289**                        | ** ** | **10,449**                       | ** ** | **9,212**              | ** ** | **11**                                              | ** ** | **32**                                                  | ** ** | **—** | ** ** | **43** | ** ** | **19,993** | ** ** |
|                                                         |   |                           | ** ** |                             | ** ** |                   | ** ** |                                                | ** ** |                                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Profit or loss after taxes                                   |   |                           |       |                             |       | -230                   |       |                                                |       |                                                    |       |   |   |   |   | -230 |   |
| Net current period  change, net of tax of -5 for derivatives |   |                           |       |                             |       |                   |       | 92                                                  |       | -32                                                     |       | 9 |   | 69 |   | 69 |   |
| **Total  comprehensive income (loss), net of tax**           |   |                           | ** ** |                             | ** ** | **-230**               | ** ** | **92**                                              | ** ** | **-32**                                                 | ** ** | **9** | ** ** | **69** | ** ** | **-161** | ** ** |
| Share issue                                                  |   | 245                            |       | 4,755                            |       |                   |       |                                                |       |                                                    |       |   |   |   |   | 5,000 |   |
| Share issue cost                                             |   |                           |       | -158                             |       |                   |       |                                                |       |                                                    |       |   |   |   |   | -158 |   |
| Shares purchased for option plans                            |   |                           |       |                             |       | -98                    |       |                                                |       |                                                    |       |   |   |   |   | -98 |   |
| Share based  compensation expense                            |   |                           |       | 45                               |       |                   |       |                                                |       |                                                    |       |   |   |   |   | 45 |   |
| Dividend in shares                                           |   | 7                              |       | -7                               |       |                   |       |                                                |       |                                                    |       |   |   |   |   | — |   |
|                                                         |   |                           | ** ** |                             | ** ** |                   | ** ** |                                                | ** ** |                                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Balance as of December 31, 2001**                          |   | **541**                        | ** ** | **15,084**                       | ** ** | **8,884**              | ** ** | **103**                                             | ** ** | **—**                                              | ** ** | **9** | ** ** | **112** | ** ** | **24,621** | ** ** |
|                                                         |   |                           |       |                             |       |                   |       |                                                |       |                                                    |       |   |   |   |   |   |   |
| Profit or loss after taxes                                   |   |                           |       |                             |       | -15,144                |       |                                                |       |                                                    |       |   |   |   |   | -15,144 |   |
| Net current period  change, net of tax of 5 for derivatives  |   |                           |       |                             |       |                   |       | 33                                                  |       | —                                                  |       | -9 |   | 24 |   | 24 |   |
| **Total  comprehensive income (loss), net of tax**           |   |                           | ** ** |                             | ** ** | **-15,144**            | ** ** | **33**                                              | ** ** | **—**                                              | ** ** | **-9** | ** ** | **24** | ** ** | **-15,120** | ** ** |
| Share issue                                                  |   | 57                             |       | 1,197                            |       |                   |       |                                                |       |                                                    |       |   |   |   |   | 1,254 |   |
| Share issue cost                                             |   |                           |       | 33                               |       |                   |       |                                                |       |                                                    |       |   |   |   |   | 33 |   |
| Share based  compensation expense                            |   |                           |       | 37                               |       |                   |       |                                                |       |                                                    |       |   |   |   |   | 37 |   |
|                                                         |   |                           | ** ** |                             | ** ** |                   | ** ** |                                                | ** ** |                                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Balance as of December 31, 2002**                          |   | **598**                        | ** ** | **16,351**                       | ** ** | **-6,260**             | ** ** | **136**                                             | ** ** | **—**                                              | ** ** | **—** | ** ** | **136** | ** ** | **10,825** | ** ** |
|                                                         |   |                           |       |                             |       |                   |       |                                                |       |                                                    |       |   |   |   |   |   |   |
| Profit or loss after taxes                                   |   |                           |       |                             |       | -3,750                 |       |                                                |       |                                                    |       |   |   |   |   | -3,750 |   |
| Net current period  change, net of tax of 73 for derivatives |   |                           |       |                             |       |                   |       | -51                                                 |       | -20                                                     |       | -140 |   | -211 |   | -211 |   |
| Reclassifications  into income                               |   |                           |       |                             |       |                   |       | 15                                                  |       |                                                    |       |   |   | 15 |   | 15 |   |
| **Total  comprehensive income (loss), net of tax**           |   |                           | ** ** |                             | ** ** | **-3,750**             | ** ** | **-36**                                             | ** ** | **-20**                                                 | ** ** | **-140** | ** ** | **-196** | ** ** | **-3,946** | ** ** |
| Purchase own shares                                          |   |                           |       |                             |       | -8                     |       |                                                |       |                                                    |       |   |   |   |   | -8 |   |
| Share based  compensation expense                            |   |                           |       | 34                               |       |                   |       |                                                |       |                                                    |       |   |   |   |   | 34 |   |
|                                                         |   |                           | ** ** |                             | ** ** |                   | ** ** |                                                | ** ** |                                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Balance as of December 31, 2003**                          |   | **598**                        | ** ** | **16,385**                       | ** ** | **-10,018**            | ** ** | **100**                                             | ** ** | **-20**                                                 | ** ** | **-140** | ** ** | **-60** | ** ** | **6,905** | ** ** |

 

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**RECENTUS GAAP ACCOUNTING PRONOUNCEMENTS**

** **

In January 2003, the FASBissued FASB Interpretation 46, ‘Consolidation of Variable Interest Entities, anInterpretation of ARB 51’ (‘FIN 46’), and amended FIN 46 in December 2003. FIN46 requires an investor with a majority of the variable interests (primarybeneficiary) in a variable interest entity (VIE) to consolidate the entity andalso requires majority and significant variable interest investors to providecertain disclosures. A VIE is an entity in which the equity investors do nothave the characteristics of a controlling financial interest, or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. FIN 46 iseffective immediately for all new VIEs created after January 31, 2003. For VIEscreated prior to February 1, 2003, FIN 46 will be effective for the company asof December 31, 2004. The disclosure requirements of FIN 46 are effective forour 2003 financial statements regardless of the date the VIE was created.

 

We continue to have significantinvolvement, with certain purchasers of non-core assets, which were disposed ofin the past, either through service level agreements or other certain specificguarantees. We are in the process of reviewing these arrangements to determinewhether the investee is a VIE and if so, if we are the primary beneficiary. Ourreview of these disposed entities has not yet identified any VIEs that wouldrequire consolidation or any significant interest in a VIE that would requiredisclosure under FIN 46. We are also in the process of reviewing our investmentportfolio, including associated companies, as well as other arrangements todetermine whether we are the primary beneficiary of any VIEs. The review hasnot yet identified any VIEs that would require consolidation or any significantexposure to VIEs that would require disclosure.

 

In April 2003, the FASB issued SFAS 149, ‘Amendment of Statement 133 onDerivative Instruments and Hedging Activities’ (SFAS 149). SFAS 149 amends andclarifies financial accounting and reporting for derivative instruments byrequiring that contracts with comparable characteristics be accounted forsimilarly and by clarifying when a derivative contains a financing componentthat warrants special reporting in the statement of cash flows. The guidance inSFAS 149 was effective prospectively for contracts entered into or modified andfor hedging relationships designated after June 30, 2003. The adoption of thisstatement had no effect on our consolidated financial statements.

 

In May 2003, the FASB issued SFAS 150, Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity (SFAS 150). Thestatement establishes standards on how to classify and measure certain financialinstruments with characteristics of both liabilities and equity and requiresadditional disclosures regarding alternative ways of settling instruments andthe capital structure of entities, all of whose shares are mandatoryredeemable. SFAS 150 does not apply to obligations under stock basedarrangements if they are accounted for under APB 25, SFAS 123 or relatedguidance.  The provisions of SFAS 150were effective for all financial instruments entered into or modified after May31, 2003, and otherwise was effective the first interim period beginning afterJune 15, 2003. However, the guidance applying to mandatorily redeemablenoncontrolling interests has been deferred. We are currently assessing theimpact of the adoption of this statement.

 

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**RECONCILINGITEMS AND EXPLANATION OF CERTAIN DIFFERENCES BETWEEN DUTCH GAAP AND US GAAP**

 

**A.GOODWILL AND OTHER LONG-LIVED ASSETS**

** **

***Impairment of goodwill***

*** ***

Under Dutch GAAP, goodwill must be tested for impairment if certainindicators of impairment exist. When such indicators are identified, theimpairment is determined by comparing the carrying value of goodwill with therecoverable amount of the cash-generating unit that contains the goodwill. Ifthe recoverable amount of the cash-generating unit is less than the carryingvalue of the goodwill, an impairment charge is recorded for the difference.

 

In 2001, we recognized impairment charges under Dutch GAAP of EUR13,843 million on the goodwill of E-Plus (EUR 13,701 million), Hutchison 3G UK(EUR 135 million) and RAM Mobile (EUR 7 million).

 

General economic developments, as well as the decisions of some mobileoperators to cease/postpone certain activities in mid-2002, triggered acritical look at the existing business plans of the mobile activities. Thisresulted in new business plans, in line with the adjusted prospects. Impairmenttests were performed on the carrying value of certain assets in the Mobiledivision, including intangible fixed assets and goodwill, which were based uponnew business plans. For the purpose of the impairment tests, we calculated therecoverable value of the assets based on external valuations and discountedcash flows, being the net selling value, and compared the outcome to thecarrying value of the investments. This led to impairment charges on goodwillrelated to E-Plus (EUR 1,427 million) and BASE (EUR 425 million) under DutchGAAP. In addition, we recorded goodwill impairment charges on KPNQwest totalingEUR 31 million. This resulted in total goodwill impairment charges in 2002 ofEUR 1,883 million under Dutch GAAP.

 

Under US GAAP, through the year ended December 31, 2001 an impairmentreview of goodwill was required only if certain indicators of impairmentexisted. An impairment charge was recognized if the total of the expectedfuture undiscounted cash flows was less than the carrying amount of thegoodwill. As the estimated undiscounted future cash flows exceeded the carryingvalue, no impairment was recognized under US GAAP for E-Plus and RAM Mobile.Our investment in Hutchison 3G UK is recorded as an equity method investment atits net asset value and is recorded at our proportionate share, and as such noimpairment was recorded under US GAAP.

 

As of January 1, 2002, we adopted SFAS 142, ‘Goodwill and OtherIntangible Assets’. SFAS 142 specifies that goodwill and other intangibles withan indefinite life are no longer amortized. Instead of amortizing goodwill overits estimated useful life, goodwill is tested for impairment on an annual basisand whenever certain triggering events are identified. SFAS 142 requires atwo-step impairment test to analyze whether or not goodwill has been impaired.Step one tests for potential impairment and requires that the fair value ofeach identified reporting unit be compared to its carrying value. We estimatethe fair value of each reporting unit using estimates based on discounted cashflows. If the fair value of the reporting unit is higher than the book value ofthe reporting unit, including goodwill, no impairment is recognized. If thefair value of the reporting unit is lower than the book value, step two of thegoodwill impairment test must be performed. Step two measures the amount of theimpairment loss, if any, through preparation of a hypothetical purchase priceallocation to determine the implied fair value of goodwill. The implied fairvalue of goodwill is then compared to the carrying value of goodwill. If theimplied fair value of goodwill is lower than the carrying value of goodwill,impairment must be recorded for the difference.

 

The adoption of SFAS 142 in 2002 led to an impairment charge under USGAAP of EUR 14,179 million on the goodwill of, mainly, E-Plus, which wasrecorded as a change of accounting principle as prescribed by SFAS 142. During2002, we recorded additional impairment charges of EUR 1,442 million, mainlyrelated to impairment tests required by SFAS 142 amounting to impairmentcharges at E-Plus (EUR 873 million) and BASE (EUR 400 million). The majority ofthe remaining impairment

 

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charge related to Hutchison 3G UK (EUR 135 million) and KPNQwest (EUR31 million). The net impairment charges under US GAAP (EUR 1,442 million) wereEUR 441 million less compared with Dutch GAAP (EUR 1,883 million), mainly dueto the differing carrying amounts of goodwill.

 

In December 2003 we performed our annual impairment test as prescribedby SFAS 142 and recorded an impairment charge of EUR 29 million. Under DutchGAAP the impairment charge on goodwill was EUR 55 million higher. Thisdifference is primarily caused by the impairment assessment being performed atthe reporting unit level under US GAAP as opposed to the cash-generating unitlevel under Dutch GAAP, which are not always the same.

 

***Impairments of other long-lived assets***

*** ***

Under Dutch GAAP, long-lived assets must be tested for impairment ifcertain impairment indicators exist. When such an impairment indicator isidentified, an impairment charge is recognized for the excess, if any, of thecarrying value of the asset over the recoverable amount.

 

For US GAAP, we apply SFAS 144, ‘Accounting for the Impairment orDisposal of Long-Lived Assets’ (SFAS 144) in order to determine whether or notan asset is impaired. We assess the impairment of identifiable intangibles(licenses and other intangibles) and property plant and equipment wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable. Long-lived assets are tested for recoverability by comparing theundiscounted cash flows of the assets to their carrying value. If the carryingvalue is greater than the total of undiscounted cash flows, the amount of theimpairment, if any, is taken as the difference between the carrying value ofthe assets compared to their fair value, estimated based on discounted cashflows.

 

General economic developments, as well as the decisions of some mobileoperators to cease/postpone certain activities in mid-2002, triggered acritical look at the existing business plans of the mobile activities. Thisresulted in new business plans, in line with the adjusted prospects. Impairmenttests were performed on the carrying value of the mobile network assets, mainlyconsisting

 

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of UMTS licenses and tangible fixed assets.Under Dutch GAAP, this led to impairment charges of EUR 5,412 million, mainlyon the UMTS licenses of E-Plus and the UMTS and DCS licenses of BASE. Under USGAAP, only the UMTS license of BASE was impaired as the undiscounted cash flowsof the other asset groups were greater than their carrying values.

As of December 31, 2003 the undiscountedvalue of the UMTS license in Germany was lower than its book value under USGAAP. This was due to an increased book value as a result of the interestcapitalization as well as a lower undiscounted value compared to prior year. Asalready recorded under Dutch GAAP in 2002, in 2003, the UMTS license under USGAAP in Germany has been impaired to the discounted value. The test alsoresulted in an impairment of the related capitalized interest.

Under Dutch GAAP the impairment of our 15% shareholding in Hutchison 3GUK was reversed for EUR 119 million after the sale of this shareholding toHutchison Whampoa Ltd. (HWL) for the same amount. Under US GAAP a reversal ofan impairment is not allowed. Accounting for the income from the sale under USGAAP is also not allowed, as control as defined under US GAAP over this 15%shareholding is not transferred until the last payment by HWL is received andthis 15% shareholding is released out of the escrow account in favor of HWL.Under US GAAP, the EUR 119 million is therefore excluded from the incomestatement.

###### ***Amortization of goodwill***

The adoption of SFAS 142 as per January 1, 2002 also resulted in areconciling item to reverse the goodwill amortization charge under Dutch GAAP,as amortization of goodwill is no longer allowed under US GAAP. In 2003 weamortized goodwill under Dutch GAAP for EUR 273 million (2002: EUR 328million). In the Reconciliation of Profit or Loss After Taxes to US GAAP for2003 EUR 272 million is recorded as amortization of goodwill and EUR 1 millionis included in the rebranding expenses.

The following table shows the results of operations as if thenon-amortization provisions of SFAS 142 were applied to 2001:
| Amounts in  millions of euro, except per share information |   | **2001**   |   |
|------------------------------------------------------------|--------|------------|--------|
|                                                       |   |       |   |
| Loss after tax as reported under US GAAP                   |   | –230  |   |
| Add back: goodwill amortization                            |   | 1,134      |   |
| Adjusted profit after tax                                  |   | 904        |   |
|                                                       |   |       |   |
| Earnings per share – basic:                           |   |       |   |
| Profit after tax as reported under US GAAP                 |   | –0.18 |   |
| Add back: goodwill amortization                            |   | 0.89       |   |
| Adjusted profit after tax                                  |   | 0.71       |   |
|                                                       |   |       |   |
| Earnings per share – diluted:                         |   |       |   |
| Profit after tax as reported under US GAAP                 |   | –0.13 |   |
| Add back: goodwill amortization                            |   | 0.78       |   |
| Adjusted profit after tax 1)                               |   | 0.64       |   |

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1) Based on an increase of net income of EUR 34 million (interestconvertible debt) in 2001 and a total of 1,456,654,982 shares outstanding on aweighted average basis in 2001.

**B. ACCOUNTING FOR BUSINESS COMBINATIONS**

US GAAP requires that, in accounting for abusiness combination, intangible fixed assets that arise from contractual orother legal rights or are separable must be separately identified andrecognized as intangible assets apart from goodwill. Under Dutch GAAP, theseintangible assets are generally included in goodwill. The most significantintangible assets identified in the acquisition of E-Plus and BASE includebrand name, customer base and other intangible assets. As the intangible assetsrecognized separately under US GAAP are amortized over shorter useful livesthan the goodwill recorded under Dutch GAAP, the intangible asset amortizationexpense is higher under US GAAP as compared to Dutch GAAP.

The components of other intangible assetswere as follows (in EUR millions):
|                           |   |                     |   | **December 31, 2003**      |   | **December 31, 2002**         |   |
|--------------------------------|--------|--------------------------|--------|----------------------------|--------|-------------------------------|--------|
|                           |   | **Amortization  period** |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Brand  name                    |   | 20 years                 |   | 1,139                      |   | -192                          |   | 1,139 |   | -134 |   |
| Customer  base                 |   | 4 years                  |   | 362                        |   | -280                          |   | 362 |   | -188 |   |
| Other  intangible fixed assets |   | 8-14 years               |   | 70                         |   | -20                           |   | 70 |   | -14 |   |
| Total                          |   |                     |   | 1,571                      |   | -492                          |   | 1,571 |   | -336 |   |

 

Amortization expense for intangible assetswas EUR 156 million in 2003 (2002: EUR 141 million). Amortization expense onintangible assets is expected to be EUR 111 million for 2004, EUR 92 millionfor 2005, EUR 68 million for 2006, EUR 63 million for 2007 and EUR 63 millionfor 2008.

In 2001, as part of the purchase of the remaining 50% interest in itssubsidiary BASE (formerly known as KPN Orange), we established an accrualagainst goodwill under Dutch GAAP for the costs associated with eliminating theOrange brand name and costs associated with the rebranding of its subsidiary asBASE. Under US GAAP, we have expensed all costs associated with the rebranding.Under Dutch GAAP this rebranding goodwill has been partially impaired in 2002.The remaining 2003 balance of Rebranding expenses under US GAAP represents thebalance of goodwill under Dutch GAAP. Future amortization of this goodwill willbe reversed under US GAAP.

**C. REORGANIZATION AND RESTRUCTURING**

Under Dutch GAAP, reorganization and restructuring provisions must berecorded for expected costs of planned reorganizations, if certain criteria aremet. Under US GAAP, the specific criteria relating to

 

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the timing of communications and nature of the costs that must be metin order to record a restructuring of a provision for liabilities and costsassociated with reorganization are more prescriptive than under Dutch GAAP.

 

At the end of 2001, KPN management approved a reorganization plan inorder to reduce the Company’s workforce. In 2001 the total provision forrestructuring and redundancy amounted to EUR 726 million, of which EUR 491million was accounted for as pension provisions in the consolidated balancesheet as these costs related to the early retirement scheme for which thereorganization plan provided. The remaining EUR 235 million was accounted foras a reorganization provision in the consolidated balance sheet and relatedmainly to the costs of compulsory redundancies, legal and termination fees andpenalties for rental contracts and contracts with suppliers.

 

In 2002, we recognized additional restructuring charges of EUR 130million for additional redundancies and the reduction in office space. Inaddition, EUR 53 million of the restructuring provision included in the planwas released to income due to the fact that a number of redundant employeesfound another job within KPN.

 

In 2003, we recognized additional restructuring charges of EUR 133million for additional redundancies and the reduction in office space. Inaddition, EUR 73 million of the restructuring provision included in the planwas released to income due to the fact that a number of redundant employeesfound another job within KPN.

 

Under US GAAP, certain elements of the reorganization provision thatwere recognized under Dutch GAAP did not meet the US GAAP criteria specifiedabove. These criteria include the timing of the communication regarding thebenefit arrangement to the employees involved. Furthermore, certain costs donot qualify as a reorganization provision in accordance with US GAAP. As aresult, the provision under US GAAP at December 31, 2003 was EUR 24 millionlower than the provision recorded under Dutch GAAP. As of December 31, 2002,the restructuring provision was EUR 31 million lower than the Dutch GAAPprovision.

 

**D.PENSIONS AND OTHER POST-RETIREMENT BENEFITS**

** **

The main Dutch Company pension plan (BPF), which is externally fundedin the foundation *‘Stichting Bedrijfspensioenfonds KPN’*, covers the employeeswho are subject to a collective labor agreement. The majority of all Dutchemployees are subject to a collective labor agreement. The pension plan is adefined benefit, average pay plan with a retirement age of 62 for salaries upto EUR 45,378. Pension benefits are accrued on an annual basis of 2.0% of thepensionable base. Part of the pension may be transferred at age 62 into thespouse’s pension. In the event of the decease of the beneficiary before the ageof 62, the spouse’s pension is covered by risk premiums. Furthermore, atemporary pension of 2% of the deductible amount is accrued to cover the threeyears before state pension commences. For salaries above EUR 45,378 a definedcontribution plan is applicable.

 

A transitional plan exists for employees in service at April 1, 2000and who were 35 years or older at that date. For these employees KPN guaranteesa benefit of 80% (between age 45 and age 35 diminishing to 60%) of the lastqualifying salary from age 62 to 65. This group of employees also receives anadditional pension at age 62 based on 1.5 extra years of service. Furthermore,if an employee has served 25 years or more on April 1, 1996, early retirementstarts at age 61 or after 40 years of service instead of at age 62.

 

The second Company pension plan (*OPF*) is externally funded in thefoundation *‘StichtingOndernemingspensioenfonds KPN’*. It covers all employees of 25 yearsand older with an individual employment contract (not subject to the collectivelabor agreement). This pension plan is comparable to the pension plan foremployees who are subject to a collective labor agreement and will thereforenot be discussed separately in detail.

 

Only the employer contributes to both of these funds. The contributionis based upon actuarial assumptions. Furthermore,KPN has agreed to pay additional contributions to the pension fund in order tosatisfy the new funding requirements of the Dutch pension authorities. Thetotal contribution to the main pension funds amounted to EUR 161 million in2003 of which EUR 16 million is paid by the new owners of divested entities.The contribution is estimated to be EUR 139 million in 2004 of which EUR 17million will be paid by the new owners of divested entities. The benefitsarising from the transitional plan are directly paid by KPN. These paymentsamounted to EUR 74 million in 2003 and are estimated at EUR 63 million for2004. Furthermore EUR 13 million is paid to other pension plans.

 

The '*Sti**chting Bedrijfspensioenfonds KPN'*and*'StichtingOndernemingspensioenfonds KPN'* manage the investment portfolio forpensions. Both pension funds have their own investment policy. The investmentpolicy is based on a yearly asset-liability study and decided on by the boardof each pension fund in consultation of investment advisers and within theboundaries given by the Regulatory Body for pension funds in the Netherlands (Pensioen-en Verzekeringskamer, or PVK). The investments are reviewed daily by theinvestment manager and on a quarterly basis by the board of the pension fund.When necessary the board decides on a change in the investment policy inconsultation of investment advisers. The assets are carried at market value.The investment portfolio is comprised of the following:

 
| **As a%**                 |   | **Strategic  (as  from 2003)** |   | **Current,  as of  December  2003** |   | **Current,  as of  December  2002** |   | **Current,  as of  December  2001** |   |
|---------------------------|--------|--------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
|                      |   |                           |   |                                |   |                                |   |                                |   |
| Equities                  |   | 35                             |   | 34                                  |   | 28                                  |   | 56                                  |   |
| Fixed income              |   | 49                             |   | 54                                  |   | 61                                  |   | 34                                  |   |
| Real estate               |   | 10                             |   | 10                                  |   | 11                                  |   | 10                                  |   |
| Other                     |   | 6                              |   | 2                                   |   | —                              |   | —                              |   |
| Cash and cash equivalents |   | —                         |   | —                              |   | —                              |   | —                              |   |
| Total                     |   | 100                            |   | 100                                 |   | 100                                 |   | 100                                 |   |

 

The funding ratio of thepension funds (being the ratio of the fair value of the investments of ourpension funds to our pension liabilities) amounts to 109.7% (2002: 106.4% and 2001: 119.3%) and 117.6% (2002: 110.2% and 2001: 130%) ofliabilities for the BPF and OPF, respectively (preliminary, unaudited figures).

 

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**PENSIONPROVISIONS UNDER US GAAP**

** **

The Projected Unit Credit Method was used to determine the ProjectedBenefit Obligation (PBO) and the Current Unit Credit Method was used todetermine the Accumulated Benefit Obligation (ABO).

 

***Curtailment***

*** ***

Under US GAAP, the curtailment gain as a result of the reorganizationwas calculated but the gain was initially taken in 2001 and partly deferred andrealized in 2002 in accordance with SFAS 88, ‘Employers’ Accounting forSettlements & Curtailments of Defined Benefit Pension Plans and forTermination Benefits’ (SFAS 88). The amount in the reconciliation reflects thedifference in timing of the recognition of the curtailment gain. Under US GAAP,the curtailment gain as a result of the divestments is taken at the moment ofdivestment. Several divestments took place in 2003 and 2002, leading tocurtailment gains. For a number of divestments it was agreed to transfer theliability of the employees as per 31 December 2004. These transfers will leadto settlement results as per that date. Under Dutch GAAP, the divestments donot lead to any curtailment effects.

 

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***Pension charges***

 

Under SFAS 87 ‘Employers’ Accounting for Pensions’ (SFAS 87), thepension charges for the years 2003, 2002 and 2001 can be broken down asfollows:

 
| **Amounts in millions of euro**                                             |   | **2003** |       | **2002** |       | **2001** |       |
|-----------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
|                                                                        |   |     |       |     |       |     |       |
| Service charges                                                             |   | -161     |       | -136     |       | -155     |       |
| Interest charges                                                            |   | -254     |       | -249     |       | -240     |       |
| Investment yield                                                            |   | 240      |       | 325      |       | 338      |       |
|                                                                        |   | -175     |       | -60      |       | -57      |       |
| Depreciation transition costs                                               |   | -14      |       | -52      |       | -51      |       |
| Depreciation of prior service charges                                       |   | 51       |       | 59       |       | 66       |       |
| Depreciation of experience gain/loss                                        |   | -30      |       | 10       |       | 21       |       |
|                                                                        |   | -168     |       | -43      |       | -21      |       |
| Defined contributions                                                       |   | -21      |       | -8       |       | -7       |       |
| Employee contributions                                                      |   | —   |       | —   |       | 12       |       |
| **Pension charges under SFAS 87 (US GAAP)**                                 |   | **-189** | ** ** | **-51**  | ** ** | **-16**  | ** ** |
| Curtailment gain Social Plans (SFAS 88)                                     |   | —   |       | 60       |       | 197      |       |
| Curtailment gains divestments (SFAS 88)                                     |   | 7        |       | 122      |       | —   |       |
| **Total pension charges/benefits under SFAS  87 and SFAS 88 (US GAAP)**     |   | **-182** | ** ** | **131**  | ** ** | **181**  | ** ** |
| Pension charges under Dutch GAAP                                            |   | -230     |       | -236     |       | -77      |       |
| **Supplementary pension charges/benefits  under SFAS 87/SFAS 88 (US GAAP)** |   | **48**   | ** ** | **367**  | ** ** | **258**  | ** ** |

 

The Dutch GAAP pension charge includes an interest charge of EUR 13million, which is included under interest charges.

 

***Balance sheet position***

 

The balance sheet position of KPN as of December 31, 2003 and December31, 2002 under SFAS 87 (Funded Status) was as follows:

 
| **Amounts in millions of euro**                            |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|------------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                       |   |               |       |               |       |
| **Accumulated Benefit Obligations**                        |   | **-3,805**         | ** ** | **-3,709**         | ** ** |
| Projected Benefit Obligation                               |   | -4,652             |       | -4,513             |       |
| Current value of plan assets                               |   | 3,592              |       | 3,156              |       |
| **Benefit obligation in excess of plan assets**            |   | **-1,060**         | ** ** | **-1,357**         | ** ** |
| Unrecognized net gain/loss                                 |   | 434                |       | 722                |       |
| Unrecognized prior service charges                         |   | -435               |       | -490               |       |
| Unrecognized net transition asset                          |   | —             |       | 14                 |       |
| **Pension provisions under SFAS 87 (US GAAP)**             |   | **-1,061**         | ** ** | **-1,111**         | ** ** |
| Pension provision under Dutch GAAP                         |   | -388               |       | -390               |       |
| **Additional pension obligation under SFAS 87  (US GAAP)** |   | **-673**           | ** ** | **-721**           | ** ** |

 

In 2003 the adjustment for additional minimum obligation was nil (2002:nil; 2001 nil). An additional reduction of shareholders’ equity did not takeplace in 2003 (2002: nil; 2001: nil).

 

The assumptions used in this calculation are the following:

 
| **As a%**            |   | **Dec. 31,  2003** |   | **Dec. 31,  2002** |   | **Dec. 31,  2001** |   |
|----------------------|--------|--------------------|--------|--------------------|--------|--------------------|--------|
|                 |   |               |   |               |   |               |   |
| Actuarial interest   |   | 5.50               |   | 5.50               |   | 5.75               |   |
| Wage inflation       |   | 3.00               |   | 3.00               |   | 3.00               |   |
| Price inflation      |   | 2.00               |   | 2.00               |   | 2.00               |   |
| Return on investment |   | 7.30               |   | 7.30               |   | 9.50               |   |

 

The decrease in the expected return on investment in 2002 is due to achange in the asset mix and a decline in the historic rates of return, whichare used to derive the expected return on investment.

 

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***Projected Benefit Obligation***

 

In 2003 and 2002 the changes in the Projected Benefit Obligation wereas follows: 

 
| **Amounts in millions of euro**                        |   | **2003**   |       | **2002**   |       |
|--------------------------------------------------------|--------|------------|------------|------------|------------|
|                                                   |   |       |       |       |       |
| **Projected Benefit Obligation at beginning  of year** |   | **-4,513** | ** ** | **-4,297** | ** ** |
| Service charges                                        |   | -161       |       | -136       |       |
| Interest charges                                       |   | -254       |       | -249       |       |
| Other employers' contributions                         |   | -16        |       | —     |       |
| Actuarial profit                                       |   | 154        |       | -53        |       |
| Benefits paid                                          |   | 127        |       | 107        |       |
| Curtailment                                            |   | 11         |       | 115        |       |
| **Projected Benefit Obligation at end of year**        |   | **-4,652** | ** ** | **-4,513** | ** ** |
|                                                   |   |       |       |       |       |
| ***Statement  of changes in plan assets***             |   |       |       |       |       |
| **Current value of plan assets at beginning  of year** |   | **3,156**  | ** ** | **3,363**  | ** ** |
| Realized investment yield                              |   | 336        |       | -243       |       |
| Employer’s contribution                           |   | 211        |       | 143        |       |
| Other employers' contributions                         |   | 16         |       | —     |       |
| Contributions paid                                     |   | -127       |       | -107       |       |
| **Current value of plan assets at end of year**        |   | **3,592**  | ** ** | **3,156**  | ** ** |

 

***Sensitivity analysis***

 

The table below shows the sensitivity of the net periodic pension costover 2003 to the most important assumptions:

 
| **Amounts in millions of euro**                |   |       |         |       |         |
|------------------------------------------------|--------|------------|--------------|------------|--------------|
| Net periodic pension cost as reported in  2003 |   | -182       | *** *** | -182       | *** *** |
| ***Change in  assumption in percent point***   |   | ***+0.5*** |         | ***-0.5*** |         |
| Discount rate                                  |   | -137       |         | -235       |         |
| Expected return on assets                      |   | 166        |         | 199        |         |
| Wage inflation                                 |   | -259       |         | -118       |         |
| Price inflation                                |   | -180       |         | -185       |         |

 

**E.REVENUE RECOGNITION**

 

Non-refundable connection fees are generally charged at the outset of aservice contract and are recognized under Dutch GAAP upon connecting thecustomer to the network. Under US GAAP, for the years ended December 31, 2002and 2001, we deferred recognition of nonrefundable connection fees andrecognized these over the estimated customer relationship period in accordancewith SEC Staff Accounting Bulletin No. 101, ‘Revenue Recognition in FinancialStatements’ (SAB 101). During those periods, we also deferred the associateddirect costs in an amount equal to or less than the amount of deferred revenuesand recognized these over the estimated customer relationship period.  Any excess direct costs were expensedimmediately.

 

As of January 1, 2003, we adopted EITF 00-21, ‘Revenue Arrangementswith Multiple Deliverables’ (EITF 00-21). EITF 00-21 addresses how to accountfor arrangements that involve the delivery or performance of multiple products,services and/or rights to use assets. EITF 00-21 requires revenue arrangementswith multiple deliverables to be divided into separate units of accounting ifthe deliverables in the arrangement meet certain criteria. Arrangementconsideration must then be allocated among the separate units of accountingbased on their relative fair values. EITF 00-21 also supersedes certainguidance set forth in SAB 101. In 2003, we also adopted SAB 104, ‘RevenueRecognition’ (SAB 104), which revises or rescinds certain interpretive guidanceregarding SAB 101 that was in conflict with the provisions of EITF 00-21.

 

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***Application of EITF00-21 to multiple element arrangements with one unit of accounting andnonrefundable, up-front connection fees***

 

For multiple element arrangements that are comprised of only one unitof accounting and include a nonrefundable, up-front connection fee, amountsrepresenting connection fees and associated costs to the extent of the relatedrevenues are deferred in accordance with SAB 101. Deferred connection fees andassociated costs are amortized over the estimated customer relationship period.Any excess of costs over related deferred revenues is expensed immediately.

 

***Application of EITF00-21 to multiple element arrangements with more than one unit of accounting***

 

Arrangement consideration received is allocated to each unit ofaccounting based on their relative fair values. As any nonrefundable, up-frontconnection fee charged does not meet the criteria of a separate unit ofaccounting, the additional arrangement consideration received from connectionfees is allocated to the other delivered item(s) to the extent that theaggregate equipment and connection fee proceeds do not exceed the allocatedfair value of the equipment. Any connection fee proceeds not allocated to thedelivered equipment are deferred upon connection and recognized as servicerevenue over the expected customer relationship period.  Costs associated with connecting customersunder multiple element arrangements with more than one unit of accounting aredeferred to the extent of the related deferred revenues, if any, and amortizedover the estimated customer relationship period.  Any excess of costs over related deferred revenues is expensedimmediately.

 

The adoption under US GAAP of EITF 00-21 as of January 1, 2003 led toan after-tax cumulative effect adjustment of EUR 26 million, or EUR 0.02per share. For the year ended December 31, 2003, under US GAAP net sales wereEUR 29 million higher and related direct costs were EUR 6million higher compared with Dutch GAAP. Prior years have not been restated. Asof December 31, 2003, cumulative revenues amounting to EUR 419 million (2002: EUR 640 million; 2001:EUR 628 million) and cumulative direct costs amounting to EUR 305 million (2002: EUR 464 million; 2001:EUR 326 million) have not yet been recognized under US GAAP, decreasing equityunder US GAAP by EUR 114 million asof December 31, 2003 (2002: EUR 176 million).

 

**F.BELLSOUTH’S EXCHANGE RIGHT**

 

Under both Dutch and US GAAP,the exchange right granted to BellSouth represented a financial instrumentrecorded at fair market value on acquisition date of EUR 7,560 million. UnderDutch GAAP, the value is fixed on the date of acquisition (February 24, 2000).On March 13, 2002, BellSouth exercised its exchange right. BellSouth received234.7 million KPN shares in exchange for its 22.51% interest in E-Plus.Consequently, the final valuation of the exchange right was known before the2001 financial statements were finalized. For this reason, the exchange rightunder Dutch GAAP as of December 31, 2001 was valued at its settlement value ofEUR 712 million. The difference between the original valuation of EUR 7,560million and the settlement value of EUR 712 million, amounting to EUR 6,848million was released in the 2001 Statement of Income. US GAAP treated the exchange right asa financial instrument valued at fair market value at balance sheet date(marked to market). The fair value of the exchange right was EUR 659 million atDecember 31, 2001 (2000: EUR 2,035 million). This difference in fair value wasresolved in 2002.

 

**G.CAPITALIZATION OF INTEREST CHARGES FOR UMTS LICENCES**

 

Under Dutch GAAP, the interest charges related to the financing of UMTSlicenses are not capitalized but are charged to income in the period to whichthose interest expenses relate. Under US GAAP, interest for the financing ofthe UMTS licenses is capitalized so long as the rights under the license havenot yet been invoked and the network continues to be actively constructed.

 

**H.OTHER DIFFERENCES BETWEEN DUTCH GAAP AND US GAAP**

 

***Derivative financial instruments***

 

Under Dutch GAAP, receivables and liabilities denominated in a foreigncurrency, including derivative contracts, are in principle carried at costconverted into euro at the exchange rates at the end of the period.Additionally, unrealized gains and losses on interest rate swaps used in hedgedrelationships are deferred until settlement or termination. US GAAP requiresvaluation of derivatives at fair value, in accordance with the requirements ofSFAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’ (SFAS133) and SFAS 138 ‘Accounting for Certain Derivative Instruments and HedgingActivities’ (SFAS 138). 

 

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The movement in the fair value of derivatives that qualify as hedginginstruments is recorded either in the Statement of Income or in OtherComprehensive Income until the hedged item is recognized in the Statement ofIncome.

 

In 2001, the cumulative effect of the initial adoption of SFAS 133 andSFAS 138 led to a charge of EUR 64 million to income before tax under US GAAPand an increase in Other Comprehensive Income of EUR 9 million after tax.Application of SFAS 133 and SFAS 138 led to a credit to income of EUR 96million in 2001.

 

In 2002, application of SFAS 133 led to a credit to income of EUR 90million before tax and a decrease of EUR 9 million after tax in othercomprehensive income.

 

In 2003, application of SFAS 133 led to a profit before tax of EUR 7million and a decrease of EUR 140 million after tax in other comprehensiveincome.

 

***Minority participating interests***

 

Under Dutch GAAP, we valued our 20.3% interest in Český Telecomuntil the sale in 2003 at the lower of net asset value or the expected netrealizable value. Under US GAAP, our investment was valued as an equityinvestment at its proportional net asset value. At the end of 2002 theproportional net asset value in Český Telecom was EUR 117 million higherthan the expected net realizable value. During 2003, we sold our interest inČeský Telecom, resulting in a profit under Dutch GAAP of EUR 46 million.Under US GAAP there was a loss of EUR 71 million, therefore the result under USGAAP is EUR 117 million lower than under Dutch GAAP.

 

Under Dutch GAAP, our 17.7% interest in Infonet is carried at net assetvalue. Under US GAAP, our investment in Infonet represents an available forsale marketable security under FAS 115, ‘Accounting for Certain Investments inDebt and Equity Securities’. In accordance with FAS 115, marketable securitiesare marked to market at each reporting date, with the resulting unrealizedgains and losses reported in Other Comprehensive Income. In 2002 and 2001, wedetermined that the fair value of the investment in Infonet declined by EUR 70million and EUR 124 million, respectively, which was other than temporary. Inaccordance with FAS 115, declines in the market value of securities of an otherthan temporary nature are written down to fair value as a realized loss in theConsolidated Statement of Income.  In2003, the decrease of EUR 20 million in value of Infonet was considered to betemporary and therefore included in Other Comprehensive Income.

 

In 1999, we set up a provision under Dutch GAAP of EUR 95 millionrelated to the financial settlement of Unisource for expected future lossesincurred by AUCS and guarantee commitments. This provision was not allowedunder US GAAP and these costs were expensed as incurred. At December 31, 2003the provision amounted to nil (2002: nil, 2001: EUR 83 million).

 

Up until 1999,we valued our interest in eircom as an equity investment. However, followingthe decision to sell eircom, we valued our interest in eircom at the lower ofhistorical cost or market value (being the expected net realizable value) underDutch GAAP. Under US GAAP, the interest in eircom continued to be valued as anequity investment. In 2001, we sold our share in eircom. Under Dutch GAAP, ourinvestment in eircom was EUR 118 million higher than the investment under USGAAP at the date of sale. Consequently, the gain on the sale of the investmentwas EUR 118 million higher under US GAAP.

 

***Minority interests***

 

As a result of the differences between US GAAP and Dutch GAAP, there isa difference in equity and profit after taxes of certain group companies and,in cases where third parties participate, in the minority interest attributableto the participating third parties. This reconciling item is primarily relatedto KPN Mobile, Xantic and SNT.

 

***Capitalized software/software producedin-house***

 

Under Dutch GAAP, we capitalize costs incurred for software purchasedand software produced in-house. Until 1998, capitalization was not allowedunder US GAAP. The reconciling difference that was reported until 2001 relatedto the difference in accounting in the period before 1998.

 

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***Foundation Stichting werknemersaandelenKPN/TPG***

 

Until 2003, the foundation *Stichting Werknemersaandelen KPN/TPG* hasnot been consolidated under Dutch GAAP due to its temporary nature and itslegal structure. Under US GAAP, we are required to consolidate this foundationas the Company has significant ownership and control of this entity. Under USGAAP, the consolidation of this foundation led to a decrease of shareholders’equity of EUR 18 million at December 31, 2002. As of 2003 the foundation isconsolidated under Dutch GAAP, which resulted in a direct change in equity.

 

***Vision Networks Holdings***

 

Prior to October 8, 2002, Vision Networks Holdings B.V. was accountedfor as a participating interest under Dutch GAAP and was stated at cost (EUR18,151). Under US GAAP Vision Networks was fully consolidated and additionalincome was recorded in 2002 of EUR 62 million (2001: EUR 7 million). On October8, 2002 the independent Supervisory Board of Vision Networks ceased allactivities and, as a result, we gained control of Vision Networks. Subsequentto October 8, 2002, Vision Networks was fully consolidated under Dutch GAAP,which aligned the Dutch GAAP and US GAAP accounting treatment of this entity.In 2003, under Dutch GAAP EUR 11 million was directly charged to equity as itrelated to the period before October 8, 2002. Under US GAAP this EUR 11 millionis charged in 2003 to the income statement.

 

***Investment grants to replace WIR allowances***

 

In 1998, under Dutch GAAP, we decided to no longer recognize thedeferred investment grants in the consolidated balance sheet, which led to arelease of EUR 86 million. US GAAP stipulates that these grants be added to incomeaccording to the original schedule. Accordingly, the deferred investment grantunder US GAAP was EUR 33 million at December 31, 2003 (2002: EUR 40 million).

 

***Self insurance***

 

Under Dutch GAAP, we recognized a provision for self-insurance, which,up to and including 1999, was allocated as a multiple of the total uninsuredrisk. The annual addition to this provision could not exceed the portion of theinsurance premium that would have been paid had the risk been insured, Since2000, Dutch guidelines issued in 2000 disallow new formations of thisprovision. Provisions already existing must be reduced to nil within 5 yearsfrom the issuance of such Dutch guidelines. Such provisions are not allowedunder US GAAP and result in a decrease in net income under US GAAP of nil in2003 (2002: nil, 2001: EUR 31 million). Under Dutch GAAP, the balance of thisprovision was nil at December 31, 2003 (2002: nil).

 

***Cumulative effect of adoption of SFAS 143 onJanuary 1, 2003***

 

With effect from January 1, 2003, we changed our accounting principlefor asset retirement obligations under Dutch GAAP, in order to bring itsaccounting principles in line with SFAS 143 ‘Accounting for ObligationsAssociated with the Retirement of Long-Lived Assets’. Prior to that date,provisions for asset retirement obligations were built up during the estimateduseful life of the assets concerned, using the linear method. With effect fromJanuary 1, 2003, the asset retirement costs are capitalized as part of thecarrying amount of tangible fixed assets and are expensed either asdepreciation costs over the estimated useful life of the asset or impairmentcharges. The asset retirement obligation is stated at net present value using adiscount rate equal to the credit-adjusted, risk-free interest rate of therelated asset.

 

The change in accounting principle had the following impact on ourbalance sheet: a provision for asset retirement obligations of EUR 72 millionwas recognized, an amount of EUR 66 million was added to tangible fixed assetsand the remaining EUR 6 million was charged against shareholders’ equity underDutch GAAP. Under US GAAP, the EUR 6 million must be charged to the profit andloss account as a cumulative effect of application of FAS 143 on January 1,2003. The effect of the change in accounting principle on the Statement ofIncome for the year 2003 is not significant.

 

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***Technical equipment lease***

 

During 2001, we entered into a sale and leaseback transaction ofcertain technical equipment in use by us. Under Dutch GAAP, the net cashreceived less the payment liability assumed was recognized as other operatingrevenues and cash received. Under US GAAP, we recognize the gross cash receivedand payment liabilities on the balance sheet and the net gain on thetransaction is recognized as other income over the 16 years term of the lease.This transaction did not have a significant impact on profit after taxes and,as a result, no reconciling item was reported.

 

***Sale and leaseback***

 

In 2001, 2002 and 2003, we entered into sale and leaseback arrangementswhereby certain real estate properties were sold to third parties and leasedback by us under operating leases. Under Dutch GAAP, the total book profit onthese sale and leaseback transactions was recognized in income. Under US GAAP,the net gain on the sale of real estate in connection with a sale and leasebackarrangement is generally recognized over the term of the lease. Thesetransactions did not have a significant impact on profit after taxes and, as aresult, no reconciling items were reported.

 

***Share based compensation expense***

 

At December 31, 2003, we had ten stock-based compensation plans, whichare described in note [3]. Prior to 2003 we accounted under US GAAP for thoseplans applying the intrinsic value recognition and measurement provisions ofAPB Opinion No. 25, ‘Accounting for Stock Issued to Employees’, and relatedinterpretations. In 2003, we adopted under US GAAP the fair value recognitionprovisions of SFAS 123 for stock-based employee compensation applying the retroactive restatement methodallowed by SFAS 148, ‘Accounting for Stock-Based Compensation-Transition andDisclosure’ (SFAS 148) an amendment of SFAS 123. Accordingly,all priorperiods presented have been restated to reflect the compensation cost thatwould have been recognized had the recognition provisions of SFAS 123 beenapplied to all awards granted to employees after January 1, 1995.

 
| **Amounts in  millions of euro** |   | **Compensation  costs per year** |   |
|----------------------------------|--------|----------------------------------|--------|
| **Options  granted in**          |   | **2003**                         |   | **2002** |   | **2001** |   |
|                             |   |                             |   |   |   |   |   |
| 2000                             |   | 4                                |   | 11 |   | 11 |   |
| 2001                             |   | 20                               |   | 19 |   | 34 |   |
| 2002                             |   | 1                                |   | 7 |   | — |   |
| 2003                             |   | 9                                |   | — |   | — |   |
|                             |   |                             |   |   |   |   |   |
| Total costs                      |   | 34                               |   | 37 |   | 45 |   |

 

Under Dutch GAAP, compensation charges for the issuance of shareoptions are generally recorded only to the extent that the market value of thecommon stock exceeds the exercise price on the date of grant. However, in 2003,we repriced options granted under our plan of December 2001. As a result of the option repricing,these options receive “variable treatment” in each reporting period subsequentto February 28, 2003, the date of the repricing, until these options areexercised, cancelled or forfeited without replacement.  Accordingly, we must measure the aggregate intrinsicvalue of vested repriced options at each balance sheet date and record underDutch GAAP a compensation expense (benefit) in the reporting period such thatthe cumulative related expense recorded is equal to this intrinsic value, ifany. We record this expense (benefit) as a component of salaries and socialcontributions expenses and an opposite direct movement in other reserves forthe same amount. For 2003 the effects of this variable treatment resulted in acompensation charge of EUR 12 million under Dutch GAAP.  The difference of EUR 22 million between theDutch GAAP and US GAAP compensation charge is recorded as a reconciling item in the Reconciliation of Profit orLoss After Taxes to US GAAP for 2003.

 

***Reclassifications and other***

 

Under Dutch GAAP, certain items are disclosed in different sections ofour Consolidated Statement of Income compared with US GAAP. These differencesdo not lead to any differences in shareholders’ equity or profit or loss aftertaxes, therefore the reclassifications below are not included in the reconciliationto US GAAP shareholders’ equity and US GAAP profit after taxes.

 

211

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***Own work capitalized***

 

Under Dutch GAAP, capitalized staff costs, materials and capitalizedinterest for captive use are presented as part of total operating revenues (ownwork capitalized). Under US GAAP, these costs are charged against the relevantline item under operating expenses.

 

***Sale of operations and assets***

 

Under Dutch GAAP, we present the sale of operations and assets as partof Other operating revenues, included in operating profit. Under US GAAP, suchproceeds would be excluded from operating profit/loss.

 

In 2003, total profit on the sale of assets amounted to EUR 476 millionand was related to the sale of Telefoongids Media (EUR 435 million), the saleof our share in Inmarsat (EUR 26 million) and the sale of UMC (EUR 15 million).

 

In 2002, total profit on the sale of assets amounted to EUR 409 millionand was related to the sale of Pannon GSM (EUR 335 million), the settlement ofthe Indonesian holding companies that held the interest in Telkomsel (EUR 30million) and the book profit on the sale of various assets, including realestate (EUR 44 million).

 

In 2001, total profit on the sale of assets amounted to EUR 521million, related to the sale of Telkomsel (EUR 346 million), 10% of our sharein KPNQwest (EUR 51 million), Datacenter (EUR 59 million) and the book profiton the sale of various assets, including real estate (EUR 65 million).

 

***Interest relating to pension provisions***

 

Interest relating to pension provisions was presented as interestexpense of EUR 35 million in 2003 (2002: EUR 35 million, 2001: EUR 18 million).Under US GAAP, this interest expense is recorded as part of periodic pensionexpense.

 

***Sale of real estate***

 

Under Dutch GAAP, we sold certain real estate properties in 2002 with abook value of EUR 17 million. We continue to use some parts of the propertiesthrough operating leases. Under these operating leases, we have the right torenew our leases on substantially the same terms as the original lease term,the total of which is substantially all of the value of the properties underDutch GAAP. Under US GAAP, this constitutes a level of continuing involvementthat requires us to account for the sale of these properties as financings.Under US GAAP, the properties remain on the balance sheet and the proceeds arerecorded as a liability. This difference in accounting does not lead to adifference in our shareholders’ equity or net income.

 

***Proportionate consolidation of joint ventures***

 

Under Dutch GAAP, investments in joint ventures may be consolidatedproportionally. This is not allowed under US GAAP. However, the SEC does notrequire a reconciling adjustment, provided that such investments are inoperating entities for which we have joint control over the financial operatingpolicies, with all other parties holding an interest in the respective jointventure.

 

Under US GAAP, investments in joint ventures must be carried as anequity investment at net asset value for its proportional equity interest. Thisdifference does not lead to an adjustment in profit or equity reconciliationunder US GAAP. Proportional consolidation of joint ventures affected thefollowing items in the Consolidated Balance Sheet and the ConsolidatedStatement of Income:

 
| **Amounts in  millions of euro**     |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **Balance sheet information**        |   |     |   |     |   |     |   |
| Fixed assets                         |   | 10       |   | —   |   | 8,269    |   |
| Current assets                       |   | 56       |   | —   |   | 452      |   |
| Provisions and long-term liabilities |   | —   |   | —   |   | 9,406    |   |
| Current liabilities                  |   | 43       |   | —   |   | 1,718    |   |
|                                 |   |     |   |     |   |     |   |
| **Statement of Income information**  |   |     |   |     |   |     |   |
| Total operating revenues             |   | 142      |   | 415      |   | 2,109    |   |
| Profit/(Loss) before taxes           |   | 9        |   | -155     |   | -911     |   |

 

212

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The profit or loss after taxesgenerated by our investments in the joint ventures amounted to a profit of EUR24 million (2002: EUR 155 million loss; 2001: EUR 879 million loss).

 

***Current portion of provisions***

 

Under Dutch GAAP, the portion of the provisions due to be releasedwithin one year is presented as part of the provisions. Under US GAAP, suchprovisions are required to be presented under current liabilities. Thisdifference would increase the current liabilities as of December 31, 2003 byEUR 228 million (2002: EUR 329 million).

 

***Cash flow statements***

 

We compile our cash flow statement in accordance with InternationalAccounting Standards (IAS 7). The SEC’s rules applicable to Annual Reports onForm 20-F permit the compilation of cash flow statements under IAS 7.

 

***Discontinued operations***

 

Under US GAAP through December 31, 2001 we accounted for the disposalof a segment of a business in accordance with APB Opinion No. 30, ‘Reportingthe Results of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions’ (APB 30), The definition of a discontinued operation under thisopinion is consistent with Dutch GAAP.

 

As of January 1, 2002 we adopted SFAS 144 under US GAAP. This statementretains the basic provisions of APB 30 for the presentation of discontinuedoperations in the income statement but broadens that presentation to include acomponent of an entity (rather than a segment of a business).

 

In 2002 and 2003, certain of our disposals, including Netwerkbouw,Softwarehouse, End User Services, Pannon, SNT France, SNT Scandinavia, KPNBelgium, Planet Internet Belgium and Telefoongids Media qualified asdiscontinued operations in accordance with SFAS 144. Consolidated statements ofincome, presented in accordance with US GAAP, do not consolidate thesediscontinued operations but rather report for all periods presented the resultsof these operations and any related gain or loss on disposal, net of tax, as aseparate component of income before extraordinary items and cumulative effectof accounting changes. These disposals do not qualify as discontinuedoperations under Dutch GAAP.

 

213

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**CorporateStatement of Income**

 

As the corporate financial information of Koninklijke KPN N.V. isincluded in the Consolidated Financial Statements, the Corporate Statement ofIncome is presented in abbreviated form (Section 402, Book 2 of the Dutch CivilCode).

 
| **Amounts in  millions of euro**        |   | **2003**  |       | **2002**   |       | **2001**   |       |
|-----------------------------------------|--------|-----------|------------|------------|------------|------------|------------|
|                                    |   |      |       |       |       |       |       |
| Income from group companies after taxes |   | 811       |       | -7,601     |       | -13,140    |       |
| Other income and expense after taxes    |   | 1,920     |       | -1,941     |       | 5,645      |       |
| **Profit/(loss) after taxes**           |   | **2,731** | ** ** | **-9,542** | ** ** | **-7,495** | ** ** |

 

214

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**Corporate BalanceSheet**

** **

***Before appropriation of net result***

*** ***

**ASSETS**

 
| **Amounts in  millions of euro**                      |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|-------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                  |   |               |       |               |       |
| **Fixed assets**                                      |   |               |       |               |       |
| *Intangible fixed assets*[33]                         |   |               |       |               |       |
| Goodwill                                              |   | 2                  |       | 3                  |       |
| **Total intangible fixed assets**                     |   | **2**              | ** ** | **3**              | ** ** |
|                                                  |   |               |       |               |       |
| *Financial fixed assets* [34]                         |   |               |       |               |       |
| Participating interests and group companies           |   | 9,142              |       | 8,381              |       |
| Loans to group companies and participating  interests |   | 6,806              |       | 4,750              |       |
| Loans                                                 |   | 16                 |       | 41                 |       |
| Other financial fixed assets                          |   | 1,707              |       | 101                |       |
| **Total financial fixed assets**                      |   | **17,671**         | ** ** | **13,273**         | ** ** |
| **Total fixed assets**                                |   | **17,673**         | ** ** | **13,276**         | ** ** |
|                                                  |   |               |       |               |       |
| **Current assets**                                    |   |               | ** ** |               | ** ** |
| Receivables [35]                                      |   | 3,583              |       | 7,025              |       |
| Prepayments and accrued income                        |   | 28                 |       | 46                 |       |
| Cash and cash equivalents                             |   | 891                |       | 1,911              |       |
| **Total current assets**                              |   | **4,502**          | ** ** | **8,982**          | ** ** |
| **TOTAL**                                             |   | **22,175**         | ** ** | **22,258**         | ** ** |

 

----

[..] Bracketed numbers refer tothe Notes to the Corporate Balance Sheet.

 

215

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**LIABILITIES**

 
| **Amounts in millions of euro**     |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|-------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                |   |               |       |               |       |
| Subscribed capital stock            |   | 598                |       | 598                |       |
| Additional paid-in capital          |   | 16,268             |       | 16,268             |       |
| Statutory reserves                  |   | 137                |       | 203                |       |
| Accumulated translation differences |   | -40                |       | 119                |       |
| Other reserves                      |   | -12,531            |       | -3,138             |       |
| Profit or loss current year         |   | 2,731              |       | -9,542             |       |
|                                |   | **7,163**          | ** ** | **4,508**          |       |
| **SHAREHOLDERS’ EQUITY**[36]   |   |               |       |               | ** ** |
|                                |   |               |       |               |       |
| **Provisions**                      |   |               | ** ** |               | ** ** |
| Pension provisions                  |   | 682                |       | 674                |       |
| Other provisions                    |   | 61                 |       | 92                 |       |
| Total provisions                    |   | **743**            | ** ** | **766**            | ** ** |
|                                |   |               |       |               |       |
| **Long-term  liabilities**          |   |               | ** ** |               | ** ** |
| Loans                               |   | 9,071              |       | 12,449             |       |
| Accruals and deferred income        |   | 3                  |       | 12                 |       |
| Total long-term liabilities         |   | **9,074**          | ** ** | **12,461**         | ** ** |
|                                |   |               |       |               |       |
| **Current  liabilities**            |   |               | ** ** |               | ** ** |
| Other liabilities [37]              |   | 4,939              |       | 4,193              |       |
| Accruals and deferred income        |   | 256                |       | 330                |       |
| Total current liabilities           |   | **5,195**          | ** ** | **4,523**          | ** ** |
|                                |   |               |       |               |       |
| **TOTAL**                           |   | **22,175**         | ** ** | **22,258**         | ** ** |

 

----

[..] Bracketed numbers refer to the Notes to the Corporate BalanceSheet.

 

216

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**Generalnotes to the Corporate Financial Statements**

 

The corporate financial information of Koninklijke KPN N.V. is includedin the Consolidated Financial Statements. The accounting principles are thesame as those used in the Consolidated Financial Statements.

 

217

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**Notesto the Corporate Balance Sheet**

** **

**FIXEDASSETS**

** **

**[33]Intangible fixed assets**

 
| **Amounts in millions of euro**   |   | **Goodwill** |       |
|-----------------------------------|--------|--------------|------------|
|                              |   |         |       |
| **Balance at December  31, 2002** |   | **3**        | ** ** |
|                              |   |         |       |
| **Changes in 2003**               |   |         | ** ** |
| Amortization                      |   | -1           |       |
|                              |   |         |       |
| **Balance at December  31, 2003** |   | **2**        | ** ** |

 

**[34]Financial fixed assets**

 
| **Amounts in millions of euro**   |   | **Group  companies** |       | **Loans to group  companies and  participating  interests** |       | **Loans** |       | **Other  financial  fixed  assets** |       | **Total**  |   |
|-----------------------------------|--------|----------------------|------------|-------------------------------------------------------------|------------|-----------|------------|-------------------------------------|------------|------------|--------|
|                              |   |                 |       |                                                        |       |      |       |                                |       |       |   |
| **Balance at December  31, 2002** |   | **8,381**            | ** ** | **4,750**                                                   | ** ** | **41**    | ** ** | **101**                             | ** ** | **13,273** |   |
|                              |   |                 |       |                                                        |       |      |       |                                |       |       |   |
| **Changes in 2003**               |   |                 | ** ** |                                                        | ** ** |      | ** ** |                                | ** ** |       |   |
| Exchange rate  differences        |   | -44                  |       | —                                                      |       | —    |       | —                              |       | -44        |   |
| New  Consolidations               |   | —               |       | 17                                                          |       | -17       |       | —                              |       | —     |   |
| Profit/(loss)                     |   | 811                  |       | —                                                      |       | —    |       | —                              |       | 811        |   |
| New loans                         |   | —               |       | 141                                                         |       | —    |       | —                              |       | 141        |   |
| Withdrawals/redemptions           |   | —               |       | -750                                                        |       | -8        |       | —                              |       | -758       |   |
| Change in  deferred taxes         |   | —               |       | —                                                      |       | —    |       | 1,555                               |       | 1,555      |   |
| Transfer from  short-term portion |   | —               |       | 2,648                                                       |       | —    |       | 10                                  |       | 2,658      |   |
| Other                             |   | -6                   |       | —                                                      |       | —    |       | 41                                  |       | 35         |   |
| **Balance of changes**            |   | **761**              | ** ** | **2,056**                                                   | ** ** | **-25**   | ** ** | **1,606**                           | ** ** | **4,398**  |   |
|                              |   |                 |       |                                                        |       |      |       |                                |       |       |   |
| **Balance at December  31, 2003** |   | **9,142**            | ** ** | **6,806**                                                   | ** ** | **16**    | ** ** | **1,707**                           | ** ** | **17,671** |   |

 

Long-term loans to group companies and participating interestsincluded, among others, loans to group companies within the Mobile division foran amount of EUR 6,708 million, excluding accrued interest, (2002 EUR 4,645million) with maturity dates between 2008 and 2013 (and with a mixture ofinterest rates: floating, fixed or profit depending).

Other financial fixed assets include a deferred tax asset of EUR 1,593million.

 

**CURRENTASSETS**

 

**[35]Receivables**

 

Receivables can be specified as follows:

 
| **Amounts in millions of euro**     |   | **Dec. 31,  2003** |       | **Dec. 31,  2002** |       |
|-------------------------------------|--------|--------------------|------------|--------------------|------------|
| Deferred tax assets                 |   | 6                  | ** ** | 4                  | ** ** |
| Short-term loans to group companies |   | 3,541              |       | 6,897              |       |
| Taxes                               |   | 36                 |       | 124                |       |
| **Receivables**                     |   | **3,583**          | ** ** | **7,025**          | ** ** |

 

218

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Short-term loans to group companies included, among others, loans toKPN Mobile N.V. for an amount of EUR 2,882 million, excluding accrued interest,(2002: EUR 5,227 million) with a maturity date of March 2004 (and an interestrate of 3.34%).

 

**SHAREHOLDERS’EQUITY**

** **

**[36]Shareholders’ equity**

 

For a breakdown of Shareholders’ equity, please refer to the Statementof Changes in Shareholders’ equity and the Notes thereto.

 

**CURRENTLIABILITIES**

 

**[37]Other liabilities**

 

Other liabilities included financial current account positions andloans from group companies for an amount of EUR 4,023 million (2002: EUR 1,916million). In 2003, these loans from group companies included, among others,loans from KPN Telecom B.V. for an amount of EUR 2,138 million (excludingaccrued interest) with a maturity date of April 2004 (and an interest rate of2.23%). Other liabilities also included an amount of EUR 26 million for taxespayable and social security contributions (2002: EUR 74 million).

 

**COMMITMENTSAND CONTINGENCIES**

 
| **Amounts in millions of euro**     |   | **Dec. 31,  2003** |   | **Dec. 31,  2002** |   |
|-------------------------------------|--------|--------------------|--------|--------------------|--------|
|                                |   |               |   |               |   |
| Commitments by virtue of guarantees |   | 38                 |   | 35                 |   |

 

We have issued several declarations of joint and several liabilitiesfor various group companies in compliance with Section 403, Book 2 of the DutchCivil Code. These declarations of joint and several liabilities for groupcompanies are included in a complete list of subsidiaries and participatinginterests, which is available for inspection at the offices of the CommercialRegister of the Chamber of Commerce in The Hague.

 

**TheHague, March 8, 2004**

 
| **The Supervisory Board** | **Board of  Management** |
|---------------------------|--------------------------|
|                      |                     |
| A.H.J. Risseeuw           | A.J. Scheepbouwer        |
| M. Bischoff               | J.M. Henderson           |
| V. Halberstadt            | G.J.M. Demuynck          |
| D.I. Jager                |                     |
| M.E. van Lier Lels        |                     |
| J.B.M. Streppel           |                     |
| M.E. van Lier Lels        |                     |
| J.B.M. Streppel           |                     |
|                      |                     |
|                      |                     |
|                      |                     |
|                      |                     |
|                      |                     |

 

219

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**Other Information**

 

**Reportof Independent Auditors**

 

For the Report of Independent Auditors, please refer to page 130 of theFinancial Statements.

 

 

220

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**Proposedappropriation of result**

Pursuant to Article 35(1) of the Articles of Association, 7% of the parvalue (EUR 0.48) will be paid out on the special share. On outstanding Class Bpreferred shares, a dividend is paid out equal to the average of the 12-monthEURIBOR increased by 1%. If the 12-month EURIBOR is no longer determined, thedividend on preference shares will be calculated based on the yield on Stateloans (Article 35(1)). No Class B preferred shares were outstanding in 2003.Subsequently, subject to the approval of the Supervisory Board, the Board ofManagement will determine what proportion of net income remaining after paymentof the dividend on the special share and any Class B preferred shares will beappropriated to the reserves (article 35(2)). The remaining net income will bedistributed as a dividend on the ordinary shares (article 35(3)). The Board ofManagement, with the approval of the Supervisory Board, may also appropriatethe complete profit to the reserves.

 

The Board of Management, with approval of theSupervisory Board, has appropriated the profit amounting to EUR 2,731 millionfor 2003 to the Other reserves. The Board of Management, with the approval of theSupervisory Board, will propose to the Annual General Meeting of Shareholdersto pay a cash dividend of EUR 623 million (EUR 0.12 per share plus anadditional special dividend of EUR 0.13 per share) for 2003 that will be paidout of the distributable reserves. The pay-out ratio of this dividend amountsto 22.5% of our profit for 2003.

 

Subject to the provisions of Article 37 of the Articles of Association,the 2003 dividend will become payable on April 28, 2004, which is 9 workingdays after it has been declared by the Annual General Meeting of Shareholders.

 

**Specialcontrol rights**

 

***Special share***

*** ***

The special share is in registered form only. No share certificate isissued for this share. The State of the Netherlands holds the special share,which entitles the holder thereof to cast two votes at the General Meeting ofShareholders. The special share confers special statutory control rights. For adescription of these rights, please refer to the section titled ‘CorporateGovernance’.

 

***The Foundation for the Protection of KPN(Stichting Bescherming KPN)***

*** ***

For a description of the Foundation for the Protection of KPN, and fora more detailed description of our Articles of Association, please refer to thesection titled ‘Corporate Governance’.

 

**Subsequentevents**

 

On February 17, 2004, KPN has sold its stake in Eutelsat S.A., one ofthe world’s leading satellite operators and based in Paris.

 

In February 2004, we swapped the EUR 1.5billion Eurobond 1998 - 2008 and the EUR 280 million Eurobond 2001–2008 (GBP 175million) from fixed interest rates (4.75% and 7.9% respectively) into floatinginterest rates. After these transactions, the fixed/floating ratio equaledapproximately 72% fixed and 28% floating. Combined with the interest rate swapon the EUR 280 million Eurobond 2001–2008 (GBP 175 million), we also rehedgedthe swap on the Euro/GBP cross currency rate.

 

221

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As a result of efficiency measures and the introduction of newtechnologies, approximately 800 jobs will be lost from within KPN’s Fixeddivision in 2004. The largest part of the reduction, approximately 500 jobs,will be realized through natural attrition. The bundling of marketing and salesactivities at the head office results in some 300 compulsory redundancies.Costs amount to approximately EUR 20 million.

 

222

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**FIVE-YEAR SUMMARY**

 

The following tables show our selected historical financial data as ofand for the years ended December 31, 1999 through 2003. We derived theselected historical financial data from our Consolidated Financial Statements.Our Consolidated Balance Sheets as of December 31, 2002 and 2003 and ourrelated Consolidated Statements of Income and of Cash Flows for the three yearsended December 31, 2003 and the related Notes appear elsewhere in thisAnnual Report. Our Consolidated Financial Statements have been prepared inaccordance with Dutch GAAP, which differs in certain significant respects fromUS GAAP. In 2003, these included significant differences in our accounting forimpairment charges, capitalization of interest on UMTS licences and pensionobligations. In 2002, these included significant differences in our accountingfor impairment charges, BellSouth's exchange right, pension obligations andsales of assets. For further information on the differences between Dutch GAAPand US GAAP as they relate to us, please refer to the Notes to our ConsolidatedFinancial Statements.

 

You should read this table together with ‘Operating results’ and ourConsolidated Financial Statements and the Notes thereto, which are includedelsewhere in this Annual Report.

 
| **Amounts in millions of euro, except for shares, per  share and ratio data**                                        |   | **As at and  for the year ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                                                 |   | **2003**                                       |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| **Income Statement  Data (1)**                                                                                       |   |                                           |   |   |   |   |   |   |   |   |   |
| **In accordance with  Dutch GAAP:**                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |
| Total operating revenues                                                                                             |   | 12,907                                         |   | 12,784 |   | 12,859 |   | 13,511 |   | 9,132 |   |
| Operating profit                                                                                                     |   | 3,108                                          |   | -5,581 |   | -14,436 |   | 2,717 |   | 1,053 |   |
| Profit/(loss) before taxes                                                                                           |   | 2,246                                          |   | -6,759 |   | -8,968 |   | 1,811 |   | 757 |   |
| Profit/(loss) after taxes                                                                                            |   | 2,731                                          |   | -9,542 |   | -7,495 |   | 1,874 |   | 828 |   |
| Earnings per ordinary share and per ADS  (non-diluted) (2, 3)                                                        |   | 1.11                                           |   | -3.94 |   | -5.88 |   | 1.90 |   | 0.87 |   |
| Earnings per ordinary share and per ADS on  a fully diluted basis (2, 3)                                             |   | 1.09                                           |   | -3.94 |   | -5.88 |   | 1.71 |   | 0.87 |   |
| Weighted average number of outstanding  ordinary shares (3)                                                          |   | 2,468,678,426                                  |   | 2,423,921,066 |   | 1,274,495,172 |   | 984,891,875 |   | 955,769,964 |   |
| Weighted average number of outstanding  ordinary shares on a fully diluted basis (3)                                 |   | 2,538,982,413                                  |   | 2,423,921,066 |   | 1,274,495,172 |   | 1,096,227,139 |   | 955,989,472 |   |
| **In accordance with  US GAAP:**                                                                                     |   |                                           |   |   |   |   |   |   |   |   |   |
| Total operating revenues from continuing  operations                                                                 |   | 12,224                                         |   | 11,766 |   | 11,318 |   | 10,155 |   | 7,751 |   |
| Operating profit from continuing operations                                                                          |   | -4,270                                         |   | 589 |   | -550 |   | 133 |   | 204 |   |
| Profit/(loss) before taxes from continuing  operations                                                               |   | -4,440                                         |   | 224 |   | 710 |   | 7,290 |   | -4 |   |
| Effect of discontinued operations, net of  taxes                                                                     |   | 433                                            |   | 85 |   | -94 |   | 18 |   | 34 |   |
| Effect of change in accounting principle,  net of taxes                                                              |   | 20                                             |   | -14,179 |   | -64 |   | -157 |   | — |   |
| Profit/(loss) after taxes                                                                                            |   | -3,750                                         |   | -15,144 |   | -230 |   | 7,336 |   | 719 |   |
| Earnings per ordinary share and per ADS  (non-diluted) from continuing operations (2, 3)                             |   | -1.70                                          |   | -0.43 |   | -0.06 |   | 7.59 |   | 0.72 |   |
| Earnings per ordinary share and per ADS on  a fully diluted basis from continuing operations (2, 3)                  |   | -1.70                                          |   | -0.43 |   | -0.06 |   | 6.82 |   | 0.72 |   |
| Earnings per ordinary share and per ADS  (non-diluted) from discontinued operations (2, 3)                           |   | 0.18                                           |   | 0.04 |   | -0.07 |   | 0.02 |   | 0.04 |   |
| Earnings per ordinary share and per ADS on  a fully diluted basis from discontinued operations (2,3)                 |   | 0.18                                           |   | 0.04 |   | -0.07 |   | 0.02 |   | 0.04 |   |
| Effect of change in accounting principle on  earnings per ordinary share and per ADS (non-diluted) (2, 3)            |   | 0.01                                           |   | -5.85 |   | -0.05 |   | -0.16 |   | — |   |
| Effect of change in accounting principle on  earnings per ordinary share and per ADS on a fully diluted basis (2, 3) |   | 0.01                                           |   | -5.85 |   | -0.05 |   | -0.14 |   | — |   |
| Total earnings per ordinary share and per  ADS (non-diluted) (2, 3)                                                  |   | -1.52                                          |   | -6.25 |   | -0.18 |   | 7.45 |   | 0.75 |   |
| Total earnings per ordinary share and per  ADS on a fully diluted basis (2, 3)                                       |   | -1.52                                          |   | -6.25 |   | -0.18 |   | 6.69 |   | 0.75 |   |
| Weighted average number of outstanding  ordinary shares (3)                                                          |   | 2,468,678,426                                  |   | 2,423,921,066 |   | 1,274,495,172 |   | 984,891,875 |   | 955,769,964 |   |
| Weighted average number of outstanding  ordinary shares on a fully diluted basis (3)                                 |   | 2,468,678,426                                  |   | 2,423,921,066 |   | 1,274,495,172 |   | 1,096,227,139 |   | 955,989,472 |   |
| **In accordance with  US GAAP (pro forma) (4):**                                                                     |   |                                           |   |   |   |   |   |   |   |   |   |
| Profit/(loss) after taxes                                                                                            |   | -3,750                                         |   | -15,144 |   | -230 |   | 7,336 |   | 729 |   |
| Profit/(loss) after taxes per ordinary  share and per ADS                                                            |   | -1.52                                          |   | -6.25 |   | -0.18 |   | 7.45 |   | 0.76 |   |
| Profit/(loss) after taxes per ordinary  share and per ADS on a fully diluted basis                                   |   | -1.52                                          |   | -6.25 |   | -0.18 |   | 6.69 |   | 0.76 |   |
| **Balance Sheet Data**                                                                                               |   |                                           |   |   |   |   |   |   |   |   |   |
| **In accordance with  Dutch GAAP:**                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |
| Total assets                                                                                                         |   | 24,125                                         |   | 25,161 |   | 41,122 |   | 53,465 |   | 17,991 |   |
| Long-term liabilities                                                                                                |   | 9,230                                          |   | 12,680 |   | 16,896 |   | 20,149 |   | 5,412 |   |
| Provisions                                                                                                           |   | 3,339                                          |   | 1,597 |   | 1,404 |   | 560 |   | 795 |   |
| Exchange right                                                                                                       |   | —                                         |   | — |   | 712 |   | 7,560 |   | — |   |
| Group equity (5)                                                                                                     |   | 7,359                                          |   | 4,780 |   | 12,172 |   | 16,352 |   | 6,722 |   |
| Capital stock (including additional paid in  capital)                                                                |   | 16,866                                         |   | 16,866 |   | 15,580 |   | 8,400 |   | 4,505 |   |
| Number of subscribed shares                                                                                          |   | 2,490,996,877                                  |   | 2,490,996,877 |   | 2,254,147,806 |   | 1,203,652,643 |   | 958,730,933 |   |
| **In accordance with  US GAAP:**                                                                                     |   |                                           |   |   |   |   |   |   |   |   |   |
| Total assets                                                                                                         |   | 25,224                                         |   | 33,049 |   | 56,178 |   | 55,032 |   | 20,446 |   |
| Long-term liabilities                                                                                                |   | 9,364                                          |   | 12,769 |   | 17,185 |   | 20,787 |   | 5,405 |   |
| Provisions                                                                                                           |   | 3,760                                          |   | 1,958 |   | 1,844 |   | 1,682 |   | 1,870 |   |
| Exchange right                                                                                                       |   | —                                         |   | — |   | 659 |   | 2,035 |   | — |   |
| Group equity                                                                                                         |   | 7,137                                          |   | 11,227 |   | 26,665 |   | 21,668 |   | 8,472 |   |
| **Other Data (in  accordance with Dutch GAAP)**                                                                      |   |                                           |   |   |   |   |   |   |   |   |   |
| Net cash (used in) provided by operating  activities                                                                 |   | 4,087                                          |   | 3,975 |   | 2,565 |   | 2,126 |   | 2,451 |   |
| Net cash (used in) provided by investing  activities                                                                 |   | -48                                            |   | -335 |   | -1,664 |   | -22,849 |   | -2,654 |   |
| Net cash (used in) provided by financing  activities                                                                 |   | -4,853                                         |   | -8,329 |   | 2,947 |   | 21,495 |   | 2,350 |   |
| Depreciation charges                                                                                                 |   | 2,101                                          |   | 2,257 |   | 2,277 |   | 1,886 |   | 1,542 |   |
| Amortization charges                                                                                                 |   | 314                                            |   | 390 |   | 1,231 |   | 1,037 |   | 122 |   |
| Impairment charges                                                                                                   |   | 120                                            |   | 7,605 |   | 14,309 |   | 116 |   | 638 |   |
| Restructuring charges                                                                                                |   | 60                                             |   | 77 |   | 705 |   | — |   | 17 |   |
| Capital expenditure                                                                                                  |   | 1,421                                          |   | 1,137 |   | 2,949 |   | 3,847 |   | 2,524 |   |
| **Ratios**                                                                                                           |   |                                           |   |   |   |   |   |   |   |   |   |
| Pay-out ratio (6)                                                                                                    |   | 22.5                                           | %      | — |   | — |   | 27.9 | % | 61.2 | % |
| Dividend per ordinary share (3,7)                                                                                    |   | 0.25                                           |   | — |   | — |   | 0.53 |   | 0.53 |   |
| Dividend per ordinary share and per ADS in  USD (2003 proposed)                                                      |   | 0.31                                           |   | — |   | — |   | 0.49 |   | 0.56 |   |
| Operating margin (8)                                                                                                 |   | 24.1                                           | %      | -43.7 | % | -112.3 | % | 20.1 | % | 11.5 | % |
| Solvency (9)                                                                                                         |   | 30.5                                           | %      | 19.0 | % | 29.6 | % | 30.6 | % | 35.5 | % |

 

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(1)          Our results were affected by a number ofsubstantial items in 2003, 2002, 2001, 2000 and 1999. In 2003, we recognized again resulting from the termination agreement Spatie Weg with MobilCom of EUR210 million, we reported a book gain on the sale of Directory Services of EUR435 million, we reversed the impairment of GSM licences of BASE of EUR 103million, we reached an agreement with the tax authorities with a positiveoutcome of EUR 1,080 million and we reversed the adjustment to net realizablevalue of Hutchison 3G UK of EUR 119 million. In 2002, the main items were theimpairment charges on goodwill of EUR 1.9 billion (E-Plus and BASE), theimpairment charges on licenses (E-Plus and BASE) of EUR 5.4 billion, theimpairment on Hutchison 3G UK of EUR 1.2 billion and the write-down of thedeferred tax asset on E-Plus and BASE of EUR 606 million. In 2001, werecognized impairment charges of EUR 14.1 billion, an amount ofEUR 6.8 billion relating to the BellSouth exchange right was releasedto income and we incurred restructuring charges of EUR 0.7 billion. Themain item in 2000 was our EUR 2.3 billion gain on the acquisition of 15%in KPN Mobile by NTT DoCoMo. In 1999, the main items were the impairments onfixed assets (platforms for fixed connections and sea cables) ofEUR 599 million and a dilution gain on KPNQwest of EUR414 million.

(2)          Please refer to Note 12 of the ConsolidatedFinancial Statements for a discussion on the method used to calculate profit orloss per share.

(3)          Restated for the effect of the two-for-oneshare split which occurred on June 5, 2000, as if the share split tookplace as of January 1, 1999.

(4)          In conjunction with our adoption of the StaffAccounting Bulletin No. 101, Revenue Recognition in Financial Statements(SAB 101), we changed our method of accounting for certain revenue streams andrelated direct costs under US GAAP, effective October 1, 2000, withretroactive effect to January 1, 2000. For further information, pleaserefer to our Consolidated Financial Statements and the Notes thereto. The proforma amounts presented assume that the new method of accounting was appliedretroactively for all periods. Pro forma amounts for years subsequent to ouradoption of SAB 101 are equivalent to the historical amounts for such years.

(5)   Groupequity 1999 has been restated for EUR 333 million appropriation of finaldividend.

(6)          Pay-out ratio: dividend (2003: proposeddividend) per ordinary share divided by earnings per (ordinary) share asdetermined under Dutch GAAP. 

(7)   Theproposed dividend over 2003 consists of a cash dividend of EUR 0.12 per shareand an additional special cash dividend of EUR 0.13 per share.

(8)   Operatingmargin: operating result divided by total operating revenues as determinedunder Dutch GAAP.

(9)          Solvency: shareholders' equity plus minorityinterest (group equity) divided by total assets as determined under Dutch GAAP.

 

224

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**INFORMATION PER QUARTER**

 

The following table sets forth our unauditedquarterly information for 2003 and 2002:

 
| **Amounts in millions of  euro, unless otherwise  stated**        |   | **Q4/2003** |       | **Q3/2003** |       | **Q2/2003** |       | **Q1/2003** |       | **Q4/2002** |       | **Q3/2002** |       | **Q2/2002** |       | **Q1/2002** |       |
|-------------------------------------------------------------------|--------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ***Operating revenues:***                                         |   |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Fixed                                                             |   | 1,881       |       | 1,830       |       | 1,846       |       | 1,842       |       | 1,880       |       | 1,815       |       | 1,842       |       | 1,839       |       |
| Mobile                                                            |   | 1,340       |       | 1,324       |       | 1,270       |       | 1,445       |       | 1,461       |       | 1,273       |       | 1,194       |       | 1,384       |       |
| Other  activities                                                 |   | 233         |       | 229         |       | 235         |       | 667         |       | 317         |       | 280         |       | 369         |       | 298         |       |
| Internal  revenues                                                |   | -340        |       | -301        |       | -308        |       | -286        |       | -295        |       | -311        |       | -300        |       | -262        |       |
| **Total operating revenues**                                      |   | **3,114**   | ** ** | **3,082**   | ** ** | **3,043**   | ** ** | **3,668**   | ** ** | **3,363**   | ** ** | **3,057**   | ** ** | **3,105**   | ** ** | **3,259**   | ** ** |
|                                                              |   |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| ***Operating result:***                                           |   |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Fixed                                                             |   | 437         |       | 379         |       | 440         |       | 457         |       | 315         |       | 352         |       | 222         |       | 106         |       |
| Mobile                                                            |   | 301         |       | 197         |       | 161         |       | 388         |       | 295         |       | 197         |       | -7,162      |       | 416         |       |
| Other  activities                                                 |   | -57         |       | 27          |       | -12         |       | 390         |       | -96         |       | -22         |       | -19         |       | -185        |       |
| **Operating result**                                              |   | **681**     | ** ** | **603**     | ** ** | **589**     | ** ** | **1,235**   | ** ** | **514**     | ** ** | **527**     | ** ** | **-6,959**  | ** ** | **337**     | ** ** |
|                                                              |   |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Financial  income and expenses                                    |   | -223        |       | -205        |       | -202        |       | -232        |       | -338        |       | -256        |       | -317        |       | -267        |       |
| Taxes                                                             |   | 972         |       | -256        |       | -221        |       | -238        |       | 29          |       | -190        |       | -795        |       | -27         |       |
| Income  from participating interests                              |   | 165         |       | -4          |       | 1           |       | -1          |       | -98         |       | -7          |       | -1,203      |       | -392        |       |
| Minority  interests                                               |   | 44          |       | 1           |       | 16          |       | 6           |       | -100        |       | -6          |       | 5           |       | 1           |       |
| **Profit/(loss) after taxes**                                     |   | **1,639**   | ** ** | **139**     | ** ** | **183**     | ** ** | **770**     | ** ** | **7**       | ** ** | **68**      | ** ** | **-9,269**  | ** ** | **-348**    | ** ** |
|                                                              |   |        |       |        |       |        |       |        |       |        |       |        |       |        |       |        |       |
| Earnings  per ordinary share (non-diluted) in euro (1)            |   | 0.67        |       | 0.05        |       | 0.08        |       | 0.31        |       | 0.03        |       | 0.08        |       | -3.90       |       | -0.15       |       |
| Earnings  per ordinary share on a fully diluted basis in euro (1) |   | 0.65        |       | 0.06        |       | 0.07        |       | 0.31        |       | 0.03        |       | 0.08        |       | -3.90       |       | -0.15       |       |

 

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(1)          The earnings per share in a quarter subsequentto the first quarter have been calculated by subtracting the cumulativeearnings per share of the previous quarter from the cumulative earnings pershare of that quarter.

 

225

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**INFORMATION ABOUT THE KPN SHARE**

We attach great importanceto transparent and regular communication with our shareholders, other capitalproviders and their intermediaries. Our Chief Executive Officer is primarilyresponsible for investor relations. Presentations for and meetings withinvestors and analysts are held on a regular basis, including those inconnection with the announcement of our results. We also emphasizecommunication with our retail investors by, for example, providing them withour free quarterly information bulletin ‘In Portefeuille’. In addition, weregularly organize presentations for retail investors. In 2003, we joined the Shareholders’Communication Channel, an initiative in which 14 major Dutch companies and 12depositary banks are participating in order to facilitate communication betweencompanies and their shareholders, and between shareholders themselves.

In all these activities, ourmanagement is supported by theInvestor Relations department, which is available on a daily basis for investors and analysts.

For more information,please refer to the Investor Relations pages on our website: www.kpn.com.

**Listings**

We are listed on the following stockexchanges (ticker: KPN):
| Stock Exchange of  Amsterdam |   | since June 1994    |
|------------------------------|--------|--------------------|
| New York (NYSE)              |   | since October 1995 |
| London                       |   | since June 1996    |
| Frankfurt                    |   | since July 1996    |

Since June 13, 1994, our ordinary shareshave been listed on the Stock Exchange of Amsterdam.  Relating to our New York listing, we have an unrestrictedsponsored ADR facility with Citibank N.A. as depositary pursuant to a depositagreement. The ADRs evidence ADSs, each of which represents the right toreceive one ordinary share. At the end of 2003, the number of issued ADRsamounted to 6,928,595 (2002: 7,088,822). The ADSs have been listed for tradingon the New York Stock Exchange (NYSE) under the symbol ‘KPN’.  For further information on our ADR facility,please refer to ‘Additional information for Shareholders — American DepositoryReceipts’. Our ordinary shares are also listed on the London Stock Exchange andthe Frankfurt Stock Exchange.

**Indices**

The KPN shares are included in the followingleading indices (weightings as of the end of 2003):
| AEX                       |   | 4.912 | % |
|---------------------------|--------|-------|---|
| DJ  Stoxx 600 Telecom     |   | 3.231 | % |
| FTSE  Eurotop 300         |   | 0.361 | % |
| FTSE  Eurotop 300 Telecom |   | 3.688 | % |
| MSCI  Euro                |   | 0.738 | % |

**Shareownership**

Our ordinary shares are held in bearer formor held in the form of ordinary shares registered in KPN’s share register inThe Hague, the Netherlands. Ordinary shares may be converted from one form tothe other but only ordinary shares in bearer form deposited with TheNetherlands Central Institute for Giro Securities may be traded on the StockExchange of Amsterdam. As of February 27, 2004, 19.3% of the shares were heldby the State of the Netherlands and the remaining 80.7% were freely marketable.For moreinformation, please refer to the section titled ‘Additional Informationfor Shareholders - Obligations to disclose holdings’.

**SHAREPRICE 2001 - 2003**

 

226

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**Dividend policy**

 

In the interest of maintaining flexibility to grow and invest in ourbusiness, while maximizing returns to shareholders, we target an optimumcapital structure. Currently, this involves containing net debt to no more thantwice the operating result plus depreciation, amortization and impairments, andmaintaining a net interest coverage (defined as operating result plusdepreciation, amortization and impairments divided by financial income andexpense) of at least 6 times. This financial framework will accommodate ourdesire to establish an adequate dividend policy for our shareholders.

 

In November 2003, we announced that we would be expecting to declare acash dividend of EUR 0.12 per share in respect of the year ending December2003. Following the agreement with the tax authorities we have decided toaugment this with an additional special dividend of EUR 0.13 per share. Theproposed dividends will be presented for approval at the Annual General Meetingof Shareholders to be held on April 15, 2004 and, by approval, paid out shortlythereafter. It is presently anticipated that, as of 2004, the level of theregular dividend will be at least EUR 0.20 per share per year.

 

Furthermore, we intend to reinstate the payment of an interim dividend.We expect to declare an interim dividend for 2004 upon publication of ourhalf-year results scheduled for August 9, 2004.

 

We have nointention to hold unutilized surplus cash balances. Surplus cash will bereturned to shareholders either via additional special dividends or via sharerepurchases. Share repurchases will only be undertaken at a price, whichenhances value for the remaining shareholders.

 

This policy may change and is based on anumber of assumptions concerning future events and is subject to uncertaintiesand risks that are outside our control.

 

**PER-SHAREINFORMATION**

 
| **Per ordinary share or per  ADS in euro**                                 |   | **2003**      |   | **2002**      |   | **2001**      |   |
|----------------------------------------------------------------------------|--------|---------------|--------|---------------|--------|---------------|--------|
|                                                                       |   |          |   |          |   |          |   |
| Non-diluted  profit after taxes                                            |   | 1.11          |   | -3.94         |   | -5.88         |   |
| Fully  diluted profit after taxes (1)                                      |   | 1.09          |   | -3.94         |   | -5.88         |   |
|                                                                       |   |          |   |          |   |          |   |
| Dividend  (2)                                                              |   | 0.25          |   | —        |   | —        |   |
| Pay-out  ratio (2)                                                         |   | 22.5          | %      | —        |   | —        |   |
|                                                                       |   |          |   |          |   |          |   |
| Number  of outstanding shares (3)                                          |   |          |   |          |   |          |   |
| •   At year-end                                        |   | 2,490,996,876 |   | 2,490,996,876 |   | 2,254,147,805 |   |
| •   On average (weighted)                              |   | 2,468,678,426 |   | 2,423,921,066 |   | 1,274,495,172 |   |
|                                                                       |   |          |   |          |   |          |   |
| Closing  prices at Stock Exchange of Amsterdam                             |   | 6.12          |   | 6.20          |   | 5.71          |   |
|                                                                       |   |          |   |          |   |          |   |
| Closing  prices at NYSE (USD)                                              |   | 7.71          |   | 6.42          |   | 5.06          |   |
|                                                                       |   |          |   |          |   |          |   |
| Average  daily trading volume at the Stock Exchange of Amsterdam (x 1,000) |   | 10,904        |   | 13,219        |   | 14,062        |   |

 

----

(1)                                  Fully diluted (dilution in relation tothe exchange right and warrant issued to BellSouth (only 2001 and 2002), theconvertible bond maturing November 2005, the bonus shares issued in 2002, andthe options granted within the scope of management and employee option plans).

(2)                                  The proposed dividend over 2003consists of a cash dividend of EUR 0.12 per share and an additional specialcash dividend of EUR 0.13 per share.

(3)                                  Excluding the special share of theDutch State.

 

227

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The following tables set forth, for theperiods indicated, the high and low closing prices of the ordinary shares andADSs as reported by the Stock Exchange of Amsterdam and the New York StockExchange (NYSE), respectively.

 

**ANNUALHIGH AND LOW CLOSING PRICES OF OUR ORDINARY SHARES ON THE STOCK EXCHANGE OFAMSTERDAM AND OUR ADSS ON THE NYSE**

 
|                 |   | **Stock  Exchange of Amsterdam** |   | **NYSE** |   |
|----------------------|--------|----------------------------------|--------|----------|--------|
|                 |   | **High**                         |   | **Low**  |   | **High** |   | **Low** |   |
|                 |   | **EUR**                          |   | **USD**  |   |
| 1999    1) |   | 48.5                             |   | 18.2     |   | 48.8 |   | 19.6 |   |
| 2000    1) |   | 74.0                             |   | 12.1     |   | 71.1 |   | 10.8 |   |
| 2001                 |   | 18.0                             |   | 2.2      |   | 16.9 |   | 2.1 |   |
| 2002                 |   | 6.9                              |   | 4.0      |   | 6.8 |   | 3.7 |   |
| 2003                 |   | 7.1                              |   | 5.4      |   | 8.0 |   | 5.9 |   |

 

----

1) Prices have been restated to reflect the two-for-one share split ofJune 5, 2000.

 

**CLOSINGPRICES OF OUR ORDINARY SHARES ON THE STOCK EXCHANGE OF AMSTERDAM AND OF OURADSS ON THE NYSE**

 
|                       |   |        |   | **Stock  Exchange of Amsterdam** |   | **NYSE** |   |
|----------------------------|--------|-------------|--------|----------------------------------|--------|----------|--------|
|                       |   |        |   | **High**                         |   | **Low**  |   | **High** |   | **Low** |   |
|                       |   |        |   | **EUR**                          |   | **USD**  |   |
| 2002                       |   | 1st quarter |   | 6.4                              |   | 5.0      |   | 5.7 |   | 4.4 |   |
|                       |   | 2nd quarter |   | 5.9                              |   | 4.0      |   | 5.2 |   | 3.7 |   |
|                       |   | 3rd quarter |   | 5.8                              |   | 4.3      |   | 5.6 |   | 4.1 |   |
|                       |   | 4th quarter |   | 6.9                              |   | 5.1      |   | 6.8 |   | 4.9 |   |
| 2003                       |   | 1st quarter |   | 7.1                              |   | 5.4      |   | 7.5 |   | 5.9 |   |
|                       |   | 2nd quarter |   | 6.4                              |   | 5.6      |   | 7.2 |   | 6.1 |   |
|                       |   | 3rd quarter |   | 6.8                              |   | 5.9      |   | 7.7 |   | 6.6 |   |
|                       |   | 4th quarter |   | 6.7                              |   | 5.8      |   | 8.0 |   | 7.2 |   |
| 2004 (through February 27) |   | 1st quarter |   | 6.9                              |   | 6.2      |   | 8.8 |   | 7.8 |   |

 

**MONTHLYHIGH AND LOW CLOSING PRICES OF OUR ORDINARY SHARES ON THE STOCK EXCHANGE OFAMSTERDAM AND OUR ADSS ON THE NYSE**

 
|                                |   | **Stock  Exchange of Amsterdam** |   | **NYSE** |   |
|-------------------------------------|--------|----------------------------------|--------|----------|--------|
|                                |   | **High**                         |   | **Low**  |   | **High** |   | **Low** |   |
|                                |   | **EUR**                          |   | **USD**  |   |
| September 2003                      |   | 6.7                              |   | 6.3      |   | 7.7 |   | 7.0 |   |
| October 2003                        |   | 6.6                              |   | 6.4      |   | 7.9 |   | 7.5 |   |
| November 2003                       |   | 6.6                              |   | 6.2      |   | 7.9 |   | 7.3 |   |
| December 2003                       |   | 6.5                              |   | 5.8      |   | 8.0 |   | 7.2 |   |
| January 2004                        |   | 6.5                              |   | 6.2      |   | 8.3 |   | 7.8 |   |
| February 2004 (through February 27) |   | 6.9                              |   | 6.3      |   | 8.8 |   | 7.9 |   |

 

The closing price of the ordinary shares on the Stock Exchange ofAmsterdam on February 27, 2004 was EUR 6.35. The closing price of the ADS onthe NYSE on February 27, 2004 was USD 7.97.

 

228

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**Financialcalendar 2004**

 

April 15, 2004

Annual General Meeting of Shareholders (Telehouse-building, LaGuardiaweg 5, Amsterdam, 14.30 hrs)

 

April 19, 2004

Ex-dividend listing of shares

 

April 28, 2004

Start of payment of 2003 final dividend

 

May 10, 2004

Publication of results for the first quarter of 2004

 

August 9, 2004

Publication of results for the second quarter of 2004

 

August 10, 2004

Ex-interim dividend listing of shares

 

August 19, 2004

Start of payment interim dividend

 

November 1, 2004

Publication of results for the third quarter of 2004

 

Please note that dates may be subject to change.

 

**Contact**

 

For more information, please contact:

 

KPN Investor Relations

Attn. JantieneKlein Roseboom

Tel.:                       (+31) 70 446 09 86

Fax:                         (+31)70 446 05 93

www.kpn.com (‘About KPN’)

ir@kpn.com

 

Should you be interested in receiving our magazine for retail investors(*InPortefeuille*, which is only published in Dutch), then we kindlyrequest that you send your address to:

 

KPN Corporate Communications

Attn. HenkDonderwinkel

P.O. Box 30000

2500 GA The Hague

The Netherlands

h.donderwinkel@kpn.com

 

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ADDITIONALINFORMATION FOR SHAREHOLDERS

 

**Legalstructure**

The following table sets forth the name and jurisdiction ofincorporation of, and our ownership and voting interest (if different) in, ourprincipal operating subsidiaries and other principal interests as ofFebruary 27, 2004.

 
| **Name of Subsidiaries and other principal interests**                 |   | **Country of  incorporation** |   | **Percentage  ownership/  voting  interest** |   |
|------------------------------------------------------------------------|--------|-------------------------------|--------|----------------------------------------------|--------|
|                                                                   |   |                          |   |                                         |   |
| KPN Telecom B.V.:                                                      |   | The Netherlands               |   | 100.0                                        |   |
| •   KPN  EnterCom Solutions B.V.                   |   | The Netherlands               |   | 100.0                                        |   |
| •   KPN  EuroRings B.V.                            |   | The Netherlands               |   | 100.0                                        |   |
| •   EuroWeb  International Corp.                   |   | USA                           |   | 50.2                                         |   |
| •   KPN  Satcom B.V.:                              |   | The Netherlands               |   | 100.0                                        |   |
| •   Xantic  B.V.                                   |   | The Netherlands               |   | 65.0                                         |   |
| •   Infonet  Services Corp.                        |   | USA                           |   | 17.7                                         |   |
| •   Infonet Nederland B.V.                         |   | The Netherlands               |   | 100.0                                        |   |
| •   HubHop  B.V.                                   |   | The Netherlands               |   | 100.0                                        |   |
| •   PanTel  Rt.                                    |   | Hungary                       |   | 75.19                                        |   |
| KPN Telecommerce B.V.:                                                 |   | The Netherlands               |   | 100.0                                        |   |
| •   KPN  Consumer Internet and Media Services B.V. |   | The Netherlands               |   | 100.0                                        |   |
| •   Planet  Media Group N.V.                       |   | The Netherlands               |   | 100.0                                        |   |
| •   XS4ALL  Holding B.V.                           |   | The Netherlands               |   | 100.0                                        |   |
| •   SNT  Group N.V.                                |   | The Netherlands               |   | 50.78                                        |   |
| KPN Mobile Holding B.V.:                                               |   | The Netherlands               |   | 100.0                                        |   |
| •   GMI  Mobilfunk Beteiligungen GmbH              |   | Germany                       |   | 100.0                                        |   |
| •   E-PlusMobilfunk GmbH &  Co.KG              |   | Germany                       |   | 22.51                                        |   |
| •   KPN  Mobile N.V.:                              |   | The Netherlands               |   | 97.84                                        | (1)    |
| •   KPN  Mobile The Netherlands B.V.               |   | The Netherlands               |   | 100.0                                        | (2)    |
| •   KPN  Mobile International B.V.                 |   | The Netherlands               |   | 100.0                                        | (2)    |
| •   BASE  N.V./S.A.                                |   | Belgium                       |   | 100.0                                        | (2)    |
| •   E-Plus  Mobilfunk GmbH & Co.KG             |   | Germany                       |   | 77.49                                        | (2)    |
| Volker Wessels Netwerk Bouw B.V.                                       |   | The Netherlands               |   | 45.0                                         |   |
| KPN Vastgoed & Facilities B.V.                                     |   | The Netherlands               |   | 100.0                                        |   |

 

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(1)                                  NTT DoCoMo owns theadditional 2.16% of KPN Mobile N.V.

(2)                                  Ownership interest ofKPN Mobile N.V.

 

**Materialcontracts**

 

As of the date of this AnnualReport, we are not party to any contracts (not entered into in the ordinarycourse of business) that are considered material to our results, financialcondition or operations.

 

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**Exchangecontrols**

 

There are no legislative or other legal provisions currently in forcein the Netherlands or arising under our Articles of Association restrictingtransfers to holders of our securities not resident in the Netherlands. Cashdividends payable in euro on ordinary shares may be officially transferred fromthe Netherlands and converted into any other currency.

 

There are no limitations, either under the laws of the Netherlands orour Articles of Association, on the right of non-residents of the Netherlandsto hold or vote our shares.

 

**Exchangerate information**

We began using the euro as our reporting currency on January 1,1999. Prices for our ordinary shares listed on the Stock Exchange of Amsterdamare also quoted in euros. Fluctuations in the exchange rate between the euroand US dollar will affect:

•                  the US dollarequivalent of the euro price of our ordinary shares listed on the StockExchange of Amsterdam and, as a likely result, the market price of our ADSslisted on the New York Stock Exchange;

•                  the US dollarconversion of any cash dividends paid in euro on our ordinary sharesrepresented by ADSs; and

•                  the presentationof our operating results and financial condition.

 

The noon buying rate for the euro in the City of New York for cabletransfers as certified for Customs purposes by the Federal Reserve Bank of NewYork on February 27, 2004, was USD 1.24 per EUR 1.00.

 

The following table sets forth the average noon buying rate for theeuro for each of the previous five years:

 
| **Year** |   | **Average (1)** |   |
|----------|--------|-----------------|--------|
|     |   |            |   |
| 1999     |   | 1.07            |   |
| 2000     |   | 0.92            |   |
| 2001     |   | 0.89            |   |
| 2002     |   | 0.95            |   |
| 2003     |   | 1.13            |   |

 

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(1)                                  Average of the noonbuying rates on the last business day for each full calendar month during therelevant period.

 

The following table sets forth the high and low noon buying rates forthe euro for each of the monthly periods indicated:

 
| **Month**                         |   | **High** |   | **Low** |   |
|-----------------------------------|--------|----------|--------|---------|--------|
|                              |   |     |   |    |   |
| September  2003                   |   | 1.17     |   | 1.08    |   |
| October  2003                     |   | 1.18     |   | 1.16    |   |
| November  2003                    |   | 1.20     |   | 1.14    |   |
| December  2003                    |   | 1.26     |   | 1.20    |   |
| January  2004                     |   | 1.29     |   | 1.24    |   |
| February 2004 (until February 27) |   | 1.28     |   | 1.24    |   |

 

For a more complete discussion of exchange rate fluctuations and thehedging techniques that we use to manage our exposure to these fluctuations,please refer to the section titled ‘Quantitative and Qualitative DisclosuresAbout Market Risk’ in our Consolidated Financial Statements.

 

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**Obligationsto disclose holdings**

Pursuant to the Dutch 1996 Act on Disclosureof Holdings in Listed Companies (*Wet MeldingZeggenschap in ter beurze genoteerde vennootschappen 1996,*or *Wmz*), anyone acting alone or in concert,as defined in the Wmz Act, obtaining or divesting, directly or indirectly, aninterest in our share capital causing that holder’s percentage of interest inour issued capital or percentage of voting right interest to fall into adifferent range, must immediately notify us and the Authority for the FinancialMarkets. These ranges are: 0 to 5%, 5 to 10%, 10 to 25%, 25 to 50%, 50 to66.66%, and 66.66% or higher. The Authority for the Financial Markets willdisclose the information by publication in a newspaper. Failure to disclose aperson’s shareholdings qualifies as an offense, and may result in civilpenalties, including suspension of voting rights, and administrative penalties.In 2003, we received one notification in connection with the sale ofapproximately 12% of our shares by the State of the Netherlands to Citibank onSeptember 19, 2003, reducing its shareholding from 31.39% to 19.3%. We havebeen informed by Citibank that it subsequently placed the shares withinstitutional investors. In 2002, we received two notifications in connectionwith BellSouth’s exchange described above (2001: no notification; 2000: nonotification). We received the first notification on January 30, 2002after we, KPN Mobile and BellSouth entered into an exchange agreement under whichBellSouth agreed to exchange its indirect 22.51% interest in E-Plus for234,700,000 newly issued KPN shares (representing a 9.42% interest in ourCompany). This transaction was completed on March 13, 2002. OnMarch 19, 2002 we received a notification that BellSouth no longer held aninterest in us.

 

The Dutch 1995 Act on the Supervision of theSecurities Trade (*Wet toezichteffectenverkeer 1995* or *Wte*)provides for an additional notification duty for (among others) holders ofshares or ADSs holding, directly or indirectly, an interest in more than 25% ofthe capital in a listed company. Such shareholders are obliged to notify theAuthority for the Financial Markets of any and all transactions they enter intowith respect to securities in that company. If a shareholder with an interestexceeding 25% is a legal entity and not an individual, the obligation isextended to the managing directors and supervisory directors of the legalentity. In 2003, we received no such notifications.

 

**AmericanDepositary Receipts**

 

The following is a summary of certain provisions of the DepositAgreement (as amended and including all exhibits thereto, referred tohereinafter as the Deposit Agreement), between KPN, Citibank N.A. (acting asdepository bank (the Depositary)) and the registered holders and beneficialowners from time to time of the American Depositary Receipts (ADRs). Thissummary does not purport to be complete and is qualified in its entirety byreference to the Deposit Agreement. The Deposit Agreement is an exhibit to thisAnnual Report and will be available for inspection at the principal office ofthe Depositary in New York, which is presently located at 111 Wall Street, NewYork, New York 10043, U.S.A. Terms used herein and not otherwise defined shallhave the respective meanings set forth in the Deposit Agreement.

 

ADRs evidencing American Depositary Shares (ADS) are issuable by theDepositary pursuant to the terms of the Deposit Agreement. Each ADS representsthe right to receive one ordinary share deposited under the Deposit Agreement(together with all other securities, property and cash received and heldthereunder at any time in respect of or in lieu of such deposited Shares,referred to hereinafter as the Deposited Securities). Ordinary shares will bedeposited to an account maintained by Citibank, N.A. Amsterdam or ABN AMRO BankN.V., as the custodian and agent of the Depositary in the Netherlands (theCustodian). Only persons in whose names ADRs are registered on the books of theDepositary will be treated by the Depositary and us as the legal owners of suchADRs.

 

The Deposit Agreement and the ADSs are governed by, and construed inaccordance with, the laws of the State of New York without reference to theprinciples of choice of law thereof. Notwithstanding anything contained in theDeposit Agreement, any ADR or any present or future provisions of the laws ofthe State of New York, the rights of holders of ordinary shares and of anyother Deposited Securities and our obligations and duties in respect of the holdersof ordinary shares or other Deposited Securities, as such, shall be governed bythe laws of the Netherlands.

 

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**Taxation**

 

This taxation summary solely addresses the principal Dutch and US taxconsequences of the acquisition, ownership and disposition of ordinary sharesand ADSs. It is a general summary which does not apply to certain categories ofinvestors and it does not discuss every aspect of taxation that may be relevantto a particular holder of ordinary shares or ADSs under special circumstances,or who is subject to special treatment under applicable law. This summary alsoassumes that we are organized, and that our business will be conducted, in themanner outlined in this Annual Report. Changes in the organizational structureor the manner in which we conduct our business may invalidate this summary.

 

This summary is based on the tax laws of the Netherlands and the UnitedStates as they are in force and in effect on the date of this Annual Report.These laws could change and a change could be effective retroactively. Thissummary will not be updated to reflect changes in laws and if such changeoccurs the information in this summary could become invalid.

 

This is a general summary and the tax consequences described may notapply to each holder of ordinary shares or ADSs. Any potential investor shouldconsult his or her own tax advisor for more information about the taxconsequences of acquiring, owning and disposing of ordinary shares or ADSs in particularcircumstances.

 

We have not addressed every potential tax consequence of an investmentin ordinary shares or ADSs under the laws of the Netherlands and the UnitedStates.

 

**DUTCHTAXATION OF NON-RESIDENT HOLDERS OF ORDINARY SHARES OR ADSS**

 

***General***

*** ***

The summary of certain Dutch taxes set out in this section, ‘Dutchtaxation of non-resident holders of ordinary shares or ADSs’, only applies to aholder of ordinary shares or ADSs who is a Non-Resident holder of shares.

 

A holder of ordinary shares or ADSs is a Non-Resident holder of sharesif:

•                  he is neitherresident, nor deemed to be resident, in the Netherlands for purposes of Dutchtaxation and, in the case of an individual, has not elected to be treated as aresident of the Netherlands for Dutch income tax purposes; and

•                  in the case ofan individual, he neither is nor has been, nor is deemed to be nor has beendeemed to be an employee of us nor of any entity related to us; and

•                  his ordinaryshares or ADSs do not form part, and are not deemed to form part, of asubstantial interest *(aanmerkelijk belang)* in us, unless suchinterest forms part of the assets of an enterprise.

 

If a person holds an interest in us, such interest forms part or isdeemed to form part of a substantial interest in us if any one or more of thefollowing circumstances are present:

•                  he alone or, inthe case of an individual, together with his partner (*partner*) has, directly orindirectly, the ownership of shares or ADSs of us representing 5% or more ofthe total issued and outstanding capital (or the issued and outstanding capitalof any class of shares) of us, or rights to acquire, directly or indirectly,shares, whether or not already issued, that represent 5% or more of the totalissued and outstanding capital (or the issued and outstanding capital of anyclass of shares) of us, or the ownership of profit participating certificates (*winstbewijzen*)that relate to 5% or more of the annual profit of us or to 5% or more of theliquidation proceeds of us;

•                  his partner orany of his relatives by blood or by marriage in the direct line (includingfoster children) of him or of his partner has a substantial interest in us;

•                  his shares,ADSs, profit participating certificates or rights to acquire shares, ADSs orprofit participating certificates in us have been acquired by him or are deemedto have been acquired by him under a non-recognition provision.

 

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For purposes of the above, a person who is only entitled to thebenefits from shares, ADSs or profit participating certificates (for instance aholder of a right of usufruct) is deemed to be a holder of shares, ADSs orprofit participating certificates, as the case may be, and his entitlement tobenefits is considered a share, ADS or a profit participating certificate, asthe case may be.

 

***Taxes on income and capital gains***

 

A Non-Resident holder of shares will not be subject to any Dutch taxeson income or capital gains in respect of dividends distributed by us (otherthan the dividend withholding tax described below) or in respect of any gainrealized on the disposal of ordinary shares or ADSs, unless:

•                  he derivesprofits from an enterprise, whether as an entrepreneur (*ondernemer*) or pursuant to aco-entitlement to the net value of an enterprise, other than as an entrepreneuror a shareholder, which enterprise is either managed in the Netherlands or, inwhole or in part, carried on through a permanent establishment or a permanentrepresentative in the Netherlands and his ordinary shares or ADSs areattributable to that enterprise; or

•                  (in the case ofan individual) he derives benefits from ordinary shares or ADSs that aretaxable as benefits from miscellaneous activities in the Netherlands (*resultaatuit overige werkzaamheden in Nederland*).

 

The concept ‘dividends distributed by us’ as used in this sectionincludes, but is not limited to, the following:

•                  distributions incash or in kind, deemed and constructive distributions (including, as a rule,consideration for the repurchase of ordinary shares or ADSs by us (other than arepurchase as a temporary investment) in excess of the average capitalrecognized as paid-in for Dutch dividend withholding tax purposes), andrepayments of capital not recognized as paid-in for Dutch dividend withholdingtax purposes;

•                  liquidationproceeds and proceeds of redemption of ordinary shares in excess of the averagecapital recognized as paid-in for Dutch dividend withholding tax purposes;

•                  the par value ofordinary shares issued by us to a holder of ordinary shares or ADSs or anincrease of the par value of shares, as the case may be, to the extent that itdoes not appear that a contribution, recognized for Dutch dividend withholdingtax purposes, has been made or will be made; and

•                  partialrepayment of capital, recognized as paid-in for Dutch dividend withholding taxpurposes, if and to the extent that there are net profits (*zuivere winst*), unless(a) our General Meeting of Shareholders has resolved in advance to makesuch repayment and (b) the par value of the ordinary shares concerned hasbeen reduced by an equal amount by way of an amendment to our Articles ofAssociation.

 

A Non-Resident holder of shares may, *inter alia*, derive benefitsfrom ordinary shares or ADSs that are taxable as benefits from miscellaneousactivities in the Netherlands in the following circumstances:

 

•                  if hisinvestment activities go beyond the activities of an active portfolio investor,for instance in case of the use of insider knowledge (*voorkennis*) or comparableforms of special knowledge; or

•                  if he makesordinary shares or ADSs available or is deemed to make ordinary shares or ADSsavailable, legally or in fact, directly or indirectly, to a connected person (*verbondenpersoon*) as described in articles 3.91 and 3.92 of the Dutch IncomeTax Act 2001;

•                  if suchactivities are performed or deemed to be performed in the Netherlands.

 

***Dividend withholding tax***

 

Dividends distributed by us to a Non-Resident holder of shares aregenerally subject to a withholding tax imposed by the Netherlands at a rate of25%. Please refer to the sub-section titled ‘Taxes on income and capital gains’for a description of the concept ‘dividends distributed by us’.

 

If a double tax treaty is in effect between the Netherlands and thecountry of residence of a Non-Resident holder of shares, such holder may beeligible for a full or partial relief from the Dutch dividend withholding tax,provided that such relief is duly claimed. Pursuant to domestic rules to avoiddividend

 

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stripping, dividend withholding tax relief will only be available tothe beneficial owner (*uiteindelijk gerechtigde*) of dividendsdistributed by us. The Dutch tax authorities have taken the position that thisbeneficial ownership test can also be applied to deny relief from Dutchdividend withholding tax under double tax treaties and the tax arrangement forthe Kingdom of the Netherlands.

 

If a Non-Resident holder of shares is resident in the NetherlandsAntilles or Aruba, or in a member state of the European Union or in a countrythat has concluded a double tax treaty with the Netherlands, we are notrequired to withhold Dutch dividend withholding tax from a dividend distributedby us to the extent that the temporary special distribution tax, discussedbelow in the section titled ‘Distribution tax’, applies to the distribution.

 

Under the Convention of December 18, 1992, between the Kingdom ofthe Netherlands and the United States of America for the Avoidance of DoubleTaxation and the prevention of Fiscal Evasion with respect to Taxes on Income(U.S./NL Income Tax Treaty), the Dutch dividend withholding tax rate ondividends paid by us on ordinary shares or ADSs held by a Non-Resident holderof shares who is resident in the United States and who is entitled to thebenefits of the U.S./NL Income Tax Treaty will generally be reduced to 15%. TheU.S./NL Income Tax Treaty provides for a complete exemption for dividendsreceived by exempt pension trusts and exempt organizations, as defined therein.Except in the case of exempt organizations, the reduced dividend withholdingtax rate under the U.S./NL Income Tax Treaty may be available at source, uponpayment of a dividend in respect of such ordinary shares or ADSs, provided thatthe holder thereof or, if applicable, the paying agent, has supplied us withthe appropriate Dutch tax forms in accordance with the Dutch implementationregulations under the U.S./NL Income Tax Treaty. If such forms are not duly andtimely provided, we generally will be required to withhold the dividendwithholding tax at the Dutch statutory rate of 25%. In such case, aNon-Resident holder of shares who is resident in the United States and who isentitled to the benefits of the U.S./NL Income Tax Treaty may obtain a refundof the difference between the amount withheld and the amount that theNetherlands was entitled to levy in accordance with the U.S./NL Income TaxTreaty, by filing the appropriate forms with the Dutch tax authorities withinthe term set therefore.

 

***Reduction***

*** ***

If we have received a profit distribution from a foreign entity, or arepatriation of foreign branch profit, that is exempt from Dutch corporateincome tax and that has been subject to a foreign withholding tax of at least5%, we may be entitled to a reduction of the amount of Dutch dividendwithholding tax withheld that must be paid over to the Dutch tax authorities inrespect of dividends distributed by us.

 

Non-Resident holders of shares are urged to consult their tax advisorsregarding the general creditability or deductibility of Dutch dividendwithholding tax and, in particular, the impact to such investors of ourpotential ability to receive a reduction as meant in the previous paragraph.

 

***Gift and inheritance taxes***

*** ***

A person who acquires ordinary shares or ADSs as a gift (in form or insubstance) or who acquires or is deemed to acquire ordinary shares or ADSs onthe death of an individual, will not be subject to Dutch gift tax or to Dutchinheritance tax, as the case may be, unless:

•                  the donor is orthe deceased was resident or deemed to be resident in the Netherlands forpurposes of gift or inheritance tax, as the case may be; or

•                  the ordinaryshares or ADSs are or were attributable to an enterprise or part of anenterprise that the donor or the deceased carried on through a permanentestablishment or a permanent representative in the Netherlands at the time ofthe gift or of the death of the deceased; or

•                  the donor makesa gift of ordinary shares or ADSs, then became a resident or deemed resident ofthe Netherlands, and dies as a resident or deemed resident of the Netherlandswithin 180 days after the date of the gift.

 

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***Distribution tax***

 

We are subject to a temporary special distribution tax at a rate of 20%to the extent that dividends distributed by us during the period fromJanuary 1, 2001 up to and including December 31, 2005 are classifiedas ‘excessive’. For purposes of this distribution tax, dividends distributed byus are considered to be excessive to the extent that, during a particularcalendar year, the total thereof exceeds the highest of the following threeamounts:

•                  4% of our marketcapitalization at the beginning of the relevant calendar year;

•                  twice the amountof the average annual dividends (exclusive of extraordinary distributions)distributed in the three calendar years immediately preceding January 1,2001; and

•                  our consolidatedcommercial results for the preceding book year, subject to certain adjustments.

 

Please refer to the section titled ‘Dutch taxation of non-residentholders of shares or ADSs—Taxes on income and capital gains’ for a descriptionof the concept ‘dividends distributed by us’.

 

The special distribution tax will not be due if and to the extent the aggregateamount of dividends distributed by us during the period from January 1,2001 up to and including December 31, 2005 exceeds the fair market valueof our assets at the end of the book year ending on December 31, 2000, netof liabilities and provisions and reduced by the paid-in capital. The specialdistribution tax will be reduced in proportion to the percentage of the sharesthat were held, at the time of the ‘excessive’ distribution, during anuninterrupted period of three years, by individuals or entities (other thaninvestment institutions *(beleggingsinstellingen)* as defined in theDutch Corporate Income Tax Act 1969) holding at least 5% of the nominal paid-incapital, provided such shareholders are resident in the Netherlands, theNetherlands Antilles or Aruba, or in a member state of the EU, or in a countrythat has concluded a double tax treaty with the Netherlands. The specialdistribution tax is not a withholding tax; it is imposed directly on us.Therefore, if it is reduced because certain shareholders own at least 5% of thenominal paid-in capital, we will receive the benefit of the reduction and itwill inure indirectly not only to the shareholders whose shareholdings causedthe reduction to apply.

 

***Capital tax***

*** ***

We are subject to Dutch capital tax at a rate of 0.55% on anycontribution received in respect of shares, unless an exemption applies.

 

***Other taxes and duties***

*** ***

No Dutch registration tax, transfer tax, stamp duty or any othersimilar documentary tax or duty, other than court fees, will be payable in theNetherlands by a holder of ordinary shares or ADSs in respect of or inconnection with the subscription, issue, placement, allotment or delivery ofordinary shares or ADSs.

 

**CERTAINUS FEDERAL INCOME TAX CONSEQUENCES FOR HOLDERS OF SHARES OR ADSS**

 

The following is a general summary of the principal US federal incometax consequences that may be relevant with respect to the purchase, ownershipand disposition of shares or ADSs. This summary addresses only the US federalincome tax considerations of holders that hold shares or ADSs as capitalassets. It is not a comprehensive description of all the tax considerationsthat may be relevant to a decision to purchase shares or ADSs. In particular,this summary does not address tax considerations applicable to holders that aresubject to special tax rules including, without limitation, the following:

 

(i)                                    financialinstitutions;

(ii)                                 insurance companies;

(iii)                              dealers or traders insecurities or currencies;

(iv)                             tax-exempt entities;

(v)                                regulated investmentcompanies;

 

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(vi)                             persons that hold sharesor ADSs as part of a ‘hedging’ or ‘conversion’ transaction or as a position ina ‘straddle’ for US federal income tax purposes;

(vii)                          persons that own (or aredeemed to own) 10% or more of our voting shares;

(viii)                       persons who hold shares or ADSsthrough partnerships or other pass-through entities;

(ix)                               persons that have a‘functional currency’ other than the US dollar; and

(x)                                  persons that haveacquired or will acquire shares or ADSs upon the exercise of options orotherwise as compensation.

 

Further, this summary does not address alternative minimum taxconsequences or the indirect effects on the holders of equity interests in aholder of shares or ADSs.

 

This summary is based on the US Internal Revenue Code of 1986, asamended (referred to hereinafter as ‘the Code’), US Treasury Regulations andjudicial and administrative interpretations thereof, in each case as in effectand available on the date of this Annual Report. All of the foregoing issubject to change, which change could apply retroactively and could affect thetax consequences described below.

 

For the purposes of this summary, a ‘US Holder’ is a beneficial ownerof shares or ADSs, that is, for US federal income tax purposes: (i) acitizen or resident of the United States; (ii) a corporation or otherentity treated as a corporation for US federal income tax purposes, created ororganized in or under the laws of the United States or any state thereof(including the District of Columbia); (iii) an estate, the income of whichis subject to US federal income taxation regardless of its source; or(iv) a trust if (x) a court within the United States is able toexercise primary supervision over its administration, and (y) one or moreUS persons have the authority to control all of the substantial decisions ofsuch trust. A ‘Non-US Holder’ is a beneficial owner of shares or ADSs that isnot a US Holder.

 

Each holder of shares or ADSs should consult its own tax advisor withrespect to the US federal, state, local and foreign tax consequences ofacquiring, owning or disposing of shares or ADSs.

 

For US federal income tax purposes, a US Holder of an ADS willgenerally be treated as the owner of the proportionate interest of the sharesheld by the depositary that is represented by such ADS. Accordingly, no gain orloss will be recognized upon the exchange of an ADS for the holder’sproportionate interest in the shares. In addition, a US Holder’s tax basis inthe withdrawn shares will be the same as the tax basis in the surrendered ADS,and the holding period in the withdrawn shares will include the period duringwhich the holder held the surrendered ADS.

 

***Distributions***

*** ***

Subject to the PFIC rules discussed below, the gross amount of anydistribution (including any amounts withheld in respect of Dutch withholdingtax) actually or constructively received by a US Holder with respect to sharesor ADSs will be taxable to the US Holder as a dividend to the extent of ourcurrent and accumulated earnings and profits as determined under US federalincome tax principles. The US Holder will not be eligible for anydividends-received deduction in respect of the dividend otherwise allowable tocorporations. Distributions in excess of earnings and profits will benon-taxable to the US Holder to the extent of, and will be applied against andreduce, the US Holder’s adjusted tax basis in the shares or ADSs. Distributionsin excess of earnings and profits and such adjusted tax basis will generally betaxable to the US Holder as capital gain from the sale or exchange of property.We do not maintain calculations of our earnings and profits under US federalincome tax principles. If we do not report to a US Holder the portion of a distributionthat exceeds earnings and profits, the distribution should generally bereported by the US Holder as a taxable dividend even if that distribution wouldotherwise be treated as a non-taxable return of capital or as capital gainunder the rules described above. The Internal Revenue Service is not bound bythe US Holder’s characterization of a payment. The amount of any distributionof property other than cash will be the fair market value of that property onthe date of distribution.

 

The amount of any distribution paid in euros, including the amount ofany withholding tax thereon, will be included in the gross income of a USHolder in an amount equal to the US dollar value of the euro calculated byreference to the exchange rate in effect on the date of receipt of suchdistribution by the US Holder, in the case of shares held directly by the USHolder, or by the depositary, in the case of

 

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ADSs, regardless of whether the euros are converted into US dollars. Ifthe euros are converted into US dollars on the date of receipt, a US Holdergenerally should not be required to recognize foreign currency gain or loss inrespect of the dividend. If the euros received in the distribution are notconverted into US dollars on the date of receipt, a US Holder will have a basisin the euro equal to its US dollar value on the date of receipt. Any gain orloss on a subsequent conversion or other disposition of the euro will betreated as ordinary income or loss.

 

Dividends received by a US Holder with respect to shares or ADSs willbe treated as foreign source income for the purposes of calculating thatholder’s foreign tax credit limitation. Subject to certain conditions andlimitations, and subject to the discussion in the next paragraph, Dutch incometax withheld on dividends at the rate specified in the Dutch-US Treaty may bededucted from taxable income or credited against a US Holder’s US federalincome tax liability. The limitation on foreign taxes eligible for the USforeign tax credit is calculated separately with respect to specific classes ofincome. For this purpose, dividends distributed by us generally will constitute‘passive income’, or, in the case of certain US Holders, ‘financial servicesincome’. In certain circumstances, a US Holder may be unable to claim foreigntax credits for foreign taxes imposed on a dividend if the US Holder(1) has not held the shares or ADSs for at least 16 days in the30-day period beginning 15 days before the ex-dividend date, during whichit is not protected from risk of loss; (2) is obligated to make paymentsrelated to the dividends; or (3) holds the shares or ADSs in arrangementsin which the US Holder’s expected profit, after non-US taxes, is insubstantial.

 

In general, upon making a distribution to shareholders, we are requiredto remit all amounts withheld as Dutch dividend withholding tax to the Dutchtax authorities and, in such circumstances, the full amount of the taxes sowithheld will generally (subject to certain limitations and conditions) beeligible for the US Holder’s foreign tax deduction or credit as describedabove. However, under certain circumstances we should be allowed to reduce theamount of Dutch dividend withholding tax that is required to be remitted to theDutch tax authorities by the lesser of (i) 3% of the portion of the grossamount of the dividend paid by us that is subject to Dutch dividend withholdingtax; and (ii) 3% of the gross amount of the dividends and profitdistributions received by us from qualifying non-Netherlands subsidiaries inthe current calendar year (up to the date of the distribution) and the twoproceeding calendar years, to the extent that the dividends and profitsdistributions have not yet been taken into account for purposes of establishingthe foregoing reduction. Please refer to the section titled ‘Certain Dutch taxconsequences for holders of shares or ADSs — Dutch taxation of non-residentholders of ordinary shares or ADSs — Dividend withholding tax — Reduction’ fora summary of conditions that must be satisfied for us to become eligible forthis reduction. Although this credit reduces the amount of dividend withholdingtax that we are required to pay to the Dutch tax authorities, it does notreduce the amount of tax we are required to withhold from dividends. In thesecircumstances, to the extent that we are not required to remit the amountwithheld as Dutch dividend withholding tax to the Dutch tax authorities, thewithholding tax likely will not qualify as a creditable or a deductible tax forUS foreign tax credit purposes. Should we be allowed to apply the reductiondescribed above, we will endeavor to provide US Holders with informationregarding the extent to which we have applied the reduction described above withrespect to dividends that have been paid to US Holders. Investors are urged toconsult their tax advisors regarding the general creditability or deductibilityof Dutch withholding taxes and, in particular, the impact to such investors ofour potential ability to receive a credit with respect to certain dividendsreceived from any of our qualifying non-Netherlands subsidiaries.

 

A distribution of additional shares or ADSs to US Holders with respectto their shares or ADSs, which is made part of a pro rata distribution to allshareholders generally will not be subject to US federal income tax. However, aUS Holder receiving a non-taxable distribution of additional shares or ADSsgenerally must allocate to those shares or ADSs a portion of its basis in the sharesor ADSs on which the distribution was made. The US Holder’s holding period inthe additional shares or ADSs will generally include the holding period of theshares or ADSs on which the distribution was made.

 

For Dutch tax purposes, increases in the par value of shares or ADSsmight be treated as dividends subject to withholding tax, but ordinarily wouldnot be treated as taxable events for US federal income tax purposes. As aresult, any Dutch withholding tax imposed in that case might be treated asimposed on income in the ‘general limitations basket’ for purposes of theforeign tax credit limitation discussed

 

238

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above. You might not be able to utilize US foreign tax credits inrespect of those Dutch taxes if you do not have sufficient foreign sourcegeneral limitations income from other sources.

 

A Non-US Holder generally will not be subject to US federal income orwithholding tax on dividends received on shares or ADSs unless that income iseffectively connected with the conduct by that Non-US Holder of a trade orbusiness in the United States.

 

***Sale or other disposition of shares or ADSs***

 

A US Holder generally will recognize gain or loss for US federal incometax purposes upon the sale or exchange of shares or ADSs in an amount equal tothe difference between the US dollar value of the amount realized from suchsale or exchange and the US Holder’s tax basis for the shares or ADSs. Thisgain or loss will be a capital gain or loss and generally will be treated asfrom sources within the United States, except that losses will be treated asforeign source to the extent the US Holder received dividends that wereincludable in the financial services income basket for foreign tax creditpurposes during the 24-month period prior to the sale. Holders of shares orADSs should consult their tax advisors with respect to the treatment of capitalgains (which may be taxed at lower rates than ordinary income for taxpayers whoare individuals, trusts or estates that hold the shares or ADSs for more thanone year) and capital losses (the deductibility of which is subject tolimitations).

 

If a US Holder receives foreign currency upon a sale or exchange ofshares or ADSs, gain or loss, if any, recognized on the subsequent sale,conversion or disposition of such foreign currency will be ordinary income orloss, and generally will be income or loss from sources within the UnitedStates for foreign tax credit limitation purposes. However, if such foreigncurrency is converted into US dollars on the date received by the US Holder,the US Holder generally will not recognize any gain or loss on such conversion.

 

A Non-US Holder generally will not be subject to US federal income orwithholding tax on any gain realized on the sale or exchange of shares or ADSsunless: (i) that gain is effectively connected with the conduct by thatNon-US Holder of a trade or business in the United States; (ii) in thecase of any gain realized by an individual Non-US Holder, that holder ispresent in the United States for 183 days or more in the taxable year ofthe sale or exchange and certain other conditions are met; or (iii) theNon-US Holder is subject to tax pursuant to provisions of the Code applicableto certain expatriates.

 

***Redemption of shares or ADSs***

 

The redemption of shares or ADSs will be treated as a sale of theredeemed shares or ADSs by the US Holder (which is taxable as described aboveunder ‘Sale or other disposition of shares or ADSs’) or, in certaincircumstances, as a distribution to the US Holder (which is taxable asdescribed above under ‘Distributions’).

 

***Passive Foreign Investment Companyconsiderations***

 

A corporation organized outside the United States generally will beclassified as a ‘passive foreign investment company’ (PFIC) for US federalincome tax purposes in any taxable year in which, after applying certainlook-through rules, either: (1) at least 75% of its gross income is‘passive income’, or (2) on average, at least 50% of the gross value ofits assets in a fiscal year is attributable to assets that produce passiveincome or are held for the production of passive income. In arriving at thiscalculation, we must also include a pro rata portion of the income and assetsof each corporation in which we own, directly or indirectly, at least a 25%interest. Passive income for this purpose generally includes dividends,interest, royalties, rents, annuities and gains from commodities and securitiestransactions. If we were classified as a PFIC, US Holders would be subject to aspecial, adverse tax regime that would differ in certain respects from thatdescribed here. Based on our estimated gross income, the average value of ourgross assets and the nature of our business, we do not believe that we will beclassified as a PFIC in the current taxable year. However, our status in anytaxable year will depend on our assets and activities in each year and noassurances can be provided in that regard.

 

239

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Holders of shares or ADSs should consult their tax advisors regardingwhether we are a PFIC and the consequences of an investment in a PFIC andcertain elections that may be available to holders of shares or ADSs in a PFIC.

 

***Backup withholding tax and informationreporting requirements***

 

Backup withholding and information reporting requirements may apply tocertain payments to US Holders on shares or ADSs and to the proceeds of a saleor redemption of the shares or ADSs. We, our agent, a broker, or any payingagent, as the case may be, may be required to withhold tax from any paymentthat is subject to backup withholding at a rate that is currently 28% of suchpayment if the US Holder fails to furnish the US Holder’s taxpayeridentification number, to certify that such US Holder is not subject to backupwithholding, or to otherwise comply with the applicable requirements of thebackup withholding rules. Certain US Holders (including, among others,corporations) are not subject to the backup withholding and informationreporting requirements. Non-US Holders who hold their shares or ADSs through aUS broker or agent or through the US office of a non-US broker or agent mightbe required to comply with applicable certification procedures to establishthat they are not US Holders in order to avoid the application of suchinformation reporting requirements and backup withholding. Backup withholdingis not an additional tax. Any amounts withheld under the backup withholdingrules from a payment to a US Holder generally may be claimed as a creditagainst such US Holder’s US federal income tax liability, provided that therequired information is furnished to the IRS. Holders of shares or ADSs shouldconsult their tax advisors as to their qualification for exemption from backupwithholding and the procedure for obtaining an exemption.

 

**Documents on display**

 

We are subject to the informational requirements of the SecuritiesExchange Act of 1934, as amended, or the Exchange Act, and file under the nameKoninklijke KPN N.V. periodic reports and other information with the U.S.Securities and Exchange Commission. We have filed and will continue to file ourannual reports on Form 20-F and furnish our interim reports (which may beby means of press releases) on Form 6-K.

 

You may inspect the information that we filed with the Commission atthe public reference facilities maintained by the Commission at theCommission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.20549. You may obtain information on the operation of the Public Reference Roomby calling the Commission at 1-800-SEC-0330. The Commission also maintains awebsite at *http://www.sec.gov*that contains reports and other information regarding registrants that fileelectronically with the Commission.

 

We will furnish the Depositary with annual reports in English, whichwill include a review of operations and annual audited Consolidated FinancialStatements, prepared in conformity with Dutch GAAP. Such statements willinclude a reconciliation of net income and shareholders’ equity to amountsdetermined in accordance with US GAAP. We also furnish the Depositary withquarterly reports in English prepared in conformity with Dutch GAAP, whichinclude unaudited interim financial information. The Depositary will promptlymail such reports to all record holders of ADRs evidencing ADSs. We will alsofurnish to the Depositary in English all notices of General Meeting ofShareholders and other reports and communications that the Company generallymakes available to its shareholders. The Depositary will make notices, reportsand communications available to holders of ADRs at the principal office of theDepositary.

 

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GLOSSARY OF TERMS

 

**ADS**

American Depository Share.

 

**ADSL**

Asymmetric Digital Subscriber Line.

With ADSL, transmissions from provider to user take place at a higherspeed than from user to provider. ADSL allows high-speed digital communication,including video signals, across an ordinary twisted-pair copper phone line. AnADSL modem is required.

 

**ARPU**

Average Revenue Per User.

The sum of connection fee revenues,subscription fee revenues and airtime service revenues during the period of onemonth, reduced for related discounts, divided by the average number ofcustomers for that period.

 

**ATMnetwork**

Asynchronous Transfer Mode.

ATM is a transfer mode in whichthe information is organized into cells. It is asynchronous in the sense thatthe recurrence of cells containing information from an individual user is notnecessarily periodic.

 

**Backbone**

Central processing point.

 

**BIPT**

Belgian Institute for Postal Services and Telecommunications.

 

**Broadband**

Broadband refers to telecommunication that provides multiple channelsof data over a single communications medium, typically using some form of frequencyor wave division multiplexing.

 

**CarrierSelect**

Method to opt for a different operator by entering an access code.

 

**Churn**

The number of mobile customers no longer connected to a mobileoperator’s network divided by the operator’s customer base.

 

**CityRing**

Fiber optic access network for data and Internet traffic in/acrossseveral Dutch cities.

 

**Co-location**

The provision of space and technical facilities (such as power supplyand air-conditioning) for a customer’s telecommunications equipment on theservice provider’s premises, in the framework of interconnection or specialaccess.

 

**Content**

The information presented on Internet sites, including its structure.

 

**CPS**

Carrier (Pre)Selection.

With CPS, a customer is no longer required to dial the Carrier SelectCode. The end user can dial the Carrier Select Code via an interactive VoiceResponse System.

 

**Darkfiber**

Fiber optics cables that have not yet been connected to transmissionequipment.

 

241

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**DCS1800**

Digital Cellular System 1800.

Mobile telephone network based on the GSM standard.

 

**DSL**

Digital Subscriber Line

DSL is a technology for bringing high-bandwidth information to homesand small businesses over ordinary copper PSTN lines. The widely used term xDSLrefers to different variations of DSL, such as ADSL, HDSL, VDSL and SDSL.

 

**DWDM**

Dense Wavelength Division Multiplexing

Use of DWDM allows providers tooffer services such as e-mail, video, and multimedia carried as Internetprotocol (IP) data over asynchronous transfer mode (ATM) and voice carried overSDH. Despite the fact that these formats—IP, ATM, and SDH—provide uniquebandwidth management capabilities, all three can be transported over theoptical layer using DWDM. This unifying capability allows the service providerthe flexibility to respond to customer demands over one network.

 

**EDGE**

Enhanced data rates for GSM evolution.

EDGE is a behind-the-scenes technology, pushing GPRS download speeds toabove 100 kbps.

 

**EpacityIP-VPN**

Connects two or more offices using IP-VPN.

 

**EuroRing**

Fiber optic network for the purpose of data and Internet traffic thatruns through several European cities.

 

**FlexiStream**

Connects various offices to one network, using a flexible bandwidth.

 

**FreephoneServices**

Toll free numbers.

 

**GPRS**

General Packet Radio Service.

Particularly suited for voice, text and images. GPRS is an applicationthat enables data packet switching via the GSM network as well as via theexisting voice communication. GPRS will complement the existing CSD (CircuitSwitched Data) of the GSM system. GPRS is based on the Global System for Mobilecommunications.

 

**Grosschurn ratio**

Gross churn ratio is defined as the number of mobile customersdisconnected from our networks and/or switched within our networks between prepaid/postpaiddivided by our customer base.

 

**GSM**

Global System for Mobile communications.

GSM is a second generation, digital mobile telephone system that iswidely used in Europe and other parts of the world to send and receive voiceand data.

 

**Hirkanetwork**

The traditional backbone network.

 

**HSCSD**

High Speed Circuit Switched Data.

 

**IAS**

Internet Access Service.

 

242

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Offers flexible Internet access.

 

**i-mode**

Mobile data services originally developed and launched by NTT DoCoMo.

 

**IP-VPN**

Internet Protocol – Virtual Private Network.

Offers a secured and private network using IP-based infrastructure.

 

**ISDN**

Integrated Services Digital Network.

A worldwide digital communications network evolving from existing telephoneservices. A standard ISDN connection consists of three channels, i.e. two Bchannels to carry data and voice at a speed of 64 Kb/s and one D channel tocarry control information at a speed of 16 Kbps.

 

**ISO**

International Organization for Standardization.

Organization responsible for setting standards and protocols, e.g. fordata communications and networks.

 

**ISP**

Internet Service Provider.

A company that provides individuals and companies access to theInternet. Therefore, ISP maintains one or more connection points to theInternet for ISP subscribers. An ISP itself can be a subcontractor of an ISPthat is connected with an Internet backbone.

 

**Lambda**

Our national fiber optic network in the Netherlands.

 

**LAN**

Local Area Network.

A LAN is a network designed tomove data between stations within a campus.

 

**Marketshare**

The operator’s share in thetotal customer base in a country.

** **

**MDFAccess**

Main Distribution Frame.

Allows other telecommunications companies to access the local network,enabling them to connect with their customers through our main distributionframe.

 

**MetroRings**

Metropolitan Area Networks (MAN).

City-level networks.

 

**MMS**

Multimedia Message Service.

MMS is the ability to send messages comprising a combination of text,sounds, images and video to MMS capable handsets.

 

**MPLS**

Multi Protocol Label Switching.

Allows customers to classify and prioritize applications over theirnetwork according to their own business needs, while providing them with a highlevel of performance, security and reliability.

 

**MVNO**

Mobile Virtual Network Operator.

A mobileoperator that does not have its own spectrum, nor its own networkinfrastructure. Instead, MVNOs have business arrangements with traditionalmobile operators to buy minutes of use to sell to their own customers.

 

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**NatVanNetwork**

National Value Added Network.

A packet switched network where sender and addressee are known.

 

**NMa**

*NederlandseMededingingsautoriteit* (Dutch Anti-trust Authority).

NMa is the Dutch authority responsible for monitoring compliance withanti-trust rules.

 

**OPTA**

*Onafhankelijke Posten Telecommunicatie Autoriteit* (Independent Post andTelecommunications Authority).

Commission established by the Dutch Government for the purpose ofmonitoring the deregulation of the telecommunications market in theNetherlands.

 

**PDH**

Plesiochronous Digital Hierarchy.

PDH (plesiochronous means nearlysynchronous) was developed to carry digitized voice over twisted pair cablingmore efficiently.

 

**Portal**

Platform offering service providers and their customers access to fixedor mobile data services.

 

**PSTN**

Public Switched Telephone Network.

Traditional telephone system that runs through copper cables (voice upto 64 Kb/s, data up to 56 Kb/s).

 

**SDH**

Synchronous Digital Hierarchy.

A digital technology for synchronous data transmission on optical mediaat very high speeds (155 Mb/s and higher).

 

**SDSL**

Symmetrical Digital Subscriber Line.

SDSL transports only data and no traditional voice. SDSL uses similarspeeds for up and download.

 

**SIMcard**

Subscriber Identity Module card.

A chip card inserted into a mobile phone, which contains informationsuch as telephone numbers and memory for storing a directory.

 

**SMS**

Short Message Service.

SMS is a service for sending messages of up to 160 characters to mobilephones that use GSM communications.

 

**Spam**

Unsolicited emails, usually to many recipients. Nor a message writtenfor and mailed to one individual known to the sender neither a reply to anemail is spam, unless that ‘reply’ is resent endlessly.

 

**UMTS**

Universal Mobile Telecommunications System.

One of the major third generation mobile communications systems beingdeveloped. UMTS is suited to deliver voice, text, music and animated images.Data can be sent via UMTS at almost the same speed as via ISDN.

 

**VPN**

Virtual Private Network.

A virtual network constructed from logic connections that are separatedfrom other users.

 

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**VoDSL**

Voice over DSL.

 

**Voicehubbing**

Voice hubbing is when a fixed-line call to a mobile network within thesame country is directed abroad in order to be able to utilize a lower tariff.

 

**WiFi**

Wireless Fidelity.

For an explanation, please refer to WLAN.

 

**WLAN**

Wireless Local Area Network.

A wireless connection that provides Internet access at the speed ofbroadband.

 

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**CROSS-REFERENCE****TO FORM 20-F**

 

**PARTI**

 
| **1**  |   | **Identity of  directors, senior management and advisers**      |   | N/A              |
|--------|--------|-----------------------------------------------------------------|--------|------------------|
|   |   |                                                            |   |             |
| **2**  |   | **Offer statistics  and expected timetable**                    |   | N/A              |
|   |   |                                                            |   |             |
| **3**  |   | **Key information**                                             |   |             |
| 3A     |   | Selected financial data                                         |   |             |
|   |   | Five year financial summary                                     |   | 223-224          |
|   |   | Exchange rate information                                       |   | 231              |
| 3B     |   | Capitalization and indebtedness                                 |   | N/A              |
| 3C     |   | Reasons for the offer and use of proceeds                       |   | N/A              |
| 3D     |   | Risk factors                                                    |   | 46-51            |
|   |   |                                                            |   |             |
| **4**  |   | **Information on the  Company**                                 |   |             |
| 4A     |   | History and development of the Company                          |   | 12-14            |
| 4B     |   | Business overview                                               |   | 16-30            |
| 4C     |   | Organizational structure                                        |   | 15,230           |
| 4D     |   | Property, plant and equipment                                   |   | 31-35            |
|   |   |                                                            |   |             |
| **5**  |   | **Operating and  financial review and prospects**               |   |             |
| 5A     |   | Operating results                                               |   | 52-57, 61-83     |
| 5B     |   | Liquidity and capital resources                                 |   | 84-91            |
| 5C     |   | Research and development, patents and licenses, etc.            |   | 36               |
| 5D     |   | Trend information                                               |   | 58-60            |
| 5E     |   | Off-balance sheet arrangements                                  |   | 88, 182-184      |
| 5F     |   | Tabular disclosure of contractual obligations                   |   | 88               |
| 5G     |   | Safe harbor                                                     |   | 5                |
|   |   |                                                            |   |             |
| **6**  |   | **Directors, senior  management and employees**                 |   |             |
| 6A     |   | Directors and senior management                                 |   | 104-107, 127-128 |
| 6B     |   | Compensation                                                    |   | 115-124          |
| 6C     |   | Board practices                                                 |   | 101-108, 125-128 |
| 6D     |   | Employees                                                       |   | 100, 196         |
| 6E     |   | Share ownership                                                 |   | 121, 144-150     |
|   |   |                                                            |   |             |
| **7**  |   | **Major shareholders  and related party transactions**          |   |             |
| 7A     |   | Major shareholders                                              |   | 112-114, 226     |
| 7B     |   | Related party transactions                                      |   | 120,188-191      |
| 7C     |   | Interests of experts and counsel                                |   | N/A              |
|   |   |                                                            |   |             |
| **8**  |   | **Financial  information**                                      |   |             |
| 8A     |   | Consolidated statements and other financial information         |   | 129-213          |
| 8B     |   | Significant changes                                             |   | 221-222          |
|   |   |                                                            |   |             |
| **9**  |   | **The offer and  listing**                                      |   |             |
| 9A     |   | Offer and listing details                                       |   | 226-228          |
| 9B     |   | Plan of distribution                                            |   | N/A              |
| 9C     |   | Markets                                                         |   | 226              |
| 9D     |   | Selling shareholders                                            |   | N/A              |
| 9E     |   | Dilution                                                        |   | N/A              |
| 9F     |   | Expenses of the issue                                           |   | N/A              |
|   |   |                                                            |   |             |
| **10** |   | **Additional  information**                                     |   |             |
| 10A    |   | Share capital                                                   |   | N/A              |
| 10B    |   | Memorandum and Articles of Association                          |   | 101-114, 221     |
| 10C    |   | Material contracts                                              |   | 230              |
| 10D    |   | Exchange controls                                               |   | 231              |
| 10E    |   | Taxation                                                        |   | 233-240          |
| 10F    |   | Dividends and paying agents                                     |   | N/A              |
| 10G    |   | Statement by experts                                            |   | N/A              |
| 10H    |   | Documents on display                                            |   | 240              |
| 10I    |   | Subsidiary information                                          |   | N/A              |
|   |   |                                                            |   |             |
| **11** |   | **Quantitative and  qualitative disclosures about market risk** |   | **177-181**      |
|   |   |                                                            |   |             |
| **12** |   | **Description of  securities other than equity securities**     |   |             |
| 12A    |   | Debt securities                                                 |   | N/A              |
| 12B    |   | Warrants and rights                                             |   | N/A              |
| 12C    |   | Other securities                                                |   | N/A              |
| 12D    |   | American depository shares                                      |   | 232              |

 

246

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**PARTII**

 
| **13** |   | **Defaults, dividend  arrearages and delinquencies**                              |   | N/A         |
|--------|--------|-----------------------------------------------------------------------------------|--------|-------------|
|   |   |                                                                              |   |        |
| **14** |   | **Material  modifications to the rights of security holders and use of proceeds** |   | N/A         |
|   |   |                                                                              |   |        |
| **15** |   | **Disclosure control  and procedures**                                            |   | **107-108** |
|   |   |                                                                              |   |        |
| **16** |   | **Reserved**                                                                      |   |        |
| 16A    |   | Audit committee financial  expert                                                 |   | 103, 105    |
| 16B    |   | Code of ethics                                                                    |   | 109         |
| 16C    |   | Principal accountant fees and  services                                           |   | 108         |
| 16D    |   | Exemptions from the listing  standards for audit committees                       |   | N/A         |
| 16E    |   | Purchase of equity securities  by the issuer and affiliated purchases             |   | 171-172     |

 

**PARTIII**

 
| **17** |   | **Financial  Statements** |   | N/A         |
|--------|--------|---------------------------|--------|-------------|
|   |   |                      |   |        |
| **18** |   | **Financial  Statements** |   |        |
|   |   |                      |   |        |
| **19** |   | **Exhibits**              |   | **129-222** |

 

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**Colophon**

 

***Published by***

 

Koninklijke KPN N.V.

P.O. Box 30000

2500 GA The Hague

The Netherlands

 

Chamber of Commerce The Hague, registration number 02 04 52 00

 

***Design***

*** ***

Ontwerpbureau Smidswater BNO, The Hague

 

***Typeset and print***

 

PlantijnCasparie, Capelle a/d IJssel

 

***Translation***

 

DBF Communicatie, Alphen a/d Rijn

 

***Coordination and production***

 

Henk Donderwinkel

 

This is the English translation of the official Dutch 2003 AnnualReport. An attempt has been made to be as literal as possible withoutjeopardizing overall consistency. Differences inevitably occur in translationand in such cases the Dutch Annual Report prevails. It also is the 2003 AnnualReport on Form 20F for filing with the Securities and Exchange Commission inthe United States.  Cross references toForm 20-F are set out at the end of this document.

 

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| **Exhibit  number** |   | **EXHIBITS**                                                                                                                                                                                                                                                                                                             |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                     |
| 1.1**               |   | Articles of Association, dated  as of May 14, 2002                                                                                                                                                                                                                                                                       |
| 2.1*****            |   | Deposit Agreement dated as of  November 29, 1994, among the Company, Citibank N.A., as depositary,  and the holders and beneficial owners of American Depositary Receipts  (including a form of American Depositary Receipt)                                                                                   |
| 2.2*****            |   | Form of American Depositary  Receipt (included in Exhibit 2.1)                                                                                                                                                                                                                                                      |
| 2.3*****            |   | Amendment No. 1 to the Deposit  Agreement, dated as of October 26, 1995                                                                                                                                                                                                                                             |
| 2.4*****            |   | Form of ADN Deposit Agreement  among KPN, Citibank N.A., as depositary, and the holders and beneficial  owners of American Depositary Notes evidenced by American Depositary Notes  Receipts issued thereunder (including a form of American Depositary Note  Receipts)                                                  |
| 2.5*****            |   | Form of American Depositary  Note Receipt (included in Exhibit 2.4)                                                                                                                                                                                                                                                      |
| 2.6******           |   | Indenture between Royal KPN  N.V. and Bankers Trust Company dated October 4, 2000 relating to  $1,000,000,000 8.375% Notes due 2030, $1,750,000,000 8.00% Notes due 2010,  $750,000,000 7.50% Notes due 2005, and EUR 1,000,000,000 6.25% Notes due  2005 issued by Royal KPN N.V., on September 27, 2000 |
| 2.7****             |   | Indenture between Royal KPN  N.V. and Citibank N.A. dated November 24, 2000 relating to  EUR 1,500,000,000 convertible subordinated notes due 2005                                                                                                                                                             |
| 4.1*****            |   | Shareholders’ agreement among  Royal KPN N.V., KPN Mobile N.V. and NTT DoCoMo Inc., governing their  relationship as shareholders in KPN Mobile N.V. dated July 12, 2000                                                                                                                                       |
| 4.2*****            |   | Registration rights agreement  among Royal KPN N.V., KPN Mobile N.V. and NTT DoCoMo, Inc. dated  August 2, 2000                                                                                                                                                                                                     |
| 4.3*****            |   | Shareholders’ agreement  between Hutchison Whampoa Limited and KPN Mobile N.V. dated July 12,  2000                                                                                                                                                                                                            |
| 4.4*                |   | EUR 1,500,000,000 syndicated  revolving credit agreement for Koninklijke KPN N.V. dated April 14, 2003                                                                                                                                                                                                                   |
| 8.1*                |   | List of Principal Subsidiaries                                                                                                                                                                                                                                                                                           |
| 12.1*               |   | Certification of Ad  Scheepbouwer, Chairman of the Board of Management and CEO, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                               |
| 12.2*               |   | Certification of Maarten  Henderson, Member of the Board of Management and CFO, pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                               |
| 13.1*               |   | Certification pursuant to  18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                        |

 

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| *      |   | Filed with this Annual Report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **     |   | Previously filed as an exhibit  to KPN’s annual report for the year ended December 31, 2002 on  Form 20-F (Commission file number 1-13980) filed with the Securities and  Exchange Commission on March 28, 2003 and incorporated herein by  reference.                                                                                                                                                                                                                                                      |
| ***    |   | Previously filed as an exhibit  to KPN’s annual report for the year ended December 31, 2001 on  Form 20-F (Commission file number 1-13980) filed with the Securities and  Exchange Commission on March 18, 2002 and incorporated herein by  reference.                                                                                                                                                                                                                                                      |
| ****   |   | Previously filed as an exhibit  to KPN’s annual report for the year ended December 31, 2000 on  Form 20-F (Commission file number 1-13980) filed with the Securities and  Exchange Commission on April 12, 2001 and incorporated herein by  reference.                                                                                                                                                                                                                                                      |
| *****  |   | Previously filed as an exhibit  to KPN’s Registration Statement on Form F-3 (Commission file  number 333-12744) filed with the Securities and Exchange Commission on  October 27, 2000 and incorporated herein by reference, as amended by  Amendment Number 1 on Form F-3/A, filed with the Securities and  Exchange Commission on November 2, 2000 and as amended by Amendment  Number 2 on Form F-3/A, filed with the Securities and Exchange  Commission on November 17, 2000. |
| ****** |   | Previously filed as an exhibit  to KPN’s annual report for the year ended December 31, 1999 on  Form 20-F (Commission file number 1-13980), as amended by Amendment  Number 1 on Form 20-F/A, filed with the Securities and Exchange  Commission on November 16, 2000 and incorporated herein by reference.                                                                                                                                                                                            |

 

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**SIGNATURES**

 

The registranthereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned tosign this Annual Report on its behalf.

 

 
|                       | KONINKLIJKE KPN N.V. |
|----------------------------|----------------------|
|                       |                 |   |
| Date:  March 10, 2004 | By:                  | */s/*AD SCHEEPBOUWER |
|                       |                 |   |
|                       |                 | Ad  Scheepbouwer*Chairman of the Board of  Management and CEO* |

 

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