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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 20-F o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934For the fiscal year ended
December 31, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from      to
 Commission file
number
    1-14860Swisscom AG
  Switzerland
(Jurisdiction of incorporation or organization) Alte Tiefenaustrasse 6,
3050 Bern, Switzerland
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Name of each exchangeTitle of each class
    
    on which registeredAmerican Depositary Shares, each representing one-tenth of
one Registered Share, Nominal Value CHF 1 per share
    
    New York Stock ExchangeRegistered Shares, Nominal Value CHF 1 per share*
    
    New York Stock Exchange
   *
    
    Listed, not for trading or quotation purposes, but only in connection with the registration
of American Depositary Shares pursuant to the requirements of the Securities and Exchange
Commission   Securities registered or to be registered pursuant to Section 12(g) of the Act: None   Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None   The number of outstanding shares of each of the issuers classes of capital or common stock as
of December 31, 2004: 66,203,261 Registered Shares, Nominal Value CHF 1 per 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 (or
for such shorter period that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ
    
    No o
 Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o
    
    Item 18 þ




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TABLE OF CONTENTS PageIntroduction
    
    
    1ITEM 1:
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    3ITEM 2:
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3:
    
    KEY INFORMATION
    
    
    4Selected Financial Data
    
    
    4Risk Factors
    
    
    10ITEM 4:
    
    INFORMATION ON THE COMPANY
    
    
    19Overview
    
    
    19Fixnet
    
    
    23Mobile
    
    
    34Enterprise Solutions
    
    
    40Other
    
    
    46Corporate
    
    
    48Participations
    
    
    48Divestments/Discontinued Operations
    
    
    48Networks and Technology
    
    
    50Property, Plant and Equipment
    
    
    55Research and Development
    
    
    56Regulation
    
    
    57ITEM 5:
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    68ITEM 6:
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    112Directors and Senior Management
    
    
    112Compensation
    
    
    117Employees
    
    
    117Share Ownership
    
    
    119ITEM 7:
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    121Major Shareholders
    
    
    121Relationship and Transactions with the Swiss Confederation
    
    
    121ITEM 8:
    
    FINANCIAL INFORMATION
    
    
    124Financial Statements
    
    
    124Legal Proceedings
    
    
    124Dividend Policy
    
    
    127ITEM 9:
    
    THE OFFER AND LISTING
    
    
    128Markets
    
    
    128Price History
    
    
    129ITEM 10:
    
    ADDITIONAL INFORMATION
    
    
    130Memorandum and Articles of Association
    
    
    130Exchange Controls
    
    
    136Taxation
    
    
    136Documents on Display
    
    
    139ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    140ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    141ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    142ITEM 14: MATERIAL MODIFICATIONS
    
    
    142ITEM 15: CONTROLS AND PROCEDURES
    
    
    142ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    142ITEM 16B: CODE OF ETHICS
    
    
    142ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    143ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    144ITEM 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    144ITEM 17: FINANCIAL STATEMENTS
    
    
    144ITEM 18: FINANCIAL STATEMENTS
    
    
    145ITEM 19: EXHIBITS
    
    
    146SIGNATURE
    
    
    147Exhibit 12Exhibit 13




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Introduction Presentation of financial and other information Swisscom publishes its financial statements in Swiss francs (CHF). Unless otherwise indicated,
all amounts in this annual report are expressed in Swiss francs. Solely for the convenience of the
reader, certain amounts denominated in foreign currencies appearing primarily under the headings
Item 4: Information on the Company  Divestments/Discontinued Operations and Item 5: Operating
and Financial Review and Prospects have been translated into Swiss francs. These translations
should not be construed as representations that the amounts referred to actually represent such
translated amounts or could be converted into the translated currency at the rate indicated. Swisscoms annual audited consolidated financial statements are prepared in accordance with
International Financial Reporting Standards (IFRS), which differ in certain respects from U.S.
GAAP. For a reconciliation of the material differences between IFRS and U.S. GAAP as they relate to
Swisscom, see Note 42 to the consolidated financial statements. As used in this annual report, the term Swisscom, unless the context otherwise requires, refers
to Swisscom AG and its consolidated subsidiaries. The term Confederation refers to the Swiss
Confederation. Cautionary statement regarding forward-looking statements This annual report contains statements that constitute forward-looking statements within the
meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S.
Securities Exchange Act of 1934, as amended. In addition, other written or oral statements, which
constitute forward-looking statements have been made and may in the future be made by or on behalf
of Swisscom. In this annual report, such forward-looking statements may be found, in particular,
in Item 4: Information on the Company and Item 5: Operating and Financial Review and Prospects
and include, without limitation, statements relating to:  

the implementation of strategic initiatives;

the development of revenue overall and within specific business areas;

the development of operating expenses;

the anticipated level of capital expenditures and associated depreciation expense; and

other statements relating to Swisscoms future business development and economic
performance. The words anticipate, believe, expect, estimate, intend, plan and similar expressions
identify certain of these forward-looking statements. Readers are cautioned not to put undue
reliance on forward-looking statements because actual events and results may differ materially from
the expected results described by such forward-looking statements. Many factors may influence Swisscoms actual results and cause them to differ materially from
expected results as described in forward-looking statements. Such factors include:  

general market trends affecting demand for telecommunications services;

developments in the interpretation and application of existing telecommunication
regulations in Switzerland and the possibility that additional regulations may be
imposed in the future;

developments in technology, particularly the timely rollout of equipment;

the evolution of Swisscoms strategic partnerships and acquisitions, including costs
associated with possible future acquisitions and dispositions; 1




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

the effects of tariff reductions and other marketing initiatives;

the outcome of litigation in which Swisscom is involved; and

macroeconomic trends, governmental decisions and regulatory policies affecting
businesses in Switzerland generally, including changes in the level of interest or tax
rates. Swisscom disclaims any intention or obligation to update and revise any forward-looking statements,
whether as a result of new information, future events or otherwise. 2




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PART I 
 ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not Applicable. 
 ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE Not Applicable. 3




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ITEM 3: KEY INFORMATION 
 Selected Financial Data Selected Consolidated Financial and Statistical Data The selected consolidated financial data below should be read in conjunction with Swisscoms
financial statements included elsewhere in this annual report. The selected financial data as of
December 31, 2000, 2001, 2002, 2003 and 2004 for each of the years in the five-year period ended
December 31, 2004, have been extracted or derived from, and are qualified by reference to, the
audited financial statements of Swisscom. The financial statements were prepared in accordance with
IFRS, which differ in certain respects from U.S. GAAP. For a reconciliation of the material
differences between IFRS and U.S. GAAP as they relate to Swisscom, see Note 42 to the consolidated
financial statements. As a result of the sale of debitel in June 2004, Swisscom treats debitel in
its consolidated financial statements as a discontinued operation. Prior years have been restated
accordingly. Year Ended December 31,CHF in millions
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Consolidated Income Statement Data:Amounts in accordance with IFRS:Net revenue
    
    
    10,067
    
    
    
    10,366
    
    
    
    10,415
    
    
    
    10,026
    
    
    
    10,057Other income
    
    
    125
    
    
    
    194
    
    
    
    230
    
    
    
    233
    
    
    
    197Total
    
    
    10,192
    
    
    
    10,560
    
    
    
    10,645
    
    
    
    10,259
    
    
    
    10,254Goods and services purchased
    
    
    1,862
    
    
    
    2,056
    
    
    
    2,073
    
    
    
    1,706
    
    
    
    1,847Personnel expenses
    
    
    2,302
    
    
    
    2,224
    
    
    
    2,329
    
    
    
    2,266
    
    
    
    2,194Other operating expenses
    
    
    2,161
    
    
    
    2,058
    
    
    
    1,989
    
    
    
    1,783
    
    
    
    1,809Depreciation
    
    
    1,826
    
    
    
    1,674
    
    
    
    1,552
    
    
    
    1,543
    
    
    
    1,548Amortization
    
    
    14
    
    
    
    62
    
    
    
    114
    
    
    
    142
    
    
    
    151Total operating expenses
    
    
    8,165
    
    
    
    8,074
    
    
    
    8,057
    
    
    
    7,440
    
    
    
    7,549Gain on sale of real estate
    
    
    
    
    
    
    568
    (1)
    
    
    
    
    
    
    
    
    
    
    Gain on partial sale of Swisscom Mobile AG
    
    
    
    
    
    
    3,837
    (1)
    
    
    
    
    
    
    
    
    
    
    Operating income
    
    
    2,027
    
    
    
    6,891
    
    
    
    2,588
    
    
    
    2,819
    
    
    
    2,705Financial expense
    
    
    (324
    )
    
    
    (764
    )
    
    
    (508
    )
    
    
    (196
    )
    
    
    (285
    )Financial income
    
    
    473
    
    
    
    416
    
    
    
    197
    
    
    
    170
    
    
    
    141Income before income taxes, equity in net
income of affiliated companies and minority
interest
    
    
    2,176
    
    
    
    6,543
    
    
    
    2,277
    
    
    
    2,793
    
    
    
    2,561Income tax (expense) benefit(2)
    
    
    (581
    )
    
    
    48
    
    
    
    (313
    )
    
    
    (467
    )
    
    
    (394
    )Equity in net income of affiliated companies
    
    
    1,754
    
    
    
    32
    
    
    
    94
    
    
    
    (9
    )
    
    
    22Minority interest
    
    
    (1
    )
    
    
    (226
    )
    
    
    (301
    )
    
    
    (340
    )
    
    
    (352
    )Net income from continuing
operations
    
    
    3,348
    
    
    
    6,397
    
    
    
    1,757
    
    
    
    1,977
    
    
    
    1,837Discontinued operations(3)
    
    
    (192
    )
    
    
    (1,433
    )
    
    
    (933
    )
    
    
    (408
    )
    
    
    (243
    )Net income
    
    
    3,156
    
    
    
    4,964
    
    
    
    824
    
    
    
    1,569
    
    
    
    1,594
 4




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CHF in millions except per Share and
    
    Year Ended December 31,ADS amounts
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Basic earnings per share(4)-on continuing operations
    
    
    45.53
    
    
    
    86.98
    
    
    
    25.97
    
    
    
    29.86
    
    
    
    28.39-on discontinued operations
    
    
    (2.62
    )
    
    
    (19.48
    )
    
    
    (13.79
    )
    
    
    (6.16
    )
    
    
    (3.76
    )-net income
    
    
    42.91
    
    
    
    67.50
    
    
    
    12.18
    
    
    
    23.70
    
    
    
    24.63Diluted earnings per share(4)-on continuing operations
    
    
    45.48
    
    
    
    86.93
    
    
    
    25.95
    
    
    
    29.85
    
    
    
    28.39-on discontinued operations
    
    
    (2.61
    )
    
    
    (19.47
    )
    
    
    (13.78
    )
    
    
    (6.16
    )
    
    
    (3.76
    )-net income
    
    
    42.87
    
    
    
    67.46
    
    
    
    12.17
    
    
    
    23.69
    
    
    
    24.63Basic and diluted earnings per ADS(4)
    
    
    4.29
    
    
    
    6.75
    
    
    
    1.21
    
    
    
    2.37
    
    
    
    2.46Amounts in accordance with U.S. GAAP:Net revenue
    
    
    10,042
    
    
    
    10,384
    
    
    
    10,424
    
    
    
    10,057
    
    
    
    10,113Net income from continuing operations
    
    
    2,432
    
    
    
    6,070
    
    
    
    1,780
    
    
    
    2,066
    
    
    
    1,968Net income
(loss) from discontinued operations
    
    
    (513
    )
    
    
    (368
    )
    
    
    (994
    )
    
    
    (8
    )
    
    
    145Cumulative effect of a change in accounting
policy
    
    
    169
    
    
    
    
    
    
    
    (1,649
    )
    
    
    38
    
    
    
    Net income (loss)
    
    
    2,088
    
    
    
    5,702
    
    
    
    (863
    )
    
    
    2,096
    
    
    
    2,113Basic earnings (loss) per share-on continuing operations
    
    
    33.07
    
    
    
    82.53
    
    
    
    26.31
    
    
    
    31.21
    
    
    
    30.41-on discontinued operations
    
    
    (6.98
    )
    
    
    (5.00
    )
    
    
    (14.69
    )
    
    
    (0.12
    )
    
    
    2.24Cumulative effect of a change in accounting
policy
    
    
    2.30
    
    
    
    
    
    
    
    (24.38
    )
    
    
    0.57
    
    
    
    -net income
    
    
    28.39
    
    
    
    77.53
    
    
    
    (12.76
    )
    
    
    31.66
    
    
    
    32.65Diluted earnings (loss) per share-on continuing operations
    
    
    33.03
    
    
    
    82.49
    
    
    
    26.29
    
    
    
    31.19
    
    
    
    30.41-on discontinued operations
    
    
    (6.97
    )
    
    
    (5.00
    )
    
    
    (14.68
    )
    
    
    (0.12
    )
    
    
    2.24Cumulative effect of a change in accounting
policy
    
    
    2.30
    
    
    
    
    
    
    
    (24.35
    )
    
    
    0.57
    
    
    
    -net income
    
    
    28.36
    
    
    
    77.49
    
    
    
    (12.74
    )
    
    
    31.64
    
    
    
    32.65Basic earnings per ADS(4)
    
    
    2.84
    
    
    
    7.75
    
    
    
    (1.28
    )
    
    
    3.17
    
    
    
    3.27Diluted earnings per ADS(4)
    
    
    2.84
    
    
    
    7.75
    
    
    
    (1.27
    )
    
    
    3.16
    
    
    
    3.27
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Year Ended December 31,CHF in millions
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Consolidated Balance Sheet Data:(end of period)Amounts in accordance with IFRS:Cash and cash equivalents
    
    
    2,063
    
    
    
    3,565
    
    
    
    1,512
    
    
    
    3,104
    
    
    
    2,387Other current assets
    
    
    3,226
    
    
    
    5,807
    
    
    
    2,871
    
    
    
    2,815
    
    
    
    3,818Property, plant and equipment
    
    
    9,901
    
    
    
    8,060
    
    
    
    7,491
    
    
    
    6,971
    
    
    
    6,395Investments in affiliated companies
    
    
    501
    
    
    
    589
    
    
    
    682
    
    
    
    41
    
    
    
    58Other non-current assets
    
    
    2,396
    
    
    
    3,028
    
    
    
    2,267
    
    
    
    1,924
    
    
    
    1,790Assets from discontinued operations
    
    
    3,916
    
    
    
    3,300
    
    
    
    2,135
    
    
    
    1,685
    
    
    
    Total assets
    
    
    22,003
    
    
    
    24,349
    
    
    
    16,958
    
    
    
    16,540
    
    
    
    14,448Short-term debt
    
    
    2,625
    
    
    
    1,696
    
    
    
    960
    (5)
    
    
    516
    (5)
    
    
    384Trade accounts payable and other current
liabilities
    
    
    3,145
    
    
    
    2,569
    
    
    
    2,170
    
    
    
    2,219
    
    
    
    2,314Long-term debt and finance lease
obligations
    
    
    3,748
    
    
    
    3,715
    
    
    
    2,674
    (5)
    
    
    2,408
    
    
    
    2,151Accrued pension cost
    
    
    1,925
    
    
    
    1,218
    
    
    
    1,101
    
    
    
    1,113
    
    
    
    1,118Accrued liabilities and other long-term
liabilities
    
    
    923
    
    
    
    1,258
    
    
    
    1,087
    
    
    
    1,090
    
    
    
    1,137Liabilities from discontinued operations
    
    
    1,038
    
    
    
    1,055
    
    
    
    886
    
    
    
    794
    
    
    
    Total liabilities
    
    
    13,404
    
    
    
    11,511
    
    
    
    8,878
    
    
    
    8,140
    
    
    
    7,104Minority interest
    
    
    29
    
    
    
    769
    
    
    
    781
    
    
    
    731
    
    
    
    663Shareholders equity
    
    
    8,570
    
    
    
    12,069
    
    
    
    7,299
    
    
    
    7,669
    
    
    
    6,681Amounts in accordance with U.S. GAAP:Assets continuing operations
    
    
    21,819
    
    
    
    24,049
    
    
    
    18,654
    
    
    
    18,360
    
    
    
    17,734Assets discontinued operations
    
    
    3,899
    
    
    
    4,049
    
    
    
    1,165
    
    
    
    1,012
    
    
    
    Total assets
    
    
    25,718
    
    
    
    28,098
    
    
    
    19,819
    
    
    
    19,372
    
    
    
    17,734Long-term debt and finance lease
obligations continuing operations
    
    
    5,588
    
    
    
    7,255
    
    
    
    6,415
    
    
    
    5,856
    
    
    
    5,394Long-term debt and finance lease
obligations discontinued operations
    
    
    34
    
    
    
    28
    
    
    
    23
    
    
    
    36
    
    
    
    Total long-term debt and finance lease
obligations
    
    
    5,622
    
    
    
    7,283
    
    
    
    6,438
    
    
    
    5,892
    
    
    
    5,394Shareholders equity
    
    
    8,110
    
    
    
    12,294
    
    
    
    5,587
    
    
    
    6,523
    
    
    
    5,982Consolidated Cash Flow Data:Amounts in accordance with IFRS:Net cash provided by operating activities
    
    
    3,613
    
    
    
    3,215
    
    
    
    3,700
    
    
    
    4,710
    
    
    
    4,068Capital expenditures:Fixed-line networks
    
    
    485
    
    
    
    470
    
    
    
    479
    
    
    
    497
    
    
    
    360Mobile networks
    
    
    286
    
    
    
    258
    
    
    
    295
    
    
    
    381
    
    
    
    434UMTS/GSM licenses
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other intangibles
    
    
    89
    
    
    
    125
    
    
    
    70
    
    
    
    98
    
    
    
    103Buildings
    
    
    18
    
    
    
    28
    
    
    
    2
    
    
    
    6
    
    
    
    13Other
    
    
    393
    
    
    
    287
    
    
    
    281
    
    
    
    183
    
    
    
    226Total capital expenditures
    
    
    1,391
    
    
    
    1,168
    
    
    
    1,127
    
    
    
    1,165
    
    
    
    1,136Investments in affiliated companies
    
    
    100
    
    
    
    2
    
    
    
    37
    
    
    
    11
    
    
    
    
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Year Ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Statistical Data:Fixed-line access lines(6)(end of period, in thousands)PSTN lines
    
    
    3,382
    
    
    
    3,240
    
    
    
    3,163
    
    
    
    3,086
    
    
    
    3,007ISDN lines
    
    
    723
    
    
    
    857
    
    
    
    911
    
    
    
    924
    
    
    
    924Total fixed-line access lines
    
    
    4,105
    
    
    
    4,097
    
    
    
    4,074
    
    
    
    4,010
    
    
    
    3,931Traffic (in millions of minutes):National fixed-line telephony(7)
    
    
    15,274
    
    
    
    14,317
    
    
    
    12,316
    
    
    
    10,957
    
    
    
    10,211Outgoing international fixed-line
telephony(8)
    
    
    1,306
    
    
    
    1,399
    
    
    
    1,394
    
    
    
    1,341
    
    
    
    1,316Mobile telephony(9)
    
    
    2,977
    
    
    
    3,296
    
    
    
    3,331
    
    
    
    3,335
    
    
    
    3,404Bluewin on-line service subscribers (end of
period, in thousands)(10)
    
    
    550
    
    
    
    734
    
    
    
    860
    
    
    
    944
    
    
    
    1,013Swisscom Mobile subscribers(11)
(end of period, in thousands)
    
    
    2,961
    
    
    
    3,373
    
    
    
    3,605
    
    
    
    3,796
    
    
    
    3,908Number of full-time equivalent employees (end of
period)
    
    
    17,459
    
    
    
    17,784
    
    
    
    17,171
    
    
    
    16,079
    
    
    
    15,477
 Notes to Selected Consolidated Financial and Statistical Data  (1)
    
    In 2001, Swisscom entered into two agreements for the sale of real estate and recorded a
gain of CHF 568 million. In 2001, Swisscom sold 25% of the shares of Swisscom Mobile AG to
Vodafone and recorded a gain of CHF 3,837 million on disposal.(2)
    
    Prior to 2002, Swisscom was subject to a weighted average statutory income tax rate of 25%.
Swisscoms effective tax rate for the year ended December 31, 2001 was reduced by three
one-time effects: (1) the gain on the sale of Swisscom Mobile was, in effect, not subject to
tax; (2) the gain on the sale of real estate, which was only partially subject to tax; and (3)
the impairment charge of debitel for tax purposes exceeded that recorded in the consolidated
financial statements. In 2002, Swisscom transferred its operations from Swisscom AG to newly
formed subsidiaries, which are each subject to individual tax rates. This resulted in a
decrease in the weighted average tax rate from 25% to 23%. In 2004, the weighted average tax
rate was 22.3%. See Note 13 to the consolidated financial statements.(3)
    
    As a result of the sale of debitel in June 2004, Swisscom treats debitel in its consolidated
financial statements as a discontinued operation. Prior years have been restated accordingly.(4)
    
    Earnings per ADS are based on the ratio of one-tenth of one share to one ADS. Basic
weighted-average number of shares outstanding in 2000, 2001, 2002, 2003 and 2004 was
73,540,974, 73,543,972, 67,647,928, 66,199,789, and 64,715,609, respectively. In March 2002,
Swisscom repurchased 7,346,739 shares, or 9.99% of its share capital, at a price of CHF 580
per share for an aggregate amount of CHF 4.3 billion. On December 22, 2004, Swisscom
completed a share repurchase program in which it repurchased shares in an aggregate amount of
CHF 2 billion representing 7.13% of its share capital. The Annual General Meeting to be held
on April 26, 2005 will vote on a resolution to reduce Swisscoms share capital accordingly.(5)
    
    Total debt at December 31, 2000, 2001 and 2002 includes debt outstanding to the Swiss Post
and the Federal Treasury in the aggregate principal amount of CHF 3.0 billion, CHF 1.8 billion
and CHF 0.8 billion, respectively. In the course of 2003, Swisscom repaid the remaining
outstanding loans of CHF 0.8 billion to the Swiss Post.(6)
    
    Based on lines in service, including courtesy and service lines and lines for payphones.(7)
    
    Represents total traffic generated by customers of Fixnet and Enterprise Solutions. Includes
traffic on courtesy and service lines. Includes traffic from Swisscoms fixed-line network to
mobile networks and to private user networks. Does not include Internet traffic and traffic
generated from Swisscom-operated public payphones, Swisscoms toll-free, cost shared and
premium rate telephone number services for business customers or by Swisscoms information
services.(8)
    
    Represents total traffic generated by customers of Fixnet and Enterprise Solutions. Based on
minutes as determined for customer billing purposes.(9)
    
    Includes minutes from all outgoing calls made by subscribers of Swisscom Mobile. Beginning in
2001, figures include voice minutes only, whereas in prior years, minutes relating to data and
value-added services were also included.(10)
    
    Active access subscribers include all paid-access subscribers and those subscribers to
Swisscoms free access services who have accessed their accounts at least once in the past 40
days. 7




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##### Table of Contents



(11)
    
    Beginning in 2001, Swisscom no longer includes accounts of any prepaid customer with
inactivity of more than twelve months in its subscriber figures. This resulted in the
deactivation of 207,000 inactive prepaid customers in December 2001. Effective December 31,
2004, approximately 124,000 customers, which have not registered with Swisscom on a timely
basis, as required by law since July 2004, were deactivated. Dividend Information The following table shows, in respect of each of the years indicated, information concerning the
dividends per share paid in Swiss francs and in U.S. dollars. Dividends were declared in Swiss
francs and converted into U.S. dollars using the noon buying rate for Swiss francs per U.S. dollar
on the date of the shareholders meeting at which the relevant dividend was approved. As used in
this annual report, the term noon buying rate refers to the exchange rate for Swiss francs per
U.S. dollar, as announced by the Federal Reserve Bank of New York for customs purposes as the rate
in The City of New York for cable transfers in foreign currencies. Dividend per ShareYear Ended December 31,
    
    (CHF)
    
    
    (USD)2000
    
    
    11
    
    
    
    6.172001(1)
    
    
    11
    
    
    
    6.782002(1)
    
    
    12
    
    
    
    9.152003(1)
    
    
    13
    
    
    
    10.012004(2)
    
    
    14
    
    
    
    n/a
   (1)
    
    In each of 2001, 2002 and 2003, shareholders received an additional distribution of CHF 8 per
share (equivalent to USD 4.48 per share, USD 4.93 per share and USD 6.00 per share, in each
case on the date of the shareholders meeting at which the relevant distribution was approved)
following par value reductions.(2)
    
    The Board of Directors has proposed a dividend of CHF 14 per share in respect of fiscal year
2004, which is subject to approval by the Annual General Meeting to be held on April 26, 2005.
In December 2004, Swisscom completed a share repurchase program, in which it repurchased
shares in an aggregate amount of CHF 2 billion. See Item 8: Financial Information  Dividend
Policy. 8




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##### Table of Contents



Exchange Rate Information The following table shows, for the years indicated, information concerning the noon buying rate,
expressed in Swiss francs per U.S. dollar. The noon buying rate on April 19, 2005 was CHF 1.1843. Year Ended December 31,
    
    Average Rate(1)2000
    
    
    1.69302001
    
    
    1.69442002
    
    
    1.54972003
    
    
    1.33742004
    
    
    1.2393
   (1)
    
    The average of the noon buying rates on the last business day of each full month during the
relevant period. The following table shows, for the periods indicated, information concerning the high and low
noon buying rates for the Swiss franc, expressed in Swiss francs per U.S. dollar. Month
    
    High
    
    
    LowOctober 2004
    
    
    1.2663
    
    
    
    1.1962November 2004
    
    
    1.2075
    
    
    
    1.1389December 2004
    
    
    1.1613
    
    
    
    1.1338January 2005
    
    
    1.1960
    
    
    
    1.1466February 2005
    
    
    1.2222
    
    
    
    1.1585March 2005
    
    
    1.2060
    
    
    
    1.1501
 9




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Risk Factors Risks Related to Swisscoms Business Proposed amendments to the Telecommunications Act would require Swisscom to offer unbundled access
to its local loop and other related services, which would negatively affect its fixed-line business
and overall operating results Since the entry into force of the Swiss Telecommunications Act on January 1, 1998 (Fernmeldegesetz)
(the Telecommunications Act), the Swiss telecommunications market has been open to competition.
While the Telecommunications Act contains provisions designed to facilitate competition in the
fixed-line telephony market, Swisscom has not yet been required to unbundle its local loop, which
means that Swisscom provides access services to the vast majority of customers who use fixed-line
telephony services in Switzerland, many of whom continue to use Swisscom as their default provider
of national and international calling services. Although competition has resulted in loss of
market share and margin pressure for such calling services, Swisscoms access business has been a
source of revenue growth and has also served to support Swisscoms retail traffic business. Under proposed amendments to the Telecommunications Act currently being considered by the Second
Chamber of the Swiss Parliament, Swisscom would be required to offer, among other things, unbundled
access to its local loop in the form of full access and bitstream access on a cost-oriented basis
as well as access rebilling. Unbundling of the local loop in the form of full access would allow
competitors to offer access services to customers in Switzerland without having to build local
loops of their own, although they would still have to make significant investments in their own
network infrastructure in order to connect to the local loop. Moreover, with access rebilling,
competitors would be able to bill customers directly for the access services provided by Swisscom.
As a result, Swisscoms competitors would be able to offer their customers a full range of
fixed-line services, including access, and their customers would receive a single bill covering all
these services. Accordingly, adoption of the proposed amendments would increase competition in the
access market and could cause Swisscom to lose additional market share in the national and
international calling markets. Unbundling of the local loop would, as currently proposed, also require market-dominant providers
to offer bitstream access for two years on a cost-oriented basis. Currently, Swisscoms competitors
provide ADSL services to its customers based on a wholesale contract with Swisscom on commercial
terms. Regulated bitstream access may therefore enable Swisscoms competitors to offer ADSL
services at lower rates than currently offered. While competitors would have to make upfront
investments in their own network infrastructure in order to reach the transfer points for bitstream
data traffic, the extent of these investments will depend on the regulations that are ultimately
adopted. As currently proposed, the amendments would require Swisscoms competitors to make
significant investments in their own network infrastructure. However, it cannot be excluded that
the amendments ultimately adopted would require less investment by Swisscoms competitors, which
would intensify competition in the broadband market. With increased competition, Swisscoms share
of the ADSL market would be likely to decline and Swisscom could be required to lower its ADSL
tariffs to remain competitive. While the loss in retail access revenue would be partially
compensated by wholesale revenue for access services provided to its competitors, those services
would have to be provided on a cost-oriented basis. Accordingly, introduction of bitstream access
could have a significant and adverse effect on the growth and profitability of Swisscoms access
business. Overall, the proposed amendments to the Telecommunications Act would negatively affect Swisscoms
fixed-line business by reducing revenues and causing margins to decline. Because fixed-line voice
and data services continue to account for a significant part of Swisscoms overall revenues, the
amendments would adversely affect Swisscoms consolidated results as well. 10




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Regulation of mobile access or call origination, mobile termination or mobile roaming may
negatively affect Swisscoms mobile revenues and overall profitability While the Telecommunications Act opened the Swiss mobile telephony market to competition, mobile
telephony in Switzerland has not yet been the subject of extensive regulation. However,
developments in the EU and Switzerland could result in additional regulation in the future. In recent years, the European Union has been analyzing the markets for various mobile telephony
services, including mobile access and call origination, mobile termination and mobile roaming with
a view to determining whether additional regulation is required to ensure effective competition and
prevent market abuse. These initiatives could ultimately lead to European-wide regulation of
mobile access and call origination and/or a significant reduction in mobile termination fees for
individual companies determined to have significant market power in their local markets. They
could also lead to a significant reduction in international roaming charges. While Switzerland is
not a member state of the EU and therefore is not subject to EU legislation, EU directives and
implementing legislation in various EU countries have served as points of reference for the
development of the Swiss regulatory regime. Although not part of the current proposed amendments to the Telecommunications Act, earlier
proposals would have provided the legal basis in Switzerland for requiring market-dominant
providers to provide access to any relevant infrastructure or service, including new technologies
such as mobile technology or wireless broadband networks, on a cost-oriented basis. There can be
no assurance that such measures will not be reintroduced in the future. Regulation of mobile
access could result in Swisscom being required to give access to its network to mobile virtual
network operators or to sell to its competitors mobile telephony minutes for resale on a
cost-oriented basis. Pressure on the Swiss regulatory authorities to regulate mobile access has
increased as a result of the award of new mobile licenses to two service providers that require
national roaming in areas where they do not have their own network. With regard to mobile termination tariffs, the Competition Commission has initiated proceedings
against Swisscom, Orange and TDC Switzerland (Sunrise), alleging that each operator has a dominant
position with respect to terminating traffic on its own mobile network. If Swisscom were found to
have a dominant position in this market, it could be required to reduce its mobile termination
fees. Concerns regarding mobile roaming charges have also been raised in Switzerland and it is possible
that Swisscom may become subject to regulation in this area as well. Regulation of mobile access or call origination, mobile termination fees or roaming charges would
have a material and adverse effect on Swisscoms mobile revenues and lead to additional pressure on
margins and reduced profitability. Since the mobile business has been a major source of Swisscoms
profitability in recent years, these regulatory changes would adversely affect Swisscoms business
as a whole. Service providers are increasingly able to offer Swisscoms core telecommunications services using
alternative technologies The availability of alternative technologies capable of supporting telecommunications services is
increasingly enabling competitors to provide services which fully substitute for Swisscoms core
services (fixed-line voice and data services and mobile telephony). With mobile penetration rates having reached 87% in Switzerland, mobile telephony is increasingly
used as a substitute for fixed-line telephony, resulting in a decline in access lines and
fixed-line traffic revenues. To the extent a Swisscom Fixnet customer opts to use Swisscoms mobile
services, Swisscom Mobile benefits from this trend. Where a customer switches to another mobile
service provider, however, Swisscom may no longer earn any revenue from this customer. Some of
this loss can be compensated by wholesale revenue which Swisscom Fixnet and Swisscom Mobile derive
from collecting fees for terminating calls on their networks and for routing calls between the
mobile networks of other mobile operators. However, with direct mobile interconnection now
available, mobile network operators are able to terminate their traffic directly on each others
networks instead of routing traffic through Swisscom Fixnet, bypassing Swisscom entirely. 11




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While the continuing substitution of mobile for fixed-line telephony has negatively affected
Swisscoms fixed-line business, Swisscom faces an even greater threat from cable operators, in
particular Cablecom, the largest cable network operator in Switzerland. Having made significant
investments in its cable network to allow for bidirectional data transfer, Cablecom has been able
to leverage its existing network into a platform for competing directly with Swisscom in its core
competencies by offering basic voice and data services, as well as high speed Internet access
services, to customers throughout Switzerland. Since mid-2004, Cablecom has been able to add
subscribers to its voice telephony services at a rapid rate and Swisscom expects this trend to
continue. There are also numerous service providers with minimum network infrastructure who take advantage of
interconnection rates and leverage the public Internet to provide low cost national and
international calling services using voice over IP (VoIP). The increasing popularity of
peer-to-peer communication also means that international calls may be placed between personal
computers at minimal cost. As the quality and convenience of using these IP-based services has
improved in recent years, they have become a viable alternative to traditional fixed-line services
for many users, a trend Swisscom expects to continue and accelerate in the future. As in the
fixed-line business, the popularity of IP-based peer to peer communication is having an
increasingly disruptive effect on Swisscoms mobile business due to substitution of instant
messaging for SMS and of VoIP-services for mobile voice telephony services. While Swisscom
continues to derive revenue from providing its infrastructure to some of these services, revenue is
likely to decline overall as a result of the increased use of these services. Increased competition may have a significant impact on the revenues and profitability of Swisscoms
fixed-line broadband business, which may not allow Swisscom to recoup its investment in the
fixed-line broadband infrastructure and multimedia services The provision of broadband access based on ADSL technology has been a fast-growing business for
Swisscom over the last several years, partially offsetting declines in its traditional fixed-line
business. In order to continue to grow this business, Swisscom is making significant capital
expenditures to increase download capacity by upgrading its network. However, there is a risk that
increased competition may negatively impact this growth and prevent Swisscom from realizing a
return on its investment. Swisscom faces strong competition particularly from cable network operators, including Cablecom,
who are able to offer high-speed Internet access via cable. Cable currently allows a higher
bandwidth offering than ADSL and has certain other advantages over ADSL. Moreover, as a cable
operator, Cablecom is particularly well positioned to combine voice, data and Internet access
services with a multimedia content offering. In response to this increased competition, Swisscom
is making capital expenditures to upgrade its network to be able to combine its core activities in
voice and Internet services with multimedia services such as TV and video on demand. However,
Cablecom has already been offering these multimedia services for some time, and Swisscom may not be
successful in entering this market. Furthermore, the proposed amendments to the Telecommunications Act described above, under which
Swisscom would be required to offer bitstream access on a cost-oriented basis for two years, would
put additional pressure on prices. If Swisscom were forced to significantly reduce its retail prices as a result of increased
competition and price pressure, this would have a significant impact on the revenues and
profitability of Swisscoms fixed-line broadband business. Demand for broadband mobile services, which Swisscom has identified as a source of future growth in
its mobile business, may be lower than expected and Swisscom may not be able to recoup the
substantial investment required to build out its networks The future success of Swisscoms mobile business, which in recent years has been Swisscoms most
profitable operating segment, depends on, among other things, the capabilities and widespread
market acceptance of broadband mobile technologies such as universal mobile telecommunication
system (UMTS) and Enhanced Data Rates for GSM Evolution (EDGE) technology. UMTS is a third
generation mobile radio system that creates additional mobile radio capacity and enables broadband
media applications while also providing high speed Internet access. EDGE is a further development
of the general packet radio service (GPRS) standard that allows 12




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considerably higher transmission speeds. Swisscom launched its commercial UMTS services in November
2004 and has recently activated EDGE technology. In connection with the build-out of its UMTS and EDGE networks and the development of related
products and services, Swisscom has incurred, and expects to incur in the future, substantial
capital expenditures. It is still unclear whether these new services will meet with market
acceptance. Market acceptance will depend on a number of factors, including the availability of
applications which exploit the potential of the technology, as well as on the breadth and quality
of available content. Furthermore, the level of demand for UMTS and EDGE services could be lower
than expected as a result of increased use of alternative mobile broadband technologies, such as
public wireless LAN. If UMTS and EDGE services fail to achieve the expected advantages over other
technologies, Swisscoms mobile business will suffer and Swisscom may be unable to recoup its
investment in UMTS and EDGE technology and could be required to write down the value of some or all
of the related assets. High penetration and increasing competition in the mobile telecommunications market could cause
customer retention costs to increase substantially and Swisscom may not be able to maintain its
current market share With mobile penetration having reached almost 87% in Switzerland at the end of 2004, it has become
more difficult to acquire new customers and Swisscom is therefore increasing its focus on customer
retention. In this market, Swisscom already faces substantial competition from the other two mobile
licensees in Switzerland, Orange and TDC Switzerland (Sunrise). Competition for business customers
is particularly intense, as Orange and TDC have been increasing their efforts to win market share
in this segment. In December 2003, the Federal Communications Commission (ComCom) awarded GSM
licenses to Tele2 and In&Phone, which will further intensify competition in the mobile business
market. For example, Tele2 is expected to launch a city network in Zurich in June 2005 at
significantly lower rates than Swisscom currently offers for comparable services. Given the high
rate of mobile penetration and increasing competition, customer retention costs, which are already
on the rise, could increase substantially. If Swisscom is unable to attract new or retain existing
customers in the mobile market, its mobile revenues would suffer and it will lose market share. At
the same time, the increasing cost of customer retention could put additional pressure on margins
and lead to a substantial decline in profitability. Actual or perceived health risks and other problems relating to mobile devices or transmission
masts could lead to stricter regulation of radiation emissions from mobile base stations and
antennae, additional compliance expenditures and decreased mobile communications usage Concern has been expressed that the electromagnetic signals from mobile devices and base stations
may pose health risks or interfere with the operation of electronic equipment, including automobile
braking and steering systems. In December 1999, the Federal Council adopted an ordinance, known as the NIS Ordinance, which
establishes emission standards to protect the population of Switzerland from non-ionizing radiation
emitted by various sources, including mobile antennae and base stations. In 2002, the Swiss Agency
for the Environment, Forests and Landscape (BUWAL) issued final recommendations which provide
guidance for enforcement authorities on the appropriate methods for measuring electromagnetic
emissions from base stations and masts in the GSM network, but which do not address emission
standards for UMTS networks. Draft recommendations relating to emission standards for UMTS networks
were published in 2004, which currently apply. Final recommendations are expected to be adopted in
the course of 2005. Depending on the enforcement recommendations ultimately adopted, it is
possible that additional capital expenditures will be required in connection with the build-out of
Swisscoms UMTS network. A recent study showed that UMTS radiation has an impact on the well-being of humans. While the
impact of UMTS radiation on the well-being of humans is supposedly small, the results of the study
are statistically significant. Additional studies, which attempt to replicate this recent study,
while correcting certain of its scientific shortcomings, are currently being conducted. If these
further studies confirm that UMTS radiation may have adverse health effects, regulatory authorities
may set stricter emission standards for the UMTS network than currently apply. Any of these
regulatory measures would have a severe and adverse effect on Swisscoms mobile business and
Swisscom may be unable to recoup its investment in the UMTS network and required to take
significant write downs. 13




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Even if no stricter regulatory measures were adopted, perceived health risks of mobile handsets or
base stations and related publicity could cause Swisscoms customer base and average usage per
customer to decline, which would have a material adverse effect on Swisscoms mobile communications
business. Environmental objections may also make it more difficult to find attractive sites for
base stations and could thereby impair the build-out of Swisscoms wireless infrastructure,
primarily the mobile network. If Swisscom is not able to benefit from a potential increase in market demand for integrated
communication solutions and IT services, its business customers and solutions business would suffer As the provision of basic telecommunication services to business customers has become a commodity
business characterized by low margins, Swisscom believes that future growth in this market will lie
in the provision of enhanced business solutions. Accordingly, it has invested in upgrading its data
networks, thereby enabling the provision of integrated data and voice services with greater
flexibility, scalability and performance. However, demand for such integrated communications
solutions has not developed as Swisscom anticipated. The slowdown of the global economy beginning
in 2001 led to a decline in corporate spending which was particularly pronounced in the IT area.
Despite modest improvement of the economy since the beginning of 2004, demand for integrated
communication solutions and IT services has remained sluggish and may potentially decline if the
economy slows down again. Moreover, Swisscom faces intense competition from other players in the
market for integrated communication solutions and IT services, some of which have more experience
than Swisscom, and there can be no assurance that Swisscom will benefit proportionately from any
upturn in market demand. The expansion of its outsourcing business exposes Swisscom to the risk that it may not be able to
achieve expected cost savings and could be required to perform long term contracts at a loss In 2003 and 2004, Swisscom expanded its business in the outsourcing market. Outsourcing contracts
are typically multi-year engagements under which Swisscom takes over management of a clients
technology operations, business processes, network and/or IT infrastructure. Generally, Swisscom
also takes over the clients employees associated with the outsourced operations and may become
responsible for the related employee obligations, such as pension and severance commitments. The
successful implementation of outsourcing projects depends among other things on Swisscoms ability
to rapidly optimize the outsourced operations by reducing costs. If Swisscom is not able to
realize anticipated efficiencies, it may not be able to perform these contracts on a profitable
basis. In addition, some of these contracts may permit termination fees or impose other penalties
if Swisscom does not meet performance levels specified in the contracts. Swisscom may consider entering into acquisitions, including potentially large acquisitions outside
its home market, which would entail a variety of important risks Swisscom continues to actively consider investment opportunities, which could potentially include
large acquisitions outside its home market. In 2004, Swisscom was in advanced discussions with the
Austrian privatization authority (ÖIAG) regarding a possible merger with Telekom Austria, but talks
were called off by both parties. More recently, Swisscom submitted a bid to acquire a 51% interest
in Cesky Telecom a.s., which the Czech government had put up for auction. However, on April 6,
2005, the Czech government approved the sale to another bidder. Swisscom expects to continue to
consider international investment opportunities in the future. Entry into any such significant acquisition would entail a variety of important risks. There can
be no assurance that Swisscom would be able to successfully execute the business plan it pursued
with a specific acquisition, such as leveraging the targets expertise in certain areas, or to
realize other anticipated benefits, including synergies, from the transaction. This risk may be
compounded in the case of a cross-border transaction, particularly if it involves a local
incumbent, as political and cultural factors may make it more difficult to implement management and
other changes. Although Swisscom would seek to conduct due diligence on any potential target, the
opportunity to do so may be limited and it is possible that the transaction could entail higher
than anticipated costs, that the target could have additional liabilities for which Swisscom may
not be entitled to indemnification or that write downs may be required, including of any goodwill
arising out of the transaction. Moreover, should Swisscom enter into a large acquisition, Swisscom
would likely incur substantial debt, which could negatively affect earnings as well as potentially
increase its cost of capital and reduce its future flexibility. 14




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Swisscom depends upon a limited number of suppliers, particularly for the supply of next generation
fixed and mobile network components Swisscoms ability to provide and roll out reliable, high quality and secure products and services,
depends upon, among other things, the adequate and timely supply of transmission, switching,
routing and data collection systems, related software and other network equipment. If Swisscom
were unable to obtain adequate supplies of equipment in a timely manner, or if there were
significant increases in the costs of such supplies, Swisscoms operations would be adversely
affected. This is particularly true with respect to network equipment and services that Swisscom
requires to upgrade its existing fixed and mobile networks to enable new broadband and multimedia
services based on new technologies, such as ADSL, very high bit-rate digital subscriber line (VDSL)
and UMTS. While Swisscom seeks to diversify its suppliers, it currently has only one supplier of
ADSL, who will also be the supplier of VDSL, and one supplier of UMTS equipment. Swisscom also
depends on the timely supply of mobile handsets which can be used in the UMTS network. Network failures may result in the loss of traffic, reduced revenue and harm to Swisscoms
reputation Modern telecommunication networks are vulnerable to damage or interruption caused by system
failures, hardware or software failures, computer viruses or external events such as storms,
floods, avalanches, fires, power loss or intentional wrongdoing. Swisscom has experienced network
failures in the past. In June 2004, Swisscoms IP network for business customers was disrupted for
several hours due to a software failure. If the disruption had continued for a longer period, it
would have had significantly adverse consequences, in particular for the banking sector. The risk
of network failures can never be entirely eliminated. Any such failure may harm Swisscoms
reputation and could result in customer dissatisfaction and reduced traffic and revenues. Complex IT systems which have been developed over a long period of time may hamper Swisscoms
business development Swisscom relies for many of its most important data processing functions on complex IT systems
which have been developed over a long period of time. Older systems have been upgraded and adapted
on an ongoing basis and new systems have been introduced. As a result, there is a lack of
harmonization in Swisscoms IT systems which may affect Swisscoms ability to compete with newer
service providers and therefore require that Swisscom make further investments to facilitate the
provision of flexible and cost-effective services to its customers and may harm its competitive
position. In addition, further adaptation and extension of Swisscoms IT systems, in particular
its billing, order management and customer relationship management systems, would be complex and
time-consuming and could therefore hamper Swisscoms business development. Swisscom may not be able to implement necessary restructuring measures, and its relations with the
trade unionscould deteriorate While Swisscom was able to reach an agreement with the trade unions on the extension of the
collective bargaining agreement in 2003, new negotiations are scheduled for 2005. In the course of
these negotiations, Swisscom expects to face considerable disagreement with the trade unions,
particularly with regard to the applicability of a new collective bargaining agreement to all
Swisscom group companies and Swisscoms aim to introduce more flexible labor and termination
conditions. If Swisscom is not able to achieve its aims, this could restrict its operating
subsidiaries in their ability to adapt to changing market conditions, which could negatively affect
their profitability. In addition, the negotiations as well as further staff reductions could damage
industrial relations or even lead to work disruptions, which in turn could also negatively affect
Swisscoms profitability and competitiveness. A decline in the capital markets or the revision of previously made assumptions may result in
increased pension expense and could affect Swisscoms profit Swisscom contributes to comPlan, a defined benefit plan, which provides retirement benefits for the
majority of its employees in Switzerland. comPlan covers the risks of old age, death and disability
in accordance with Swiss pension legislation. 15




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The determination of the liability and expense for pension benefits in Swisscoms consolidated
financial statements is based on the guidelines of the International Financial Reporting Standards
(IFRS) and is dependent on the selection of assumptions which attempt to anticipate future events,
including the discount rate, expected long-term rate of return on plan assets and rates of increase
in future compensation levels. These assumptions are regularly reviewed and revised when
appropriate, and changes in one or more of them could affect the amount of Swisscoms recorded
expenses for these benefits. For 2005, Swisscom expects to make contributions to the comPlan in
the amount of CHF 196 million. However, Swisscom plans to review the benefits and contributions
under the comPlan and expects to amend the plan in the course of 2005. These amendments may
require Swisscom to pay a higher amount than currently planned, which could have a significant
negative effect on Swisscoms cashflows from operating activities in 2005. Under IFRS, the total underfunding as of December 31, 2004 was CHF 2,050 million, of which CHF
1,118 million is recognized in the balance sheet. The difference, consisting of an unrecognized
actuarial loss and unrecognized prior service cost totalling CHF 932 million, is subject to future
recognition as described in Note 2.15 to the consolidated financial statements and will result in
an additional expense of CHF 10 million in 2005, after an additional expense of CHF 9 million in
2004. For more information on Swisscoms pension plan, see Note 9 to the consolidated financial
statements. If actual experience differs from expectations, Swisscoms results of operations and
cash outflows in future periods could be affected. A deterioration of the capital markets would
affect Swisscoms future pension expense and could lead Swisscom to increase its contributions,
which would result in higher cash outflows. Swisscom may be audited by the Swiss tax authorities and, if any deficiencies are uncovered, may be
required to make substantial payments Since Swisscoms incorporation as a Swiss stock corporation, only some of Swisscoms group
companies have been subject to a detailed review by the Swiss tax authorities. Based on the
experience of other Swiss companies, Swisscom believes that a review of the direct and indirect
taxes of other Swisscom group companies or of the whole group may occur in the near future. Past
audits by the Swiss tax authorities of other Swiss companies have in some cases resulted in
substantial additional payments being required of the affected companies. While Swisscom was not
required to pay any substantial additional payments as a result of past tax reviews of its group
companies, it cannot be excluded that, if Swisscom is audited by the Swiss tax authorities in the
future and any deficiencies are uncovered, Swisscom may have to make substantial payments for which
it has not made provisions. Swisscom is involved in a number of legal proceedings which, if decided against Swisscom, could in
the aggregate have a material adverse effect on its results Swisscom is involved in several legal proceedings that are described in more detail under Item 8:
Financial Information  Legal Proceedings. Swisscoms position as the principal telecommunications
provider in Switzerland has attracted the attention of its competitors in Switzerland and of the
Swiss regulatory authorities. In addition, Swisscom is regularly involved in legal disputes with
competitors as a result of its leading position in the fixed-line and mobile communications markets
in which it operates. For example, Swisscom is currently involved in a legal proceeding with
respect to fixed-fixed interconnection fees, in which it may be required to lower interconnection
prices by 25-35%. Although Swisscom believes that most of these proceedings would not individually
have a material adverse effect on its results of operations and financial condition, in the
aggregate these proceedings could have such an effect. In connection with the sale of debitel, Swisscom may not be able to recover the full amount of the
vendor loan notes and may be required to make additional payments under the representations and
warranties made and indemnities provided in the purchase agreement On June 8, 2004, Swisscom sold its 95% stake in debitel AG in a leveraged buy out by funds advised
by the private equity firm Permira (Permira Funds), for a purchase price of EUR 640 million (equity
value). The purchase price was partially financed by Swisscom through the conversion of existing
intercompany loans in the amount of EUR 210 million into two vendor loan notes of EUR 105 million
each, assumed by debitel Konzernfinanzierungs GmbH, an indirect 100% owned subsidiary of the entity
acquired by Permira Funds in the transaction. Swisscom received a first repayment of EUR 20
million on this obligation in early 2005. 16




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##### Table of Contents



A portion of the purchase price was also financed on a senior secured basis by a consortium of
banks. Repayment of Swisscoms vendor loan notes, which have a term of 7 and 8 years,
respectively, is subordinated to the full repayment of the senior facilities provided by these
banks. Upon repayment of the senior facilities, the vendor loan notes will be secured by assets of
debitel Konzernfinanzierungs GmbH, which consist primarily of the debitel shares acquired in the
transaction. As a result, Swisscom faces the risk that it may not recover the full amount of the
vendor loan notes in the event debitel Konzernfinanzierungs GmbH were to default on its obligations
and the assets securing the vendor loans notes were insufficient to satisfy both the senior banks
and Swisscom. Should this be the case, Swisscom would need to write off these loans. As is common in this type of transaction, Swisscom has agreed to indemnify the purchaser for any
breach of the representations and warranties made by it in the purchase agreement and for certain
liabilities, including tax liabilities, of debitel. In addition, Swisscom has agreed to bear the
risk of, and to indemnify the purchaser for, any losses which may arise in the future at one of
debitels international subsidiaries. However, the purchase agreement provides Swisscom with the
right to assume control of this subsidiary under certain conditions in order to minimize its
liability under this indemnity. Based on current estimates, the maximum amount that could become due relating to the
representations and warranties (excluding the indemnification given for one of debitels
international subsidiaries) was approximately EUR 110 million at December 31, 2004. No accrual has
been recorded for this potential indemnification as management believes that the criteria for the
recognition of a liability had not been met. Risks Related to Ownership by the Swiss Confederation The interests of the Swiss Confederation, which owns a majority stake in Swisscom, may differ from
those of Swisscom and could hamper Swisscoms development The Swiss Confederation holds a majority of Swisscom shares. Any reduction of the Confederations
holding below a majority would require a change in law. Swisscom may not undertake a capital
increase that would otherwise have the effect of decreasing the Confederations shareholding to
less than a majority, unless the Confederation agrees to participate in the capital increase.
Swisscoms ability to raise additional equity capital could therefore be constrained. In addition,
Swisscom could also be limited in its ability to undertake major corporate actions, such as
acquisitions or entry into strategic partnerships, either at the parent company level or through
subsidiaries, which are important elements of its strategy. The sale of a substantial stake in Swisscom by the Swiss Confederation could negatively affect
Swisscoms share price The Swiss Confederation currently holds a 61.4% stake in Swisscom. The stake will increase again
to 66.1% after effectiveness of the planned share capital reduction following the share buyback
completed in December 2004. While any reduction of the Confederations holding below a majority
would require a change in law, future sales by the Swiss Confederation down to the required
majority may occur. In 2003 and 2004, the Swiss government issued bonds exchangeable into Swisscom
shares in the aggregate amount of CHF 3.9 billion. The exchangeable bonds that are currently
outstanding have remaining maturities ranging from one year to two and a half years. Full exercise
of these bonds would cause the Confederations stake in Swisscom to decline to 57.2% (assuming
effectiveness of the share capital reduction). The Federal Council has also reaffirmed its
intention to further reduce its stake to the legal minimum. The sale or potential sale of a
significant number of Swisscoms shares by the Swiss Confederation may cause the market price of
Swisscoms shares and ADSs to decline significantly. 17




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Risks Related to Swisscoms Shares Currency fluctuations may adversely affect the trading prices of Swisscoms ADSs and the value of
any distributions Swisscom makes Because Swisscoms stock is traded in Swiss francs and the ADSs are traded in U.S. dollars,
fluctuations in the exchange rate between the two currencies may affect the relative value of
Swisscoms ADSs. In addition, should Swisscom make any distribution on its common stock in Swiss
francs, the depositary will convert such distributions to U.S. dollars. If exchange rates fluctuate
before the depositary converts the currencies, U.S. shareholders may lose some of the value of the
distribution. Shareholders rights are governed by Swiss law and differ in some respects from the rights of
shareholders under U.S. law Swisscom is a stock corporation organized under the laws of Switzerland. The rights of holders of
Swisscoms shares, and therefore, many of the rights of its ADS holders, are governed by Swisscoms
articles of incorporation and by Swiss law. These rights differ in some respects from the rights of
shareholders in typical U.S. corporations. In particular, Swiss law significantly limits the
circumstances under which shareholders of Swiss corporations may bring derivative actions. It may not be possible for shareholders to enforce judgments of U.S. courts against members of
Swisscoms Board of Directors or Group Executive Board Swisscom is a Swiss stock corporation. The members of its Board of Directors and Group Executive
Board are non-residents of the United States. In addition, Swisscoms assets and the assets of
members of its Board of Directors and Group Executive Board are located in whole or in substantial
part outside the United States. As a result, it may not be possible for shareholders to enforce
against Swisscom or members of its Board of Directors and Group Executive Board judgments obtained
in the United States courts based on the civil liability provisions of the securities laws of the
United States. In addition, awards of punitive damages and judgments rendered in the United States
or elsewhere may be unenforceable in Switzerland. 18




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##### Table of Contents



ITEM 4: INFORMATION ON THE COMPANY 
 Overview Swisscom is the principal telecommunications provider in Switzerland, offering a comprehensive
range of products and services to residential and business customers. As the leading provider of
fixed-line services, Swisscom offers analog and digital access services. In addition, Swisscom
offers broadband services over existing subscriber lines using a technology commonly referred to as
ADSL. As of December 31, 2004, Swisscom provided 3.9 million fixed-line telephone access lines in
Switzerland, of which 0.9 million were digital or ISDN lines and 0.8 million were being used for
ADSL access. In 2004, Swisscom billed an aggregate of 17.1 billion minutes of national transit and
interconnection traffic and terminated over 1.5 billion minutes of incoming international traffic
on behalf of other telecommunication service providers. Through Swisscom Mobile AG, in which
Vodafone holds a 25% stake, Swisscom is the leading mobile telecommunications service provider in
Switzerland, with over 3.9 million subscribers to its mobile service as of December 31, 2004.
Swisscom also offers a full range of state-of-the-art data services, from leased lines to
integrated solutions for its corporate customers. In 2004, Swisscoms net revenue amounted to CHF
10.1 billion. On June 8, 2004, Swisscom sold its 95% stake in debitel AG, the largest network-independent
telecommunications provider in Europe, in a leveraged buyout by funds advised by the private equity
firm Permira (Permira Funds), for a purchase price of EUR 640 million (equity value). As a result
of the sale, debitel is treated in the consolidated financial statements as a discontinued
operation. Prior years have been restated accordingly. See  Divestments/Discontinued Operations
 debitel. Swisscom operates a variety of state-of-the-art telecommunications networks which enable the quick
and cost-effective introduction of next-generation services. Swisscoms PSTN/ISDN network features
fully digitalized transmission and local switching and fully integrated ISDN. Swisscom has upgraded
its access networks to provide broadband connectivity services via ADSL technology in the local
loop. ADSL technologies operate, like ISDN, over existing copper lines, but offer higher speed and
volume for data transmission. Swisscoms current ADSL offering provides download speeds of up to
2.4 Mbit/s and is available to more than 98% of the population of Switzerland. Swisscom also
operates several data networks used for the provision of packet switched, frame relay and
asynchronous transfer mode (ATM) data services and, to an increasing extent, IP and Ethernet
communication. Swisscoms mobile telephony network is a digital mobile dual band network based on
the international GSM standard. Swisscom has also built out a separate third generation UMTS
network. UMTS is mobile radio system that creates additional mobile radio capacity and enables
broadband media applications while also providing high speed Internet access. Swisscom is
currently capable of providing UMTS service to almost 90% of the Swiss population. As described in
more detail below, Swisscom is currently making targeted investments in both its fixed-line and
mobile networks to increase coverage where needed as well to enhance capacity and upgrade
functionality. See  Networks and Technology. The following table sets forth Swisscoms capital expenditures for the periods indicated. Year Ended December 31,CHF in millions
    
    2002
    
    
    2003
    
    
    2004Fixed-line network
    
    
    479
    
    
    
    497
    
    
    
    360Mobile network
    
    
    295
    
    
    
    381
    
    
    
    434Other
    
    
    353
    
    
    
    287
    
    
    
    342Total
    
    
    1,127
    
    
    
    1,165
    
    
    
    1,136
 Prior to January 1, 1998, Swisscom was the state monopoly service provider and was subject only to
limited competition. On January 1, 1998, the Swiss telecommunications market was opened to
competition with the implementation of the Telecommunications Act. Since then, a large number of
competitors have entered the Swiss market, with intense competition in both fixed-line and mobile
telephony and in services provided to business customers. 19




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Although Switzerland is not a member of the EU, the Swiss market has been liberalized on the
schedule and in the manner set forth in the EU directives mandating the liberalization of
telecommunications services in member states. In October 2004, the First Chamber of the Swiss
Parliament passed a bill with significant amendments to the Telecommunications Act, which is
currently under consideration by the Second Chamber of the Swiss Parliament. These amendments
would, if adopted into law, require Swisscom to offer unbundled access to its local loop, as well
as access to leased lines, on a cost-oriented basis. See  Regulation  Unbundling of the Local
Loop and Other Access Regulation. Under the Telecommunications Act, Swisscom was required to continue to provide certain basic
telecommunications services comprising Universal Service throughout Switzerland until December 31,
2002, with a number of such services subject to price ceilings. In June 2002, ComCom renewed
Swisscoms Universal Service license for another five-year term. Under the terms of this license,
ISDN access is part of Universal Service and is subject to a price ceiling. On December 22, 2004, Swisscom completed a share repurchase program in which it repurchased shares
in an aggregate amount of CHF 2 billion representing 7.13% of its share capital. The Annual
General Meeting to be held on April 26, 2005 will vote on a resolution to reduce Swisscoms share
capital accordingly. See Item 8: Financial Information  Dividend Policy. Historically, Swisscoms operations were a part of the Swiss PTT, a dependent agency of the Swiss
Government. The Telecommunications Enterprise Act of 1997 (the TUG) established Swisscom as a
special statutory stock corporation. The TUG provides that the Swiss Confederation must hold a
majority of the capital and voting rights of Swisscom. Any reduction of the Confederations holding
below a majority would require a change in law. In 2003 and 2004, the Swiss government issued
several bonds exchangeable into Swisscom shares in the aggregate amount of CHF 3.9 billion. The
exchangeable bonds that are currently outstanding have remaining maturities ranging from one year
to two and a half years. Full exercise of these bonds would cause the Confederations stake in
Swisscom to decline to 57.2% (assuming effectiveness of the share capital reduction described
above). Swisscoms principal executive offices are located at Alte Tiefenaustrasse 6, 3050 Bern,
Switzerland. For a list of Swisscoms subsidiaries and affiliated companies, see Note 40 to the
consolidated financial statements. Strategy Swisscoms primary strategy is to remain a leading and innovative multi-service provider of
telecommunication services in Switzerland. In addition to focusing on its home market, Swisscom
actively considers investments abroad. In its home market, Swisscom believes that the mobile business continues to have growth potential,
while the fixed-line business is likely, in spite of increasing broadband penetration, to erode
over time. Accordingly, Swisscom seeks to optimize its free cash flow from existing businesses,
while exploring any opportunities to develop new businesses in Switzerland. In particular, Swisscoms strategy in its home market is:  

To develop and introduce innovative
broadband services.Swisscom believes that
the provision of broadband services to
customers in both its fixed-line and mobile
businesses is key to customer retention and
will also be a source of future revenue
growth. In its fixed-line business,
Swisscom strategy is to combine its core
competencies in voice and Internet access
services with multimedia services such as TV
and video on demand. Swisscom refers to
this strategy as its triple play strategy.
Swisscom has recently piloted a TV over DSL
service, which it intends to introduce on a
commercial basis during the second half of
2005. In its mobile business, Swisscom is
actively promoting video telephony services
and has expanded the range of broadband
mobile services available through the
Vodafone live! portal to include live TV and
3D video games. In addition, to further
this triple play strategy, Swisscom
recently acquired a 49% strategic stake in
CT Cinetrade AG, a Swiss media company whose
activities include a pay-TV channel, video
and DVD film rights, as well as movie
theaters. 20




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

To support the development and roll out of
broadband services through targeted
investment in network infrastructure.To
support its triple play strategy, Swisscom
is making targeted investments to enhance
the capacity, reach and functionality of its
broadband networks. Swisscom expects such
enhancements to include the introduction of
very high bit-rate digital subscriber line
(VDSL) technology in its fixed-line access
network. VDSL will allow downstream speeds
well above 10Mbit/s capable of supporting
rich multimedia services, such as the
simultaneous transmission of multiple
television channels. With respect to its
mobile networks, Swisscom continues to build
out its UMTS capability, while also
investing in capacity enhancements and
functional upgrades of its existing GSM/GPRS
network, for example with the recent
deployment of EDGE technology. Following its
prudent investment policy, Swisscom intends
to proceed with network enhancements in
incremental steps aligned with market
demand.

To improve its domestic position by
developing adjacent and new businesses.
Swisscom seeks to expand its business into
adjacent and new businesses in order to
leverage its strong customer base in
Switzerland. In 2004, Swisscom
significantly expanded its telecommunication
and IT infrastructure outsourcing
activities. Swisscom believes that
infrastructure outsourcing business will
grow in the future as technologies converge
and demand increases for combined IT and
telecommunication solutions. With the
acquisition of Billag Card Services AG in
2003, Swisscom made its debut in the market
for third party billing and loyalty cards
processing services, a business which
Swisscom seeks to expand in the future.

To maintain customer loyalty in its core
businesses through enhanced customer care.
In addition to providing innovative
broadband services to retain and attract
customers, Swisscom seeks to maintain
customer loyalty through enhanced customer
care, which it believes distinguishes it
from its competitors. In its fixed-line
business, Swisscom offers a variety of
promotions, such as discounts for evening
and weekend calls and temporary discounts,
and recently introduced new pricing models,
which gives its customers greater
flexibility in choosing the tariff that best
fits their individual needs. In its mobile
business, Swisscom offers a full range of
different tariff models and various customer
loyalty programs, such as handset subsidies.
The merger of its businesses of Enterprise
Solutions and Swisscom Systems to form a new
business segment named Swisscom Solutions
enables Swisscom to deliver traditional data
and voice as well as integrated
communications solutions from a single
source, which it believes will improve the
convenience of its services and increase
customer satisfaction.

Efficiency improvements.As a result of
increased pressure on margins due to strong
competition and regulatory effects, Swisscom
has placed increasing emphasis on cost
management in recent years. Swisscom seeks
to achieve efficiency improvements in
particular through reducing headcount and
optimizing workplace infrastructure. In
addition, Swisscom has sold or closed down
businesses with low margins such as its
international point of presence in North
America and European sales offices, and its
international wholesale business, which it
agreed to combine with Belgacom in February
2005. While being primarily focused on its home market, Swisscom continues to actively consider
investment opportunities outside of Switzerland with a focus on Europe. Swisscom has defined strict
criteria which are applied to any larger investment opportunity: sustainability of the business,
strategic fit, quality of management, reasonability of price and overall impact on Swisscoms
business and risk profile. In 2004, Swisscom was in advanced discussions with the Austrian
privatization authority (ÖIAG) regarding a possible merger with Telekom Austria. While talks were
called off by both parties, Swisscom continues to believe that Telekom Austria would be a promising
investment. More recently, Swisscom submitted a bid to acquire a 51% interest in Cesky Telecom
a.s., which the Czech government had put up for auction. However, on April 6, 2005, the Czech
government approved the sale to another bidder. In addition to considering such larger
investments, Swisscom may also make venture capital type investments in companies at various stages
of development in promising sectors of the telecommunications industry. Should no suitable
investment opportunity arise, Swisscom intends, in accordance with its dividend policy, to return
capital it does not require to its shareholders. See Item 8: Financial Information  Dividend
Policy. 21




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##### Table of Contents



Overview of Revenue by Business Segment In 2004, Swisscom operated in the following business segments:  

Fixnetprovides fixed-line voice and Internet access services as well as a
comprehensive range of fixed-line telecommunication services to residential and
business customers. In addition, Fixnet provides a wide range of wholesale services.
Fixnet also offers a variety of other services, including the sale of customer
equipment, the provision of leased lines and the operation of a directories database.

Mobileprovides mobile telephony, data and value-added services in Switzerland.

Enterprise Solutionsprovides national and international fixed-line voice telephony
services to business customers and offers leased lines, Intranet, private network and
other services.

Othercovers mainly the sale of corporate voice communications equipment through
Swisscom Systems, the provision of IT services through Swisscom IT Services as well as
the provision of high-speed Internet access to business travelers across Europe through
Swisscom Eurospot.

Corporateincludes Swisscoms headquarter functions, group-company shared services,
property rentals through the real estate company Swisscom Immobilien and Swisscoms
programs under its social plan. The following table sets forth external revenue generated by Swisscoms segments for the periods
indicated. Year Ended December 31,CHF in millions
    
    2002
    
    
    2003
    
    
    2004Fixnet
    
    
    4,907
    
    
    
    4,601
    
    
    
    4,555Mobile
    
    
    3,434
    
    
    
    3,511
    
    
    
    3,679Enterprise Solutions
    
    
    1,167
    
    
    
    1,081
    
    
    
    987Other
    
    
    833
    
    
    
    761
    
    
    
    768Corporate
    
    
    74
    
    
    
    72
    
    
    
    68Total
    
    
    10,415
    
    
    
    10,026
    
    
    
    10,057
 In 2004, the following effects had an impact on the structure of Swisscoms reporting segments. The
previous years figures have been restated to reflect these changes:  

Sale of debitel.As a result of the sale of debitel in June 2004, the former
reporting segment debitel is now reported separately as a discontinued operation in the
consolidated financial statements. See   Divestments/Discontinued Operations 
debitel.

Customer transfer from Enterprise Solutions to Fixnet.Effective January 2004,
approximately 46,000 business customers with primarily standard traffic needs were
transferred to the Fixnet segment from Enterprise Solutions, which has increased its
focus on large business customers with complex communication needs.

Direct mobile interconnection.Since February 2003, direct mobile interconnection
has been available, and Swisscom Mobile and other mobile network operators are now able
to terminate their traffic directly on each others networks rather than through
Fixnet, which had been the intermediary for such traffic. In 2004, Swisscom Mobile
entered into an agreement with a further mobile network operator. As a result, the
revenues and costs associated with this counterparty, which in the past had been
recorded as external revenues and costs in the Fixnet segment are now recorded as
external revenues and costs in the Mobile segment. 22




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##### Table of Contents



Fixnet Through Fixnet, Swisscom is the leading provider of fixed network telecommunication services in
Switzerland, which it provides to residential, business and wholesale customers. In 2004, Fixnet
generated total revenue of CHF 5.7 billion, including sales of CHF 1.2 billion to other Swisscom
business segments. With external revenues of CHF 4.6 billion, Fixnet accounted for 45% of
Swisscoms consolidated net revenue in 2004. Services provided by Fixnet include:  

Access.Fixnet provides access services, including traditional analog, digital and
broadband access services, to residential and business customers. As of December 31,
2004, Fixnet provided 3.9 million fixed-line telephone access lines, including 0.9
million ISDN lines, and offered ADSL access over 0.8 million subscriber lines.

Retail Traffic.Fixnet provides national and international fixed-line voice
telephony services to residential and business customers. In 2004, Fixnet carried an
aggregate of 11.5 billion minutes of national telephony and dial-up Internet traffic
and 1.0 billion minutes of outgoing international traffic generated by residential
customers.

Wholesale Traffic.Fixnet provides a wide range of wholesale services to Swisscoms
other segments (which results in the recognition of intersegment revenue) and to other
national and international telecommunications providers. In 2004, Fixnet billed a total
of 17.1 billion minutes of national interconnection and transit traffic and terminated
1.5 billion minutes of outgoing international traffic and 1.5 billion minutes of
incoming international traffic.

Other Traffic.Fixnet operates public payphones, provides operator services and
offers prepaid calling cards.

Other.Fixnet also offers a variety of other services, including the sale of
customer equipment, the provision of leased lines and the operation of a directories
database. The following table sets forth external revenue generated by Fixnet for the periods indicated. Year Ended December 31,CHF in millions
    
    2002
    
    
    2003
    
    
    2004Access
    
    
    1,581
    
    
    
    1,715
    
    
    
    1,876Retail traffic
    
    
    1,405
    
    
    
    1,329
    
    
    
    1,240Wholesale traffic
    
    
    942
    
    
    
    677
    
    
    
    691Other traffic
    
    
    208
    
    
    
    247
    
    
    
    158Other
    
    
    771
    
    
    
    633
    
    
    
    590Total
    
    
    4,907
    
    
    
    4,601
    
    
    
    4,555
 Effective January 2004, Enterprise Solutions increased its focus on large business customers with
complex, solution-oriented telecommunication needs, while Fixnet continues to deliver standardized
telecommunication products for the residential and small business customer markets. As a result,
the revenues and costs generated by 46,000 customers with primarily standard traffic needs were
transferred from Enterprise Solutions to Fixnet. Prior years have been restated accordingly. In order to strengthen its competitive position in the retail fixed-line market, Swisscom aims to
increase usage of its broadband access services and to strengthen customer loyalty. Swisscom
believes that demand for broadband connectivity services continues to increase and will remain a
future source of growth. Swisscom is actively marketing broadband connectivity in the retail market
under the brand name Bluewin. Swisscom believes that combining its core activities voice and
Internet with multimedia services such as TV and video on demand, a so-called triple-play strategy,
will be an effective means of competing with cable network operators. Swisscom carried out a
3-month field trial ending February 2005 of providing television to 600 of its users and plans to
introduce the 23




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new multimedia services on a commercial basis during the second half of 2005. In addition, Swisscom
seeks to optimize product distribution and to promote customer care through direct and indirect
sales channels, such as Swisscom shops and specialized outlets. Swisscom also operates a direct
marketing center. Access Fixnet provides homes and businesses in Switzerland with analog and digital telephone access lines
as well as a variety of supplementary services. In addition, Swisscom offers Internet access
services to residential and business customers as well as broadband Internet access services to
other Internet service providers on a wholesale basis. In 2004, external revenue from access
services amounted to CHF 1,876 million. Voice Access Swisscoms analog voice access service, provided over the public switched telephone network (PSTN),
consists of providing connections between a customers premises and the PSTN for basic voice,
facsimile and Internet services. Each PSTN access line provides a single telecommunications
channel. Swisscom offers its PSTN customers a wide range of supplementary services including call
forwarding, call waiting, engaged line callback, three-party conference calling and caller
identification suppression services. In 2004, PSTN services comprised 48% of total access revenue. Swisscoms digital voice access services are provided over the integrated services digital network
(ISDN). ISDN allows a single access line to be used for a number of purposes simultaneously,
including voice, Internet, data and facsimile transmission. ISDN provides higher quality
connections with faster transmission of signals, and increases the bandwidth capacity of the access
network. ISDN also supports a full range of supplementary services. Swisscom offers both basic
ISDN access lines with two channels and primary ISDN access lines with thirty channels. The following table sets forth, for the periods indicated, selected data relating to access lines
provided by Fixnet to residential and business customers. As of December 31,In thousands of lines(1)
    
    2002
    
    
    2003
    
    
    2004PSTN(2)
    
    
    3,163
    
    
    
    3,086
    
    
    
    3,007ISDN(3)
    
    
    911
    
    
    
    924
    
    
    
    924Total access lines
    
    
    4,074
    
    
    
    4,010
    
    
    
    3,931Total access channels
    
    
    5,335
    
    
    
    5,261
    
    
    
    5,175
   (1)
    
    Based on lines in service, including courtesy lines and service lines.(2)
    
    Each PSTN line provides one access channel.(3)
    
    ISDN lines consist of basic ISDN lines and primary ISDN lines. A basic ISDN line provides two
access channels and a primary ISDN line provides 30 access channels. ISDN growth has slowed in recent years and stagnated in 2004 because of high ISDN penetration
and the increasing use of ADSL services, which are also offered over PSTN line. In addition, the
total number of access lines declined primarily due to the market entry of Cablecom, Switzerlands
major cable network operator, which offers telephony and Internet services over its own
infrastructure. Swisscom expects this trend to continue. Swisscom does not receive revenue in connection with the initial in-house installation of access
lines, which is generally performed by independent contractors. Most available supplementary
services are included in the monthly subscription. 24




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##### Table of Contents



The following table sets forth information relating to Swisscoms charges in effect in 2004 for the
provision of access services. CHF (including VAT)
    
    Activation Fee
    
    
    Monthly FeePSTN
    
    
    43.00
    
    
    
    25.25ISDN basic
    
    
    43.00
    
    
    
    43.00ISDN primary
    
    
    914.60
    
    
    
    538.00
 Under the terms of the Universal Service license, the provision of ISDN access is included within
Swisscoms Universal Service obligation and is subject to a price ceiling of CHF 40.00 (excluding
VAT). PSTN access is subject to a price ceiling of CHF 23.45 (excluding VAT). Additional charges
may be levied for the provision of supplementary services. See   Regulation  Universal Service
and   Regulation  Price Ceilings for Universal Service. In October 2004, the First Chamber of the Swiss Parliament passed a bill with significant
amendments to the Telecommunications Act, which is currently under consideration by the Second
Chamber of the Swiss Parliament. These amendments would, if adopted into law, require Swisscom to
offer unbundled access to its local loop on a cost-oriented basis. Swisscom does not expect the
amendments to the Telecommunications Act to become effective before mid-2006. See   Regulation 
Unbundling of the Local Loop and Other Access Regulation and Item 8: Financial Information 
Legal Proceedings. Internet Access Under the brand name Bluewin, Swisscom is the leading Internet service provider for retail
customers in Switzerland, offering broadband Internet access over asynchronous digital subscriber
lines (ADSL) and narrowband Internet access as a dial-up service over ISDN and PSTN lines. In
addition, Swisscom Fixnet provides broadband Internet access to other Internet service providers on
a wholesale basis. The following table provides information about the number of access subscribers for the periods
indicated: Year Ended December 31,In thousands of lines/subscribers
    
    2002
    
    
    2003
    
    
    2004Bluewin ADSL lines
    
    
    109
    
    
    
    274
    
    
    
    490Wholesale ADSL lines
    
    
    86
    
    
    
    213
    
    
    
    312Total ADSL lines
    
    
    195
    
    
    
    487
    
    
    
    802Bluewin narrowband subscribers(1)
    
    
    751
    
    
    
    670
    
    
    
    523
   (1)
    
    Includes active access subscribers only, defined as all paid-access subscribers and those
subscribers to Swisscoms free-access services who have accessed their accounts at least once
in the past 40 days. In recent years, growth in the access area has come from ADSL technology, which Swisscom
believes will also be the source for future growth. ADSL offers significantly higher transmission
speeds compared to ISDN. Because ADSL may be offered over a traditional PSTN line, ADSL growth may
lead to a decline in the number of ISDN lines. Through Bluewin, Swisscom offers residential Internet users and small businesses Internet access
service packages facilitating high-quality Internet access using both narrowband and broadband
access technologies, IP-based communication services, personal information management services and
shared hosting services. Internet access over ADSL is offered on a flat-fee basis, depending on
the size of bandwidth. Bluewins strategy is to focus on its core competencies within Switzerland. In particular, Bluewin
seeks to increase the number of subscribers to ADSL access services by offering new ADSL services
and increasing significantly the capacity of its ADSL lines. Following the so-called triple play
strategy of combining its core activities with 25




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multimedia services, Bluewin plans to offer television and video on demand during the second half
of 2005. In order to evaluate the technological feasibility and market appeal of offering
television over its broadband infrastructure, Swisscom carried out a 3-month field trial ending
February 2005 of providing television to 600 of its broadband subscribers. In preparing the market
for Swisscoms entry into the TV business, in March 2005 Swisscom launched a first product offering
related to TV services which can be used over the cable network. In March 2002, two of Swisscoms competitors filed a petition with the Competition Commission,
alleging that Swisscom is illegally subsidizing Bluewin and abusing its dominant position in both
the retail and wholesale market for ADSL services. On May 6, 2002, the Competition Commission
issued a provisional order requesting Swisscom to offer its competitors the same discounts as it
gives to Bluewin and launched an investigation. On December 15, 2003, the Competition Commission
issued a decision, in which it determined abusive behavior by Swisscom of its market-dominant
position and enjoined Swisscom from giving any discounts exclusively to Bluewin. In February 2004,
Swisscom lodged an appeal against this decision. On January 13, 2005, Swisscom filed a petition to
reconsider the provisional order on the grounds that market conditions have changed. See Item 8:
Financial Information  Legal Proceedings  Other Regulatory Proceedings". Retail Traffic Swisscom provides comprehensive national and international calling services to residential and
business customers. Fixnet considers small and medium sized enterprises, depending on the
complexity of their telecommunications needs, to be residential customers. External revenue
attributable to national traffic and outgoing international traffic originating on the fixed-line
network generated by Fixnet customers amounted to CHF 1,240 million in 2004. Retail traffic has declined in recent years, mainly due to a significant decline in local area
traffic and Internet traffic. Local area traffic declined in 2002 and 2003 mainly as a result of
the numbering plan introduced in 2002, which allows subscribers who have pre-selected an
alternative carrier to have their local calls automatically routed over that carriers network. In
2004, the decline in local area traffic was a result of the fact that Internet is increasingly
accessed via Internet dial-up numbers, offered by Internet service providers, and ADSL lines, with
the result that the associated traffic is no longer included in Swisscoms local area traffic
statistics. The migration to ADSL lines is also the reason for the decline in Internet traffic.
Swisscom expects retail traffic to continue to decline. Swisscom believes it is well-positioned to remain the leading provider of national traffic and
outgoing international call services in the Swiss market. To this end, Swisscom continues to
implement new measures designed to maintain its market share in national and international
telephony traffic and to increase customer loyalty. In 2004, Swisscom intensified its efforts to
retain and win back customers through direct marketing campaigns and new pricing models. Traffic.The following table sets forth, for the periods indicated, selected information relating
to Fixnets national and outgoing international fixed voice telephony traffic generated by
residential customers. Year Ended December 31,In millions of minutes(1)
    
    2002
    
    
    2003
    
    
    2004Local and long distance traffic
    
    
    8,804
    
    
    
    7,732
    
    
    
    7,205Fixed-to-mobile traffic(2)
    
    
    907
    
    
    
    950
    
    
    
    949Internet traffic
    
    
    5,766
    
    
    
    4,842
    
    
    
    3,323Total national retail traffic
    
    
    15,477
    
    
    
    13,524
    
    
    
    11,477International retail traffic(3)
    
    
    961
    
    
    
    968
    
    
    
    955Total retail traffic
    
    
    16,438
    
    
    
    14,492
    
    
    
    12,432
   (1)
    
    Includes traffic on courtesy and service lines. Does not include traffic generated from
Swisscom-operated public payphones.(2)
    
    Includes traffic from calls from the fixed-line network to private user networks.(3)
    
    Based on minutes of outgoing international traffic as determined for retail customer billing
purposes. Does not include international wholesale traffic originating outside Switzerland. 26




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##### Table of Contents



In 2004, 48% of the outgoing international traffic generated by residential customers
(excluding outgoing mobile traffic) was directed toward three countries: Germany, France and Italy. Tariffs.Swisscoms national traffic charges are calculated on the basis of call duration, time of
day and day of the week, and whether the call is fixed-to-fixed or fixed-to-mobile. Recently,
Swisscom launched new pricing models, under which customers can opt to pay a monthly subscription
fee, allowing them to make both national as well as international calls at reduced rates or even
for free at certain off-peak times. Local area and national long distance calls in Switzerland are billed at the same rate as follows: CHF/minute(1)
    
    Peak(2)
    
    
    Off-Peak(3)National single tariff
    
    
    0.08
    
    
    
    0.04
   (1)
    
    Calls are charged in incremental steps of CHF 0.10 without a set-up charge.(2)
    
    Monday to Friday from 8:00 a.m. to 5:00 p.m.(3)
    
    Monday to Friday from 5:00 p.m. to 8:00 a.m., as well as on Saturdays, Sundays and holidays. The following table sets forth information relating to the tariffs billed for fixed-to-mobile
calls: CHF/minute(1)
    
    Peak(2)
    
    
    Off-Peak(3)Fixed-to-mobile tariff
    
    
    0.55
    
    
    
    0.45
   (1)
    
    Calls are charged in incremental steps of CHF 0.10 without a set-up charge.(2)
    
    Monday to Friday from 7:00 a.m. to 7:00 p.m.(3)
    
    Monday to Friday from 7:00 p.m. to 7:00 a.m., as well as on Saturdays, Sundays and holidays. Swisscoms international calling charges are generally based on duration, destination and day
of the week. In recent years, Swisscom has substantially reduced its international calling charges,
both through tariff reductions and volume discounts. Swisscom has a weekday rate applicable from
Monday to Friday and a weekend rate for Saturday and Sunday and five tariff groups. The following table sets forth information relating to Swisscoms international tariffs in effect
at the end of December 2004 for calls to the countries generating the most outgoing international
traffic: In CHF/minute, including VAT(1)
    
    Weekday
    
    
    WeekendGermany, Austria, France, Italy, United Kingdom, United States
    
    
    0.12
    
    
    
    0.10Portugal, Spain, Netherlands
    
    
    0.25
    
    
    
    0.20Serbia, Montenegro, Russia
    
    
    0.65
    
    
    
    0.50
   (1)
    
    Calls are charged in incremental steps of CHF 0.10 without a set-up charge. A surcharge is
applied for calls to foreign mobile networks. Swisscom offers a variety of promotions, such as discounts for evening and weekend calls and
temporary discounts, designed to improve price perception and reduce churn. Under its Universal Service obligation, Swisscom is required to provide, subject to price ceilings,
comprehensive local and national long distance calling service throughout Switzerland until
December 31, 2007. Swisscoms current tariffs are well below the applicable ceiling. See  
Regulation  Price Ceilings for Universal Service. 27




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##### Table of Contents



Wholesale Traffic Swisscom provides various national and international wholesale services to other telecommunications
providers, including network operators, service providers and resellers. Swisscoms portfolio of
national wholesale services includes basic interconnection services, which Swisscom offers to all
licensed operators, registered service providers and others entitled to interconnection under the
Telecommunications Act. See   Regulation  Interconnection by a Market-Dominant Provider.
Swisscoms international wholesale business consists of terminating incoming international traffic
and international termination traffic. Since February 2003, direct mobile interconnection has been available, and Swisscom and other
mobile network operators are now able to terminate their traffic directly on each others networks.
As a result, traffic between the networks of contracting operators is now routed directly and is
no longer terminated via the national and international network of Fixnet Wholesale. In 2004,
Swisscom entered into an agreement with a further mobile operator. As a result, the revenues and
costs associated with this counterparty, which in the past had been recorded as external revenues
and costs in the Fixnet segment, were recorded as external revenues and costs in the Mobile segment
in 2004. Prior years have been restated accordingly. Since the introduction of direct mobile
interconnection, Swisscoms competitors have been able to offer its customers direct mobile
interconnection which resulted in a decrease in traffic over Swisscoms network. The international wholesale business is characterized by low margins due to overcapacity and strong
competition. In February 2005, Swisscom and Belgacom, the leading telecommunications company in
Belgium, signed an agreement to combine their international wholesale activities. Effective July 1,
2005, Swisscom will contribute its international wholesale business and international network in
return for a 28% interest in the new business. Accordingly, beginning July 2005, Fixnets
wholesale business will only consist of its current wholesale national business. Wholesale National Swisscom has a standard interconnection offer which it markets to all licensed operators,
registered service providers and others eligible for interconnection under the Telecommunications
Act, and complements this standard offer with a portfolio of extended interconnection services and
wholesale products. In 2004, external revenue from national wholesale services amounted to CHF 246
million. The following table sets forth information relating to Fixnets national interconnection and
transit traffic for the periods indicated. Year Ended December 31,In millions of minutes
    
    2002
    
    
    2003
    
    
    2004National wholesale traffic(1)
    
    
    18,491
    
    
    
    17,871
    
    
    
    17,055
   (1)
    
    Based on minutes as determined for customer billing purposes. Includes traffic related to
third party revenues for access, termination and transit services. Swisscoms standard interconnection offer encompasses a set of basic interconnection services
which Swisscom is required to offer under the Telecommunications Act. The standard offer comprises
interconnection between access points on the Swisscom network and competitors points of presence,
originating, terminating and transit services, access to Swisscoms emergency, national and
international directory enquiry services as well as access to Business Numbers of Swisscom and
other service providers. Under the Telecommunication Act, the interconnection rates charged by a market dominant provider
must be cost-oriented, but may include an appropriate return on capital. Interconnection rates are
based on long run incremental costs (LRIC) of an efficient operator and may not include
historical costs. See   Regulation  Interconnection by a Market Dominant Provider. 28




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##### Table of Contents



The following table sets forth information relating to Fixnets interconnection prices for the
periods indicated. Year Ended December 31,CHF/minute(1)
    
    2002
    
    
    2003
    
    
    2004Regional termination
    
    
    0.0143
    
    
    
    0.0130
    
    
    
    0.0114National termination
    
    
    0.0218
    
    
    
    0.0203
    
    
    
    0.0186Regional carrier selection
    
    
    0.0144
    
    
    
    0.0130
    
    
    
    0.0115National carrier selection
    
    
    0.0219
    
    
    
    0.0203
    
    
    
    0.0187
   (1)
    
    Includes set-up charge. Calculated based on the weighted average price of a call of four
minutes duration, whereby the traffic split in peak, off-peak and night calls was taken into
consideration. In 2004, Swisscom reduced its standard interconnection rates by up to 13%. For 2005, Swisscom
announced further reductions of interconnection rates of up to 7%. Swisscom believes that its
interconnection rates are in line with the European average and represent a fair, transparent and
consistent implementation of the applicable regulatory requirements. Swisscom expects to continue
to adapt its interconnection charges from time to time as it realizes further cost savings through
network optimization or improvements in efficiency. Swisscom has regularly been involved in legal proceedings relating to its interconnection
obligations. In November 2003, ComCom issued decisions requiring Swisscom to lower interconnection
prices with retroactive effect for the years 2000 to 2003 by 25-35%. Swisscom lodged an appeal
against this decision with the Federal Court. Swisscoms competitors, TDC and WorldCom also filed
an appeal demanding further reductions than decided by ComCom. In October 2004, the Federal Court
overturned the ComCom decision on procedural grounds and remanded the petitions for re-hearing
before ComCom. For further information on legal proceedings relating to interconnection, see Item
8: Financial Information  Legal Proceedings. Incoming International Traffic Swisscom receives payments from other carriers for its role in terminating inbound international
traffic under a specific accounting rate system. With growing competition resulting from market
liberalization, accounting rate levels have fallen significantly in liberalized markets. This has
had the effect of reducing Swisscoms revenue from the termination of incoming international
traffic. In 2004, external revenue from incoming international traffic amounted to CHF 200
million. Swisscom has jointly invested in over 60,000 circuits which it shares with about 150 other
international operators and has a variety of traffic volume agreements with such operators. Under
these agreements, the parties agree upon tailor-made volume deals to mutually secure the incoming
traffic streams. The following table sets forth information relating to Fixnets incoming international traffic in
minutes for the periods indicated. Year ended 31 December,In millions of minutes
    
    2002
    
    
    2003
    
    
    2004Incoming international traffic(1)
    
    
    1,837
    
    
    
    1,607
    
    
    
    1,521
   (1)
    
    Minutes of incoming traffic terminated in Switzerland as determined for international
settlement purposes. In 2004, 65% of incoming international traffic originated from five countries: Germany, United
States, France, United Kingdom and Italy. International Termination Traffic In the area of international termination traffic, Swisscom offers two services: a standard service,
which provides least cost routing to a wide range of destinations, and a more expensive premium
service, which provides high quality transit services to substantially all global destinations. As
an outgrowth of market liberalization, Swisscom 29




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also provides termination of outgoing international traffic to other national network operators and
service providers. In 2004, external revenue from international termination traffic amounted to
CHF 245 million. Swisscom provides wholesale voice services through its European network (EOSNET), which links key
European cities along routes with heavy international traffic. For a description of the European
network, see   Networks and Technology  Fixed-Line Networks. The following table sets forth Swisscoms international termination traffic in minutes for each of
the periods indicated. Year Ended December 31,In million of minutes
    
    2002
    
    
    2003
    
    
    2004International termination traffic(1)
    
    
    1,878
    
    
    
    1,188
    
    
    
    1,508
   (1)
    
    Minutes of outgoing traffic terminated outside of Switzerland. International termination traffic increased in 2004 as a result of expanded marketing and
sales activities. The substantial volume decrease in 2003 reflects the discontinuation of its local
sales offices in Europe and the sale of its international point of presence in the United States in
2002. Other Traffic Swisscom generates other traffic revenue from the operation of private and public payphones (which
Swisscom is required to maintain as part of its Universal Service obligation), operator services
and from the sale of pre-paid cards. In 2004, Swisscom realized external revenue of CHF 158 million
from these services. Other Other services comprise the sale of customer equipment, the provision of leased lines, the
operation of a directories database and a variety of other services. Customer Equipment Swisscom is a leading provider of customer equipment to residential customers in the Swiss
telecommunications market. Swisscom purchases from third-party suppliers all of the
telecommunications equipment that it sells or rents under the Swisscom brand name. In addition,
Swisscom sells telecommunications equipment under third-party brand names. Swisscom offers
residential customers primarily PSTN and ISDN corded and cordless telephone handsets and facsimile
machines. Swisscom also offers mobile handsets and a variety of other products through its Swisscom
shops, including ADSL modems. In 2004, sales of customer equipment generated external revenue of
CHF 250 million. The most important distribution channel for Swisscoms customer equipment is the Swisscom shops. In
addition, Swisscom uses third-party distribution channels. Leased Lines Swisscom offers a full portfolio of leased lines throughout Switzerland. Customers can choose
among a wide range of bandwidths and a selection of different service levels. Swisscom has
contracts with approximately 70 wholesale customers in Switzerland. Business customers, the primary
customer segment for leased lines, are targeted through Enterprise Solutions. See   Enterprise
Solutions  Networking. In October 2004, the First Chamber of the Swiss Parliament passed a bill
with significant amendments to the Telecommunications Act, which is currently under consideration
by the Second Chamber of the Swiss Parliament. These amendments would, if adopted into law, require
Swisscom to offer access to leased lines on a cost-oriented basis. See   Regulation  Unbundling
of the Local Loop and Other Access Regulation and Item 8: Financial Information  Legal
Proceedings. In 2004, the provision of leased lines generated external revenue of CHF 136
million. 30




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##### Table of Contents



Directories Swisscom Directories operates, maintains and sells Switzerlands most comprehensive directories
database, the electronic phonebook (Elektronisches Telefonbuch ETV ®or ETV). ETV includes over
6 million residential and business entries and is updated daily with subscriber information from
Switzerlands major telecommunications service providers. Swisscom Directories is also responsible
for the production, marketing and distribution of printed telephone books, as well as the
operation, production and development of electronic directories and the online yellow pages.
Additionally, Swisscom Directories has primary responsibility for the development and marketing of
customized directories solutions for small and medium-sized enterprises and the directories
industry. In 2004, Swisscom Directories generated external revenue of CHF 113 million. The directories business is regulated under the Telecommunications Act. Since 2001, every
telecommunication service provider is required to provide its regulated data, including daily data
updates, not only to directories publishers, as was the case in the past, but to any interested
party and for any use. In 2002, Swisscom Directories was appointed by all major telecommunication
providers as their data agent and is now responsible for centrally handling the provision of
regulated data. In connection with an investigation to determine whether Swisscom Directories
offered its directories database to third parties at prices and on conditions that prevent them
from effectively using the data, the Competition Commission determined that Swisscom Directories
has a market-dominant position, but decided not to pursue the matter. Swisscom appealed the finding
that it has a market-dominant position. The appeal is still pending. See   Item 8: Financial
Information  Legal Proceedings. Other Other revenue comprises mainly Internet narrowband traffic to third-party ISP numbers. In
addition, it provides a range of value added services and data services to residential customers.
In 2004, external revenue from these services amounted to CHF 91 million. Competition In the area of fixed network telephony and related services, Swisscom faces intense competition,
particularly in the national and international calling markets. In 2004, price competition
intensified due to increased competition from cable network operators, in particular the entry into
the fixed-line market of Cablecom, the largest cable network operator in Switzerland. Swisscom
expects price competition to intensify in 2005 due to increased competition from cable network
operators and Internet service providers. Access. Swisscom did not face significant competition in the residential access market until
recently, mainly due to the fact that Swisscom has not yet been required to unbundle its local
loop. However, competition has increased since mid-2004, when Cablecom started offering telephony
services over cable on a commercial basis und is thereby directly competing with Swisscoms PSTN
and ISDN access services. In October 2004, the First Chamber of the Swiss Parliament passed a bill
with significant amendments to the Telecommunications Act, which is currently under consideration
by the Second Chamber of the Swiss Parliament. These amendments would, if adopted into law, require
Swisscom to offer unbundled access to its local loop on a cost-oriented basis. See   Regulation
 Unbundling of the Local Loop and Other Access Regulation and Item 8: Financial Information 
Legal Proceedings  Proceedings Relating to Unbundling of the Local Loop. Unbundling of the local
loop would give competitors direct access to Swisscoms customers and the ability to offer them a
full range of services without the need to use Swisscom as an intermediary. In addition to loss of
access revenues, unbundling of the local loop is likely to lead to increased competition for
national and international traffic as customers would for the first time be able to choose among
competing full-service providers of fixed-line telephony. Swisscoms principal competitors in the Internet access market are TDC Switzerland (Sunrise) and
Cablecom. TDC offers narrowband dial-up access through its own network as well as ADSL broadband
access through a reselling agreement with Swisscom Fixnet. Cablecom offers narrowband dial-up
access through its subsidiary SwissOnline as well as broadband access over its cable network. 31




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##### Table of Contents



In the market for broadband access, Swisscom faces stiff competition from cable network operators
offering cable modem applications. With the rollout of broadband mobile services based on UMTS
technology, Swisscom could face competition in the future from providers of broadband mobile
services. In order to compete with other broadband access operators more effectively, Swisscom doubled the
capacity of its ADSL services by March 2004. In order to promote ADSL on the wholesale market as
well, Swisscom did not charge its wholesale customers a set-up fee for most of 2004. In connection
with the tariff reduction introduced in March 2002, two of Swisscoms competitors filed a petition
with the Competition Commission, alleging that Swisscom is illegally subsidizing Bluewin and
abusing its dominant position in both the retail and wholesale market for ADSL services. In
December 2003, the Competition Commission determined that Swisscom has abused its market dominant
position for ADSL services and enjoined Swisscom from giving any discounts exclusively to Bluewin.
In February 2004, Swisscom lodged an appeal against this decision. On January 13, 2005, Swisscom
filed a petition to reconsider the provisional order on the grounds that market conditions have
changed. See Item 8: Financial Information  Legal Proceedings  Other Regulatory Proceedings. National Retail Traffic. Swisscom faces increasing competition in the national retail traffic
market mainly due to the market entry of Cablecom. In the local area traffic market, competition
increased in particular in 2002 and 2003 as a result of the introduction of the new numbering plan
in March 2002. Currently, Swisscoms principal competitors in the national retail traffic market
are TDC Switzerland (Sunrise), Tele2, EconoPhone and Cablecom. In 2005, prices are expected to
remain under pressure, mainly due to increased competition from cable network operators and
Internet service providers offering Internet telephony (known as voice over IP) services. Tariffs for fixed to mobile calls, which are accounted for in national traffic, are expected to
come under particular pressure due to regulatory initiatives in the European Union regarding mobile
termination and two proceedings in which Swisscom is involved. See   Regulation  Mobile
Telecommunications. Swisscoms competitors for national long distance service depend on Swisscom for the provision of
wholesale origination and termination access and transit services. As a result, the pricing of
these services has had an important impact on the development of retail competition. Since January
1, 2000, Swisscom has been required to calculate its interconnection costs in any market in which
it is market-dominant on the basis of the long-run incremental cost of an efficient operator and
may no longer include historical costs. As a result, interconnection prices have steadily
declined. Because interconnection rates calculated on the basis of long-run incremental costs only
cover the additional cost to Swisscom of giving other providers access to its network and do not
include the historical costs incurred by Swisscom in building out its network, Swisscoms
competitors may be able to offer retail services at lower prices than Swisscom while still covering
their costs. See  Regulation  Interconnection by a Market Dominant Provider. In November 2003,
ComCom issued decisions requiring Swisscom to lower interconnection prices with retroactive effect
for the years 2000 to 2003 by 25-35%. Swisscom lodged an appeal against this decision with the
Federal Court. In October 2004, the Federal Court issued a decision overturning the ComCom
decisions on procedural grounds and remanding the petitions for re-hearing before ComCom, which
will consider the pricing issue anew. See Item 8: Financial Information  Legal Proceedings. International Retail Traffic.Swisscom also faces strong competition in the outgoing international
calling market. Swisscoms principal competitors in the outgoing international traffic market are
TDC Switzerland (Sunrise), Tele2, EconoPhone and Cablecom, which focus their marketing on offering
reduced rates for calls directed to countries of high traffic volume. The development of
interconnection pricing will also impact competition in the area of outgoing international
telephony. Over the long term, Swisscom expects that additional market share will be lost in the area of
international fixed voice telephony due to the increasing use of voice-over-IP technologies, and
that international rates will come under additional pressure as services based on such technologies
begin to proliferate. Wholesale Traffic.In 2004, Swisscom continued to face increasing competition in the national
wholesale market from various network providers such as Colt and TDC Switzerland (Sunrise),
currently offering services between major Swiss cities and international outgoing services to
resellers. The increasing number of direct interconnection agreements between mobile operators has
also led to a decrease in Swisscoms share of the interconnection market. 32




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In the area of international voice termination, Swisscom competes with low-cost operators. These
operators are equipped with advanced technology that allows easy and quick re-routing of calls to
take advantage of least-cost routes shortly after they emerge. These trends have resulted in
further price erosion, which could only partially be compensated for by increased traffic. Other Traffic.In the public and private payphones market, Swisscom does not face significant
competition. However, the overall market for public and private payphone use is expected to
decline further due to increasing use of mobile phones and phone cards issued by other operators. In the market for operator services, Swisscom faced only limited competition in 2004. Swisscom is
allowed to use the well-known access number 111 until the end of 2006. Swisscom will thereafter
have to switch to a new generic service number, which is expected to result in a significant
reduction in traffic volumes for its operator services. Customer Equipment.In the area of customer equipment, Swisscom competes directly with equipment
manufacturers and third-party vendors. A number of Swisscoms principal suppliers of telephones
and other customer equipment, including mobile handsets, also compete with Swisscom. Vigorous
competition and rapid technological change in the sector, as well as increasing competition from
companies that are also active in other sectors of the telecommunications market, have led to
falling prices. Leased Lines.In 2004, Swisscom continued to face intense competition in the market for national
leased lines, in particular in areas with high data volume. Swisscoms main competitors in this
market are Cablecom, Sunrise and Colt. In October 2004, the First Chamber of the Swiss Parliament
passed a bill with significant amendments to the Telecommunications Act that would, if adopted into
law, require Swisscom to offer interconnection of leased lines on a cost-oriented basis, which is
expected to intensify competition. See   Regulation  Unbundling of the Local Loop and Other
Access Regulation. Directories.Swisscom does not face significant competition in the directories market. However,
barriers to entry are low, particularly in the online directory market. Swisscom Directories
expects to face increased competition from other online directory operators, as well as from
traditional direct marketing companies expanding into the directories market. 33




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##### Table of Contents



Mobile Overview Swisscom Mobile is the leading provider of mobile telephony services in Switzerland, with
3.9million mobile subscribers as of December 31, 2004. In 2004, Swisscoms mobile
activities generated total revenue of CHF 4.4 billion, including sales of CHF 0.7 billion to other
Swisscom business segments. With external revenues of CHF 3.7 billion in 2004, Swisscom Mobile
accounted for 37% of Swisscoms consolidated net revenue. The following table sets forth the external revenue generated by Mobile for the periods indicated. Year Ended December 31,CHF in millions
    
    2002
    
    
    2003
    
    
    2004Base fees
    
    
    698
    
    
    
    685
    
    
    
    691Connectivity voice
    
    
    2,138
    
    
    
    2,221
    
    
    
    2,286Connectivity data and value-added services
    
    
    486
    
    
    
    454
    
    
    
    521Other mobile revenue(1)
    
    
    112
    
    
    
    151
    
    
    
    181Total Mobile
    
    
    3,434
    
    
    
    3,511
    
    
    
    3,679
   (1)
    
    Includes revenue from the sale of handsets sold through sales channels other than Swisscom
shops and from SICAP, a wholly owned subsidiary, which provides prepaid billing services to
mobile network operators. Most of Swisscoms mobile telephony revenue is generated from monthly subscription fees and
traffic charges for mobile voice telephony, which accounted for 81% of its external revenues in the
mobile segment in 2004. With the commercial launch of services enabled by high speed GPRS, PWLAN and UMTS technologies,
Swisscom believes that an increasingly significant portion of its mobile revenue will be generated
by mobile data services, value-added services, Internet access and e-commerce services. In
November 2003, Swisscom implemented the Vodafone live! portal, providing mobile information,
entertainment, community and lifestyle premium services, and Swisscom has added significant new
features to these services since then. Swisscom believes that these services will contribute in the
future to the generation of m-commerce revenue and enhance customer retention. In September 2004,
Swisscom launched a new service enabling seamless data download/synchronization via a PC card
integrating all three mobile broadband technologies (GPRS, PWLAN, UMTS) which Swisscom believes
will contribute in the future to the generation of data revenues. Since February 2003, direct mobile interconnection has been available, and Swisscom and other
mobile network operators are now able to terminate their traffic directly on each others networks
rather than through Fixnet, which had been the intermediary for such traffic. In 2004, Swisscom
entered into an agreement with a further mobile operator. As a result, the revenues and costs
associated with this counterparty, which in the past had been recorded as external revenues and
costs in the Fixnet segment, were recorded as external revenues and costs in the Mobile segment in
2004. Prior years have been restated accordingly. Alliance with Vodafone In connection with the acquisition of a 25% shareholding in Swisscom Mobile AG by Vodafone Group
Plc (Vodafone) effective April 1, 2001, Swisscom Mobile and Vodafone entered into a service
agreement, which set out the terms on which Swisscom Mobile and Vodafone would cooperate in certain
areas. In November 2003, the original service agreement was replaced by a new service agreement
between Swisscom Mobile, Vodafone and Vodafone Marketing Sarl, to reflect the continued and
deepening co-operation between Swisscom Mobile and Vodafone and the development of new technologies
in recent years. Under the service agreement, each of Swisscom Mobile and Vodafone agreed to provide the other with
access to its products and services, and to provide certain consultancy and supporting services in
agreed circumstances. The service agreement also provides for a framework for co-managing
international corporate accounts and co-operation in the area of product development, and gives
Swisscom Mobile the right to use future upgrades of certain services 34




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and enabling platforms developed by the Vodafone group on normal commercial terms even if the
service agreement is terminated. Swisscom Mobile pays an overall fee for all services and products
provided by the Vodafone group companies. In general, all services provided by Swisscom Mobile under the service agreement are to be offered
to Vodafone on terms and conditions equivalent to those offered to other members of the Swisscom
group, while Vodafone is required to offer its services to Swisscom Mobile on terms and conditions
equivalent to those offered to other members of the Vodafone Group of a similar size as Swisscom
Mobile. Furthermore, each of Swisscom Mobile and Vodafone has agreed, subject to certain
exceptions, not to offer the services provided under the service agreement to any other mobile
telecommunications business in any of the Vodafone territories, in respect of Swisscom Mobile, and
any of Switzerland and Liechtenstein, in the case of Vodafone. Swisscom Mobile and Vodafone have also entered into a branding agreement, which sets forth the
terms for mutual use of their trade names and marks. Swisscom believes this strategic alliance enhances its competitive position in the mobile market.
Through this alliance, Swisscom Mobile has access to Vodafone products, services and know-how and
to other relevant global activities in mobile telecommunications. Swisscom Mobile may also
participate in Vodafones worldwide arrangements for the procurement and/or supply chain management
of infrastructure, handsets and other products, which enables Swisscom Mobile to realize cost
savings. In 2004, Swisscom generated service revenue from the co-operation with Vodafone in the amount of
CHF 80 million and paid an amount of CHF 137 million for services purchased from Vodafone. These
payments primarily related to roaming charges that each of Swisscom Mobile and Vodafone paid the
other for the use of the others network by its customers. GSM and the Introduction of Next Generation Mobile Services Swisscoms mobile services are provided using the global system for mobile communications (GSM)
standard, the dominant digital standard in Europe and much of the rest of the world. Swisscom offers its mobile services using both the 900 MHz frequency band and, in urban areas where
the 900 MHz band no longer has the capacity to carry peak traffic, the 1800 MHz frequency band. In 2001, Swisscom completed the implementation of general packet radio service (GPRS) technology in
the network. GPRS is a standard for data transfer on GSM mobile phone networks and utilizes packet
switching technology. In February 2002, Swisscom launched its first commercial GPRS service with a
transmission rate of up to 50 kbit/s. In December 2000, Swisscom was awarded one of four UMTS licenses auctioned in Switzerland, for
which it paid CHF 50 million. Universal mobile telecommunication system (UMTS) is a third
generation mobile radio system that creates additional mobile radio capacity and enables broadband
media applications while also providing high speed Internet access. Under the amended terms of the
UMTS license, each licensee was required to build out its network to achieve 50% population
coverage by the end of 2004. Swisscom reached this milestone in May 2003. Swisscom continues to build out its broadband networks, such as UMTS. In September 2004, Swisscom
launched its commercial UMTS services. Swisscom also invests in capacity enhancements and
functional upgrades of its existing GSM network. For example, in order to further improve its GPRS
services, Swisscom has recently activated Enhanced Data Rates for GSM Evolution (EDGE) technology
in all active GSM locations. Other projects include building additional base stations in tunnels
and along train routes and extending the reach of the networks dual-band capability. For further
information on Swisscoms mobile network, see   Networks and Technology  Mobile
Telecommunications Network. In December 2002, Swisscom introduced a public wireless LAN (PWLAN) service. Swisscom Mobile is the
leading PWLAN network operator in Switzerland, currently operating approximately 800 hotspots in
Switzerland. In 35




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##### Table of Contents



addition, Swisscom Mobile offers access to over 2,700 additional hotspots throughout Europe through
roaming agreements. For more information on these networks and Swisscoms PWLAN services, see 
Networks and Technology  Mobile Telecommunications
Network and  Other  Swisscom Eurospot. In December 1999, the Federal Council adopted an ordinance, known as the NIS Ordinance, which
establishes emission standards to protect the population of Switzerland from non-ionizing radiation
emitted by various sources, including mobile antennae and base stations. In July 2002, the Swiss
Agency for the Environment, Forests and Landscape (BUWAL) issued final recommendations which
provide guidance for enforcement authorities on the appropriate method for measuring
electromagnetic emissions from base stations and masts in the GSM network. In order to comply with
the applicable emission standards and maintain the current level of service, Swisscom has been and
will be required to put up additional antennae. However, Swisscom does not expect the associated
costs in 2005 to be materially different from those incurred in previous years. While the BUWAL
recommendations establish uniform standards for measuring emissions in GSM networks, they do not
address emission standards for UMTS networks. Draft recommendations relating to emission standards
for UMTS networks were published in 2004 and are currently applied. Final recommendations are
expected to be adopted in the course of 2005. Depending on the enforcement recommendations
ultimately adopted, it is possible that additional capital expenditures will be required in
connection with the build out of Swisscoms UMTS network. See  Regulation  Mobile
Telecommunications. Base Fees Swisscoms base fees are generated from the monthly subscription fees paid by Swisscoms mobile
subscribers. The following table shows the total number of subscribers to Swisscoms mobile
services at the dates indicated. As of December 31,In thousands(1)
    
    2002
    
    
    2003
    
    
    2004Postpaid
    
    
    2,298
    
    
    
    2,387
    
    
    
    2,518Prepaid(2)
    
    
    1,307
    
    
    
    1,409
    
    
    
    1,390Total Subscribers
    
    
    3,605
    
    
    
    3,796
    
    
    
    3,908
   (1)
    
    Includes service accounts.(2)
    
    Does not include accounts of any inactive prepaid customer in its subscriber figures. A
customer is deemed inactive after a period of twelve months without making a call or sending a
SMS message. Effective June 2004, all prepaid customers in Switzerland who activated their SIM card after
November 1, 2002, were required by law to register with a mobile operator in order to avoid being
deactivated. As a result, approximately 340,000 customers registered with Swisscom, while
approximately 124,000 customers previously accounted for as prepaid subscribers by Swisscom were
deactivated effective December 31, 2004. Since 1995, the number of mobile customers in the Swiss marketplace has grown annually, with
overall market penetration reaching almost 87% at the end of 2004. Swisscom expects growth in the
mobile market to continue, although at a slower rate in light of high market penetration. With the
growing market penetration, Swisscom focuses increasingly on customer retention. In order to promote customer retention, Swisscom has implemented customer loyalty and win-back
programs, including incentives for twelve and twenty-four month contract commitments, handset
subsidies and handset renewal possibilities, which resulted in a further decline of customer churn.
While Swisscoms mobile business relies primarily on Swisscom shops for sales and marketing, it is
also expanding its use of indirect and alternative sales channels. 36




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Connectivity Voice As the leading provider of mobile telephony services in Switzerland, Swisscom offers its customers
mobile telephony service in Switzerland as well as abroad. Swisscom has roaming agreements with
386 mobile operators worldwide covering 173 countries and earns revenue from those operators when
their subscribers make mobile phone calls in Switzerland. Swisscom also has distribution
agreements with Tele2, a fixed-line and mobile service provider, which sells Swisscom Prepaid Cards
under its own branding, marketing and pricing. Traffic.The table below sets forth, for the periods indicated, the volume of traffic relating to
Swisscoms mobile telephony business. Year Ended December 31,In millions of minutes
    
    2002
    
    
    2003
    
    
    2004Connectivity Voice(1)
    
    
    3,331
    
    
    
    3,335
    
    
    
    3,404
   (1)
    
    Includes minutes from all outgoing calls made by Mobile subscribers as well as service
accounts and traffic generated by service accounts. For information on average monthly minutes of use and average monthly revenue per mobile
customer, see Item 5: Operating and Financial Review and Prospects  Results of Operations by
Segment  Mobile. Principal Products.Swisscom currently offers nine principal mobile products: Natel pro, Natel
international, Natel swiss, Natel budget, Natel easy, Natel easy youth, Natel data basic, Natel
corporate and Natel Corporate Mobile Network (CMN), the last two of which target the business
segment. All products provide Swisscom customers with the full range of available mobile services, allowing
them to make and receive calls within Switzerland or internationally, using the same telephone
number over GSM systems in countries where Swisscom has roaming agreements. The roaming features
also apply to Natel easy, a prepaid service, which does not involve a subscription contract or a
monthly basic charge. From the range of postpaid products, customers can choose the product which
best suits their usage. Natel pro is aimed at customers with high usage throughout the day, whereas
Natel budget is an economical product for low-usage subscribers. Natel CMN allows corporate
customers to establish a virtual private network using special tariff models and short access
numbers. Natel corporate is a postpaid service with monthly fees graduated according to the number
of subscribers within a company. Natal data basic is a special tariff model for the use of PC cards
enabling data traffic only. The following table sets forth, at the dates indicated, subscriber numbers relating to each of
Swisscoms principal mobile products. Year Ended December 31,In thousands
    
    2002
    
    
    2003
    
    
    2004Natel easy
    
    
    1,307
    
    
    
    1,409
    
    
    
    1,311Natel swiss
    
    
    1,352
    
    
    
    1,256
    
    
    
    1,181Natel budget
    
    
    409
    
    
    
    544
    
    
    
    664Natel corporate
    
    
    97
    
    
    
    177
    
    
    
    248Natel international
    
    
    264
    
    
    
    224
    
    
    
    183Natel CMN
    
    
    104
    
    
    
    118
    
    
    
    169Natel easy youth
    
    
    
    
    
    
    
    
    
    
    79Natel pro (former Natel business)
    
    
    73
    
    
    
    64
    
    
    
    54Natel data basic
    
    
    
    
    
    
    4
    
    
    
    20Total subscribers
    
    
    3,605
    
    
    
    3,796
    
    
    
    3,908
 Tariffs.Swisscom offers a variety of tariff and service packages targeting different customer
segments. While headline tariffs have remained stable since a significant tariff reduction for its
principal products at the end of 1999, Swisscom has introduced lower-cost products for residential
and business customers (Natel budget and Natel corporate), which have effectively resulted in an
overall tariff reduction. Because Swisscoms mobile customers can 37




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switch from one tariff to another, which Swisscom believes helps to prevent customer churn, the
introduction of budget services has led to a decline in the number of subscribers to Swisscoms
higher priced services. Swisscom expects that pressure on mobile tariffs, especially in the highly
competitive business segment, will remain fierce in the future. In addition, regulation of mobile
access could result in Swisscom being required to sell to its competitors mobile telephony minutes
for resale on a cost-oriented basis, which would put additional pressure on tariffs. The following table sets forth information relating to Swisscoms tariffs for its principal Natel
products, as in effect at December 31, 2004. All tariffs include VAT. SIMCHF
    
    Card Fee
    
    
    Monthly Base Fees
    
    
    Peak(1)
    
    
    Off Peak(2)
    
    
    Night And Weekend(3)Natel easy(4)
    
    
    40
    
    
    
    
    
    
    
    0.99
    
    
    
    0.90
    
    
    
    0.80Natel swiss
    
    
    40
    
    
    
    25
    
    
    
    0.59
    
    
    
    0.40
    
    
    
    0.20Natel budget(5)
    
    
    40
    
    
    
    15
    
    
    
    0.70
    
    
    
    0.70
    
    
    
    0.70Natel corporate
    
    
    40
    
    
    
    13-73
    (6)
    
    
    0.18-0.99
    (7)
    
    
    0.18-0.99
    (7)
    
    
    0.18-0.99
    (7)Natel international
    
    
    40
    
    
    
    45
    
    
    
    0.40
    
    
    
    0.30
    
    
    
    0.20Natel CMN
    
    
    40
    
    
    
    15-45
    (6)
    
    
    
    (8)
    
    
    
    (8)
    
    
    
    (8)Natel easy youth
    
    
    40
    
    
    
    
    
    
    
    0.75
    
    
    
    0.75
    
    
    
    0.75Natel pro (former
Natel business)
    
    
    40
    
    
    
    75
    
    
    
    0.25/0.15
    (9)
    
    
    0.25/0.15
    (9)
    
    
    0.25/0.15
    (9)Natel data basic(10)
    
    
    40
    
    
    
    10
    
    
    
    0.30
    
    
    
    0.30
    
    
    
    0.30
   (1)
    
    Monday to Friday from 7:00 a.m. to 7:00 p.m., except holidays.(2)
    
    Monday to Friday from 6:00 a.m. to 7:00 a.m. and 7:00 p.m. to 10:00 p.m.(3)
    
    Monday to Friday from 10:00 p.m. to 6:00 a.m., weekends and holidays.(4)
    
    Natel easy customers are charged an initial fee for the SIM card only, and there is no fee
for recharging the card.(5)
    
    Natel budget customers are charged a flat rate for every call, but the monthly basic charge
includes either 15 free minutes or 50 free SMS messages.(6)
    
    The monthly charges for Natel corporate and Natel CMN are staggered according to the total
number of subscriptions within a company.(7)
    
    The minute rates of Natel corporate depend on the chosen base product.(8)
    
    The minute rates of Natel CMN depend on criteria such as destination.(9)
    
    Natel business customers are charged a flat rate for calls irrespective of time or day. All
calls made up to a threshold of 300 minutes per month cost CHF 0.25 per minute and all calls
made in excess of the 300 minute per month threshold cost CHF 0.15 per minute.(10)
    
    Natel data basic is only available for data traffic. For calls placed and received outside Switzerland, all Natel customers were given the option
in 2004 to switch from the surcharge pricing model, under which a roaming surcharge is charged in
addition to the tariffs imposed by the local mobile network operator, to a fixed tariff model,
under which tariffs vary depending on the users geographic zone. This model provides the
customer higher cost transparency and better cost control. Connectivity Data and Value-Added Services Connectivity data and value-added services comprise mainly short messaging services (SMS) and
multimedia messaging services (MMS). Short messaging services (SMS), one of the most popular mobile data services, allows messages with
up to 160 letters to be sent via a digital mobile phone. In 2002, Swisscom launched a multimedia
messaging service (MMS), which is a further development of its SMS service. Swisscom MMS allows
customers to compose, send and receive messages using all forms of media including text, pictures
and audio. Swisscom MMS will enable customer to customer messaging from MMS mobile devices and
personal computers. Swisscom also offers MMS as a wholesale service to third party content
providers. 38




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##### Table of Contents



The table below sets forth, for the periods indicated, the numbers of SMS messages sent. Year Ended December 31,2002
    
    
    2003
    
    
    2004Number of SMS messages (in millions)(1)
    
    
    1,650
    
    
    
    1,847
    
    
    
    1,986
   (1)
    
    Includes service accounts and traffic generated by service accounts. Does not include
wholesale SMS messages. The new mobile data service Vodafone live! allows customers to take and send picture messages,
download games and polyphonic ringtones and to access information and entertainment services. In
2004, additional features were introduced such as video telephony and live television. These
mobile entertainment and mobile data services are continually upgraded either globally through
Vodafone or locally through Swisscom. Swisscom aims to be active throughout the mobile data value chain. Swisscom is therefore opening
standardized interfaces to enable platforms which can be used by third parties to offer mobile data
and other services to Swisscom mobile subscribers. Examples of such services include premium
priced SMS and MMS, which can be enriched with information based on the location of the subscriber,
and point of sale payment through mobile handsets. Other Customer Equipment Sales.Revenue from sales of mobile handsets through Swisscom shops is
accounted for in Swisscoms Fixnet segment. All other revenue from the sale of mobile handsets is
allocated to Mobile. SICAP AG.SICAP AG, a wholly owned subsidiary of Swisscom Mobile AG provides prepaid billing
services to mobile network operators worldwide, including so-called over-the-air solutions, through
which prepaid GSM SIM-card settings can be modified via SMS. Competition In its mobile business, Swisscom faces competition primarily from the two other original mobile
licensees in Switzerland, Orange and TDC Switzerland (Sunrise). In December 2003, ComCom awarded
GSM licenses to two other competitors, Tele2 and In&Phone, which will further intensify competition
in the mobile business. Tele2 is expected to launch a city network in Zurich in June 2005 and
plans to expand its services to other cities either by building out its own network or by entering
into national roaming agreements with the other mobile network operators. Swisscom expects competition, especially for business customers, to remain strong in 2005 due to
increased tariff pressure and competing enhanced data solutions. Competition in the residential
segment is expected to be driven by handset subsidies as well as by new competitive price plans,
which Tele2 has announced in December 2004. In the future, Swisscom expects to face competition in the provision of GPRS and UMTS services from
Sunrise and Orange, both of which hold Swiss UMTS licenses. As in the case of fixed-line voice telephony, competition in the mobile market has been facilitated
by provisions of the Telecommunication Act and related ordinances requiring that Swisscom offer
easy access and number portability. Although equal access is also mandated under the applicable
regulations, ComCom has provisionally suspended the implementation of equal access in the mobile
network until technical developments and international standards allow its implementation. 39




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Enterprise Solutions Overview Enterprise Solutions is the leading provider of fixed network telecommunication services to
business customers in Switzerland. In 2004, Enterprise Solutions generated total revenue of CHF
1.1 billion, including sales of CHF 0.1 billion to other Swisscom business segments. With external
revenues of CHF 1 billion in 2004, Enterprise Solutions accounted for 10% of Swisscoms
consolidated net revenue in 2004. Services provided by Enterprise Solutions include:  

National and International Traffic.Enterprise Solutions offers national and
international fixed-line voice telephony services to business customers. In 2004,
Enterprise Solutions carried an aggregate of 2.1 billion minutes of national telephony
traffic and 0.4 billion minutes of outgoing international traffic generated by business
customers.

Networking.In the area of networking, Enterprise Solutions offers national and
international leased lines, Intranet services, as well as national and international
(through Infonet Switzerland) private network services.

Inhouse and Processes.Inhouse and Processes services comprise the provision of
Business Numbers, which business customers use to provide their customers with access
to information services, and system integration services.

Other.Enterprise Solutions also offers a variety of other services, including
consulting, business Internet, telecommunication infrastructure outsourcing and public
data network services. Effective January 1, 2005, Enterprise Solutions was merged with Swisscom Systems, formerly
accounted for under Other, to form a new business segment named Swisscom Solutions. The following table sets forth external revenue generated by Enterprise Solutions for the periods
indicated. Year Ended December 31,CHF in millions
    
    2002
    
    
    2003
    
    
    2004National and international traffic
    
    
    382
    
    
    
    344
    
    
    
    297Networking
    
    
    551
    
    
    
    521
    
    
    
    460Inhouse and processes
    
    
    102
    
    
    
    89
    
    
    
    84Other
    
    
    132
    
    
    
    127
    
    
    
    146Total
    
    
    1,167
    
    
    
    1,081
    
    
    
    987
 Depending on a customers size and the complexity of its communication needs, Enterprise Solutions
addresses its business customers through a key-account management team, direct and indirect sales
channels. Effective January 2004, Enterprise Solutions increased its focus on large business customers with
complex, solution-oriented telecommunication needs, while Fixnet continues to deliver standardized
telecommunication products for the residential and small business customer markets. As a result,
the revenues and costs generated by 46,000 customers with primarily standard traffic needs were
transferred from Enterprise Solutions to Fixnet. Prior years have been restated accordingly. Due to continued slowdown and overcapacity in the telecommunications market, Enterprise Solutions
has experienced a general decrease in market demand in all customer segments. Large business
customers have postponed planned investments in telecommunications solutions during the last couple
of years. Enterprise Solutions continues to focus resources on meeting customers needs for
complex telecommunication services to ensure its long-term growth and, where necessary, will
complement its portfolio through partnerships. 40




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##### Table of Contents



National and International Traffic Enterprise Solutions provides national and international fixed-line voice telephony services to
business customers. For a description of these voice telephony services, which Swisscom also
provides to residential customers, and of developments impacting the provision of fixed-line
telephony services, see  Fixnet  Access and   Fixnet  Retail Traffic. The following table sets forth, for the periods indicated, selected information relating to
Enterprise Solutions national and international fixed voice telephony traffic generated by
business customers. Year Ended December 31,In millions of minutes(1)
    
    2002
    
    
    2003
    
    
    2004Local and long-distance traffic
    
    
    2,278
    
    
    
    1,972
    
    
    
    1,779Fixed-to-mobile traffic(2)
    
    
    327
    
    
    
    303
    
    
    
    278Total national traffic
    
    
    2,605
    
    
    
    2,275
    
    
    
    2,057International traffic (3)
    
    
    433
    
    
    
    373
    
    
    
    361Total traffic
    
    
    3,038
    
    
    
    2,648
    
    
    
    2,418
   (1)
    
    Includes traffic on courtesy and service lines.(2)
    
    Includes traffic for calls from the fixed-line network to private user networks.(3)
    
    Based on minutes of outgoing international traffic as determined for retail customer billing
purposes. Does not include international wholesale traffic originating outside Switzerland. For information on tariffs for national and international traffic, see  Fixnet  Retail
Traffic  Tariffs. Enterprise Solutions offers a variety of volume-based discounts to its largest
business customers. Networking In the area of networking, Enterprise Solutions offers national and international leased lines and
Intranet services. As an alternative to leased lines, Enterprise Solutions provides solutions to
complex data communication demands by offering national and, through Infonet Switzerland,
international private networks. National Leased Line Services Enterprise Solutions is the leading provider of leased lines in Switzerland. Leased lines are
fixed point-to-point connections between separate locations, which may be used by the customer for
voice and high volume data or video transmission. Leased lines are used by business customers to
assemble their own private networks and by resellers to establish networks in order to offer
information services. Swisscom also offers leased line services on a wholesale basis. See 
Fixnet  Other. Enterprise Solutions also offers managed leased line services to its national leased line
customers. Through active fault management and automatic rerouting in case of network failure,
Enterprise Solutions managed leased line services guarantee up to 99.99% end-to-end availability. In addition, Enterprise Solutions offers its city services product and color line metro service.
The city services product is an optimal solution for business customers with high-volume data
traffic between their office locations within a given city or between cities. The benefits of city
services include high bandwidth and around the clock end-to-end management. Enterprise Solutions
color line metro service provides digital transmission based on dense wavelength division multiplex
(DWDM) technology. DWDM is an optical technology used to increase bandwidth over existing fiber
optic backbones, which permits transparent data transfer for all network protocols and application
data types in ring and end-to-end connections. This service is primarily aimed at customers who
need to transfer large amounts of data in gigabits between two or more locations in or around
business centers. 41




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##### Table of Contents



The following table sets forth information relating to Enterprise Solutions national leased lines. Year Ended December 31,Number of leased lines(1)
    
    2002
    
    
    2003
    
    
    2004Total national leased lines
    
    
    20,644
    
    
    
    18,293
    
    
    
    14,214
   (1)
    
    Excluding twisted copper pairs. The number of national leased lines has declined over the recent years, as customers
increasingly migrate to high capacity services based on IP due to more customer applications
requiring higher bandwidths. Enterprise Solutions leased line subscribers pay an initial installation charge based on the type
and capacity of the line and, thereafter, pay a monthly fee, which is also based on the type and
capacity of the leased line and, in addition, varies with the length of the line. In recent years,
leased line tariffs have declined due to regulatory pressures and increased competition from other
infrastructure-based operators, with charges for the high bandwidth offerings declining most
dramatically in price. Under the Telecommunications Act, a licensed telecommunications service provider may be required to
provide leased lines in accordance with international standards at cost-related prices in a
particular region if it is determined that demand for such services is not being met. International Leased Line Services Enterprise Solutions offers international leased lines to its business customers with cross-border
requirements. Through its own European network or in cooperation with other international
carriers, Enterprise Solutions offers its European customers the convenience of single-end ordering
and billing for half- and full-circuits. For a description of Swisscoms European network, see 
Networks and Technology  Fixed-Line Networks. The following table sets forth information relating to Enterprise Solutions international leased
lines. As of December 31,Number of leased lines
    
    2002
    
    
    2003
    
    
    2004Total international leased lines
    
    
    608
    
    
    
    488
    
    
    
    424
 Through its partnerships, Swisscom provides end-to-end managed leased line services for
international corporate networks in a number of European countries. However, in recent years, the
number of international leased lines has been falling mainly due to increased competition
particularly from global players, as Enterprise Solutions has only a limited reach in the
international market for fully managed circuits. Swisscom also offers such services on a wholesale
basis via its EOSNET network. Intranet Services Enterprise Solutions Intranet services consist primarily of router management services. Since
mid-2000, this service has been deployed on a multiservice platform based on multiprotocol label
switching (MPLS) technology, which gives network operators high flexibility to divert and route
traffic around link failures and congestions. As of December 31, 2004, Enterprise Solutions
managed approximately 22,000 routers, mainly on behalf of banking and insurance clients, as well as
large retailers. Other services within the Intranet services portfolio include remote access
services, which enable access to a companys Intranet through all commercially available access
technologies, and encryption services for customers with strict security requirements. 42




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##### Table of Contents



National Private Networks Enterprise Solutions offers private networks for data transmission based on a variety of
technological platforms. The services comprise frame relay and asynchronous transfer mode (ATM)
services. Enterprise Solutions frame relay service is a fully-managed networking solution which is a
cost-effective alternative to leased lines. Frame relay refers to a data transmission technology
that is used for middle to high bandwidth networking. It is ideal for LAN-to-LAN applications,
particularly for business customers with highly variable data traffic. Enterprise Solutions offers
frame relay at a variety of access rates, ranging from 64 kbit/s to 34 Mbit/s. Enterprise Solutions ATM services permit flexible and tailored broadband data transmission of up
to 155 Mbit/s. Applications include LAN speed interconnections, multi-computer network links,
real-time video, electronic publishing, and other multimedia applications. Enterprise Solutions
also offers ATM services featuring variable bit rate transmission. In the past couple of years, the increased substitution of Internet Protocol (IP) services for
frame relay and ATM services among large business customers has resulted in decreased sales of
frame relay and ATM services. International Private Networks Swisscom holds a 90% share of Infonet Switzerland AG. Infonet Switzerlands main areas of focus
are internationally managed Intranet services and remote access services over public networks for
smaller subsidiaries and mobile users. In addition, Infonet markets extranet services to its
customers, both on a closed user-group basis and through public network access, including the
Internet. After the sale of its stake in Infonet Services Corporation (Infonet), the prior
minority shareholder of Infonet Switzerland, to British Telecommunications plc (BT), Swisscom
remains the majority shareholder in Infonet Switzerland, with the remaining 10% stake now held by
BT. Swisscom is currently not aware of any significant effects this change in ownership may have
on its business with Infonet Switzerland. For more information on the sale of Infonet, see 
Divestments/Discontinued Operations. Inhouse and Processes Inhouse and processes services comprise the provision of Business Numbers and system integration
services, which include various local area network services and a customer relationship management
service. Business Numbers Enterprise Solutions Business Numbers consist primarily of toll-free, cost-shared and premium rate
numbers for both national and international use, which Swisscoms business customers use to provide
their customers with access to information services. Enterprise Solutions cost-shared service allows business customers to assume a portion of the cost
of the calls they receive. Enterprise Solutions premium rate services allow business customers to
make information accessible by telephone for a fee, a portion of which is received by the party
being called. In addition, these premium rate services also allow for flat rate charging on a per
call or product basis and credit-per-call billing, under which the party placing the call
receives credit for the cost of their call. These numbers are mainly used by business customers as
a retail sales channel and as an additional form of payment. Enterprise Solutions premium rate
services offer a variety of supplementary services, including the ability to terminate calls
outside Switzerland, to receive calls from other countries without revenue sharing with the
subscriber and an efficient call management system. Demand for Business Numbers has declined over the past few years, primarily as a result of the
increasing substitution of other information services, such as the Internet and informational
company websites, for Business Numbers. 43




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System Integration Enterprise Solutions system integration services include local area network (LAN) services and
customer relation management (CRM) services, which Swisscom provides together with its
industry-leading partners. Enterprise Solutions offers a full range of LAN services, including LAN network design as well as
network operation and maintenance, providing the infrastructure for all data and voice over
Internet protocol (IP) requirements within the campus area of business customers. Enterprise
Solutions CRM services provide customer interaction solutions, which allow its customers to
enhance their customer relationship management. These services include end-to-end tracking
technology and contact center solutions which combine conventional call center applications with
e-mail, Internet and mobile telephony. Other Other services offered by Enterprise Solutions comprise business Internet services, public data
network services, professional services and a variety of supporting services. Business Internet Enterprise Solutions business Internet service portfolio includes a full range of Internet access
and applications for business customers and national Internet service providers (ISPs). These
services include managed firewall services and spam filtering IP transit services over the national
and international dedicated IP-Plus backbone. Public Data Networks Enterprise Solutions continues to offer low speed packet switched data network services based on
the well-established X.25 protocol as well as Telex services. Professional Services Enterprise Solutions professional services include consulting and project management services
which cover the entire portfolio of telecommunications services and products Enterprise Solutions
offers. In 2004, Enterprise Solutions significantly expanded its telecommunication infrastructure
outsourcing activities. Enterprise Solutions believes that its telecommunication infrastructure
outsourcing business will grow in the future as technologies converge and demand increases for
combined IT and telecommunication solutions. Enterprise Solutions seeks to maintain its leading
position through its know-how, complete service offering and stable financial situation. As a
systems integrator, Enterprise Solutions offers, together with other Swisscom companies or external
partners, information and communication technologies in the field of connectivity, network security
and customer interaction management. Supporting Business Enterprise Solutions provides a variety of supporting services, including security services and
military communication networks. 44




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Competition Enterprise Solutions faces intense competition in serving its business customers. TDC Switzerland
(Sunrise) and Cablecom are the overall market challengers in Switzerland. TDC Switzerland is
positioning itself as a full-service provider. Cablecom aims to position itself as a provider of
broadband and of voice-over-IP services over its cable infrastructure. Other competitors include
Colt, which offers telecommunication services to customers in specific locations, and MCI/Verizon,
offering mainly international services. Increasing demand for low-cost products of lower quality
puts additional price pressure on companies such as Enterprise Solution that focus on
higher-quality products. National and international outgoing traffic.As in the residential market, Swisscom faces
significant competition in the corporate telephony market, with the stiffest competition occurring
in the long distance and outgoing international calling markets. However, thanks to successful
customer win-back and retention programmes, Enterprise Solutions market share has stabilized. Networking.In its national leased line business, Enterprise Solutions has faced increasing
competition from TDC Switzerland (Sunrise), Colt and MCI as well as from Cablecom, the largest
cable network operator in Switzerland, which operates its own infrastructure and has invested
heavily to upgrade it. Enterprise Solutions also faces competition from electrical power
providers, which offer telecommunication services to customers via their own high-capacity fiber
networks. Competition in the national leased line market may also increase substantially if the
amendments to the Telecommunications Act currently under consideration by the Second Chamber of the
Swiss Parliament are adopted. See  Regulation  Unbundling of the Local Loop and Other Access
Regulation. In its international leased line business, Enterprise Solutions has been facing intense competition
from international players, such as Colt, Equant/Global One, MCI/Verizon, Worldcom, British Telecom
and Deutsche Telecom for several years, leading to stiff price competition and a decline in market
share. In the market for other networking services, specifically private networks and Intranet services,
Enterprise Solutions currently faces competition from Cablecom and TDC Switzerland (Sunrise), as
well as system integrators such as IBM. Prices for private networks in low-speed bandwidths have come under significant pressure due to the
increased use of low-cost broadband services. The market for high-speed bandwidths (> 2Mbit/s)
remains very competitive, and is no longer limited to connections between cities, but has expanded
to interregional connections throughout Switzerland. The market for Intranet services in
Switzerland is growing as corporate clients telecommunications needs in the field of LAN services
evolve and as the need for value-added services in the Intranet, Extranet and Internet domains
based on highly sophisticated IP technologies, including voice and data integration, increases. Inhouse and processes.Since 2001, OfCom, the Swiss Federal Office for Communication, has taken
over responsibility for allocating individual service numbers from a range of numbers used for
Business Numbers to end-users, who are required to pay both a one-time set up charge and a monthly
subscription fee to OfCom. End-users who have been allocated numbers may put the number into
operation with the telecommunications service provider of their choice. As a result, competition in
this business area has increased. In the system integration business, Enterprise Solutions major competitors are Getronics, Nextira
One, T-Systems, Accenture and international system integrators. Other.Enterprise Solutions major competitors for business Internet services are Cablecom and TDC
Switzerland (Sunrise). In the area of professional services, Enterprise Solutions primary
competitors are consulting firms. In its supporting business, Enterprise Solutions does not face
competition and has secured its position through long-term contracts. 45




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Other Swisscom is also active in a variety of other businesses, including the operation, maintenance and
sale of voice communication equipment, the provision of IT, broadcasting and billing services as
well as the provision of high-speed Internet access to business travelers across Europe. The following table sets forth external revenue for the periods indicated. Year Ended December 31,CHF in millions
    
    2002
    
    
    2003
    
    
    2004Swisscom Systems
    
    
    406
    
    
    
    345
    
    
    
    292Swisscom IT Services
    
    
    213
    
    
    
    214
    
    
    
    207Swisscom Broadcast
    
    
    162
    
    
    
    149
    
    
    
    148Billag
    
    
    52
    
    
    
    52
    
    
    
    112Swisscom Eurospot
    
    
    
    
    
    
    1
    
    
    
    9Total Other
    
    
    833
    
    
    
    761
    
    
    
    768
 Swisscom Systems Swisscom Systems provides a comprehensive portfolio of products and services in the field of
private branch exchanges (PBXs). Customers range from small and medium-sized companies to
companies with an extensive network of branch offices. Swisscom Systems offers a full range of
products and services, including maintenance services and managed services up to complete voice
outsourcing. Cooperation with leading manufacturers ensures delivery of high-end products and
services and a long-term protection of investment. As of December 31, 2004, Swisscom Systems had
965 full-time employees. Swisscom Systems sells its products through a key-account management team to large and medium-sized
enterprises. Smaller PBX systems are mainly distributed via indirect channels. Due to the entry
of new players in the systems integration market, Swisscom Systems has experienced increased price
pressure on the sale and maintenance of equipment, a trend that continued in 2004. Since 2002,
Swisscom Systems has suffered from declining demand for network and telephony equipment caused by
increased competition, the continuing weak economic situation, and uncertainty due to current
technological developments, which has led many customers to upgrade existing equipment and to
postpone new investments in telecommunications equipment. Effective January 1, 2005, Swisscom Systems was merged with Enterprise Solutions to form a new
business segment named Swisscom Solutions. Competition.Swisscom Systems competes directly with local and global companies offering system
integration services, such as Ascom, NextiraOne and Siemens. Swisscom IT Services Until December 31, 2004, Swisscom held 71.1% of Swisscom IT Services AG, with the balance held by
eight cantonal banks. Effective December 31, 2004, Swisscom acquired the remaining 28.9% stake
held by the eight cantonal banks for a purchase price of CHF 115 million. As of December 31, 2004,
Swisscom IT Services had 2,100 full-time employees. Swisscom IT Services offers end-to-end business solutions, primarily in the financial services and
telecommunications industries. In addition to business solutions, Swisscom IT Services focuses on
systems integration, IT outsourcing and infrastructure services, including desktop services and
datacenter services. To strengthen its position as an IT provider, Swisscom IT Services is
expanding its business into the outsourcing market with a focus on mid-sized and large companies. Swisscom IT Services customers are largely the Swisscom group companies and the former minority
shareholders of Swisscom IT Services, the eight cantonal banks. Swisscom IT Services provides IT
outsourcing services to these 46




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customers pursuant to long-term contracts. The four smaller of the eight cantonal banks will
migrate to a new banking platform at the end of 2006, which will also be run by Swisscom IT
Services. A further cantonal bank will migrate to this new banking platform and will be a new
outsourcing customer of Swisscom IT Services. With regard to other customers, Swisscom IT Services significantly expanded its business in 2004 by
signing some long-term outsourcing agreements with major companies in the telematics, media, health
insurance, airline and financial sectors. In addition, Swisscom IT Services has entered into a
long-term partnership with Hewlett-Packard Switzerland to launch an integrated and low cost
solution package for electronic workplaces for the Swiss market. In 2004, Swisscom IT Services revenue associated with the eight cantonal banks totaled CHF 145
million and revenue with other customers amounted to CHF 62 million. Competition.In the professional IT services market, Swisscom IT Services competes with IBM,
Hewlett-Packard, T-Systems, EDS, Real Time Center, Unicible and a number of local players. Swisscom Broadcast Swisscom Broadcast operates a national network for the transmission and broadcast of analog and
digital signals for television and radio broadcasting. Such services are provided to the Swiss
Broadcasting Corporation (Schweizerische Radio- und Fernsehgesellschaft) (SRG), the main provider
of public television and radio broadcasting in Switzerland. Swisscom Broadcast provides these services to SRG on freely negotiated commercial terms under a
long-term contract with SRG that was terminated effective 2006. In March 2005, Swisscom Broadcast
agreed on a new long-term contract with SRG that will become effective at the beginning of 2007 and
run at least until the end of 2011. In 2004, Swisscom Broadcast was paid CHF 108 million to
broadcast SRG programming. In December 2004, Swisscom Broadcast acquired TeleRätia, a local transmission and broadcasting
provider. On December 18, 2002, the Federal Council presented to the Swiss Parliament a draft of a revised
radio and television law. Swisscom Broadcast does not expect the revision of this law to have any
economic effect until 2006. Billag In addition to providing broadcasting services to SRG, Swisscom, through its wholly-owned
subsidiary Billag, will continue to collect radio and television licensing fees on behalf of SRG on
a contractual basis until 2007. In addition, Billag collects certain copyright licensing fees and
provides customer data management, invoicing and other services. Through the acquisition of a 100%
stake in T-Systems Card Services AG (now Billag Card Services AG) in December 2003, Billag is a
leading provider of third party billing and loyalty cards processing services, some of which
include the financing of purchases billed to the customer on a delayed basis when using a loyalty
card. Billag seeks to expand its business in this market. Swisscom Eurospot Swisscom Eurospot is a leading provider of high-speed Internet access and conference services to
business travelers in Europe (excluding Switzerland). It operates a broadband Internet access
network in premium hotels where business travelers are expected to generate significant traffic.
The companys infrastructure spans more than 2,000 active properties encompassing approximately
170,000 hotel rooms in 12 countries, with more properties to enter operation soon. In addition,
approximately 1,400 properties in 3 countries are accessible to Swisscom Eurospot customers through
roaming agreements. During 2004, Swisscom Eurospot extended its product portfolio by offering customized meeting and
conference service solutions as well as PCs for business travelers. Swisscom Eurospot is continuously looking for growth opportunities  organically or through
acquisitions  in Europe and in other regions of the world. 47




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Corporate Corporate includes Swisscoms headquarters functions, Swisscoms programs under its social plan
(the outplacement program PersPec and the employment program Worklink), group-company shared
services and the real-estate company Swisscom Immobilien AG (SIMAG). For a description of
PersPec and Worklink, see Item 6: Directors, Senior Management and Employees  Employees 
Workforce Reduction and Productivity Improvement. SIMAG SIMAG manages Swisscoms portfolio of real estate properties, some of which it leases to other
group companies and, to a limited extent, to third parties. In addition, it provides facility
management services, such as energy purchasing, and security and cleaning, for third parties as
well as for internal use. For more information on Swisscoms real estate, see  Property, Plant
and Equipment. 
 Participations In 2001, Swisscom, along with other leading Swiss companies, acquired a shareholding in Swiss
International Airlines Limited (formerly Crossair) which took over a major part of the assets of
Swissair after it entered into receivership in late 2001. Since then, Swisscom has written down
most of the value of its investment, which amounted to CHF 100 million. 
 Divestments/Discontinued Operations debitel As of December 31, 2003, Swisscom owned 93% of debitel AG, which it had acquired in a series of
transactions in 1999 and 2001. debitel is the largest network-independent mobile communications
service provider in Europe. On April 29, 2004, Swisscom entered into an agreement to sell its 95% stake in debitel, including
2% it had acquired from ElectronicPartner in connection with this transaction, in a leveraged
buyout by funds advised by the private equity firm Permira (Permira Funds), for a purchase price of
EUR 640 million (equity value). The purchase price paid in cash amounted to EUR 430 million. The
remainder was financed by Swisscom through the conversion of existing intercompany loans in the
amount of EUR 210 million into two vendor loan notes of EUR 105 million each, assumed by debitel
Konzernfinanzierungs GmbH, an indirect 100% owned subsidiary of the entity acquired by Permira
Funds in the transaction. Consideration from the sale, including the vendor loan notes, was
recorded at fair value upon completion of the transaction. A portion of the purchase price was also financed on a senior secured basis by a consortium of
banks. Repayment of Swisscoms vendor loan notes, which have a term of 7 and 8 years,
respectively, is subordinated to the full repayment of the senior facilities provided by these
banks. Upon repayment of the senior facilities, the vendor loan notes will be secured by assets of
debitel Konzernfinanzierungs GmbH, which consist primarily of the debitel shares acquired in the
transaction. In connection with the transaction, Swisscom has agreed to indemnify the purchaser for any breach
of the representations and warranties made by it in the purchase agreement and for certain
liabilities, including tax liabilities, of debitel. In addition, Swisscom has agreed to bear the
risk of and to indemnify the purchaser for any losses which may arise in the future at one of
debitels international subsidiaries. However, the purchase agreement provides Swisscom with the
right to assume control of this subsidiary under certain conditions in order to minimize its
liability under this indemnity. 48




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As a result of the sale, debitel is treated in the consolidated financial statements as a
discontinued operation. Prior years have been restated to facilitate comparison. For further
information, see Note 39 to the consolidated financial statements. Infonet Service Corporation In November 2004, Swisscom and the other shareholders of Infonet Services Corporation (Infonet)
agreed to sell their respective stakes in Infonet to British Telecommunications plc (BT). Infonet
provides global voice, data and networking solutions, including managed networks, remote access
services and Internet, Intranet, electronic commerce and messaging services to companies seeking to
outsource their worldwide communications needs. In February 2005, Swisscom received USD 170 million
as consideration for its 17.7% stake. Despite the sale of its stake in Infonet, Swisscom remains the exclusive distributor of Infonet
services in Switzerland through Infonet Switzerland AG, in which Swisscom has a 90% interest.
Revenue from its Infonet business is accounted for in the segment Enterprise Solutions. Infonet
also purchased certain services from Swisscom, as well as from its other principal shareholders, on
a non-exclusive basis. In 2004, Swisscom purchased services from Infonet through Infonet
Switzerland in the aggregate amount of CHF 36.8 million. AUCS Until 2002, Swisscom also had an interest in AUCS, a former joint venture of various
telecommunication companies. In 1999, Swisscom and the other AUCS shareholders agreed to transfer
management of AUCS voice, data and networking services business to Infonet, which managed the AUCS
business until September 2002. Swisscom and its joint venture partners KPN and Telia are jointly
and severally liable for all remaining costs in winding down the business of AUCS. It is expected
that the winding down will be completed by the end of 2005. In connection with this winding down,
Swisscom has a remaining provision in the amount of CHF 10 million which it believes is sufficient
to cover all remaining expenses. 49




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Networks and Technology Overview Swisscom owns and operates a number of fixed and mobile telecommunications networks to support its
diverse range of products and services. Swisscoms fixed-line network and almost all of its data
networks are managed by Fixnet. Swisscoms mobile networks are the direct responsibility of Mobile.
For more information on Swisscoms technical equipment relating to its networks, see   Property,
Plant and Equipment. Reduction of network complexity and cost optimization were central aspects of Swisscoms network
strategy in the past three years. This strategy was accompanied by a rigorous investment policy
focusing the resources on developing and enhancing strategic growth platforms for broadband and IP
technologies. In order to implement Swisscoms triple play strategy, technical preparation and planning
activities were initiated in 2004. To be able to deliver voice, Internet access and TV over one
uniform infrastructure, significant enhancements are required affecting the core and access network
as well as service platforms for voice and data. Following its prudent investment policy, Swisscom
intends to proceed with the necessary enhancements in incremental steps aligned with market demand. In 2004, Swisscom had capital expenditures of CHF 360 million relating to its fixed-line network. A
substantial part of this amount was used to extend the lifetime of the PSTN/ISDN platform and to
reduce the complexity of the PSTN/ISDN network. With respect to its mobile network, Swisscom continues to make significant investments in
infrastructure in order to maintain high quality of service and to increase capacity. In 2004,
Swisscom had capital expenditures of CHF 434 million relating to its mobile network. Fixed-Line Networks Swisscom operates a highly sophisticated PSTN/ISDN network, principally for the provision of public
voice telephony, and several data networks used for the provision of packet switched, frame relay
and asynchronous transfer mode (ATM) data services and, to an increasing extent, IP and Ethernet
communication. These networks are supported by Swisscoms access networks and its extensive
national and international transmission infrastructure. While Swisscom continues to use its existing networks for voice and transport services, upgrading
and optimizing them wherever necessary, it is increasingly developing its broadband and IP
capabilities. In the data area, a strong trend towards IP and Ethernet is clearly discernable,
whereas for voice, the timing of an expected shift towards voice over IP is less clear. Swisscom
is monitoring industry trends very closely and continues to co-operate closely with major equipment
suppliers in Europe and the U.S. Access Networks.Swisscoms access network is divided into 923 individual access networks. Each
access network is subdivided into a primary and secondary access network, allowing the network to
be configured in the manner optimal for reaching subscribers and bundling traffic. The local loops which connect customers to Swisscoms local exchanges use a variety of
technologies, including radio, copper and fiber optic cable. In 2000, Swisscom implemented a broadband connectivity service which connects end-customers to
Swisscoms IP backbone via ADSL technology in the local loop and allows Internet service providers
to offer faster IP-based services to these same end-users. ADSL technologies operate, like ISDN,
over existing copper lines, but offer higher speed and volume for data transmissions. In 2004,
Swisscom increased the number of broadband ports, allowing Swisscom to meet the growing customer
demand in terms of available connections and traffic capacity at any time. The service is now
available to more than 98% of the population of Switzerland. 50




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Swisscoms current service offering goes up to 2.4 Mbit/s (downstream) and has currently the
ability to offer ADSL bandwidth in excess of 4 Mbit/s (downstream) to approximately 80% of Swiss
households. However, in the mid- to long-term this bandwidth capacity will not be sufficient for
rich multimedia services, in particular for simultaneous transmission of several TV channels.
Swisscom therefore intends to enhance its ADSL network with the next generation of DSL technology
called very high bit-rate digital subscriber line (VDSL). VDSL will allow downstream speeds well
above 10Mbit/s although it requires closer proximity of active network elements to customer
locations and hence more fiber in the access network. Preparations for this significant technology
shift started in 2004 and are now well underway. Transmission Infrastructure. Swisscoms domestic interexchange transmission system is 100% digital
and, as of December 31, 2004, consisted of approximately 31,500 kilometers of fiber optic cable
representing 900,000 kilometers of individual optical fibers. Capable of operating at speeds of up
to 10 Gbit/s, fiber optic cable vastly exceeds the capacity of traditional copper cable or radio
links. All of Swisscoms exchanges have been connected with fiber optics. Swisscoms core network contains a synchronous digital hierarchy (SDH) transmission system and its
regional network has SDH self-healing rings in selected areas. SDH is a transmission standard for
networks that use fiber optics, which allows for a simpler and more easily managed network with
enhanced reliability. Swisscom also continues to use and maintain its plesiochronous digital
hierarchy (PDH) infrastructure, which, in accordance with its investment policy, is not being
proactively replaced but phased out whenever economically viable. In addition to its classic SDH networks, in 2004 Swisscom started to build out regional Ethernet
rings that will be used to deliver Ethernet service to business customers as well as to connect the
next generation of DSL technology, in particular VDSL. This constitutes an important step towards
a simple but powerful all-IP network. Swisscom also operates EOSNET, a European fiber optic network for voice and data interconnection
which provides end-to-end control between Switzerland and Swisscoms points of presence in London,
Frankfurt, Amsterdam, Paris, Brussels and Milan. Swisscoms international transmission infrastructure consists of terrestrial and submarine cable
transmission systems. Swisscom is an investor in about 80 submarine cables worldwide. In addition
to investments in a number of smaller cables in Europe (e.g., in the English Channel, North Sea and
Mediterranean), Swisscom has important investments in the major submarine cables TAT-14 and AC-1 in
the Atlantic and SEA-ME-WE3. In February, 2005, Swisscom and Belgacom, entered into an agreement to combine their international
wholesale activities. As part of this agreement, effective July 1, 2005, Swisscom will contribute
its international network, consisting of EOSNET, submarine cables and other network elements, in
return for a 28% interest in the new business. PSTN/ISDN Network. Swisscoms domestic network connects virtually all Swiss homes and the vast
majority of Swiss businesses, with traffic routed, as of December 31, 2004, through 796 remote
subscriber switches, 96 local exchanges and 2 x 15 transit exchanges. These switches are connected
by Swisscoms transmission infrastructure. Swisscom also operates international gateway switches in
Zurich and Geneva. Swisscoms ISDN service, which is fully integrated with the PSTN, is based on the ETSI (European
Telecommunication Standards Institute) standard. Swisscom is capable of providing ISDN service to
100% of its customers. The Swisscom PSTN/ISDN network offers a high level of quality and security.
With four-fold redundancy built into the core network on the transmission layer and two-fold
redundancy on the switching layer, Swisscom is able to ensure a very high level of availability. In 2003, Swisscom started to reduce the complexity and operating costs of its PSTN/ISDN network by
relying on fewer vendors for switches and other network components, while maintaining the quality
of its PSTN/ISDN network well beyond 2010. This project was successfully completed by the end of
2004. On top of its network switches, Swisscom operates an intelligent network platform, which supports a
range of value-added services by associating advanced computer technologies with traditional
switching techniques. 51




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Data and IP Networks. Swisscom owns leased line networks used for managed and unmanaged services
and a number of switched data networks used for packet switched (X.25), frame relay and ATM data
transmission services. In addition, Swisscom operates two IP platforms that are used for all of
Swisscoms broadband services and which have become increasingly important for Swisscom since the
roll-out of its ADSL services. In 2003, Swisscom decided to introduce two new platforms for the delivery of optical and Ethernet
services, which are to be rolled out strictly according to demand for these new services. The new
optical platform enables managed high capacity/high quality services up to 10 Gbit/s. Ethernet is a
high-capacity platform with which the bandwidth of IP traffic can be increased significantly. In
light of the so-called triple play strategy, the Ethernet platform will not only be used for
business services but is also expected to transport the vastly increased amount of data traffic
generated by residential broadband users. The rollout of the Ethernet platform is scheduled to
take place in the course of 2005. The platforms used for the provision of leased lines and managed bandwidth services include a
dedicated multiplexing platform which allows transmission speeds from below 64 kbit/s up to 2
Mbit/s. Swisscoms PDH platform supports unmanaged leased lines from 2 Mbit/s up to 34 Mbit/s,
whereas its SDH platform supports managed and unmanaged services starting at 2 Mbit/s and going up
to 155 Mbit/s and in some cases even up to 622 Mbit/s. Swisscoms various switched data networks offer different transmission speeds. The traditional
packet switched network (X.25) provides transmission speeds up to 128 kbit/s. The frame relay
network provides variable bandwidth and operates at transmission speeds between 64 kbit/s (low
capacity) and 34 Mbit/s (high capacity). The ATM network operates at transmission speeds of up to
155 Mbit/s. Swisscom often handles IP applications on the frame relay and ATM platforms, meaning that frame
relay and ATM are used as the transport medium for IP traffic. For instance, when a Bluewin
subscriber logs on to the Internet using a dial-up connection, the call is routed to IP traffic
over the ATM network to central IP switches in Zurich. Swisscom expects that the traditional data networks (X.25, frame relay and ATM) will in the medium
term be replaced by IP and Ethernet, responding to the demand for higher bandwidth at lower cost.
Swisscom has therefore reduced its investments in these networks significantly. Swisscom also operates a state-of-the-art IP network which uses multi-protocol label switching
technology. This technology allows data packets to be prioritized for more efficient transmission
on the backbone which interconnects Internet service providers to local ADSL customers. It is also
used for IP-based LAN interconnection services for corporate customers. However, the use of this
technology requires that both the sender and the recipient of the prioritized information be
equipped with IP multi-protocol label switching routers (MPLS Network). Swisscoms IP network is
continuously enhanced to accommodate the growing capacity demand from ADSL customers. The MPLS
network will also be used for triple play service and in connection with VDSL. The following table provides selected information as of the dates indicated relating to Swisscoms
principal data and IP transmission networks. At December 31,Number of ports/leased lines(1)
    
    2002
    
    
    2003
    
    
    2004X.25 ports
    
    
    4,317
    
    
    
    2,862
    
    
    
    2,126Frame relay ports
    
    
    5,443
    
    
    
    4,754
    
    
    
    4,043Leased lines less than 2Mb
    
    
    42,640
    
    
    
    26,099
    
    
    
    17,919Leased lines equal to or higher than 2Mb
    
    
    18,300
    
    
    
    20,778
    
    
    
    18,702ATM ports
    
    
    393
    
    
    
    318
    
    
    
    263IP-servicesTotal ports IP data services(2)
    
    
    16,320
    
    
    
    17,442
    
    
    
    20,490Total ports IP broadband access
    
    
    214,787
    
    
    
    543,582
    
    
    
    828,345
   (1)
    
    Data includes Swisscoms internal usage.(2)
    
    Mainly LAN interconnecting services for business customers, including 18,685 ADSL ports in
2004. 52




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Mobile Telecommunications Network Swisscom currently operates one national mobile telephony network, capable of providing service to
over 99% of the populated areas in Switzerland. Swisscoms current mobile network is a digital
mobile dual band network, based on the international GSM standard that operates at both 900 MHz and
1800 MHz. Swisscom currently operates 13.6 MHz in the 900 MHz band and 12.4 MHz in the 1800 MHz
band. The state of the art network architecture allows Swisscom to extend its network in a very
flexible, market driven and cost optimized way. Swisscoms mobile network consists of base transceiver stations for GSM and UMTS, base station
controllers and mobile switching centers. The base transceiver stations transmit calls to and from
mobile handsets. The base transceiver stations used for UMTS are called Node B. The base station
controllers relay calls between the base transceiver stations and mobile switching centers, which
in turn are connected to the PSTN and ISDN network. The following table shows data relating to Swisscoms mobile network as of the dates indicated. At December 31,2002
    
    
    2003
    
    
    2004Base Transceiver Stations
    
    
    4,654
    
    
    
    5,247
    
    
    
    5,481Node B
    
    
    283
    
    
    
    695
    
    
    
    1,308Base Station Controllers.
    
    
    40
    
    
    
    43
    
    
    
    43Mobile Switching Center
    
    
    31
    
    
    
    31
    
    
    
    32
 The design of the core network allows for the efficient integration of new technologies such as
GPRS and UMTS. HSCSD.In 2001, Swisscom launched high speed circuit switched data (HSCSD) services. HSCSD is a
data transmission standard for GSM mobile phone networks. Like ISDN, HSCSD technology is based on
the principle of traffic channel bundling. It is currently possible to bundle up to four channels
corresponding to a data transmission rate of 57.6kbit/s. Additional network access servers were
installed as interfaces for the connection of the mobile network to the fixed-line network. GPRS.In 2001, Swisscom also completed implementation of general packet radio service (GPRS)
technology in the network. GPRS is a standard for data transfer on GSM mobile phone networks and
utilizes packet switching technology. This means that data is divided up into small packets and
sent in a similar way to data transmission on computer networks or when surfing on the Internet.
With this technology the user is always online and can send and receive data at any time. In
February 2002, Swisscom launched its GPRS service with data capacities of up to 50 kbit/s. EDGE.In order to further improve its GPRS services, Swisscom has recently activated Enhanced Data
Rates for GSM Evolution (EDGE) technology in all active GSM locations. EDGE is a further
development of the GPRS standard that allows considerably higher transmission speeds of between 150
kbit/s and 200 kbit/s. UMTS.In 2000, Swisscom was awarded one of four universal mobile telecommunication system (UMTS)
licenses auctioned in Switzerland, for which it paid CHF 50 million. The license took effect on
January 1, 2002 and will be valid for 15 years. Swisscom received one Frequency Division Duplex
Channel and one Time Division Duplex Channel in the allocated Frequency Band of 2.1 GHz. UMTS is a
third generation mobile radio system that creates additional mobile radio capacity and enables
broadband media applications while also providing high speed Internet access. Swisscom
successfully tested UMTS calls on its pilot network and opened its UMTS network to a limited user
group in order to test new data services. In 2004, Swisscom focused on the installation of
additional UMTS base stations in order to achieve good coverage for the launch of UMTS in 2004. As
of December 2004, Swisscom had installed over 1,300 UMTS base transceiver stations (Node B),
ensuring population coverage of 83%. Swisscom has thereby fulfilled all requirements set forth in
the terms of the UMTS license. 53




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Swisscom is investing in its mobile network to upgrade its existing network, and to further extend
the coverage of UMTS. Swisscom expects to make significant additional investments over the next
several years in connection with the continued build-out of its UMTS network. PWLAN.Swisscom offers a public wireless LAN (PWLAN) service in Switzerland through Swisscom
Mobile and across Europe through Swisscom Eurospot. See   Swisscom Mobile and   Other 
Swisscom Eurospot. PWLAN provides complementary wireless broadband Internet access through
gateways connected to a fixed-line network. Swisscom intends to expand its PWLAN network in 2005. Broadcasting Networks Swisscom Broadcast operates a terrestrial broadcasting network, including a wireless backbone. The
network components are installed throughout Switzerland on over 500 towers, which are owned by
Swisscom Broadcast. Fewer than ten sites are located outside Switzerland in the border regions of
neighboring countries. Swisscom Broadcasts broadcasting network serves as a feeder network as well as a distribution
network by gathering the signals from their sources (e.g., radio and TV studios) and feeding them
to radio and television transmitters, which then distribute the programs to the individual
households. Swisscom Broadcasts feeder network for gathering and transmitting the signals uses both microwave
and fiber-optic ATM networks ensuring coverage on a redundant basis. The microwave part of the
feeder network is also used to feed TV programs from neighboring countries to the networks of local
cable network operators. For the distribution of the programs, Swisscom Broadcast operates approximately 800 FM radio
transmitters, over 1,000 TV analogue transmitters and approximately 20 digital audio broadcasting
transmitters. In addition, Swisscom Broadcast operates approximately 60% of the transmitters used
by private broadcasters in Switzerland. 54




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Property, Plant and Equipment Real Estate Property As of December 31, 2004, Swisscom has real estate property with an aggregate net book value of CHF
1,009 million. Of this amount, CHF 671 million relates to property which Swisscom uses under the
leaseback contracts described below and in Note 29 of the consolidated financial statements. Such
property was not subject to any mortgages or other security interests as of such date.
Substantially all of Swisscoms properties are used for telecommunications installations, research
centers, service outlets and offices. Swisscoms real estate portfolio is managed by real estate professionals with a view to realizing
value from the portfolio. Swisscom sold a significant portion of its real estate portfolio and has
entered into leaseback contracts for some of the buildings sold, a number of which have been
qualified as finance leases. The gain from the sale of these buildings, CHF 239 million in 2001,
will be recognized in income over the duration of these leasing contracts. Due to a change in IAS
17 as of January 1, 2005, the land and building elements of a lease of land and buildings are
considered separately for the purposes of lease classification and the land element is no longer
classified as a finance lease. This results in a reduction of real estate property on Swisscoms
balance sheet. For further information on the change in IAS 17, see Note 42 of the consolidated
financial statements. Over the last few years, Swisscom has implemented a strategy to steadily reduce its real estate
management costs, which included outsourcing certain real estate management functions, especially
cleaning and maintenance. Restructuring measures announced in October 2003 included the lay-off of
approximately 60 full-time employees. The costs associated with these restructuring measures were
fully accounted for as per December 31, 2003. In 2004, Swisscom introduced a new program with the aim of optimizing workplace infrastructure by
moving employees to main buildings, introducing desk sharing and by reducing the office space
allocated per employee. These measures as well as further workforce reductions are expected to
allow Swisscom to terminate various lease-back contracts in 2006, to reduce facility management
costs and to free up office and other space, the majority of which Swisscom expects to rent out to
third parties. Technical Equipment As of December 31, 2004, Swisscom carried on its balance sheet assets mainly related to its network
infrastructure in the amount of CHF 4,656 million. Of this amount, CHF 113 million relates to
technical equipment for which Swisscom entered into sale and leaseback contracts. 55




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Research and Development Swisscoms research and development expenses (not including software development costs) amounted to
CHF 39 million in 2004 and CHF 41 million in 2003. Swisscom believes that continued research and development activities enhance its competitiveness.
Swisscom currently focuses its research and development efforts on three main areas: (1) extending
its range of communication services by exploiting the increasing convergence of fixed-line
telecommunication, mobile telecommunication, information and entertainment technologies; (2)
enhancing the quality of service and customer care; and (3) exploring network technologies to
enable new services as well as to achieve cost efficiencies. Swisscoms research and development activities include programs to explore and develop new
opportunities in: (1) advanced communication and information services that seamlessly integrate a
wide range of networks, applications and devices using state-of-the-art technologies such as voice
over IP, web technologies, voice-controlled interactions and intelligent network technologies, (2)
current software technology trends and their impact on the efficiency of creating new services and
on the quality of service, as well as on related areas such as digital identity management for
transaction and authentication services, and the security management of communication networks,
computer systems, and communication devices, (3) multimedia information and entertainment services
enhanced by broadband access through various access networks and terminals, focusing in particular
on mobile entertainment and triple play (voice, Internet, and TV over the same network), (4)
emerging network technologies enabling wired and wireless, fixed and mobile broadband services
including home-networking applications, with special emphasis on seamless access across different
networks, and (5) electromagnetic compatibility and perceived health issues arising from existing
and emerging service delivery technologies. Swisscom explores strategies and technologies to increase customer satisfaction and customers use
of new services. In particular, Swisscom takes into account social and socio-economic trends,
diffusion and adoption of telecommunication services, management of customer expectations and new
marketing approaches. Moreover, Swisscom applies usability testing, which means that Swisscom
observes potential users interacting with prototype applications and services with a view to
improving interface and dialog design. Swisscom monitors, on a continuous basis, the consortia that develop technologies and applications
that serve as industry-wide standards, such as the global system for mobile communications (GSM)
association, the third generation partnership project (3GPP) consortium (UMTS services and beyond),
the WiFi and WiMax fora (wireless access technologies), the moving picture experts group (MPEG,
making video signals suitable for transmission at lower bandwidths), the liberty alliance (virtual
identity management and authentication services), and the digital living network alliance (DLNA,
home-networking applications). In addition, Swisscom participates in a number of international
organizations. Swisscom pursues a number of research initiatives with industrial partners, universities,
institutes and other research labs. Under these initiatives, Swisscom and its partners cooperate in
carrying out joint projects and by sharing research and development results. Swisscom has a variety of patents and licenses to protect its investments. No single patent or
license is material to its business. 56




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Regulation Overview The regulatory framework governing telecommunications services in Switzerland was established with
the entry into effect on January 1, 1998 of the Telecommunications Act. The Telecommunications Act
and the implementing ordinances thereunder opened domestic and international public fixed-line
telephony in Switzerland to competition and provided for the granting of national mobile
telecommunications licenses to new competitors, as well as to Swisscom. Switzerland is not a
member state of the EU and therefore is not subject to EU legislation relating to
telecommunications. However, EU directives and implementing legislation in various EU countries
have served as points of reference for the development of the Swiss regulatory regime. In March 2003, the Federal Council adopted significant amendments to the Telecommunications
Ordinance (Verordnung über Fernmeldedienste), which is the principal ordinance on
telecommunications services. However, based on a decision issued by the Federal Court in November
2004, these amendments will not be applicable on the grounds that the Telecommunications Act, as
currently in effect, does not provide sufficient legal basis for those amendments. In October 2004, the First Chamber of the Swiss Parliament (National Council) passed a bill with
significant amendments to the Telecommunications Act that would, among other things, reflect some
of the amendments to the Telecommunications Ordinance. According to the Federal Council, these
amendments are intended to bring the Swiss telecommunications regulatory regime in line with recent
regulatory developments in the EU. They are also intended to address certain perceived
shortcomings in the existing legislation. The bill is currently under consideration by the Second
Chamber of the Swiss Parliament (State Council). Swisscom does not expect the amendments to the
Telecommunications Act to become effective before mid-2006. The Telecommunications Act is intended to ensure that (1) reliable universal service is provided at
affordable prices to the entire population of Switzerland; (2) telecommunications traffic is free
from interference and respects personal and intellectual property rights; and (3) effective
competition in the provision of telecommunications services is allowed to develop. Important
features of the current regulatory framework include:  

Open Competition Subject to Licensing and Notification
Requirements.A basic principle of the Telecommunications Act is
to permit open competition in telecommunications services, subject
to licensing and notification requirements. With limited
exceptions, anyone who provides telecommunication services and
independently operates a significant portion of the
telecommunications installations used to provide transmission and
anyone who wishes to make use of radiocommunication frequencies
must obtain a license from the regulatory authority. Anyone
meeting the conditions for a license application is entitled to
receive a license, subject to frequency availability in the case
of a license to use radiocommunication frequencies. Anyone who
provides telecommunications services without being required to
obtain a license must notify the regulatory authority. At the end
of 2004, more than 300 operators had been licensed or registered
under this requirement.

Swisscom to Provide Universal Service Until December 31, 2007.As
a transition measure under the Telecommunications Act, Swisscom
was required to provide Universal Service throughout Switzerland
until December 31, 2002. In June 2002, ComCom renewed Swisscoms
Universal Service license for another five year term.

Price Ceilings on Universal Service.According to the
Telecommunications Ordinance and under the terms of its Universal
Service license, Swisscom may not increase the prices charged for
certain specified Universal Services above the price ceiling for
each such service set forth in the regulatory ordinance. With
effect from January 1, 2003, ISDN has been included in Universal
Service and the provision of ISDN access is subject to a price
ceiling. The price ceilings limit Swisscoms ability to rebalance
tariffs by increasing prices for services such as basic access or
local telephone calls, although the ordinance does not restrict
Swisscom from offering selective discounts in connection with
tailored service packages or to particular customer segments. 57




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

A Market-Dominant Service Provider Must Allow Interconnection to
its Network.A telecommunications service provider that is
dominant in a particular market must allow interconnection to its
installations and services by other service providers on a
non-discriminatory basis, and in particular may not put other
service providers in a worse position than its internal
departments or affiliates. The Telecommunications Act and
ordinances require a market-dominant service provider to publish a
standard offer of interconnection services, and contemplate that
the market-dominant provider and those providers seeking
interconnection will reach negotiated interconnection agreements,
failing of which empowers the regulatory authority to determine
the interconnection conditions.

Interconnection Prices. In any market where an operator is deemed
to be dominant, it must set its prices for the relevant
interconnection service in a transparent and cost-oriented manner.
Since January 1, 2000, such prices have had to be based on the
long-run incremental cost of providing the interconnection
service, which may include an appropriate return on capital
employed.

Carrier Selection. In order to promote competition in national
and international telephony services, public fixed-line telephony
service providers are required to provide their users with the
ability to select their desired national and international service
providers on both a call-by-call basis (using a five-digit number
prefix) (known as easy access) and a pre-selection basis for all
calls (subject to call-by-call override) (known as equal
access). Mobile telephony service providers are currently
required to provide their users with the ability to select their
desired international service provider on an easy access basis
only.

Number Portability. Under number portability, public fixed-line
telephony service providers, mobile telephony service providers
and providers of certain services such as toll-free numbers must
allow customers who switch to another service provider within the
same category of service to retain the same telephone number. The
cost of implementing number portability is borne by each service
provider. The original service provider may charge a fee to the
new service provider to cover the direct administrative costs of
connection for a particular customer change. Important features of the amendments to the Telecommunications Act currently under review by the
Second Chamber of the Swiss Parliament include:  

Unbundling of the Local Loop and Other Access Regulation.
Market-dominant service providers will be required to offer full
access to the unbundled local loop, bitstream access (for a
limited period of two years), access to ducts, access to leased
lines and access rebilling on a cost-oriented basis. While the new
regulatory scheme would be broader than interconnection, it
would, as currently proposed, not extend to new technologies such
as mobile technology or wireless broadband networks.

Elimination of Licensing Requirement to Reduce Barriers to Entry.
The proposed amendments to the Telecommunications Act would
eliminate the existing requirement that telecommunications service
providers obtain a license to provide most services. The existing Telecommunications Act sets forth an overall regulatory framework and provides for the
promulgation of ordinances establishing more detailed rules. The Federal Council has issued a
number of ordinances, the most important of which is the Telecommunications Ordinance (Verordnung
über Fernmeldedienste), which covers licensing conditions and procedures, universal service
requirements (including price ceilings), usage of land in public use, interconnection,
telecommunications confidentiality and privacy requirements, services in extraordinary
circumstances such as civil defense and other matters. The Federal Council has also issued the
Frequency Management and Radio Licenses Ordinance (Verordnung über Frequenzmanagement und
Funkkonzessionen), as well as ordinances concerning signal protocols and numbering systems,
telecommunications installations and fees. ComCom has issued an ordinance under the
Telecommunications Act specifying requirements for number portability and carrier selection. OfCom
and the Department of Environment Transport, Energy and Communication (Eidgenössisches Departement
für Umwelt, Verkehr Energie und Kommunikation) (UVEK) have also issued ordinances under the Act. Many important matters of regulatory policy were not resolved by the Telecommunications Act, having
been left to the legislative bodies and regulatory agencies responsible for the promulgation of
such ordinances. As has occurred in other countries, legal challenges concerning the application of
the Telecommunications Act and the interpretation of the ordinances promulgated thereunder have
arisen and may continue to arise. While amendments to the 58




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Telecommunications Act have to be approved by the Parliament and therefore take considerable time,
ordinances can be amended or revised quite quickly. Regulatory Authorities Under the Telecommunications Act, responsibility for regulation of the telecommunications sector
and the promotion of fair and open competition has been allocated among several regulatory bodies.
The two principal regulatory bodies under the Telecommunications Act are the Federal Office for
Communication (Bundesamt für Kommunikation, BAKOM) (OfCom) and the Federal Communications
Commission (Eidgenössische Kommunikationskommission) (ComCom). OfCom is responsible for
day-to-day oversight of the telecommunications sector and answers to UVEK and the Federal Council,
as well as to ComCom. ComCom is an independent regulatory agency which is vested with
decision-making authority in the telecommunications sector. The Federal Council has also delegated
certain limited powers to UVEK. OfCom was created by the Swiss Telecommunications Act of 1992, which separated the principal
regulatory functions of Swiss Telecom PTT from its commercial operations and transferred those
regulatory functions to OfCom, whose senior officers are appointed by the Federal Council. Under
the Telecommunications Act, all residual regulatory functions of Swiss Telecom PTT were transferred
to OfCom. OfComs duties include supervising compliance by license holders with the
Telecommunications Act and the ordinances thereunder, as well as with the terms and conditions of
their respective licenses, proposing terms of interconnection to ComCom for approval in cases where
the parties fail to agree on interconnection terms, managing the radiocommunication frequency
spectrum, managing signal protocols and numbering systems, and issuing certain technical and
administrative regulations. OfComs responsibilities also include proposing the text of any
amendments to the ordinances for approval by the Federal Council, UVEK or ComCom, as the case may
be. Decisions made by OfCom may be appealed before an Appeals Board (Rekurskommission). OfCom also
represents Switzerland in specific international bodies, such as the ITU, CEPT/ECC and IRG. In
order to separate the role of the Confederation as shareholder from its role as regulator, the
Telecommunications Act created ComCom as a fully independent regulatory agency, and provided that
ComCom would have responsibility for all matters affecting the development of competition in the
telecommunications market. ComCom acts as the exclusive licensing authority under the
Telecommunications Act, rules on the terms of interconnection in cases where the parties are unable
to reach agreement, has the power to obligate a license holder to provide Universal Service if the
request for tenders fails to result in adequate Universal Service coverage, and approves the
national radiocommunications frequency allocation plan and national numbering plans. The
Telecommunications Act allows ComCom to delegate responsibility for certain tasks to OfCom. ComCom
has delegated responsibility for granting all licenses to be granted without bidding procedures to
OfCom. OfCom must take direction from ComCom, which cannot be overruled by UVEK or the Federal
Council in respect of any matter falling within the sphere of its regulatory authority. The members
of ComCom, who must be independent specialists, are appointed by the Federal Council to four-year
terms. ComCom members may not be removed once appointed, but the Federal Council has the right to
not renew the appointment of a member upon the expiration of his term. Decisions of ComCom may be
appealed to the Swiss Federal Supreme Court. UVEK retains certain limited roles under the Telecommunications Act. In the Telecommunications
Ordinance, the Federal Council has delegated to UVEK the power to regulate the provision of
Universal Service in remote areas. In addition, UVEK has the right to order the expropriation of
private property for the establishment of telecommunications installations if in the public
interest. UVEK also fixes the amount of administrative charges necessary to cover the expenses of
the regulatory authorities. Licensing and Notification Requirements The Telecommunications Act requires that anyone who provides telecommunication services and
independently operates a significant portion of the telecommunications installations used to
provide transmission must obtain a license. In addition, licenses are required for users of the
radiocommunication frequency spectrum and for an operator with Universal Service obligations.
Anyone who is a provider of telecommunications services in any other way must notify OfCom, but is
not required to obtain a license. Under the proposed amendments to the Telecommunications Act,
licenses would only be required for service providers with a Universal Service obligation and for
users of radio frequencies. 59




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Under the existing Telecommunications Act, telecommunications services are subject to such
licensing and notification requirements if they involve the electrical, magnetic, optical or
electromagnetic transmission of information for third parties over lines or radio waves. The
Telecommunications Ordinance excludes service providers from such licensing and notification
requirements who transmit information solely (1) within a corporate network, (2) within a building
or (3) on a single property or on two adjoining or separated properties. In addition, a pure
reseller or broker of telecommunications services is not considered a provider of
telecommunications services under the Telecommunications Act and is therefore not required to
satisfy the licensing or notification requirements. A provider of international telecommunications
services whose services are provided through a connection in Switzerland with another carrier is
not required to satisfy the licensing or notification requirement if the carrier through which it
is connected meets such requirement. In general, anyone meeting the conditions for a license application, subject to the availability of
frequencies in the case of a license to use radiocommunication frequencies, is entitled to receive
a license. Conditions include the requirement that the applicant have the necessary technical
capabilities, and that the applicant provide assurances that it will comply with the
Telecommunications Act, the ordinances thereunder and the terms of the license, respect Swiss labor
law and maintain working conditions customary for the industry. ComCom may also impose other
conditions in particular situations. An applicant incorporated in a foreign country may be denied a
license if its home country law does not provide reciprocal treatment. Licenses are granted for
specified periods determined by ComCom by reference to normal market and industry standards for the
recovery of investments. Licenses for the use of radiocommunication frequencies are subject to availability, taking into
account the national frequency allocation plan, and must not eliminate or constitute a serious
obstacle to effective competition unless an exception can be justified on grounds of economic
efficiency. In questions relating to effective competition, ComCom may consult with the Competition
Commission. Radiocommunication frequency licenses are normally to be granted on the basis of an
open request for tenders if there are not enough frequencies to meet all applicants present and
future needs. As discussed below under Mobile Telecommunications, in 1998, ComCom adopted a
frequency allocation plan, under which there were three national mobile telephony licenses,
consisting of the mobile telephony license automatically granted to Swisscom pursuant to the
Telecommunications Act and two licenses awarded through a competitive process based on designated
criteria. In 2003, this frequency allocation plan was revised to cover two additional mobile
telephony licenses, which were awarded to In&Phone and Tele2 in December 2003. Under the Telecommunications Act, the regulatory authorities require the payment of administrative
charges to cover their expenses. For 2004, Swisscom was required to pay charges of CHF 7 million,
which includes license and administrative fees and fees for the use of radiocommunication
frequencies and numbering/naming/addressing elements. Under the proposed amendments to the
Telecommunications Act, ComCom would be entitled to levy certain additional charges. Under the Telecommunications Act, a failure on the part of a licensee to abide by the terms of
applicable law, including the Telecommunications Act, the ordinances thereunder and the terms of
the license, may be sanctioned by ComCom. Such sanctions may include the suspension, revocation or
withdrawal of the license. In addition, to the extent that a provider of telecommunications
services fails to comply with the terms of its license or with a decision having force of law, such
service provider may be required to pay a monetary penalty equal to up to three times the amount of
any gain resulting from such failure to comply. In the event such gain cannot be determined or
estimated, the service provider may be required to pay up to 10% of the amount of its revenue in
the prior year in Switzerland. Universal Service One of the principal objectives of the Telecommunications Act is to ensure that affordable
Universal Service is provided to all sections of the Swiss population. Under the Telecommunications
Act transition provisions, Swisscom was required to provide Universal Service throughout
Switzerland until December 31, 2002. In June 2002, ComCom renewed Swisscoms Universal License for
another five year term. In its bid for the new license, Swisscom renounced the right to receive
contributions from other telecommunication service providers for providing Universal Service.
However, Swisscom stipulated that its bid was based on the regulations then in effect and that a
reevaluation would be required if the regulations were changed, and in particular if Swisscom were
required to offer 60




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unbundled access to its local loop. Competitors of Swisscom are free to offer some or all of the
services included in Universal Service. The Telecommunications Ordinance, as amended in October 2001, defines Universal Service as
comprising the following services:  

basic access, consisting of a network connection that enables users to make national and international telephone calls
in real-time as well as telefax and data connections with data transmission rates appropriate for Internet access, and
entry in the public telephone subscriber directory;

additional services,consisting of information concerning unsolicited calls, call forwarding, suppression of caller
identification, billing information, and blockage of outgoing calls;

emergency call services, including routing to the competent authority, with the ability to determine the callers
location;

directory services, including access to Swiss subscriber directories in electronic form or through voice information in
each official Swiss language;

public payphonesin sufficient number around the clock for in and outgoing national telephone calls and outgoing
international telephone calls, each in real time, with access to emergency call services and to telephone directories
in each official Swiss language;

transcription servicesfor the hearing-impaired; and

directory and connection servicesfor the blind and seeing-impaired. The Federal Council is authorized to periodically modify the services included under the Universal
Service obligation in accordance with social and economic requirements and technological
developments. Since January 1, 2003, Swisscom has been required to provide digital access, in
addition to analog access, based on ISDN or its equivalent, capable of supporting two simultaneous
connections and three different access numbers. Price Ceilings for Universal Service The Telecommunications Act provides that the Federal Council is periodically to fix upper limits
for the price of Universal Service. In periodically determining such tariff ceilings, the Federal
Council is to strive to set tariffs that are not dependent on distance. The ceilings are to apply
uniformly over the entire region covered by the license and are to be determined in light of the
development of the market. In the Telecommunications Ordinance, the Federal Council established price ceilings for specified
Universal Services, effective January 1, 1998. In amending the Telecommunications Ordinance in
October 2001, the Federal Council imposed new price ceilings for the services comprised within
Universal Service, which took effect on January 1, 2003, including a price ceiling on ISDN access.
In the case of PSTN access, the price ceiling was not changed. These new conditions on the
Universal Service license are expected to remain in effect until at least 2007. 61




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The following table sets forth the price ceilings (excluding VAT) which took effect on January 1,
2003: Maximum charge activation
    
    CHF 40.00Basic Access
Line Rental Charge  PSTN (per month)
    
    CHF 23.49Basic Access
Line Rental Charge  ISDN (per month)
    
    CHF 40.00Public Payphone Additional Per Minute Charge
    
    CHF   0.19
    (1)
 Peak(2)
    
    
    Off-peak(3)
    
    
    Night(4)National Traffic Tariffs (per minute charge)
    
    CHF 0.11
    
    CHF 0.09
    
    CHF 0.06
   (1)
    
    Except calls to helplines 143 or 147 and to the transcription service for hearing-impaired
persons, for which a per use charge of CHF 0.50 applies. Traffic charges for calls from public
payphones must be the same as for calls from private homes.(2)
    
    Monday to Friday from 8:00 a.m. to 5:00 p.m.(3)
    
    Monday to Friday from 6:00 a.m. to 8:00 a.m., 5:00 p.m. to 10:00 p.m., as well as on
Saturdays, Sundays and holidays from 6:00 a.m. to 10:00 p.m.(4)
    
    Daily from 10:00 p.m. to 6:00 a.m. Because price ceilings have been established separately for each Universal Service component,
as opposed to establishing a single price cap for all such services taken together, Swisscom is
limited in its ability to rebalance tariffs by increasing the tariff for access service to
compensate for reduced traffic tariffs. However, the Ordinance does not restrict Swisscom from
offering selective discounts in connection with tailored service packages or to particular customer
segments, and Swisscom is also free to raise prices for a particular service at any time up to the
then-applicable price ceiling. In addition to the price ceilings established by the Federal
Council, Swisscom is subject to certain consumer price legislation in setting its prices. The level
of prices charged by a market-dominant telecommunications service provider can be subject to review
by the Supervisor of Prices (Preisüberwacher) under the Federal Act on the Supervision of Prices of
December 20, 1985 (Preisüberwachungsgesetz). Interconnection by a Market-Dominant Provider The Telecommunications Act provides that a telecommunications service provider that has a dominant
position in a particular market must provide interconnection to other telecommunications service
providers on a non-discriminatory basis and in accordance with a transparent and cost-oriented
pricing policy, stating the conditions and prices separately for each interconnection service. The
Telecommunications Act authorized the Federal Council to determine the principles governing
interconnection. The Telecommunications Act and ordinances do not define what the relevant markets are for
purposes of this interconnection requirement. Under the Telecommunications Act, OfCom is required
to consult the Swiss Competition Commission (Wettbewerbskommission) to determine whether a provider
has a dominant position in a market. Under the Swiss Cartel Act, an enterprise is deemed to have
a dominant market position if it is able, as regards supply or demand, to behave in a substantially
independent manner with regard to the other participants in the market. Market share is only one
among several criteria for assessing whether or not an enterprise has a dominant market position. In the Telecommunications Ordinance, the Federal Council has specified that a market-dominant
provider must provide interconnection to the necessary equipment, services and information to other
providers on a non-discriminatory basis, in no worse manner than the market-dominant provider
supplies internally to its divisions, subsidiaries and partners. Interconnection is to be made
through common usage of, for example, telecommunications installations, buildings and land, as
necessary. Those entitled to interconnection from a market-dominant provider under the terms of the
Telecommunications Ordinance are (1) licensed providers of telecommunications services, (2)
providers of telecommunications services that are obligated to make a notification to OfCom under
the Telecommunications Act and (3) international telecommunications services providers. The Telecommunications Ordinance requires that a market-dominant provider must include at least the
following in its basic offering of interconnection services: (1) origination, termination and
transit of all call services included within Universal Service; (2) call identification services,
including identification of incoming connections, 62




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completed calls, uncompleted calls and similar services; (3) access to the 08xx (toll-free) and
09xx (shared-toll) value-added services; (4) adequate physical connection to the telecommunications
installations of the providers seeking access as necessary to accomplish the services connection;
and (5) access to any other services as to which the provider is market-dominant. Upon request, a market-dominant provider must make known the technical and commercial terms and
conditions of its interconnection services, and the basis on which the interconnection service is
offered must be disclosed in an understandable and unbundled manner. In addition, the
market-dominant provider is required to publish at least once a year the following information: the
basic offering; a description of standard interconnection points and access conditions; and a
complete description of the applicable interfaces and signal protocols. To satisfy these
requirements, Swisscom publishes an interconnection brochure on the Internet and in paper format. A
market-dominant provider must further promptly make known any changes in the terms of its
interconnection services offering expected in the following twelve months. The Telecommunications Ordinance requires that prices charged for interconnection services by a
market-dominant provider be cost-oriented. Since January 1, 2000, prices have had to be based on
the following principles: a component related to the cost of providing interconnection; a
component based on the long-run incremental cost (LRIC) of providing the requested services using
the required network components; a constant mark-up for joint and common costs; and a return on
capital invested at a rate customary for the industry. Costs must assume the expenses and
investments of an efficient operator using modern equivalent assets and must be forward-looking. A
provider of interconnection services must use accounting principles consistent with cost-oriented,
non-discriminatory and transparent pricing. Following the introduction of LRIC, Swisscom substantially reduced its standard interconnection
rates. Swisscom believes that its current interconnection rates are in line with the European
average and represent a fair, transparent and consistent implementation of the applicable
regulatory requirements. Swisscom expects to continue to reduce its interconnection charges from
time to time as it realizes further cost savings through network optimization or improvements in
efficiency. Since 2000, Swisscom has been involved in two legal proceedings relating to
interconnection. In November 2003, ComCom issued a decision which requires Swisscom to lower
interconnection prices with retroactive effect for the years 2000 to 2003 by 25-35%. Swisscom has
filed an appeal against this decision. In October 2004, the Federal Court overturned ComComs
decision on procedural grounds and remanded the petitions for re-hearing before ComCom. See Item
8: Financial Information  Legal Proceeding. In addition to market-dominant telecommunications service providers, providers of universal
services are also obligated to make a basic offering of interconnection to other service providers. Swisscom has developed a standard interconnection offer, which it markets to all service providers
in the Swiss market eligible for interconnection under the
Telecommunications Act. See  Fixnet
Wholesale Traffic  Wholesale National. As of December 31, 2004, Swisscom had concluded
interconnection agreements with 32 operators. Interconnection agreements, except for confidential
portions thereof, can be consulted by the public at the offices of OfCom. The Telecommunications Act provides that if a service provider that is required to provide
interconnection and an applicant for interconnection cannot reach agreement within three months,
ComCom is authorized, on a proposal from OfCom, to fix the conditions for interconnection. If the
interconnection provider cannot demonstrate that its prices are properly related to costs as
required, ComCom may determine the interconnection conditions on the basis of market and industry
comparisons. Unbundling of the Local Loop and Other Access Regulation Until April 1, 2003, under the terms of the Telecommunications Act and the Telecommunications
Ordinance, market-dominant service providers have not been required to offer unbundled access to
the local loop or access to leased lines on a cost-oriented basis. This principle was confirmed by
the Federal Supreme Court in October 2001 in the Commcare case, in which the Court ruled that
leased lines and transmission media do not fall within the interconnection provisions of the
Telecommunications Act and related Ordinance and stated that there is no legal basis for a
requirement that Swisscom unbundle the local loop. 63




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In response to this decision, and supported by ComCom, in July 2002, the Federal Council proposed
amendments to the Telecommunications Act and the Telecommunications Ordinance that would require
Swisscom to offer unbundled access to its local loop and interconnection to leased lines on a
cost-oriented basis. The proposal would have provided for all three kinds of unbundling, Full
Access, Shared Line Access and Bitstream Access. In March 2003, the Federal Council adopted the amendments to the Telecommunications Ordinance, with
effect from April 1, 2003. However, based on a decision issued by the Federal Court in November
2004, these amendments will not be applicable on the grounds that the Telecommunications Act as
currently in effect does not provide sufficient legal basis for those amendments. In October 2004, the First Chamber of the Swiss Parliament passed a bill in the first reading with
significant amendments to the Telecommunications Act, which is currently under consideration by the
Second Chamber of the Swiss Parliament. Under the proposed amendments to the Telecommunications
Act, market-dominant service providers would be required to offer access to the unbundled local
loop, bitstream access (for a limited period of two years), access to ducts, access to leased lines
and access rebilling on a cost-oriented basis. This new regulatory scheme would, as currently
proposed, not extend to new technologies such as mobile technology or wireless broadband networks.
Swisscom does not expect the amendments to the Telecommunications Act to become effective before
2006. Mobile Telecommunications In connection with the opening of the mobile market to competition, ComCom has adopted a
radiocommunication frequency allocation plan under which there were to be a total of three national
mobile GSM telephony licenses. One mobile telephony license was automatically granted to Swisscom
pursuant to the Telecommunications Act. ComCom awarded the two additional national mobile telephony licenses through a competitive process
based on designated criteria in May 1998 to diAX (now TDC Switzerland, Sunrise) and Orange. diAx
was granted the right to use frequencies in the 900 MHz and 1800 MHz bands and Orange the right to
use frequencies in the 1800 MHz band. The three GSM licenses are effective for a ten-year period
until 2008. Swisscom will need to apply for renewal of its license until May 31, 2006. It cannot
be excluded that ComCom may impose certain conditions on the renewal, including additional fees. In October 2000, ComCom put further frequencies (GSM 900 MHz and GSM 1800 MHz) in the extended GSM
band up for auction. The auction was ultimately suspended, and the frequencies were allocated by
mutual agreement. Pursuant to this agreement, Swisscom received 5 MHz, TDC Switzerland (Sunrise)
received 7 MHz and Orange received 2.2 MHz in the GSM 900 MHz band, including frequencies in the
extended GSM band. A concession of seven years was granted on the basis of this agreement, with
each contender paying the minimum price. In 2003, a third frequency block of 2x25 MHz on the GSM
1800 MHz band has become available for civilian use and a GSM license was awarded to each of
In&Phone and Tele2. With the aim to foster competition in the mobile telecommunication market,
Swisscom and the other two GSM operators were not allowed to participate in the bidding process. In November 2004, ComCom decided to award the remaining frequencies reserved for the GSM standard
to the three GSM operators currently active in Switzerland (Swisscom, Sunrise and Orange) with the
aim of facilitating nationwide coverage in Switzerland for broadband mobile data services. On December 6, 2000, an auction for four UMTS licenses commenced with the participation of four
operators. The UMTS licenses were sold for a total of CHF 205 million to Swisscom, dSpeed (a wholly
owned subsidiary of TDC Switzerland, Sunrise), and Telefónica, each paying CHF 50 million, and
Orange, paying CHF 55 million. Under the original terms of the UMTS license, each licensee was
required to build out its network to achieve population coverage of 20% by the end of 2002 and 50%
by the end of 2004, unless it is unable to fulfill this obligation for reasons beyond its control
and can prove that it has made every effort to do so. In June 2002, ComCom amended the terms of the
license to eliminate the requirement that 20% population coverage be achieved by the end of 2002.
Licensees were still required to achieve 50% population coverage by the end of 2004. Swisscom
achieved this threshold in May 2003. 64




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While the Telecommunications Act opened the Swiss mobile telephony market to competition, mobile
telephony in Switzerland has not yet been the subject of extensive regulation. However,
developments in the EU and Switzerland could result in additional regulation in the future. In recent years, the European Union has been analyzing the markets for various mobile telephony
services, including mobile access and call origination, mobile termination and mobile roaming with
a view to determining whether additional regulation is required to ensure effective competition and
prevent market abuse. These initiatives could ultimately lead to European-wide regulation of
mobile access and call origination and/or a significant reduction in mobile termination fees for
individual companies determined to have significant market power in their local markets. They
could also lead to a significant reduction in international roaming charges. While Switzerland is
not a member state of the EU and therefore is not subject to EU legislation, EU directives and
implementing legislation in various EU countries have served as points of reference for the
development of the Swiss regulatory regime. Although not part of the current proposed amendments to the Telecommunications Act, earlier
proposals would have provided the legal basis in Switzerland for requiring market-dominant
providers to provide access to any relevant infrastructure or service, including new technologies
such as mobile technology or wireless broadband networks, on a cost-oriented basis. There can be
no assurance that such measures will not be reintroduced in the future. Regulation of mobile
access could result in Swisscom being required to give access to its network to mobile virtual
network operators or to sell to its competitors mobile telephony minutes for resale on a
cost-oriented basis. Pressure on the Swiss regulatory authorities to regulate mobile access has
increased as a result of the award of new mobile licenses to two service providers that require
national roaming in areas where they do not have their own network. See also Item 8: Financial
Information  Legal Proceedings  Other Regulatory Proceedings for further information on a
regulatory proceeding currently pending, which could also result in Swisscom being required to
reduce its mobile termination fees. On December 22, 1999, the Federal Council adopted an ordinance relating to protection against
non-ionizing radiation (Verordnung über den Schutz vor nichtionisierender Strahlung), known as the
NIS Ordinance, which came into force on February 1, 2000. The NIS Ordinance is designed to
protect the population of Switzerland from non-ionizing radiation emitted by various sources,
including mobile antennae, and limits emissions by mobile base stations to specified levels. The
Ordinance applies to mobile and any telecommunications services transmitted over radio, such as GSM
or UMTS services. For mobile antennae with a minimum power exceeding 6 watts, construction
authorizations issued by local authorities are required. Newly-built stations are required to
comply with the emissions standards and existing stations have had to be upgraded to bring them
into compliance. Swisscom has substantially completed the upgrade of its existing stations for
compliance with these standards. The NIS Ordinance is implemented by the cantons, which have used in the past different methods of
measuring radiation emissions to determine compliance with the NIS Ordinance, resulting in
significant regional variations in effective emission standards. In July 2002, BUWAL issued final
recommendations which provide guidance for enforcement authorities on the appropriate method for
measuring electromagnetic emissions from base stations and masts in the GSM network. These
recommendations are generally binding on the cantons, but deviations are permitted under certain
circumstances. In order to comply with the applicable emission standards and maintain the current
level of service, Swisscom has been and will be required to put up additional antennae. However,
Swisscom does not expect the associated costs in 2005 to be materially different from those
incurred in previous years. While the BUWAL recommendations establish uniform standards for measuring emissions in GSM
networks, they do not address emission standards for UMTS networks. Draft recommendations relating
to emission standards for UMTS networks were published in 2004 and are currently applied. Final
recommendations are expected to be adopted and become effective in the course of 2005. Depending on
the enforcement recommendations ultimately adopted, it is possible that additional capital
expenditures will be required in connection with the build-out of Swisscoms UMTS network. 65




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Carrier Selection and Number Portability Under the Telecommunications Act and ComComs ordinance relating to carrier selection and number
portability public fixed-line telephony service providers are required to provide their users the
ability to select their desired national and international service providers on both a call-by-call
basis (using a five-digit number prefix) (known as easy access) and on a pre-selection basis
(subject to call-by-call override) (known as equal access). Public mobile telephony service
providers are also required to provide their users the ability to select their desired
international service provider on an easy access basis. ComCom has suspended provisionally a further requirement that public mobile telephony service
providers implement equal access in the mobile network until technical development and
international standards allow its implementation. In addition, public fixed-line telephony service providers, public mobile telephony service
providers and non-geographical services such as providers of toll-free numbers are required to
provide number portability. Number portability means that customers must be given the ability to
switch to another service provider within the same category of service (i.e., fixed-line to
fixed-line, mobile to mobile) while retaining the same telephone number. The cost of implementing
number portability is borne by each service provider. The original service provider may charge a
fee to the new service provider to cover the direct administrative costs of connection for a
particular customer move. At the end of March 2002, a new numbering plan was introduced in Switzerland. Under the new plan,
all phone numbers in Switzerland are to consist of ten digits, with the former area code having
become an integral part of a subscribers phone number. As a result, subscribers who have
pre-selected an alternative carrier will have their local calls routed automatically over that
carriers network. Leased Lines Under the Telecommunications Act and the Telecommunications Ordinance, ComCom is authorized to
require a licensed telecommunications services provider to provide leased lines at cost-oriented
prices in a particular region if it is determined that demand for such lines has not otherwise been
fully met. To date, ComCom has not taken any action under these provisions. For information on the proposed amendments to the Telecommunications Act that would, if adopted,
require Swisscom to offer access to leased lines on a cost-oriented basis, see   Unbundling of
the Local Loop and Other Access Regulation and Item 8: Financial Information  Legal
Proceedings. Ownership of Lines and Rights of Way The Telecommunications Act provides that ownership in lines for the transmission of information by
means of telecommunications techniques is with the licensee who has installed them or acquired them
from third parties. Prior to the enactment of the Telecommunications Act, Swisscom had the right to use land in public
use (roads, footpaths, squares, waterways, lakes, etc.) free of cost to install and operate lines.
The Telecommunications Act provides that every holder of a telecommunications service license is
to have such right to use land in public use free of cost to install and operate lines and public
payphones, provided that such use does not interfere with the common use of such land in public
use. The owner of such land (e.g., the Confederation, the cantons or the communities) is to grant
the licensee a respective approval in a short and simple procedure. Except for the administrative
costs for such procedure, no charges may be levied on the licensee. Under the Telecommunications Ordinance, every holder of a telecommunications service license is
also entitled to install and operate lines that cross railway lines. If the holder of a telecommunications service license cannot reach agreement with the owner of
private property on the use of such property by the licensee for the installation and operation of
lines, UVEK may grant the licensee the 66




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right of expropriation if the establishment of a telecommunications installation on private
property is in the public interest. OfCom may, for reasons of public interest, in particular to protect the national heritage and the
environment, also require the holder of a license for telecommunications services to grant other
licensees the right to make joint use of its existing installations, if they have sufficient
capacity, in return for appropriate compensation. With respect to this right for joint use of
existing installations, the provisions on interconnection are to be applied by analogy. International Obligations Over 70 member countries of the World Trade Organization (WTO) representing over 90% of the
worlds basic telecommunications revenue, including Switzerland, the members of the EU and the
United States, have entered into the Basic Agreement on Telecommunications (BATS) to provide
market access to some or all of their basic telecommunications services. This agreement has been in
effect since February 5, 1998. BATS is part of the General Agreement on Trade in Services, which is
administered by the WTO. Under BATS, Switzerland and the other signatories have made commitments to
provide market access, under which they are to refrain from imposing certain quotas or other
quantitative restrictions in specified telecommunications services sectors and to provide national
treatment, under which they are to avoid treating foreign telecommunications service suppliers
differently than national service suppliers. In addition, a number of signatories, including
Switzerland, agreed to the pro-competitive principles set forth in a reference paper relating to
anti-competitive behavior, interconnection, universal service, transparency of licensing criteria,
independence of the regulator and allocation of scarce resources. However, the Federal Supreme Court found in its decision of October 3, 2001 (re Commcare AG vs.
Swisscom) that even if the WTO/BATS provisions were directly applicable in Switzerland, which is
uncertain, they do not grant any right to unbundling or to obtain leased lines or transmission on
interconnection terms. 67




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ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion should be read in conjunction with Swisscoms consolidated financial
statements, which have been prepared in accordance with International Financial Reporting Standards
(IFRS), which differ in certain respects from U.S. GAAP. For a reconciliation of the material
differences between IFRS and U.S. GAAP, see Note 42 to the consolidated financial statements. INTRODUCTION Swisscom is the principal telecommunications provider in Switzerland, offering a comprehensive
range of products and services to residential and business customers. Swisscoms core business is
the provision of fixed-line and mobile telephony and data services. Fixed-line services are
provided through the business segments Fixnet and Enterprise Solutions, generating 45% and 10% of
Swisscoms total revenues in 2004, respectively. Mobile services are provided through the business
segment Mobile, generating 37% of Swisscoms total revenues in 2004. For a more detailed
description of the services provided by each of these segments, see Item 4: Information on the
Company. The principal sources of revenues within each of these segments are:  

Fixnet:monthly subscription fees for providing telephone and Internet access,
charges for making calls from a fixed-network access lines, and wholesale
interconnection charges to other telecommunication companies;

Mobile:monthly subscription fees, traffic charges for calls made in Switzerland by
Mobiles customers, roaming and termination fees paid by other mobile operators, and
fees from data services;

Enterprise Solutions:charges for fixed-line voice telephony services to business
customers, fees for providing leased lines and Intranet services as well as integrated
communications solutions. The principal components of Swisscoms operating expenses include:  

Goods and services purchased, mainly consisting of interconnection fees for national
and international traffic and costs of customer equipment;

Personnel expenses, consisting of payroll and other employee related costs;

Other operating expenses, including costs for customer acquisition and retention
measures, marketing and selling expenses, information technology costs, and expenses
for repairs and maintenance. Swisscoms revenue and results of operations are and may be affected by a number of important
factors, including: Regulatory environment.Since the entry into force of the Telecommunications Act, the Swiss
telecommunications market has been open to competition. The Telecommunications Act contains
numerous provisions designed to facilitate competition, which primarily affect the traditional
telecommunications services Swisscom offers. For example, under the Telecommunications Act,
Swisscom is required to offer standard interconnection services on a cost-oriented basis. As a
result, Swisscom had to substantially reduce its interconnection rates in recent years. In the
three year period under review, Swisscom reduced its interconnection rates by an average of 9% per
year. Swisscom expects further reductions in 2005. With interconnection rates declining, retail
tariffs in the fixed-line business have come under pressure, which has negatively affected
revenues. Swisscom has also experienced increased price pressure in the business customer segment
of its mobile business and competition is expected to further increase since new GSM license
holders have announced the start of their operations for 2005. The most important challenge facing
Swisscom is therefore maintaining its leadership in the Swiss telecommunications market on current
levels of 68




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profitability. The extent to which it is able to do so will largely depend on its ability to reduce
its operating costs and implement further staff reductions. A number of regulatory initiatives are currently pending that are likely to further increase
competition and put additional pressure on margins. Under proposed amendments to the
Telecommunications Act, Swisscom would be required to offer, among other things, unbundled access
to its local loop on a cost-oriented basis. The adoption of these amendments would facilitate
competition in the access market and could cause Swisscom to lose additional market share in the
national and international calling markets. Furthermore, Swisscoms mobile termination tariffs and roaming charges may become subject to
regulation in the future. Regulation of mobile termination fees or roaming charges would have a
significant impact on Swisscoms mobile revenues and reduce margins and profitability. Technological developments.In recent years, the telecommunications industry has seen rapid
technological developments that have resulted in a change in user patterns and given rise to new
competitive challenges. Traditional telecommunication services, such as fixed-line services, are
increasingly being replaced by mobile phones and other communication technologies, such as voice
over IP. The availability of alternative technologies capable of supporting telecommunications
services is enabling competitors to provide services which fully substitute for Swisscoms core
services (fixed-line voice and data services and mobile telephony). In mid-2004, Cablecom began to
offer telephony services over cable on a commercial basis and has been experiencing rapid growth in
the number of its subscribers. Swisscom seeks to counter these developments by participating in the
growing market for broadband services by providing innovative multimedia services such as TV and
video on demand over its fixed-line network. Economic environment.Swisscoms business is influenced by general economic conditions in
Switzerland. In the last several years, economic growth in Switzerland has been anemic, with gross
domestic product actually declining in 2003, before recovering modestly in 2004. During this
economic slowdown customers have become more conscious of usage levels and tariffs. For example,
many of Swisscoms mobile customers have been switching to budget service packages, which has led
to a decline in the number of subscribers to Swisscoms higher priced services, effectively
resulting in an overall tariff reduction. To stimulate demand in its fixed-line and mobile
businesses, Swisscom has introduced new services based on broadband technologies such as ADSL and
UMTS, in which Swisscom has made, and continues to make, substantial investments. However, in a
weak economic environment customers are more reluctant to use higher priced services. Accordingly,
if the economy remains weak and consumer spending does not improve, Swisscom may not be able to
realize a return on its investments in these technologies. Weak growth in the Swiss economy has
also had a strong impact on Swisscoms business with corporate communication and IT solutions in
which demand remains sluggish notwithstanding recent improvement in general economic conditions. Personnel expenses.Personnel expenses make up a significant portion of Swisscoms cost base. In
order to improve productivity and reduce costs, Swisscom has implemented a workforce reduction
program under which it eliminated approximately 2,300 positions in the three years under review.
While this program has resulted in an overall decline in personnel expenses, the benefit has been
muted by the fact that Swisscom has had to incur expenses associated with termination benefits such
as its outplacement program (PersPec) and alternative employment programs, such as its employment
program (Worklink). Swisscoms continued ability to implement staff reductions and reduce personnel
expenses will have a significant impact on its future profitability. Capital expenditures and depreciation.Swisscoms results may also be affected by the level of its
depreciation expense, which in turn depends on the timing and extent of its capital expenditures.
In addition, the rapid pace of technological change may require Swisscom to reduce its estimates of
the useful lives of its equipment, which would cause depreciation expenses to increase. Swisscoms
depreciation expenses (excluding the effect of an impairment relating to sea cable in 2004 of CHF
155 million) declined in the periods under review as a decline in depreciation in the Fixnet
segment due to an increase in the number of fully depreciated assets was only partially offset by
an increase in the Mobile segment due to increased investments in UMTS and EDGE technology and the
resulting reduction of the useful lives of certain GSM equipment. In the medium term, depreciation
expenses are expected to remain relatively stable, as a decrease in depreciation expenses due to an
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assets is expected to be offset by an increase due to an increase in capital expenditures mainly
related to new fixed-line broadband technologies. SUMMARY OF RESULTS Despite strong competition and a weak economic environment in 2004, Swisscom was able to maintain
revenue at the same level as in 2003. Declining traffic revenue from traditional fixed-line
telephony was offset by an increase in access revenue, reflecting an increase in ADSL subscribers,
and in revenue from mobile telephony. Competition in the fixed-line market has increased with cable network operators introducing voice
telephony services over their own infrastructure. In addition, the ongoing substitution of
fixed-line telephony by mobile telephony and of Internet dial-up traffic by broadband Internet use
resulted in a significant decrease in traffic volumes. Strong competition has also put pressure on
traffic prices in the business segment. The resulting decline in fixed-line traffic revenue was
partially offset by an increase in access revenues as the number of ADSL subscribers continued to
increase, albeit at a slower rate than in 2003. Growth in the mobile telephony market is slowing. However, mobile revenues increased mainly due to
a further increase in the number of subscribers reflecting an increase in penetration. A decrease
in usage of voice telephony was offset by an increase in the usage of new data services. In 2004, Swisscom continued to focus on cost management, in particular on headcount reduction.
However, mainly as a result of the increase in the mobile subscriber base and related expenses for
the purchase of mobile handsets and traffic charges, total expenses increased compared to 2003
resulting in a decrease in operating income. Although Swisscoms cash flows from operating activities in 2004 declined compared to 2003,
Swisscom still maintains a balance sheet with a significant cash position and in accordance with
its return policy, it returned approximately CHF 2.9 billion to its shareholders through dividends
and a share buy back in 2004 and plans to return the same amount to its shareholders in 2005. For the future, Swisscom expects that growing competition, in particular from cable operators, as
well as regulatory risks such as unbundling of the local loop and a reduction in interconnection
tariffs will further increase pressure on margins in the traditional fixed-line business. Swisscom
seeks to counter these developments by participating in the growing market for broadband services
through the introduction of innovative services. With penetration rates having reached very high
levels, subscriber growth in the mobile market is slowing. Mobile revenues are expected to be
driven by Swisscoms ability to retain high-value customers and to stimulate usage through the
implementation of new services and new mobile broadband technologies. Mobile revenues may also be
affected by declining prices as a result of increased competition and regulatory initiatives, which
could include regulation of mobile termination tariffs as well as access to certain mobile
services. CRITICAL ACCOUNTING POLICIES Swisscoms financial statements are prepared in accordance with International Financial Reporting
Standards (IFRS). In addition, Swisscom reconciles net income and shareholders equity to U.S.
GAAP. See Note 42 to the consolidated financial statements. The preparation of these financial
statements requires management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and
liabilities. Set out below are the details of certain significant estimates made by management in
the financial statements where it is possible that the estimate of a condition, situation or set of
circumstances that existed at the date of the financial statements will change in the future due to
one or more future confirming events and that the effect of the change would be material to the
financial statements. 70




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Pension fund accrual The determination of the liability and expense for pension benefits is dependent on the selection
of assumptions, which attempt to anticipate future events, used by Swisscoms actuary to calculate
such amounts. Those assumptions are described in Note 9 to the consolidated financial statements
and include the discount rate, expected long-term rate of return on plan assets and rates of
increase in future compensation levels. In addition, Swisscoms actuary also uses subjective
factors such as withdrawal and mortality rates. The assumptions used for IFRS are consistent with
those used for U.S. GAAP. Approximately 30% of the pension plan assets at December 31, 2004 were
held in stocks and bonds denominated in foreign currencies, primarily USD and EUR. From the date of inception of Swisscoms pension plan, comPlan, in January 1999 to December 31,
2004, the cumulative actual return on assets has been significantly lower than the expected return.
The average annual actual return on plan assets in this period was 2.5%, whereas the expected
return was 4.5% in 2004, 5% in 1999 and 2003 and 5.5% from 2000 to 2002, which resulted in a
cumulative actuarial loss of CHF 664 million at December 31, 2004. As a result of improved
performance of the stock markets in 2004, this actuarial loss was reduced by CHF 64 million,
reflecting the excess of the actual return on assets of CHF 284 million over the expected return of
CHF 220 million. During the second half of 2003, Swisscom reviewed the plans investment strategy
and revised its assumption for the expected return on plan assets from 5.0% to 4.5% from 2004.
While Swisscom believes that the assumption for the long-term return is appropriate, should the
stock markets underperform or exchange rates change, this would affect Swisscoms future expense
and could lead Swisscom to increase its contributions. The discount rate used for the calculation of the pension liability at the end of 2004 was 3.15%.
Should the discount rate decrease by 0.5%, the pension liability would increase by approximately
CHF 634 million and the annual pension expense would increase by approximately CHF 9 million. The rate of increase in future compensation levels used in 2004 was 2.3%. Should this rate increase
by 0.5%, the pension liability would increase by approximately CHF 133 million and the annual
pension expense would increase by approximately CHF 13 million. In connection with the settlement of its obligation to retired employees in 1998, Swisscom retained
a liability for pension indexation, which up until December 31, 2004, was a guaranteed rate.
Effective January 1, 2005, new legislation was introduced to abolish the previously guaranteed
pension indexation. As a result of this new legislation, Swisscom reduced its assumption for
pension indexation from 1.0% to 0.5%, which resulted in a decrease in the liability from CHF 338
million at December 31, 2004 to CHF 169 million at December 31, 2005. While Swisscom believes that
the assumption used to determine this liability is appropriate, should the Government decide to
change the indexation, this would affect Swisscoms pension liability and future expense. In 2004, under U.S. GAAP, Swisscom recorded a minimum liability of CHF 743 million, of which CHF
245 million reflected the unrecognized prior service cost and was recorded as an intangible asset.
The remaining CHF 498 million, net of tax of CHF 111 million, was recorded against equity. An
increase of the minimum liability would result in a further reduction of shareholders equity. Valuation debitel On April 29, 2004, Swisscom entered into an agreement to sell its stake in debitel to Telco Holding
S.à r.l. Luxembourg and completed the sale on June 8, 2004 for a total of EUR 640 million. Details
on the transaction are described in Note 39 to the financial statements. Of the total selling
price, EUR 430 million was paid in cash and the remaining EUR 210 million was in the form of vendor
loans. Swisscom granted two vendor loan notes of EUR 105 million each to a 100% subsidiary of Telco
Holding S.à.r.l. The repayment of these loans is scheduled over seven and eight years,
respectively. The loans were initially recorded at fair value, which amounted to EUR 168 million
(CHF 254 million) and will subsequently be accounted for using the effective interest method. The
fair value calculation was based on an interest rate of 12.5%. The loans amounted to EUR 179
million (CHF 275 million) at December 31, 2004. The repayment of the vendor loans is dependant on debitels future performance and Swisscom
therefore faces the risk that it may not recover the full amount of these loans. Should this be the
case, Swisscom would need to write off these loans. In January 2005, Swisscom received a first
repayment of EUR 20 million. 71




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In connection with the transaction, Swisscom has agreed to indemnify the purchaser for any breach
of the representations and warranties made by it in the purchase agreement and for certain
liabilities, including tax liabilities, of debitel. In addition, Swisscom has agreed to bear the
risk of and to indemnify the purchaser for any losses which may arise in the future at one of
debitels international subsidiaries. As this subsidiary recorded net income in the period from
the date of sale until December 31, 2004, Swisscom has not been required to pay such
indemnification. Swisscom has the option to assume control of this subsidiary for EUR 1 should the
future cash losses exceed the amount of EUR 14 million or after December 31, 2005. The buyer has
the right to sell the international subsidiary back to Swisscom for the same amount in January
2006. Based on current estimates, the maximum amount that could become due relating to the
representations and warranties (excluding the indemnification given for one of debitels
international subsidiaries) is approximately EUR 110 million at December 31, 2004. No accrual has
been recorded for this potential indemnification as management believes that the criteria for the
recognition of a liability have not been met. Useful lives of technical equipment Technical equipment, with a net book value of CHF 4,656 million at December 31, 2004, represents a
significant portion of Swisscoms total assets. Swisscom estimates the useful lives of this
equipment in order to determine the amount of depreciation expense to be recorded during any
reported period. The estimated lives are based on historical experience as well as taking into
account anticipated technological or other changes. Detail of the useful lives is included in Note
2.9 of the consolidated financial statements. Useful lives under U.S. GAAP are identical to those
under IFRS. Changes in technology or in Swisscoms intended use of these assets may cause the
estimated period of use or the value of these assets to change, which would result in increased or
decreased depreciation expense. Swisscom performs internal studies annually or when events or
circumstances indicate that the useful life may no longer be appropriate. Additionally, technical
equipment is reviewed for impairment whenever events indicate that their carrying amounts may not
be recoverable. In assessing impairment, Swisscom follows the provisions of IAS 36 Impairment of
Assets and SFAS 144 Accounting for the Impairment or disposal of Long-Lived Assets utilizing
cash flows which take into account managements estimates of future operations under IFRS and U.S.
GAAP, respectively. Provision for dismantlement and restoration As detailed in Note 26 to the financial statements, management has included a provision of CHF 337
million at December 31, 2004 for the dismantlement and restoration of mobile stations and analog
transmitter stations. In 2003, Swisscom extended the expected timing of the dismantlement as a
result of a change in the requirements of a major customer, which will result in the stations being
used for a longer period. The dismantlements are expected to be incurred mainly after 2010. This
resulted in a reduction in the present value of the provision of CHF 43 million, which reduced
financial expense in 2003 by a corresponding amount. The provision is based on future estimated
costs and is discounted using an appropriate discount rate. While management believes that the
assumptions used are appropriate, should they not be accurate, the amount required could differ
from the amount of the provision. Effective January 1, 2003, Swisscom adopted SFAS 143 Accounting
for Asset Retirement Obligations and as a result there is no material difference between the asset
retirement obligation under IFRS compared to U.S. GAAP. The net impact of adopting SFAS 143, which
was a credit to the income statement of CHF 31 million, was recorded as a cumulative effect of
accounting change on January 1, 2003. See Note 42 to the consolidated financial statements. 72




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RESULTS OF GROUP OPERATIONS Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Net revenue
    
    
    10,415
    
    
    
    10,026
    
    
    
    10,057
    
    
    
    (3.7
    )
    
    
    0.3Other income
    
    
    230
    
    
    
    233
    
    
    
    197
    
    
    
    1.3
    
    
    
    (15.5
    )Total
    
    
    10,645
    
    
    
    10,259
    
    
    
    10,254
    
    
    
    (3.6
    )
    
    
    (0.0
    )Goods and services purchased
    
    
    2,073
    
    
    
    1,706
    
    
    
    1,847
    
    
    
    (17.7
    )
    
    
    8.3Personnel expenses
    
    
    2,329
    
    
    
    2,266
    
    
    
    2,194
    
    
    
    (2.7
    )
    
    
    (3.2
    )Other operating expenses
    
    
    1,989
    
    
    
    1,783
    
    
    
    1,809
    
    
    
    (10.4
    )
    
    
    1.5Depreciation
    
    
    1,552
    
    
    
    1,543
    
    
    
    1,548
    
    
    
    (0.6
    )
    
    
    0.3Amortization
    
    
    114
    
    
    
    142
    
    
    
    151
    
    
    
    24.6
    
    
    
    6.3Total operating expenses
    
    
    8,057
    
    
    
    7,440
    
    
    
    7,549
    
    
    
    (7.7
    )
    
    
    1.5Operating income
    
    
    2,588
    
    
    
    2,819
    
    
    
    2,705
    
    
    
    8.9
    
    
    
    (4.0
    )Financial result
    
    
    (311
    )
    
    
    (26
    )
    
    
    (144
    )
    
    
    (91.6
    )
    
    
    453.8Income tax (expense) benefit
    
    
    (313
    )
    
    
    (467
    )
    
    
    (394
    )
    
    
    49.2
    
    
    
    (15.6
    )Equity in net income of affiliated
companies
    
    
    94
    
    
    
    (9
    )
    
    
    22
    
    
    
    n.a.
    
    
    
    n.a.Minority interest
    
    
    (301
    )
    
    
    (340
    )
    
    
    (352
    )
    
    
    13.0
    
    
    
    3.5Net income from continuing operations
    
    
    1,757
    
    
    
    1,977
    
    
    
    1,837
    
    
    
    12.5
    
    
    
    (7.1
    )Discontinued operations(1)
    
    
    (933
    )
    
    
    (408
    )
    
    
    (243
    )
    
    
    (56.3
    )
    
    
    (40.4
    )Net income
    
    
    824
    
    
    
    1,569
    
    
    
    1,594
    
    
    
    90.4
    
    
    
    1.6
   (1)
    
    On June 8, 2004 Swisscom completed the sale of its stake in debitel. As a result, debitel
is reported separately as a discontinued operation in the consolidated financial statements.
The previous years figures were restated accordingly. Net revenue Revenue slightly increased from CHF 10,026 million in 2003 to CHF 10,057 million in 2004,
reflecting an increase in revenue from Mobile, partially offset by a decrease in revenue from
Fixnet and Enterprise Solutions. The increase in revenue from Mobile mainly reflects an increase in
the number of subscribers as well as increased usage of new data services and revenue from the sale
of handsets. The decrease in revenue in Fixnet was mainly due to a decrease in traffic revenues
reflecting primarily a decrease in internet traffic as customers continued to migrate to ADSL. This
decrease was partially offset by an increase in access revenues as a result of the substantial
increase in the number of ADSL subscribers, reflecting the continuing growth in demand for high
bandwidth connectivity. The decrease in revenue from Enterprise Solutions was mainly due to a
decrease in traffic and networking revenues as a result of fierce competition. Revenue decreased from CHF 10,415 million in 2002 to CHF 10,026 million in 2003, reflecting a
decrease in revenue from the segments Fixnet and Enterprise Solutions. This decrease was partially
offset by an increase in revenue from Mobile, mainly reflecting an increase in the number of
subscribers. The decrease in revenue in Fixnet and Enterprise Solutions was mainly due to a
decrease in traffic revenue as a result of a loss in market share resulting primarily from the
introduction of 10-digit numbering at the end of March 2002. Since then, the full 10-digit number
must be dialed for all calls. As a result, subscribers who have pre-selected an alternative carrier
have all their national calls routed automatically over that carriers network, whereas in the
past, customers had to enter the carrier override code on a call-by-call basis. In addition, a new
tariff was introduced in May 2002, which combines the local area and national long distance zones
into a single national tariff zone, resulting in increased local area tariffs but decreased
national long distance tariffs. Access revenues increased as a result of a substantial increase in
the number of ADSL subscribers, reflecting the growing demand for high bandwidth connectivity. 73




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Goods and services purchased Goods and services purchased increased from CHF 1,706 million in 2003 to CHF 1,847 million in 2004,
primarily due to an increase in Mobiles costs of equipment purchased for resale reflecting an
increase in the number of handsets sold due to a growing subscriber base and higher average
purchase prices for more sophisticated handsets. The increase in the number of mobile subscribers
also resulted in an increase in expenses that Mobile had to pay other carriers for its customers
roaming on the others networks as well as for national and international interconnection. Goods and services purchased decreased from CHF 2,073 million in 2002 to CHF 1,706 million in 2003,
primarily reflecting a decrease in goods and services purchased by Fixnet as a result of the sale
of its international point of presence in North America in October 2002, the closure of its
European sales offices in November 2002, and a change in Fixnets accounting method for its
third-party ISP numbers. See  Fixnet  External segment expenses. Personnel expenses Personnel expenses decreased from CHF 2,266 million in 2003 to CHF 2,194 million in 2004 mainly as
a result of a decrease in termination benefits from CHF 88 million in 2003 to CHF 48 million in
2004, a decrease in the average number of employees resulting from restructuring measures
implemented in 2002 and 2003 and a decrease in pension expense of CHF 38 million, as described in
Note 9 of the consolidated financial statements. These effects have partially been offset by an
overall salary increase and an increase due to the integration of Billag Card Services which was
acquired in December 2003. Personnel expenses decreased from CHF 2,329 million in 2002 to CHF 2,266 million in 2003 as a
result of a decrease in the average number of employees resulting from restructuring measures
implemented in 2002, partially offset by an overall salary increase as well as an increase in the
average salary of Mobile employees due to increased skill sets and an increase in pension expense
of CHF 54 million, as described in Note 9 of the consolidated financial statements. Other operating expenses Other operating expenses increased from CHF 1,783 million in 2003 to CHF 1,809 million in 2004 due
primarily to an increase in expenses for consultancy and temporary personnel and the consolidation
of Billag Card Services, which was acquired in December 2003. These increases were partially offset
by a decrease in other operating expenses by Fixnet due to an increase in the provision that was
recorded in 2003 for the case against Swisscom relating to its interconnection prices. Other operating expenses decreased from CHF 1,989 million in 2002 to CHF 1,783 million in 2003 due
primarily to a decrease in expenses incurred by the segment Other as a result of cost reduction
measures that were introduced in 2003 at Swisscom Systems and IT Services and a decrease at Fixnet
due to the optimization of maintenance costs and a reduction in advertising spending, partially
offset by an increase in the provision that was recorded in 2003 for the case against Swisscom
relating to its interconnection prices. Depreciation Depreciation slightly increased from CHF 1,543 million in 2003 to CHF 1,548 million in 2004 mainly
due to (i) an increase in depreciation at Mobile due to an increase in capital expenditures
relating to the rollout of new broadband technologies and a respective reduction in the useful
lives of older network equipment and (ii) an impairment of CHF 155 million relating to sea cable
owned by Fixnet, as described in Note 21 of the consolidated financial statements. These effects
were partially offset by lower depreciation in the Fixnet segment mainly due to an increase in the
number of fully depreciated assets and to the phase out of one of Fixnets switching platforms in
2004, which resulted in only partial year depreciation in 2004. Depreciation decreased from CHF 1,552 million in 2002 to CHF 1,543 million in 2003 due primarily to
an increase in the number of fully depreciated assets that have not been replaced in several
segments, partially offset by an increase in depreciation at Fixnet and Mobile. This increase was a
result of the reduction of the useful life of one of 74




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Fixnets three switching platforms, which Fixnet decided in December 2002 to phase out over the
course of 2003 and 2004, and the reduction of useful lives of certain GSM equipment which had to be
replaced earlier than expected due to the roll out of UMTS. Amortization Amortization increased from CHF 142 million in 2003 to CHF 151 million in 2004 due to the
amortization of goodwill for Billag Card Services, which was acquired in December 2003. Amortization increased from CHF 114 million in 2002 to CHF 142 million in 2003 due primarily to the
acquisition of several companies in the WLAN business forming the foundation of Swisscom Eurospot. Financial result Financial result decreased from a net expense of CHF 26 million in 2003 to a net expense of CHF 144
million in 2004, mainly due to a reduction in 2003 in the present value of the provisions for
dismantlement due to the extension of the expected timing of the dismantlement. See Note 26 of the
consolidated financial statements. The decline in financial result was also due to a decrease in
foreign exchange gains from CHF 48 million in 2003 to CHF 5 million in 2004. Financial result improved from a net expense of CHF 311 million in 2002 to a net expense of CHF 26
million in 2003 due primarily to a reduction in interest payable reflecting the repayment of debt
to the Swiss Post and a decrease in asset write-downs in 2003. In 2003, Swisscom recorded an
impairment charge of CHF 33 million on its investment in Swiss International Airlines Limited,
compared to CHF 41 million in 2002. Swisscom also recorded an impairment charge of CHF 111 million
on its investment in Infonet in 2002. In addition to these effects, Swisscom recorded foreign
exchange gains of CHF 48 million in 2003 compared to foreign exchange losses of CHF 70 million in
2002. These improvements in financial result were partially offset by a decrease in interest
receivable due to a reduction in cash balances on deposit and in interest rates. Income tax Income tax expense decreased from CHF 467 million in 2003 to CHF 394 million in 2004. In prior
years, a valuation allowance was recorded on certain deferred tax assets as it was considered
improbable that benefits would be realized in the future. In 2004, this assessment changed as a
result of organizational changes and deferred tax assets of CHF 113 million were capitalized
against expenses. In 2003, income tax expense decreased by CHF 80 million as a result of an
impairment of the goodwill relating to debitel, which was tax-deductible. The effective tax rate
for 2004 was 15.4%. For 2005, an effective tax rate of 22% is expected. Income tax expense increased from CHF 313 million in 2002 to CHF 467 million in 2003 due primarily
to an increase in taxable income. The effective tax rate for 2003 and 2002 was 16.7% and 14%,
respectively. For further information relating to income tax expense, see Note 13 to the consolidated financial
statements. Equity in net income of affiliated companies Equity in net income of affiliated companies improved from a loss of CHF 9 million in 2003 to an
income of CHF 22 million in 2004. The loss in 2003 included the loss from the disposal of the
indirectly held investment in Cesky Telecom in 2003. Equity in net income of affiliated companies decreased by CHF 103 million from an income of CHF 94
million in 2002 compared to a loss of CHF 9 million in 2003, due primarily to the disposal of
Swisscoms indirectly held investment in Cesky Telecom which resulted in a loss of CHF 71 million
and a decrease in income related to Swisscoms investment in AUCS compared to prior year. See Note
22 to the consolidated financial statements. 75




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Minority interest Minority interest relates mainly to the 25% shareholding of Vodafone in Swisscom Mobile AG.
Minority interest increased by 3.5% in 2004 and 13.0% in 2003 due to an increase in net income of
Swisscom Mobile AG. Discontinued operation On June 8, 2004, Swisscom sold its stake in debitel to Telco Holding S.à r.l. Luxembourg. As a
result, debitel is reported separately in the consolidated financial statements as a discontinued
operation. For details on this transaction, see Note 39 of the consolidated financial statements. The following table sets forth debitels results for the periods indicated: Year EndedDecember 31,
    
    
    Period from JanuaryCHF in millions
    
    2002
    
    
    2003
    
    
    1 to June 8, 2004Net revenue
    
    
    4,111
    
    
    
    4,555
    
    
    
    1,917Expenses(1)
    
    
    (4,993
    )
    
    
    (4,938
    )
    
    
    (1,913
    )Operating (loss) income
    
    
    (882
    )
    
    
    (383
    )
    
    
    4Other net (expenses) income
    
    
    (51
    )
    
    
    (25
    )
    
    
    1Net (loss) income from discontinuing operations
    
    
    (933
    )
    
    
    (408
    )
    
    
    5
   (1)
    
    Includes goodwill amortization in 2002, 2003 and 2004 of CHF 277 million, CHF 172 million
and CHF 57 million, respectively, and impairment of goodwill in 2002 and 2003 of CHF 702
million and CHF 280 million, respectively. Revenue and net income of debitel up to the date of completion of the sale in 2004 amounted to
CHF 1,917 million and CHF 5 million, respectively, including goodwill amortization of CHF 57
million. A loss on the sale of CHF 248 million was recorded in 2004 reflecting primarily the
removal of the cumulative currency translation loss of CHF 238 million from equity into the income
statement. For information on Swisscoms remaining exposure related to debitel, see critical
accounting polices above. Net operating loss of debitel in 2003, including goodwill amortization of CHF 172 million and
goodwill impairment of CHF 280 million, was CHF 383 million. The impairment charge was calculated
based on the value in use of the investment which approximated the net proceeds expected from the
sale. Excluding the expenses relating to goodwill, debitel had net operating income of CHF 69
million. Net operating loss of debitel in 2002, including goodwill amortization of CHF 277 million and
goodwill impairment of CHF 702 million, was CHF 882 million. The impairment charge recorded in 2002
resulted from a decline in future expected growth in the mobile sector and the expected delay in
the third generation system, UMTS. Excluding the expenses relating to goodwill, debitel had net
operating income of CHF 97 million. Outlook Based on continuing strong competition and assuming no significant regulatory changes, Swisscom
expects consolidated net revenue to remain relatively stable in 2005. However, Swisscom expects
operating expenses (before depreciation and amortization) to increase as a percentage of revenues.
Nevertheless, operating income should remain relatively stable due to a significant reduction of
depreciation and amortization expenses. This reduction reflects an expected decrease in impairment
expenses at Fixnet as well as a decrease in goodwill amortization since, starting in 2005, goodwill
will no longer be amortized in accordance with IFRS 3. 76




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RESULTS OF OPERATIONS BY SEGMENT In 2004, the following effects had an impact on the structure of Swisscoms reporting segments. The
previous years figures have been restated to reflect these changes.  

Sale of debitelAs a result of the sale on June 8, 2004, the former reporting segment debitel is now
reported separately as a discontinued operation in the consolidated financial statements.
See   Divestments/Discontinued Operations  debitel.

Customer transfer from Enterprise Solutions to FixnetEffective January 2004, Enterprise Solutions increased its focus on large business customers
with complex, solution-oriented telecommunication needs, while Fixnet continues to deliver
standardized telecommunication products for the residential and small business customer
markets. As a result, the revenues and costs generated by 46,000 customers with primarily
standard traffic needs were transferred from Enterprise Solutions to Fixnet.

Direct mobile interconnectionSince February 2003, direct mobile interconnection has been available. Direct mobile
interconnection allows Swisscom Mobile and other mobile network operators to terminate their
traffic directly on each others networks rather than through Fixnet, which had been the
intermediary for such traffic. In 2003, Swisscom Mobile entered into an agreement with one
of the other mobile operators and in 2004 with another. As a result, the revenues and costs
associated with this counterparty, which in the past had been recorded as external revenues
and costs in the Fixnet segment are now recorded as external revenues and costs in the
Mobile segment. The reporting segments for 2004 were defined as follows:  

Fixnetprovides access, fixed-line voice, Internet and a comprehensive range of other
fixed network telecommunication services to residential and business customers. In
addition, Fixnet provides a wide range of wholesale services. Fixnet also offers a variety
of other services, including the sale of customer equipment, the provision of leased lines
and the operation of a directories database.

Mobileprovides mobile telephony, data and value-added services in Switzerland and sells
mobile handsets.

Enterprise Solutionsprovides national and international fixed-line voice telephony
services to business customers and offers leased lines, Intranet, private network and other
services.

Othercovers mainly the sale of corporate voice communications equipment through
Swisscom Systems, the provision of IT services through Swisscom IT Services as well as the
operation of a pan-European network for broadband Internet connectivity through Swisscom
Eurospot.

Corporateincludes Swisscoms headquarter functions, group-company shared services,
property rentals through the real estate company Swisscom Immobilien and Swisscoms
programs under its social plan. 77




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The following table sets forth net revenue and operating income for the segments in place in 2004
for the periods indicated. Segment results Net revenue
    
    
    Operating incomeCHF in millions
    
    2002
    
    
    2003
    
    
    2004
    
    
    2002
    
    
    2003
    
    
    2004Fixnet
    
    
    6,227
    
    
    
    5,781
    
    
    
    5,715
    
    
    
    878
    
    
    
    1,045
    
    
    
    1,098Mobile
    
    
    4,112
    
    
    
    4,140
    
    
    
    4,356
    
    
    
    1,685
    
    
    
    1,674
    
    
    
    1,617Enterprise Solutions
    
    
    1,341
    
    
    
    1,210
    
    
    
    1,126
    
    
    
    6
    
    
    
    48
    
    
    
    66Other
    
    
    1,463
    
    
    
    1,304
    
    
    
    1,295
    
    
    
    (114
    )
    
    
    (42
    )
    
    
    9Corporate
    
    
    704
    
    
    
    703
    
    
    
    608
    
    
    
    133
    
    
    
    94
    
    
    
    (91
    )Intersegment elimination
    
    
    (3,432
    )
    
    
    (3,112
    )
    
    
    (3,043
    )
    
    
    
    
    
    
    
    
    
    
    6
    (1)Total
    
    
    10,415
    
    
    
    10,026
    
    
    
    10,057
    
    
    
    2,588
    
    
    
    2,819
    
    
    
    2,705
   (1)

Intersegment profits and losses may occur as a result of offsetting intersegment services
and sales of assets. These are eliminated in the consolidated financial statements and
disclosed in segment reporting in the column Intersegment elimination. 78




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Fixnet Revenue from Fixnet comprises primarily revenue from access services and fixed retail telephony
traffic in respect of residential and business customers, revenue from wholesale traffic services
offered to national and international telecommunication providers and revenue from payphone
services, operator services and prepaid calling cards. Fixnet also provides leased lines, sells
customer equipment and operates a directories database. See
Item 4: Information on the Company 
Fixnet. The following table sets forth the segment results for Fixnet and the percentage changes therein
for the periods presented: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Net revenue from external customers
    
    
    4,907
    
    
    
    4,601
    
    
    
    4,555
    
    
    
    (6.2
    )
    
    
    (1.0
    )Intersegment net revenue
    
    
    1,320
    
    
    
    1,180
    
    
    
    1,160
    
    
    
    (10.6
    )
    
    
    (1.7
    )Net revenue
    
    
    6,227
    
    
    
    5,781
    
    
    
    5,715
    
    
    
    (7.2
    )
    
    
    (1.1
    )Segment expenses
    
    
    5,349
    
    
    
    4,736
    
    
    
    4,617
    
    
    
    (11.5
    )
    
    
    (2.5
    )Segment operating income
    
    
    878
    
    
    
    1,045
    
    
    
    1,098
    
    
    
    19.0
    
    
    
    5.1Segment margin
    
    
    14.1
    %
    
    
    18.1
    %
    
    
    19.2
    %
 The following table sets forth net revenue from external customers generated by Fixnet for the
periods indicated: Net revenue from external customers Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Access
    
    
    1,581
    
    
    
    1,715
    
    
    
    1,876
    
    
    
    8.5
    
    
    
    9.4Retail traffic
    
    
    1,405
    
    
    
    1,329
    
    
    
    1,240
    
    
    
    (5.4
    )
    
    
    (6.7
    )Wholesale traffic
    
    
    942
    
    
    
    677
    
    
    
    691
    
    
    
    (28.1
    )
    
    
    2.1Other traffic
    
    
    208
    
    
    
    247
    
    
    
    158
    
    
    
    18.8
    
    
    
    (36.0
    )Other revenue
    
    
    771
    
    
    
    633
    
    
    
    590
    
    
    
    (17.9
    )
    
    
    (6.8
    )Total Fixnet external revenue
    
    
    4,907
    
    
    
    4,601
    
    
    
    4,555
    
    
    
    (6.2
    )
    
    
    (1.0
    )
 In 2004, Fixnets total external revenue decreased by 1.0% due primarily to a decrease in retail
traffic revenue reflecting a decrease in internet traffic as customers continued to migrate to
asynchronous digital subscriber lines (ADSL) and a decrease in other traffic revenue due to the
release of deferred revenue in 2003 relating to prepaid calling cards. These effects were partially
offset by higher access revenues reflecting an increase in the number of ADSL subscribers. In 2003, Fixnets total external revenue decreased by 6.2% due primarily to a decline in wholesale
traffic revenue, mainly due to the sale of Swisscoms North American operation and the
discontinuation of its European sales offices and to a decrease in other revenue due to a change in
the accounting method for its ISP numbers. These decreases were partially offset by an increase in
access revenue driven by the growth of the ADSL business. Fixnet expects total revenue from external customers to decrease in 2005, mainly due to a decrease
in average tariffs and the introduction of flat rates as a result of increasing competition as well
as a further reduction of interconnection rates. Furthermore, Fixnet entered into an agreement with
Belgacom, whereby both Fixnet and Belgacom will transfer their international wholesale businesses
into a newly formed company with effect from July 1, 2005. As Fixnet will only have a minority
stake in this new company, it will not be consolidated and therefore all associated revenues and
costs will no longer be recorded by Fixnet. 79




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Access.Revenue from access services consists principally of monthly subscription fees charged to
customers for providing analog (PSTN) and digital (ISDN) telephone access lines to residences and
businesses in Switzerland, broad- and narrowband internet access as well as access line activation
fees. The following table sets forth certain data relating to Swisscoms access services: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)PSTN access revenue
    
    
    907
    
    
    
    910
    
    
    
    900
    
    
    
    0.3
    
    
    
    (1.1
    )ISDN access revenue
    
    
    562
    
    
    
    569
    
    
    
    571
    
    
    
    1.2
    
    
    
    0.4Total PSTN/ISDN access revenue
    
    
    1,469
    
    
    
    1,479
    
    
    
    1,471
    
    
    
    0.7
    
    
    
    (0.5
    )ADSL retail revenue
    
    
    39
    
    
    
    112
    
    
    
    228
    
    
    
    187.2
    
    
    
    103.6ADSL wholesale revenue
    
    
    33
    
    
    
    85
    
    
    
    138
    
    
    
    157.6
    
    
    
    62.4Total ADSL revenue
    
    
    72
    
    
    
    197
    
    
    
    366
    
    
    
    173.6
    
    
    
    85.8Other access revenue
    
    
    40
    
    
    
    39
    
    
    
    39
    
    
    
    (2.5
    )
    
    
    0.0Total access revenue
    
    
    1,581
    
    
    
    1,715
    
    
    
    1,876
    
    
    
    8.5
    
    
    
    9.4Access lines (at period end, in
thousands)(1):PSTN lines(2)
    
    
    3,163
    
    
    
    3,086
    
    
    
    3,007
    
    
    
    (2.4
    )
    
    
    (2.6
    )ISDN lines(3)
    
    
    911
    
    
    
    924
    
    
    
    924
    
    
    
    1.4
    
    
    
    0.0Total access lines
    
    
    4,074
    
    
    
    4,010
    
    
    
    3,931
    
    
    
    (1.6
    )
    
    
    (2.0
    )ADSL subscribers lines (at period
end, in thousands of lines):Retail subscriber lines
    
    
    109
    
    
    
    274
    
    
    
    490
    
    
    
    151.4
    
    
    
    78.8Wholesale subscriber lines
    
    
    86
    
    
    
    213
    
    
    
    312
    
    
    
    147.7
    
    
    
    46.5Total ADSL subscribers lines
    
    
    195
    
    
    
    487
    
    
    
    802
    
    
    
    149.7
    
    
    
    64.7
   (1)
    
    Based on lines in service, including courtesy and service lines.(2)
    
    Each PSTN line provides one access channel.(3)
    
    ISDN lines consist of basic ISDN lines and primary ISDN lines. A basic ISDN line provides two
access channels and a primary ISDN line provides 30 access channels. Total access revenue increased by 9.4 % and 8.5% in 2004 and 2003, respectively, mainly driven
by an increase in revenue from ADSL. The number of ADSL subscriber lines continued to increase
substantially in 2004, but at a declining growth rate. PSTN revenue slightly decreased in 2004 as a result of the continuing mobile substitution and
increased competition from cable network operators. Revenue from ISDN access remained stable in
2004 and increased only slightly in 2003 reflecting the high penetration rate in Switzerland and
the fact that the fast growing ADSL technology can also be offered over a traditional PSTN line. Fixnet expects access revenues to increase in 2005 due to a further growth of ADSL subscriber lines
while the number of PSTN and ISDN lines will decline due to increasing competition especially from
cable network operators and substitution by mobile telephony. 80




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Retail traffic.Retail traffic revenue consists of charges to customers for making national and
international calls from a fixed-network access line, including calls made from the fixed network
to mobile operators networks (fixed-to-mobile), as well as charges to customers for accessing
the internet through narrowband access. The following table sets forth certain information relating to Swisscoms retail traffic: Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,CHF in millions (except percentages)(1)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Local and long distance traffic revenue
    
    
    532
    
    
    
    470
    
    
    
    435
    
    
    
    (11.7
    )
    
    
    (7.4
    )Fixed-to-mobile traffic revenue
    
    
    459
    
    
    
    464
    
    
    
    466
    
    
    
    1.1
    
    
    
    0.4Internet traffic revenue
    
    
    189
    
    
    
    162
    
    
    
    109
    
    
    
    (14.3
    )
    
    
    (32.7
    )International traffic revenue(2)
    
    
    225
    
    
    
    233
    
    
    
    230
    
    
    
    3.6
    
    
    
    (1.3
    )Total retail traffic revenue
    
    
    1,405
    
    
    
    1,329
    
    
    
    1,240
    
    
    
    (5.4
    )
    
    
    (6.7
    )Traffic (in millions of minutes)(1)(3):Local and long distance traffic
    
    
    8,804
    
    
    
    7,732
    
    
    
    7,205
    
    
    
    (12.2
    )
    
    
    (6.8
    )Fixed-to-mobile traffic(4)
    
    
    907
    
    
    
    950
    
    
    
    949
    
    
    
    4.7
    
    
    
    (0.1
    )Internet traffic
    
    
    5,766
    
    
    
    4,842
    
    
    
    3,323
    
    
    
    (16.0
    )
    
    
    (31.4
    )International traffic(5)
    
    
    961
    
    
    
    968
    
    
    
    955
    
    
    
    0.7
    
    
    
    (1.3
    )Total retail traffic
    
    
    16,438
    
    
    
    14,492
    
    
    
    12,432
    
    
    
    (11.8
    )
    
    
    (14.2
    )
   (1)
    
    Local area, national long distance and fixed to mobile do not include traffic or revenue,
as appropriate, generated from Swisscom-operated public payphones.(2)
    
    Does not include revenue from international calls made from payphones or revenue from calling
cards.(3)
    
    Includes traffic on courtesy and service lines.(4)
    
    Includes traffic for calls from the fixed-line network to private user networks.(5)
    
    Based on minutes of outgoing international traffic as determined for retail customer billing
purposes. Does not include international wholesale traffic originating outside Switzerland. Total retail traffic revenue declined by 6.7% in 2004 and 5.4% in 2003, primarily due to a
decrease in local and long distance traffic revenue as well as Internet traffic revenue. In both 2003 and 2004, the decrease in local and long distance as well as Internet traffic revenue
is a result of the migration of local Internet dial-up traffic to ADSL. ADSL customers pay a fixed
monthly fee, irrespective of the amount of usage, which is recorded under access revenue. The
decrease is also due to the substitution effect from increased use of mobile phones. In 2003,
revenue was also negatively impacted by a loss of market share resulting from the introduction of
10-digit numbering in March 2002. For 2005, Fixnet expects retail traffic revenue to further decline as a result of (i) a decrease in
average tariffs and the introduction of flat rates due to increasing competition, (ii) the
continuing migration to ADSL, and (iii) the ongoing substitution of mobile telephony. 81




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Wholesale traffic.Swisscom recognizes revenue in the Swiss market from providing network services
to other telecommunication companies. Such services include primarily the standard interconnection
services Swisscom is required to provide to other telecommunication service providers eligible for
interconnection under the Telecommunications Act. Wholesale international revenue comprises
primarily (i) revenue for international incoming traffic, and (ii) revenue from international
termination traffic. The following table sets forth certain information relating to Swisscoms wholesale traffic: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Wholesale national traffic revenue
    
    
    362
    
    
    
    300
    
    
    
    246
    
    
    
    (17.1
    )
    
    
    (18.0
    )International incoming traffic revenue
    
    
    289
    
    
    
    208
    
    
    
    200
    
    
    
    (28.0
    )
    
    
    (3.8
    )International termination traffic revenue
    
    
    291
    
    
    
    169
    
    
    
    245
    
    
    
    (41.9
    )
    
    
    45.0Total wholesale traffic revenue
    
    
    942
    
    
    
    677
    
    
    
    691
    
    
    
    (28.1
    )
    
    
    2.1Total wholesale telephony traffic (millions of
minutes):Wholesale national traffic(1)
    
    
    18,491
    
    
    
    17,871
    
    
    
    17,055
    
    
    
    (3.4
    )
    
    
    (4.6
    )International incoming traffic(2)
    
    
    1,837
    
    
    
    1,607
    
    
    
    1,521
    
    
    
    (12.5
    )
    
    
    (5.4
    )International termination traffic(3)
    
    
    1,878
    
    
    
    1,188
    
    
    
    1,508
    
    
    
    (36.7
    )
    
    
    26.9Total wholesale traffic
    
    
    22,206
    
    
    
    20,666
    
    
    
    20,084
    
    
    
    (6.9
    )
    
    
    (2.8
    )
   (1)
    
    Based on minutes as determined for customer billing purposes. Includes traffic related to
third party revenues for access, termination and transit services.(2)
    
    Minutes of incoming traffic terminated in Switzerland as determined for international
settlement purposes.(3)
    
    Minutes of outgoing traffic terminated outside of Switzerland. Total wholesale traffic revenue increased by 2.1% in 2004 compared to 2003, primarily due to
an increase in international termination traffic revenue, partially offset by a decrease in
wholesale national traffic. International termination traffic revenue increased by 45.0% in 2004 as a result of an increase in
traffic volume by 26.9% due to the expansion of the business as a result of focused marketing
activities as well as a greater share of higher tariff traffic to mobile networks. The decrease in
wholesale national traffic revenue by 18.0% is due to a further reduction in interconnection rates
and a decline in traffic volume by 4.6% as a result of the migration of third-party Internet
traffic to ADSL and direct access of residential and business customers to other operators
networks. Total wholesale traffic revenue decreased by 28.1% in 2003 compared to 2002 primarily due to a
strong decrease in national and international traffic revenues. Wholesale national traffic revenue decreased by 17.1% in 2003 due to a reduction in interconnection
rates, a change in the accounting method for its third-party ISP numbers as, starting in 2003,
revenue from these numbers are reported net of service providers costs, and a decrease in transit
traffic to Swisscom Mobile as a result of direct mobile interconnection. International incoming traffic revenue decreased by 28.0% in 2003 due to a decline in traffic
volume by 12.5% as a result of a loss in market share due to increased competition and a decrease
in the average international accounting rates. International termination traffic revenue decreased
by 41.9% primarily as a result of the sale of Swisscoms international point of presence, Swisscom
North America, in October 2002. In addition, in November 2002, Swisscom decided to close its
European sales offices as the margins realized in this business were very low. 82




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Fixnet expects wholesale traffic revenue to decline in 2005 due to (i) a further reduction of
interconnection rates, (ii) a decrease in traffic volume caused by the continuing migration to ADSL
and (iii) direct access of residential and business customers to networks of other operators.
Furthermore, Fixnet entered into an agreement with Belgacom, whereby both Fixnet and Belgacom will
transfer their international wholesale businesses into a newly formed company with effect from July
1, 2005. As Fixnet will only have a minority stake in this new company, it will not be consolidated
and therefore all associated revenues and costs will no longer be recorded by Fixnet. Commencing on
July 1, 2005, Fixnets wholesale business will consist of wholesale national only. Other traffic.Fixnet operates public payphones as part of its obligation to provide Universal
Service. Also, Swisscom generates revenue from operator services and the sale of prepaid calling
cards. The following table sets forth Fixnets other traffic revenue: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Other traffic revenue(1)
    
    
    208
    
    
    
    247
    
    
    
    158
    
    
    
    18.8
    
    
    
    (36.0
    )
   (1)
    
    Includes revenue from prepaid calling cards, operator services and payphone services. Other traffic revenue decreased by 36.0% in 2004 and increased by 18.8% in 2003, mainly due to
the release of deferred revenue of CHF 72 million in 2003 relating to prepaid calling cards. Revenue from the sale of telephone cards, which are valid for 3 years, is deferred and recognized
either when the services are provided or once the card is no longer valid. Historically, Swisscom
was not able to reliably track the total amount of unutilized credit for cards that were no longer
valid. In 2003, however, Swisscom implemented changes to the system to allow it to reliably track
this amount. As a result, in 2003, Swisscom released CHF 72 million to revenue, of which CHF 39
million relate to 2002 and CHF 29 million to 2001 and prior years. Prior years were not restated as
the effect was not material. Excluding this one-time release of deferred revenue, other traffic revenue decreased by 10% in 2004
and by 16% in 2003, mainly due to increased competition and online substitution for operator
services and substitution of payphone services through the use of mobile phones. Fixnet expects other traffic revenue to decline in the future as mobile phones continue to
substitute payphones and as customers make further use of online services. Other revenue.Other revenue comprises primarily revenue from the sale of customer equipment, the
provision of leased lines and the operation of a directories database as well as other activities. The following table sets forth Fixnets other revenue: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Customer equipment(1)
    
    
    235
    
    
    
    252
    
    
    
    250
    
    
    
    7.2
    
    
    
    (0.8
    )Leased lines
    
    
    160
    
    
    
    143
    
    
    
    136
    
    
    
    (10.6
    )
    
    
    (4.9
    )Directories
    
    
    93
    
    
    
    107
    
    
    
    113
    
    
    
    15.1
    
    
    
    5.6Revenue from other activities(2)
    
    
    283
    
    
    
    131
    
    
    
    91
    
    
    
    (53.7
    )
    
    
    (30.5
    )Total other products revenue
    
    
    771
    
    
    
    633
    
    
    
    590
    
    
    
    (17.9
    )
    
    
    (6.8
    )
   (1)
    
    Includes fixed-line customer premises equipment and mobile handsets sold through Swisscom
Shops.(2)
    
    Includes primarily revenue from Internet narrowband traffic to third-party ISP numbers and
until its sale in October 2003, revenue from Telecom FL. 83




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Other revenue declined by 6.8% in 2004 compared to 2003 mainly due to a decline in revenue
generated from other activities, mainly reflecting the sale of Swisscoms wholly owned subsidiary
Telecom FL AG in October 2003. Revenue from the sale of customer equipment remained relatively stable overall in 2004 as a decline
in revenues from the sale and rental of fixed-line customer premises equipment was partially offset
by an increase in revenues from the sale of mobile handsets. Other revenue declined by 17.9% in 2003 compared to 2002 mainly due to a decline in revenue
generated from other activities mainly as a result of a change in the accounting method for its ISP
numbers. Starting in 2003, revenue from these numbers are reported net of service providers costs,
which resulted in a decrease in revenue of CHF 117 million in 2003. Fixnet expects other revenue to slightly increase in 2005, mainly due to the introduction of new
data services. Intersegment net revenue Fixnet is responsible for building and maintaining the fixed-line network and sells network
capacity to Enterprise Solutions and Mobile. Therefore, intersegment revenue comprises primarily
revenue from Enterprise Solutions and Mobile for the use of the fixed network as well as revenue
from Mobile for handset commissions due for new mobile subscribers that sign up in a Swisscom shop. Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Intersegment net revenue
    
    
    1,320
    
    
    
    1,180
    
    
    
    1,160
    
    
    
    (10.6
    )
    
    
    (1.7
    )
 Intersegment revenue decreased by 1.7% in 2004 compared to 2003 mainly due to a decrease in traffic
from Swisscoms business customers recorded under Enterprise
Solutions (see  Enterprise Solutions
 National and International Traffic)and a decrease in commissions received from Swisscom Mobile
for the sale of prepaid cards. These effects have partially been offset by an increase in
commissions received from Swisscom Mobile for the sale of mobile handsets through Swisscom Shops. Intersegment revenue decreased by 10.6% in 2003 compared to 2002 primarily as a result of a
reduction in tariffs, a decrease in traffic from Swisscoms business customers recorded under
Enterprise Solutions (see  Enterprise Solutions  National and International Traffic)and the
netting effect of CHF 24 million relating to third-party ISP
numbers (see  Fixnet  Other Revenue
 Other). Fixnet expects intersegment revenue to further decrease in 2005 due to a decrease in volumes and
prices of voice and data services sold to business customers through Enterprise Solutions. 84




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Segment expenses Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Goods and services purchased
    
    
    1,069
    
    
    
    690
    
    
    
    693
    
    
    
    (35.5
    )
    
    
    0.4Personnel expenses
    
    
    1,069
    
    
    
    1,017
    
    
    
    954
    
    
    
    (4.9
    )
    
    
    (6.2
    )Other operating expenses
    
    
    700
    
    
    
    643
    
    
    
    580
    
    
    
    (8.1
    )
    
    
    (9.8
    )Depreciation and amortization
    
    
    1,055
    
    
    
    1,083
    
    
    
    1,072
    
    
    
    2.7
    
    
    
    (1.0
    )Other operating income(1)
    
    
    (84
    )
    
    
    (108
    )
    
    
    (85
    )
    
    
    28.6
    
    
    
    (21.3
    )Total external segment expenses
    
    
    3,809
    
    
    
    3,325
    
    
    
    3,214
    
    
    
    (12.7
    )
    
    
    (3.3
    )Intersegment expenses
    
    
    1,540
    
    
    
    1,411
    
    
    
    1,403
    
    
    
    (8.4
    )
    
    
    (0.6
    )Total segment expenses
    
    
    5,349
    
    
    
    4,736
    
    
    
    4,617
    
    
    
    (11.5
    )
    
    
    (2.5
    )
   (1)
    
    Includes mainly capitalized costs and gains on sale of property, plant and equipment. External segment expenses External segment expenses decreased by 3.3% in 2004 compared to 2003 due primarily to a decrease in
personnel expenses and other operating expenses.  

Goods and services purchased remained stable in 2004. An increase in international
termination traffic expenses reflecting an increase in revenue was partially offset by
(i) a decrease in expenses due to the sale of Swisscoms wholly owned subsidiary
Telecom FL in October 2003, (ii) a decrease in international incoming traffic expenses
reflecting a decrease in the volume of traffic terminating on other operators networks
and (iii) a decrease in expenses for fixed-line customer premises equipment reflecting
a decrease in sales.

Personnel expenses decreased by 6.2% due to a decrease in termination benefits from
CHF 63 million in 2003 to CHF 40 million in 2004. Excluding termination benefits,
personnel expenses decreased by 4.2%, mainly reflecting the headcount reductions in
2003 and 2004, partially offset by an overall salary increase.

Other operating expenses decreased by 9.8% mainly due to an exceptional expense in
2003 for an increase in the provision recorded for the case against Swisscom by two of
its competitors relating to Swisscoms interconnection prices. See Item 8: Financial
Information  Legal Proceedings. In addition, commissions paid to third parties
relating to the sale of card products decreased.

Depreciation and amortization expense decreased by 1.0% mainly due to an increase in
the number of fully depreciated assets and the phase out of one of Fixnets three
switching platforms in 2004, which resulted in only partial year depreciation for this
platform in 2004 as compared to the previous year. These effects have partially been
offset by an impairment charge of CHF 155 million relating to assets in the
international wholesale business mainly consisting of long-term utilization rights of
sea cables. See Note 21 of the consolidated financial statements for further
information relating to this impairment. 85




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External segment expenses decreased by 12.7% in 2003 compared to 2002 due to a significant decrease
in goods and services purchased.  

Goods and services purchased decreased by 35.5% due to the sale of its international
point of presence in North America in October 2002, the closure of its European points
of presence in November 2002 and to a change in Fixnets accounting method for its
third-party ISP numbers, as described in Other revenue above, the effect of which was
CHF 167 million in 2003. These effects were partially offset by an increase in expenses
incurred for ADSL equipment reflecting the increase in the number of ADSL subscribers.

A decrease in personnel expenses by 4.9% reflecting a decrease in the average number
of employees resulting from the headcount reductions in 2002 and a decrease in the
termination benefits from CHF 86 million in 2002 to CH 63 million in 2003.

Other operating expenses decreased by 8.1% mainly due to cost reduction measures
that were introduced in 2003, reflecting the optimization of maintenance costs,
partially through more favorable purchase prices as a result of increasing competition
on the supplier side and a reduction in spending for advertising. In addition, losses
on disposals of fixed assets of CHF 14 million were recorded in 2003, compared to CHF
50 million in 2002. These decreases were partially offset by an increase in the
provision recorded for the case against Swisscom by two if its competitors relating to
Swisscoms interconnection prices. See Item 8: Financial Information  Legal
Proceedings.

Depreciation and amortization expense increased by 2.7% in 2003 as a result of the
reduction of the useful life of one of Fixnets three switching platforms, which Fixnet
decided in December 2002 to phase out over the course of 2003 and 2004. Fixnet expects external segment expenses to decrease in 2005, mainly due to a decrease in
depreciation expenses as a result of an impairment charge in 2004 relating to assets in the
international wholesale business and an increase in fully depreciated assets. In addition, external
segment expenses are also expected to decrease as a result of the agreement with Belgacom relating
to the international wholesale business, as described in Wholesale traffic revenue above. Intersegment expenses Intersegment expenses comprise primarily network fees to Mobile for calls from other networks
terminating on the mobile network, expenses payable to Mobile for the purchase of mobile handsets
and amounts payable to other divisions for information technology, rental of real estate and
management fees. Intersegment expenses remained relatively stable in 2004. An increase in expenses payable to Mobile
for the purchase of mobile handsets was offset by a decrease in traffic from other mobile network
operators terminating on Swisscom Mobiles network through Fixnet as an intermediary as a result of
increased competition from other mobile network operators offering direct mobile interconnection as
well as a decrease in expenses payable to other group companies for information technology, rental
of real estate and management fees. Intersegment expenses decreased by 8.4% in 2003 compared to 2002 mainly reflecting a decrease in
traffic from other mobile network operators terminating on Swisscom Mobiles network through
Fixnet. A reduction in information technology expenses reflecting a reduction in the number of
projects undertaken by Fixnet also contributed to the decrease. Fixnet expects intersegment expenses to decrease in 2005 as a result of a reduction in expenses
related to the international wholesale business as a result of the agreement with Belgacom, as
described in Wholesale traffic revenue above. An increase in energy costs billed by Swisscoms
real-estate company Swisscom Immobilien AG as a result of a centralized energy cost settlement is
expected to be compensated by lower network fees primarily due to a decrease in traffic from other
network operators terminating on Swisscom Mobiles network through Fixnet. 86




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Segment margin Segment margin increased from 18.1% in 2003 to 19.2% in 2004, due to further cost reductions mainly
through lower personnel expenses as a result of headcount reductions. Segment margin increased from 14.1% in 2002 to 18.1% in 2003, despite a 7.2% decrease in revenue
due to (i) cost reduction measures that were introduced in 2003, in particular in repairs and
maintenance, information technology and advertising; (ii) a reduction in personnel expenses as a
result of the headcount reduction in 2002; and (ii) the sale and closure of Swisscoms
international points of presence in the fourth quarter of 2002, which was a very low margin
business. Fixnet expects its margin to slightly increase in 2005 due primarily to a reduction in depreciation
expenses reflecting an increase in fully depreciated assets and the transfer of its international
wholesale businesses into a newly formed company with Belgacom, as this business is characterized
by very low margins. 87




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Mobile Revenue from Mobile consists principally of monthly subscription fees, domestic and international
traffic charges for calls made in Switzerland or abroad by Swisscoms customers and roaming fees
paid by foreign operators whose customers use their mobile telephones over Swisscoms networks. It
also consists of fees for using value-added services numbers, data traffic and sending SMS and MMS
messages as well as the sale of mobile handsets through channels other than Swisscom shops. See
Item 4: Information on the Company  Mobile  Principal Products. The following table sets forth the segment results for Mobile and the percentage changes therein
for the periods presented: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Net revenue from external customers
    
    
    3,434
    
    
    
    3,511
    
    
    
    3,679
    
    
    
    2.2
    
    
    
    4.8Intersegment net revenue
    
    
    678
    
    
    
    629
    
    
    
    677
    
    
    
    (7.2
    )
    
    
    7.6Net revenue
    
    
    4,112
    
    
    
    4,140
    
    
    
    4,356
    
    
    
    0.7
    
    
    
    5.2Segment expenses
    
    
    2,427
    
    
    
    2,466
    
    
    
    2,739
    
    
    
    1.6
    
    
    
    11.1Segment operating income
    
    
    1,685
    
    
    
    1,674
    
    
    
    1,617
    
    
    
    (0.7
    )
    
    
    (3.4
    )Segment margin
    
    
    41.0
    %
    
    
    40.4
    %
    
    
    37.1
    %
 The following table sets forth net revenue from external customers generated by Mobile for the
periods indicated: Net revenue from external customers Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Base Fees
    
    
    698
    
    
    
    685
    
    
    
    691
    
    
    
    (1.9
    )
    
    
    0.9Connectivity Voice
    
    
    2,138
    
    
    
    2,221
    
    
    
    2,286
    
    
    
    3.9
    
    
    
    2.9Connectivity Data and VAS
    
    
    486
    
    
    
    454
    
    
    
    521
    
    
    
    (6.6
    )
    
    
    14.8Other mobile revenue(1)
    
    
    112
    
    
    
    151
    
    
    
    181
    
    
    
    34.8
    
    
    
    19.9Total Mobile external revenue
    
    
    3,434
    
    
    
    3,511
    
    
    
    3,679
    
    
    
    2.2
    
    
    
    4.8
   (1)

Includes revenue from the sale of handsets sold through sales channels other than Swisscom
shops and from SICAP, a prepaid billing platform. In 2004 and 2003, Mobiles total external revenue increased by 4.8% and 2.2%, respectively,
due primarily to the increase in Connectivity Voice revenue reflecting an increase in the number of
subscribers. Data and value-added services (VAS) revenue had a further positive effect on revenues
in 2004 reflecting the increased revenue from new data services. Mobile expects total revenue from external customers to increase slightly in 2005, mainly due to
the continuing growth of the subscriber base and a further increase in the usage of data services. 88




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The following table sets forth certain data relating to Mobiles subscribers and traffic: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Average number of subscribers
(in thousands)(1):Postpaid
    
    
    2,221
    
    
    
    2,333
    
    
    
    2,449
    
    
    
    5.0
    
    
    
    5.0Prepaid(2)
    
    
    1,266
    
    
    
    1,353
    
    
    
    1,441
    
    
    
    6.9
    
    
    
    6.5Average number of subscribers
    
    
    3,487
    
    
    
    3,686
    
    
    
    3,890
    
    
    
    5.7
    
    
    
    5.5Average monthly minutes of use per user
(AMPU)(1)(3)
    
    
    126
    
    
    
    121
    
    
    
    118
    
    
    
    (4.0
    )
    
    
    (2.5
    )Average monthly revenue per user (ARPU)(4)
    
    
    85
    
    
    
    81
    
    
    
    81
    
    
    
    (4.7
    )
    
    
    0.0Traffic (in millions of minutes)(1):Connectivity voice(5)
    
    
    3,331
    
    
    
    3,335
    
    
    
    3,404
    
    
    
    0.1
    
    
    
    2.1Number of SMS messages (in millions)(1) (6)
    
    
    1,650
    
    
    
    1,847
    
    
    
    1,986
    
    
    
    11.9
    
    
    
    7.5
  (1)

Includes service accounts and traffic generated by service accounts.(2)

Excludes inactive customers. Swisscom no longer includes accounts of any inactive prepaid
customer in its subscriber figures. A customer is deemed inactive after a period of twelve
months without making a call or sending an SMS message. On a yearly average, inactive
customers were 163,846 in 2002, 196,172 in 2003 and 209,461 in 2004.(3)

Includes traffic from all outgoing calls made by Mobile subscribers, excluding inactive
customers, plus traffic from all incoming calls made to Mobile subscribers from all other
networks.(4)

Includes revenue from all outgoing calls made by Mobiles subscribers, excluding inactive
customers, including roaming and data and value added services, plus revenue from all incoming
calls made to Mobile subscribers from all other networks as well as base fee revenues.ARPU reconciliation Year EndedDecember 31,CHF in millions (except where indicated)
    
    2002
    
    
    2003
    
    
    2004Net revenue
    
    
    4,112
    
    
    
    4,140
    
    
    
    4,356less revenue from sale of mobile handsets
    
    
    241
    
    
    
    298
    
    
    
    386less roaming revenue(a)
    
    
    211
    
    
    
    199
    
    
    
    165less other non-service revenue
    
    
    105
    
    
    
    46
    
    
    
    38Service revenue relevant to ARPU
    
    
    3,555
    
    
    
    3,597
    
    
    
    3,767Average subscribers (in thousands)
    
    
    3,487
    
    
    
    3,686
    
    
    
    3,890ARPU/month (in CHF)
    
    
    85
    
    
    
    81
    
    
    
    81
 (a)
    
    Consists of roaming fees paid by foreign operators whose customers use their mobile
telephones over Swisscoms networks and until 2003, roaming fees from the national
roaming agreement with another domestic mobile network operator.  Swisscom believes that ARPU provides its management and investors with useful information
concerning the financial performance of its product and service offerings and its ability
to attract and retain high-value customers.(5)

Includes minutes from all outgoing calls made by Mobiles customers and foreign visitors
using the network of Swisscom Mobile.(6)

Excludes wholesale SMS messages. Base Fees.Net revenue from base fees consists principally of monthly subscription charges,
which includes revenue from the sale of SIM cards. 89




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While the base fee revenue increased 0.9% in 2004, primarily due to an increase in the subscriber
base, it decreased by 1.9% in 2003 as a result of the continued migration of customers from higher
price to lower price tariff subscriptions which continued in 2004, but at a slower rate. Mobile expects base fee revenue to remain stable in 2005. Connectivity Voice.Net revenue from connectivity voice consists principally of the domestic and
international traffic charges for calls made in Switzerland by Mobiles customers, roaming fees
paid by operators whose customers use their mobile telephones over Mobiles network and revenue
from the termination of traffic on Mobiles network from other Swiss mobile operators. Further,
fees from a roaming agreement with Orange, whereby Orange subscribers may use the Mobile network in
parts of Switzerland, were recorded under Connectivity Voice. The roaming agreement with Orange was
terminated in July 2003. Connectivity Voice revenue increased by 2.9% in 2004, mainly due to an increase in the number of
subscribers as well as an increase in roaming revenues, partially offset by a decrease in the
average monthly minutes of use per user (AMPU) as well as a decline in revenues due to the
termination of the national roaming agreement with Orange in July 2003. The increase in the
subscriber base is mainly the result of an increase in market penetration and a value-based churn
management. However, lower AMPU as well as increasing price competition in the business segment
resulted in a decrease of the average monthly revenue per user (ARPU) from voice telephony, which
was offset by an increase in the ARPU from data services. Connectivity Voice revenue increased by 3.9% in 2003 compared to 2002, primarily due to an increase
in revenue from traffic from other mobile network operators terminated directly on Mobiles network
rather than through Fixnet as an intermediary as a result of increased competition from other
mobile network operators offering direct mobile interconnection. This increase in directly
terminated traffic results in a decline in traffic through Fixnet which resulted in a decrease in
intersegment revenue. Revenue also increased as a result of an increase in Mobiles subscriber
base, partially offset by a decrease in AMPU and ARPU, reflecting the weak economic environment. Mobile expects voice revenues to increase in 2005 due to a further increase in the subscriber base,
partially offset by a decline in prices. Connectivity data and value-added services.Net revenue from data and value-added services consists
principally of fees generated from SMS messages, multimedia messaging services (MMS) and
information services. Connectivity data and value-added services revenue increased by 14.8% in 2004 mainly due to an
increase in the subscriber base, higher usage of new data services and the introduction of
termination fees for SMSs in January 2004, based on a new interworking agreement with another
mobile network operator. Connectivity data and value-added services revenue decreased by 6.6% in 2003, mainly due to the
effect of a change in the accounting method for value-added services numbers. Starting in 2003,
revenue from these numbers are reported net of service providers costs, which resulted in a
decrease in revenue of CHF 48 million. Prior years have not been restated as the effect is not
material. For 2005, Mobile expects this area to be its fastest growing business area, driven primarily from a
further stimulation and penetration of MMS, an increase in the customer base and an increased usage
of new services and products. 90




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Other Mobile revenue.Other Mobile revenue mainly consists of revenue from the sale of mobile
handsets through third-party outlets and revenue from services of the prepaid billing platform
SICAP rendered to other GSM operators. Other mobile revenue increased by 19.9% and 34.8% in 2004 and 2003, respectively, as a result of an
increase in the number of handsets sold and an increase in the average price per handsets due to
more sophisticated features. Mobile expects revenue in this area to decline in 2005 as a result of a decrease in the number and
the average price of handsets sold. Intersegment net revenue Intersegment net revenue comprises principally revenue from Fixnet for incoming calls made to
Mobile subscribers from other networks and revenue from the sale of mobile equipment in the
Swisscom shops. Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Intersegment net revenue
    
    
    678
    
    
    
    629
    
    
    
    677
    
    
    
    (7.2
    )
    
    
    7.6
 Intersegment net revenue increased by 7.6% in 2004 compared to 2003 due to an increase in the
number of handsets sold through Fixnets Swisscom shops. Intersegment net revenue decreased by 7.2% in 2003 compared to 2002 mainly due to a decrease in
network fees from Fixnet as a result of a decrease in traffic from other mobile network operators
terminating on Swisscom Mobiles network through Fixnet as an intermediary as a result of increased
competition from other mobile network operators offering direct mobile interconnection which
resulted in an increase in Connectivity Voice revenue. This effect was partially offset by an
increase in revenue from the sale of handsets due to an increase in the number of higher priced
handsets with more sophisticated features. Mobile expects revenue in this area to decline in 2005 as a result of a decrease in the number of
handsets sold through Fixnets Swisscom shops. Segment expenses Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Goods and services purchased
    
    
    767
    
    
    
    801
    
    
    
    971
    
    
    
    4.4
    
    
    
    21.2Personnel expenses
    
    
    269
    
    
    
    297
    
    
    
    310
    
    
    
    10.4
    
    
    
    4.4Other operating expenses
    
    
    476
    
    
    
    473
    
    
    
    505
    
    
    
    (0.6
    )
    
    
    6.8Depreciation and amortization
    
    
    289
    
    
    
    310
    
    
    
    359
    
    
    
    7.3
    
    
    
    15.8Other operating income(1)
    
    
    (18
    )
    
    
    (14
    )
    
    
    (16
    )
    
    
    (22.2
    )
    
    
    14.3Total external segment expenses
    
    
    1,783
    
    
    
    1,867
    
    
    
    2,129
    
    
    
    4.7
    
    
    
    14.0Intersegment expenses
    
    
    644
    
    
    
    599
    
    
    
    610
    
    
    
    (7.0
    )
    
    
    1.8Total segment expenses
    
    
    2,427
    
    
    
    2,466
    
    
    
    2,739
    
    
    
    1.6
    
    
    
    11.1
   (1)
    
    Includes mainly capitalized costs and gains on sale of property, plant and equipment. 91




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External segment expenses External segment expenses increased by 14.0% in 2004 compared to 2003 primarily due to an increase
in goods and services purchased and in depreciation and amortization.  

Goods and services purchased increased by 21.2% primarily due to an increase in the
number of handsets purchased for resale and higher average purchase prices for mobile
handsets supporting new technologies as well as an increase in national and
international interconnection and roaming expenses reflecting the increase in the
subscriber base.

Personnel expenses increased by 4.4% as a result of an increase in the number of
employees required to manage the growth of the business and an overall salary increase.

Other operating expenses increased by 6.8%, mainly due to an increase in expenses
related primarily to the retention of mobile customers as a result of value-based churn
management.

Depreciation and amortization increased by 15.8% due to an increase in investments
for the rollout of new broadband technologies and the resulting reduction of the useful
lives of certain GSM equipment. External segment expenses increased by 4.7% in 2003 compared to 2002 due primarily to an increase
in goods and services purchased and in personnel expenses.  

Goods and services purchased increased by 4.4% due primarily to an increase in the
number of handsets sold and increased average purchase prices for mobile handsets
supporting new technologies such as MMS and GPRS.

Personnel expenses increased by 10.4% as a result of an increase in the number of
employees required to manage the growth of the business, an overall salary increase and
an increase in the average salary due to the increased skill sets of employees. The
increase in the number of employees in 2003 was due to an increased need for employees
in the roll-out of the next generation network and in customer care.

Other operating expenses decreased by 0.6% as a result of a decrease in IT costs
reflecting a decrease in projects and a decrease in commissions reflecting a lower
number of new customers and Mobiles strategy to reduce commissions. These decreases
were partially offset by an increase in costs due to a new arrangement entered into
with Vodafone in 2003 regarding access to its products and services, particularly to
Vodafone live!, which was launched in the fourth quarter of 2003.

Depreciation and amortization increased by 7.3% as a result of a reduction of the
useful lives of certain GSM equipment, which will have to be replaced earlier than
expected due to the roll-out of UMTS. Mobile expects external segment expense to increase in 2005 due to a further increase in expenses
related to the retention of customers and due to an increase in depreciation expenses reflecting an
increase in investments in new broadband technologies in 2004. 92




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Intersegment expenses Intersegment expenses comprise primarily network fees to Fixnet for mobile calls terminated on
other networks, commissions payable for the acquisition of new customers or the extension of
existing contracts in the Swisscom shops, rent, information technology costs and management fees. Intersegment expenses increased by 1.8% in 2004 compared to 2003 primarily due to an increase in
expenses payable to Fixnet as a result of an increase in the number of new customers and contract
extensions acquired through the Swisscom shops in 2004. Expenses for leased lines from Fixnet also
increased due to the increased number of GSM and UMTS sites. Intersegment expenses decreased 7.0% in 2003 compared to 2002 due primarily to a change in the
accounting method for its value-added services numbers. Starting in 2003, revenue from these
numbers is reported net of service providers costs. The effect of this for 2003 was CHF 48
million. Prior years have not been restated as the effect is not material. Mobile expects intersegment expenses to remain relatively stable in 2005. Segment margin Segment margin decreased from 40.4% to 37.1% in 2004 compared to 2003 due primarily to an increase
in expenses for subscriber retention as a result of value-based churn management and an increase in
depreciation and amortization expenses reflecting an increase in investments for new broadband
technologies. Segment margin remained relatively stable in 2003 compared to 2002, as the increase in revenue was
offset by a corresponding increase in segment expenses. Mobile expects segment margin to remain stable in 2005 as an increase in revenue is expected to be
offset by an increase in depreciation expenses. 93




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Enterprise Solutions Revenue from Enterprise Solutions comprises primarily revenue from national and international
fixed-line voice telephony services to business customers, revenue from networking, revenue from
inhouse and processes and revenue from a variety of other services. See Item 4: Information on the
Company  Enterprise Solutions. Effective January 1, 2005, Swisscom Enterprise Solutions was merged with Swisscom Systems, formerly
accounted for in the segment Other, into a new business segment named Swisscom Solutions. This
effect has not been reflected in the figures presented but will be reported in 2005, with a
restatement of prior years numbers. The following table sets forth the segment results for Enterprise Solutions and the percentage
changes therein for the periods presented: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Net revenue from external customers
    
    
    1,167
    
    
    
    1,081
    
    
    
    987
    
    
    
    (7.4
    )
    
    
    (8.7
    )Intersegment net revenue
    
    
    174
    
    
    
    129
    
    
    
    139
    
    
    
    (25.9
    )
    
    
    7.8Net revenue
    
    
    1,341
    
    
    
    1,210
    
    
    
    1,126
    
    
    
    (9.8
    )
    
    
    (6.9
    )Segment expenses
    
    
    1,335
    
    
    
    1,162
    
    
    
    1,060
    
    
    
    (13.0
    )
    
    
    (8.8
    )Segment operating income
    
    
    6
    
    
    
    48
    
    
    
    66
    
    
    
    700.0
    
    
    
    37.5Segment margin
    
    
    0.4
    %
    
    
    4.0
    %
    
    
    5.9
    %
 The following table sets forth net revenue from external customers generated by Enterprise
Solutions for the periods indicated: Net revenue from external customers Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)National and international traffic
    
    
    382
    
    
    
    344
    
    
    
    297
    
    
    
    (9.9
    )
    
    
    (13.7
    )Networking
    
    
    551
    
    
    
    521
    
    
    
    460
    
    
    
    (5.4
    )
    
    
    (11.7
    )Inhouse and processes
    
    
    102
    
    
    
    89
    
    
    
    84
    
    
    
    (12.7
    )
    
    
    (5.6
    )Other revenue
    
    
    132
    
    
    
    127
    
    
    
    146
    
    
    
    (3.8
    )
    
    
    15.0Total Enterprise Solutions external
revenue
    
    
    1,167
    
    
    
    1,081
    
    
    
    987
    
    
    
    (7.4
    )
    
    
    (8.7
    )
 In 2004 and 2003, Enterprise Solutions total external revenue decreased by 8.7% and 7.4%,
respectively, due primarily to a decrease in national and international traffic revenue as a result
of a decrease in traffic volumes and lower average tariffs as well as a decline in networking
revenue due to price pressure and the substitution of older technologies through IP-based services. Enterprise Solutions, as part of the new segment Swisscom Solutions in 2005, expects revenues from
external customers to decrease in 2005, mainly due to continuing price pressure for traffic and
data services as well as substitution through IP-based services. 94




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National and International Traffic National and international traffic revenue consists of charges to business customers for making
national and international calls and comprises the same products as those of the Fixnet segment.
See   Fixnet  Accessand  Fixnet  Retail Traffic. The following table sets forth certain information relating to Enterprise Solutions national and
international fixed-line traffic revenue: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Local and long-distance traffic revenue
    
    
    155
    
    
    
    134
    
    
    
    107
    
    
    
    (13.5
    )
    
    
    (20.1
    )Fixed-to-mobile traffic revenue
    
    
    145
    
    
    
    136
    
    
    
    122
    
    
    
    (6.2
    )
    
    
    (10.3
    )Total national traffic revenue
    
    
    300
    
    
    
    270
    
    
    
    229
    
    
    
    (10.0
    )
    
    
    (15.2
    )International traffic revenue
    
    
    82
    
    
    
    74
    
    
    
    68
    
    
    
    (9.8
    )
    
    
    (8.1
    )Total traffic revenue
    
    
    382
    
    
    
    344
    
    
    
    297
    
    
    
    (9.9
    )
    
    
    (13.7
    )Traffic (in millions of minutes)(1):Local and long-distance traffic
    
    
    2,278
    
    
    
    1,972
    
    
    
    1,779
    
    
    
    (13.4
    )
    
    
    (9.8
    )Fixed-to-mobile traffic(2)
    
    
    327
    
    
    
    303
    
    
    
    278
    
    
    
    (7.3
    )
    
    
    (8.3
    )Total national traffic
    
    
    2,605
    
    
    
    2,275
    
    
    
    2,057
    
    
    
    (12.7
    )
    
    
    (9.6
    )International traffic(3)
    
    
    433
    
    
    
    373
    
    
    
    361
    
    
    
    (13.9
    )
    
    
    (3.2
    )Total traffic
    
    
    3,038
    
    
    
    2,648
    
    
    
    2,418
    
    
    
    (12.8
    )
    
    
    (8.7
    )
   (1)
    
    Includes traffic on courtesy and service lines.(2)
    
    Includes traffic for calls from the fixed-line network to private user networks.(3)
    
    Based on minutes of outgoing international traffic as determined for retail customer billing
purposes. Does not include international wholesale traffic originating outside Switzerland. Total traffic revenue decreased by 13.7% and by 9.9% in 2004 and 2003, respectively, mainly
due to (i) a decrease in local and long-distance traffic revenue as a result of a decrease in
traffic volumes reflecting a loss of market share as well as lower average tariffs and (ii) a
decrease in revenue from fixed-to-mobile traffic, due primarily to a decrease in traffic volume as
a result of the migration of traffic from Enterprise Solutions to Mobile, as customers increasingly
use mobile phones or other technologies that enable them to route traffic directly over the mobile
instead of the fixed-line network. Networking.Revenue from Networking comprises revenue from national and international leased lines,
Intranet services, as well as revenue from national and, through Infonet Switzerland, international
private network services. See Item 4: Information on
the Company  Enterprise Solutions  Networking. 95




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The following table sets forth, for the periods indicated, certain information relating to
Swisscoms networking services: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Leased lines revenue
    
    
    274
    
    
    
    244
    
    
    
    205
    
    
    
    (10.9
    )
    
    
    (16.0
    )Intranet services revenue
    
    
    161
    
    
    
    179
    
    
    
    172
    
    
    
    11.2
    
    
    
    (3.9
    )Private networks revenue(1)
    
    
    116
    
    
    
    98
    
    
    
    83
    
    
    
    (15.5
    )
    
    
    (15.3
    )Total networking revenue
    
    
    551
    
    
    
    521
    
    
    
    460
    
    
    
    (5.4
    )
    
    
    (11.7
    )Number of leased lines (period end):National leased lines(2)
    
    
    20,644
    
    
    
    18,293
    
    
    
    14,214
    
    
    
    (11.4
    )
    
    
    (22.3
    )International leased lines
    
    
    608
    
    
    
    488
    
    
    
    424
    
    
    
    (19.7
    )
    
    
    (13.1
    )Total leased lines
    
    
    21,252
    
    
    
    18,781
    
    
    
    14,638
    
    
    
    (11.6
    )
    
    
    (22.1
    )
   (1)
    
    Includes revenue from Infonet Switzerland.(2)
    
    Excluding twisted copper pairs. Total networking revenue decreased by 11.7% and 5.4% in 2004 and 2003, respectively, mainly as
a result of a decrease in revenues from leased lines and private networks. In 2003, the decline was
partially offset by an increase in revenues from intranet services. The decrease in leased lines revenue is a result of (i) price reductions due to continued
competitive pressure, (ii) the migration to IP based services which are part of Intranet services
and (iii) a reduction in the number of leased lines as a result of network optimization and
consolidation in the number of customers sites. Private networks revenue declined mainly due to
the migration to internet protocol (IP) based services. The migration from leased lines, frame
relay and ATM services to IP based services resulted in an increase in revenues from Intranet
services in 2003, but in 2004 this effect was offset by lower prices. Inhouse and processes.Revenue from inhouse and processes comprises primarily revenue from
Business Numbers, which business customers use to provide their customers access to information
services, and revenue from System Integration, consisting of various local area network services
and a customer relationship management service. For a description of Business Numbers and System
Integration, see Item 4: Information on the Company  Enterprise Solutions  Inhouse and
Processes. The following table sets forth, for the periods presented, certain information related to
Enterprise Solutions inhouse and processes revenue: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Business Numbers revenue
    
    
    67
    
    
    
    65
    
    
    
    60
    
    
    
    (3.0
    )
    
    
    (7.7
    )Other inhouse and processes revenue(1)
    
    
    35
    
    
    
    24
    
    
    
    24
    
    
    
    (31.4
    )
    
    
    0.0Total inhouse and processes revenue
    
    
    102
    
    
    
    89
    
    
    
    84
    
    
    
    (12.7
    )
    
    
    (5.6
    )Business Numbers traffic
(in millions of minutes)(2)
    
    
    775
    
    
    
    721
    
    
    
    673
    
    
    
    (7.0
    )
    
    
    (6.7
    )
   (1)
    
    Includes primarily System Integration.(2)
    
    Does not include calls made by Enterprise Solutions customers to Business Numbers of other
providers. 96




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Total inhouse and processes revenue decreased by 5.6% in 2004, mainly due to a decrease in
revenue from business numbers reflecting a decline in traffic volume as a result of the
substitution of speech-enabled services by mobile and Internet services Total inhouse and processes revenue decreased by 12.7% in 2003 compared to 2002, reflecting a
decrease in revenue from other inhouse and processes due to a large project in 2002 and a decrease
in customer demand. Other revenuecomprises primarily business Internet services, public data network services and
professional as well as supporting services. For a description of these services, see Item 4:
Information on the Company  Enterprise Solutions  Other. The following table sets forth, for the periods indicated, certain information with respect to
Enterprise Solutions other revenue: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Business internet revenue
    
    
    43
    
    
    
    48
    
    
    
    50
    
    
    
    11.6
    
    
    
    4.2Other revenue(1)
    
    
    89
    
    
    
    79
    
    
    
    96
    
    
    
    (11.2
    )
    
    
    21.5Total other revenue
    
    
    132
    
    
    
    127
    
    
    
    146
    
    
    
    (3.8
    )
    
    
    15.0
   (1)
    
    Includes public data networks, professional and supporting services. Total other revenue increased by 15.0% in 2004 compared to 2003, mainly due to revenue growth
from professional services such as outsourcing services. Total other revenue decreased by 3.8% in 2003 compared to 2002 due primarily to a decrease in
revenue from public data networks as a result of customers migrating from the low-speed X.25
protocol to high-capacity products. Intersegment revenue.Intersegment revenue comprises primarily revenue from networking services and
business numbers. Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Intersegment net revenue
    
    
    174
    
    
    
    129
    
    
    
    139
    
    
    
    (25.9
    )
    
    
    7.8
 Intersegment revenue increased by 7.8% in 2004 compared to 2003 due primarily to revenue from the
one-time sale of a platform that is no longer used by Enterprise Solutions to Fixnet. Excluding
this one-time effect, intersegment revenue remained relatively stable in 2004 compared to 2003. Intersegment revenue decreased by 25.9% in 2003 compared to 2002 due primarily to a substantial
reduction in the demand for Enterprise Solutions services from other Swisscom companies as a
result of group internal optimization. 97




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Segmentexpenses Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Goods and services purchased
    
    
    93
    
    
    
    77
    
    
    
    85
    
    
    
    (17.2
    )
    
    
    10.4Personnel expenses
    
    
    196
    
    
    
    203
    
    
    
    155
    
    
    
    3.6
    
    
    
    (23.6
    )Other operating expenses
    
    
    56
    
    
    
    40
    
    
    
    28
    
    
    
    (28.6
    )
    
    
    (30.0
    )Depreciation and amortization
    
    
    32
    
    
    
    33
    
    
    
    14
    
    
    
    3.1
    
    
    
    (57.6
    )Total external segment expenses
    
    
    377
    
    
    
    353
    
    
    
    282
    
    
    
    (6.4
    )
    
    
    (20.1
    )Intersegment expenses
    
    
    958
    
    
    
    809
    
    
    
    778
    
    
    
    (15.6
    )
    
    
    (3.8
    )Total segment expenses
    
    
    1,335
    
    
    
    1,162
    
    
    
    1,060
    
    
    
    (13.0
    )
    
    
    (8.8
    )
 External segment expenses External segment expenses decreased by 20.1% in 2004 compared to 2003 due primarily to a decrease
in personnel expenses, other operating expenses and depreciation and amortization.  

Goods and services purchased increased by 10.4% in 2004 as Enterprise Solutions
recorded a provision for future losses related to the phase-out of products based on
older technologies. This effect has been partially offset by a reduction in foreign
network access and interconnection costs reflecting the decrease in revenues.

Personnel expenses decreased by 23.6% due primarily to a decrease in termination
benefits from CHF 41 million in 2003 to CHF 18 million in 2004. Excluding termination
benefits, personnel expenses decreased by 16.0% reflecting the headcount reductions in
2002 and 2003.

Other operating expenses decreased by 30.0% due primarily to lower expenses for
business reengineering projects and a loss on equipment sales recorded in 2003.

Depreciation and amortization decreased by 57.6%, mainly due to a decrease in
capital expenditures in 2003 as a result of a poor demand for customer equipment. External segment expenses decreased by 6.4% in 2003 compared to 2002 due primarily to a decrease in
goods and services purchased and other operating expenses.  

Goods and services purchased decreased by 17.2% mainly as a result of the fewer
projects realized related to System Integration. In contrast, business related to
Infonet was relatively stable in 2003.

Personnel expenses increased by 3.6% due primarily to an increase in termination
benefits from CHF 10 million in 2002 to CHF 41 million in 2003. Excluding termination
benefits, personnel expenses decreased by 11.7% reflecting the headcount reductions in
2002 and 2003, partially offset by an overall salary increase and an increase in
average salary due to an increase of employees with higher skill sets.

Other operating expenses decreased by 28.6% mainly reflecting cost cutting measures
introduced in 2003 reflecting the optimization of repairs and maintenance costs and a
reduction in spending for advertising as well as a decrease in bad debt expense. Enterprise Solutions, as part of the new segment Swisscom Solutions in 2005, expects external
segment expenses to decrease in 2005, mainly due to lower personnel expenses as a result of further
headcount reductions in 2005. 98




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Intersegment expenses Intersegment expenses comprise primarily network fees payable to Fixnet for telephony and leased
lines and amounts payable to other divisions for information technology, rental of real estate and
management fees. Intersegment expenses decreased by 3.8% and 15.6% in 2004 and 2003, respectively, primarily due to
a reduction in network fees charged by Fixnet, mainly reflecting a decrease in the volume and
prices of telephony traffic and leased lines. In 2004, lower IT expenses for Swisscom IT Services
as a result of lower prices had a further decreasing effect on intersegment expenses. Enterprise Solutions, as part of the new segment Swisscom Solutions in 2005, expects intersegment
expenses to decrease in 2005 mainly as a result of a decrease in the volume of telephony traffic
and leased lines purchased from Fixnet. Segment margin Segment margin increased from 4.0% in 2003 to 5.9% in 2004 despite a decrease in revenue of 6.9%,
due to significant cost reductions, in particular lower personnel expenses as a result of headcount
reductions and a decrease in termination benefits of CHF 23 million as well as lower intersegment
expenses reflecting lower network fees from Fixnet. Segment margin increased from 0.4% in 2002 to 4.0% in 2003 despite a decrease in revenue of 9.8%,
due to significant cost reductions, in particular lower intersegment expenses reflecting lower
network fees from Fixnet and as a result of optimization efforts. These effects were partially
offset by an increase in termination benefits of CHF 31 million in 2003 compared to 2002. Enterprise Solutions, as part of the new segment Swisscom Solutions in 2005, expects its margin to
decrease in 2005, as cost reductions are expected to only partially offset a further decrease in
revenue. 99




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Other The following table sets forth the results for the segment Other and the percentage changes therein
for the periods presented: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Net revenue from external customers
    
    
    833
    
    
    
    761
    
    
    
    768
    
    
    
    (8.6
    )
    
    
    0.9Intersegment net revenue
    
    
    630
    
    
    
    543
    
    
    
    527
    
    
    
    (13.8
    )
    
    
    (2.9
    )Net revenue
    
    
    1,463
    
    
    
    1,304
    
    
    
    1,295
    
    
    
    (10.9
    )
    
    
    (0.7
    )Segment expenses
    
    
    1,577
    
    
    
    1,346
    
    
    
    1,286
    
    
    
    (14.7
    )
    
    
    (4.5
    )Segment operating (loss) income
    
    
    (114
    )
    
    
    (42
    )
    
    
    9
    
    
    
    (63.2
    )
    
    
    n.a.Segment margin
    
    
    (7.8
    %)
    
    
    (3.2
    %)
    
    
    0.7
    %
 The following table sets forth net revenue from external customers generated by the segment Other
for the periods indicated: Net revenue from external customers Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Swisscom Systems
    
    
    406
    
    
    
    345
    
    
    
    292
    
    
    
    (15.0
    )
    
    
    (15.4
    )Swisscom IT Services
    
    
    213
    
    
    
    214
    
    
    
    207
    
    
    
    0.5
    
    
    
    (3.3
    )Swisscom Broadcast
    
    
    162
    
    
    
    149
    
    
    
    148
    
    
    
    (8.0
    )
    
    
    (0.7
    )Billag
    
    
    52
    
    
    
    52
    
    
    
    112
    
    
    
    0.0
    
    
    
    115.4Swisscom Eurospot
    
    
    
    
    
    
    1
    
    
    
    9
    
    
    
    n.a.
    
    
    
    800.0Total other external revenue
    
    
    833
    
    
    
    761
    
    
    
    768
    
    
    
    (8.6
    )
    
    
    0.9
 Swisscom Systems.Revenue from Systems consists of revenue from the sale, rental and equipment
maintenance to business customers of end-user telecommunications equipment in the field of private
branch exchanges (PBXs), network management systems and fixed-line and cordless telephone handsets.
Systems revenue also includes revenue from managed services up to complete voice outsourcing. Effective January 1, 2005, Swisscom Systems was merged with Enterprise Solutions into a new
business segment named Swisscom Solutions. This effect has not been reflected in the figures
presented but will be reported in 2005, with a restatement of prior years numbers. Systems revenue decreased by 15.4% in 2004 compared to 2003 primarily as a result of a reduction in
rental contracts, a decrease in the number of PBXs sold and increased competition in the service
business. Systems revenue decreased by 15.0% in 2003 compared to 2002 primarily as a result of a reduction in
prices of equipment, a reduction in rental contracts and a declining demand reflecting increased
competition and the weak economic situation. Swisscom Systems, which will be part of the new Segment Solutions in 2005, expects revenue from
external customers to decrease in 2005, mainly due to price pressure as a result of continuing
strong competition for the sale and maintenance of equipment and reluctance of customers to invest
in new equipment in light of current technological developments such as voice-over-IP. 100




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Swisscom IT Services.Swisscom IT Services offers end-to-end business solutions primarily in the
financial services and telecommunications industries. In addition to business solutions, Swisscom
IT Services focuses on system integration, outsourcing and IT infrastructure services, including
desktop services and data-center services. Effective December 31, 2004, Swisscom increased its
stake in Swisscom IT Services to 100% through the acquisition of the minority stake held by eight
cantonal banks. IT Services revenue decreased by 3.3% in 2004 compared to 2003, mainly as a result of lower
revenues from its former minority shareholder. This decrease has been partially offset by an
increase in revenue from IT outsourcing services with other customers. IT Services revenue remained relatively stable in 2003 compared to 2002, as the increase in revenue
from other customers was partially offset by a decrease in revenue from its former minority
shareholder. While it is expected that revenue from the former minority shareholder will further decrease in
2005, IT Services expects that this decrease can be more than compensated by further growth in
outsourcing services. Swisscom Broadcast.Broadcasting revenue stems from fees for the transmission and broadcasting of
analogue and digital signals for television and radio broadcasting. Such services are provided
primarily to the Swiss Broadcasting Corporation (the SRG). Broadcasting revenue remained relatively stable in 2004 compared to 2003. Broadcasting revenue decreased 8.0% in 2003 compared to 2002 as a result of the reduction of
terrestrial coverage from three to one language starting in May 2002 impacting the full year 2003. Swisscom Broadcast expects revenue to increase slightly in 2005 mainly as a result of the
acquisition of a local transmission and broadcasting provider, TeleRätia, in December 2004. In
addition, the development of new products such as digital audio and video broadcasting is also
expected to have a positive impact on revenues in 2005. Billag.In addition to providing broadcasting services to SRG, Swisscom entered into an agreement
to collect radio and television licensing fees on behalf of SRG until 2007. Swisscom collects such
fees through Billag. In December 2003, Billag AG acquired T-Systems Card Services AG, renamed
Billag Card Services AG, a loyalty card processor. Billag revenue more than doubled in 2004, reflecting revenue from the business with loyalty cards
from the acquisition of Billag Card Services. Billag revenue remained stable in 2003 compared to 2002. Billag expects revenue to remain relatively stable in 2005. Swisscom Eurospot.Swisscom Eurospot provides high-speed Internet access and conference services to
business travelers mainly in premium hotels across Europe (excluding Switzerland). Eurospot revenue strongly increased in 2004, reflecting the continuing rollout of its business
activities in Europe. Eurospot expects revenue to further increase in 2005. 101




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Segment expenses Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Goods and services purchased
    
    
    143
    
    
    
    138
    
    
    
    106
    
    
    
    (3.5
    )
    
    
    (23.2
    )Personnel expenses
    
    
    686
    
    
    
    585
    
    
    
    522
    
    
    
    (14.7
    )
    
    
    (10.8
    )Other operating expenses
    
    
    357
    
    
    
    283
    
    
    
    327
    
    
    
    (20.7
    )
    
    
    15.5Depreciation and amortization
    
    
    225
    
    
    
    198
    
    
    
    201
    
    
    
    (12.0
    )
    
    
    1.5Other operating income(1)
    
    
    (5
    )
    
    
    (18
    )
    
    
    (12
    )
    
    
    260.0
    
    
    
    (33.3
    )Total external segment expenses
    
    
    1,406
    
    
    
    1,186
    
    
    
    1,144
    
    
    
    (15.7
    )
    
    
    (3.5
    )Intersegment expenses
    
    
    171
    
    
    
    160
    
    
    
    142
    
    
    
    (6.4
    )
    
    
    (11.3
    )Total segment expenses
    
    
    1,577
    
    
    
    1,346
    
    
    
    1,286
    
    
    
    (14.7
    )
    
    
    (4.5
    )
   (1)
    
    Includes mainly capitalized costs and gains on sale of property, plant and equipment. Total segment expenses decreased by 4.5% in 2004 compared to 2003 primarily due to a decrease
in personnel expenses and in goods and services purchased, partially offset by an increase in other
operating expenses.  

Goods and services purchased decreased by 23.2%, mainly reflecting a decrease in the
number and lower average prices of telecommunications equipment purchased by Systems
for resale.

Personnel expenses decreased by 10.8% due to a decrease in termination benefits from
CHF 48 million in 2003 to CHF 6 million in 2004 as well as a decrease in the average
number of employees, mainly at Systems and IT Services, resulting from the headcount
reductions in 2002 and 2003.

Other operating expenses increased by 15.5% due primarily to the consolidation of
Billag Card Services, which was acquired in December 2003. Total segment expenses decreased by 14.7% in 2003 compared to 2002 due primarily to a decrease in
personnel expenses and in other operating expenses.  

Personnel expenses decreased by 14.7%, mainly due to a decrease in termination
benefits from CHF 101 million in 2002 to CHF 48 million in 2003 as well as a decrease
in the average number of employees at Systems, resulting from the restructuring
measures accounted for in 2002.

Other operating expenses decreased by 20.7%, mainly reflecting the decrease in
revenue and cost cutting measures at Systems and at IT Services.

Depreciation and amortization decreased by 12.0%, due to a decline in the rental
business for telecommunications equipment at Systems and an increase in the number of
fully depreciated assets at Systems and IT Services.  These decreases were partially offset by an increase in expenses relating to the rollout of
the pan-European business activities of Swisscom Eurospot. Total segment expenses, excluding Swisscom Systems, are expected to increase in 2005 due to an
increase in personnel expenses reflecting an increase in headcount mainly at Swisscom Broadcast due
to the development of new products and at Swisscom Eurospot. Total segment expenses will also be
impacted by an increase in depreciation mainly at Swisscom Eurospot as a result of the rollout of
its network across Europe. 102




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Segment margin Segment margin increased, despite a decrease in revenue, from a negative margin of 7.8% in 2002 to
a negative margin of 3.2% in 2003 and to a positive margin of 0.7% in 2004, due primarily to a
reduction in termination benefits and cost cutting measures. It is expected that the margin of the segment Other, excluding Swisscom Systems, will increase in
2005 due to an increase in revenue, partially offset by an increase in personnel expenses. 103




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Corporate The Corporate segment encompasses Swisscoms headquarter functions, group-company shared services,
the real-estate company Swisscom Immobilien AG (SIMAG) and its social plan programs
( PersPec and Worklink). For a description of PersPec and Worklink, see Item 6: Directors,
Senior Management and Employees  Employees  Workforce Reduction and Productivity Improvement.
SIMAG manages Swisscoms portfolio of real estate properties, some of which it leases to other
group companies and, to a limited extent, to third parties. In addition, it provides facility
management services, such as energy purchasing, and security and cleaning, for third parties as
well as for internal use. For more information on Swisscoms real estate, see Item 4: Information
on the Company Property, Plant and Equipment. The following table sets forth the results for the segment Corporate and the percentage changes
therein for the periods presented: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Net revenue from external customers(1)
    
    
    74
    
    
    
    72
    
    
    
    68
    
    
    
    (2.7
    )
    
    
    (5.6
    )Intersegment net revenue
    
    
    630
    
    
    
    631
    
    
    
    540
    
    
    
    0.2
    
    
    
    (14.4
    )Net revenue
    
    
    704
    
    
    
    703
    
    
    
    608
    
    
    
    (0.1
    )
    
    
    (13.5
    )Segment expenses
    
    
    571
    
    
    
    609
    
    
    
    699
    
    
    
    6.7
    
    
    
    14.8Segment operating (loss) income
    
    
    133
    
    
    
    94
    
    
    
    (91
    )
    
    
    (29.3
    )
    
    
    n.a.
   (1)
    
    Net revenue from external customers includes rental income, facility management services
and other revenues. Net revenue remained relatively stable in 2003, but decreased by 13.5% in 2004 due to lower
revenue from other group companies as a result of (i) lower management fees reflecting a decrease
in the amount of shared services offered; (ii) the elimination of revenue for the operation of two
central systems as the system ownership was transferred from Swisscom headquarters to other group
companies in 2004; and (iii) a reduction in heating and additional services relating to real estate
sold in 2001, for which SIMAG received final bills in 2003 that were higher than anticipated. Net revenue is expected to increase in 2005 due to an increase in revenue from SIMAG as a result of
a new centralized settlement system for energy costs through which SIMAG will charge energy costs
to other group companies. Revenue from SIMAG will also increase due to a group wide space
optimization program whose costs will be charged to the other group companies. Segment expenses Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Goods and services purchased
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (100.0
    )
    
    
    0.0Personnel expenses
    
    
    109
    
    
    
    164
    
    
    
    253
    
    
    
    50.5
    
    
    
    54.3Other operating expenses
    
    
    397
    
    
    
    339
    
    
    
    368
    
    
    
    (14.6
    )
    
    
    8.6Depreciation and amortization(1)
    
    
    65
    
    
    
    61
    
    
    
    54
    
    
    
    (6.2
    )
    
    
    (11.5
    )Other operating income(2)
    
    
    (101
    )
    
    
    (26
    )
    
    
    (29
    )
    
    
    (74.3
    )
    
    
    11.5Total external segment expenses
    
    
    471
    
    
    
    538
    
    
    
    646
    
    
    
    14.2
    
    
    
    20.1Intersegment expenses
    
    
    100
    
    
    
    71
    
    
    
    53
    
    
    
    (29.0
    )
    
    
    (25.4
    )Total segment expenses
    
    
    571
    
    
    
    609
    
    
    
    699
    
    
    
    6.7
    
    
    
    14.8
   (1)
    
    Excluding amortization of goodwill.(2)
    
    Includes mainly capitalized costs and gains on sale of property, plant and equipment. 104




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Total segment expenses increased by 14.8% in 2004 compared to 2003 primarily due to an
increase in personnel expenses and other operating expenses.  

Personnel expenses increased by 54.3% due to the following:Costs relating to workforce reduction measures are calculated per segment for the
employees participating in one of the workforce reduction programs and are recorded as
part of that segments expense. Not all of the costs relating to termination benefits
recorded by the segments meet the criteria for recognition under IFRS. These costs are
eliminated in the Corporate segment, i.e. are deducted from personnel expenses. However,
expenses related to employees who have been transferred into Worklink are recorded in the
Corporate segment. For further information, see Note 7 to the consolidated financial
statements.The amount of termination benefits eliminated from the Corporate segment decreased from
CHF 106 million in 2003 to CHF 18 million in 2004, primarily as a result of an overall
decrease in the amount of termination benefits recorded by other segments. This was
partially offset by an increase in the expense for employees who are employed by Worklink
from CHF 53 million in 2003 to CHF 81 million in 2004 reflecting an increase in the number
of employees that were transferred into Worklink in 2004.This increase in costs for social plan measures was partially offset by a decrease in
termination benefits from CHF 42 million to CHF 2 million, mainly reflecting the
reorganization of SIMAG in 2003 and a provision for partial early retirement of CHF 18
million that was recorded in 2003.

Other operating expenses increased by 8.6% mainly as a result of the release of a
provision in 2003 for dismantlement and restoration costs due to the elimination of the
liability resulting from the sale of stations, which reduced expenses in 2003 by CHF 22
million. For further information, see Note 26 to the consolidated financial statements. Total segment expenses increased by 6.7% in 2003 compared to 2002 primarily due to an increase in
personnel expenses and a decrease in other operating income, partially offset by a decrease in
other operating expenses:  

Personnel expenses increased by 50.5% due to the following:An increase in termination benefits from CHF 14 million in 2002 to CHF 42 million in 2003
reflecting primarily the reorganization of SIMAG and a provision for partial early
retirement of CHF 18 million.A reduction in the amount of termination benefits eliminated from the Corporate segment,
as described above, from CHF 119 million in 2002 to CHF 106 million in 2003.An increase in the expense for employees who are employed by Worklink from CHF 32 million
in 2002 to CHF 53 million in 2003 reflecting an increase in the number of employees that
were transferred into Worklink in 2003.

Other operating expenses decreased by 14.6% due to the release of a provision for
dismantlement and restoration costs in 2003, as described above, and as a result of cost
reduction measures that were introduced in 2003.

Other operating income decreased by 74.3% mainly as a result of the reversal of a
liability of CHF 70 million in 2002. This liability was established in 1997 and was no
longer legally owed, as the rights to payment expired in 2002. Total segment expenses are expected to increase in 2005 due to an increase in the expenses for
Worklink, reflecting an increase in the number of employees that will be transferred to Worklink,
and an increase in the costs associated with the centralized settlement system for energy costs and
the group-wide space optimization program that will be carried out by SIMAG. 105




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LIQUIDITY AND CAPITAL RESOURCES Cash flows Swisscoms primary source of liquidity is cash generated from operations. The following table sets
forth certain information regarding Swisscoms cash flows: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Net cash provided by operating activities
    
    
    3,700
    
    
    
    4,710
    
    
    
    4,068
    
    
    
    27.3
    
    
    
    (13.6
    )Net cash provided by (used in) investing activities
    
    
    1,666
    
    
    
    (625
    )
    
    
    (1,354
    )
    
    
    n.a.
    
    
    
    116.6Net cash used in financing activities
    
    
    (7,432
    )
    
    
    (2,557
    )
    
    
    (3,422
    )
    
    
    (65.6
    )
    
    
    33.8Net (decrease) increase in cash and cash
equivalents from continuing operations
    
    
    (2,066
    )
    
    
    1,528
    
    
    
    (708
    )
    
    
    n.a.
    
    
    
    n.a.Net (decrease) increase in cash and cash
equivalents from discontinued operations
    
    
    (49
    )
    
    
    (50
    )
    
    
    4
    
    
    
    2.0
    
    
    
    n.a.
 Cash provided by operating activities Cash provided by operating activities decreased by 13.6% in 2004 compared to 2003 mainly as a
result of lower operating income, an increase in income taxes paid and due to dividends received in
2003 from Cesky Telecom of CHF 121 million. An increase in working capital had a further decreasing
effect on operating cash flows in 2004, due to an increase in mobile handset inventory, reflecting
the increased demand for handsets and a less significant decrease in trade accounts receivables in
2004 compared to 2003 as a result of significant efforts that were made in 2003 to collect old
outstanding debts in particular from Fixnet Wholesale international business customers. The increase of 27.3% in net cash provided by operating activities in 2003 compared to 2002 is
primarily due to the increase in operating income as well as a decrease in income taxes paid and a
decrease in contributions paid to the pension fund. In addition, Swisscom received dividends from
Cesky Telecom of CHF 121 million in 2003. Cash provided by (used in) investing activities Cash used in investing activities increased from CHF 625 million in 2003 to CHF 1,354 million in
2004 mainly due to the investment of CHF 829 million in short-term fixed period deposits. In 2004,
Swisscom received cash of CHF 485 million from the sale of its stake in debitel (representing
proceeds from the sale of CHF 616 million less cash and cash equivalents of CHF 131 million that
remained with debitel) and acquired the minority stake in Swisscom IT Services for cash in the
amount of CHF 115 million. In 2003, Swisscom sold its indirectly held investment in Cesky Telecom
for net proceeds of CHF 510 million. Information on Swisscoms capital expenditure is shown below. Cash flows from investing activities changed from cash provided of CHF 1,666 million in 2002 to
cash used of CHF 625 million in 2003 mainly due to the effect of the disposal of current financial
assets in 2002 where Swisscom received proceeds of CHF 2.9 billion, which was used to finance the
share buy-back. In 2003, Swisscom sold its indirectly held investment in Cesky Telecom for net
proceeds of CHF 510 million. 106




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Capital Expenditure.The following table sets forth Swisscoms capital expenditure by category for
the periods presented: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Fixed-line network
    
    
    479
    
    
    
    497
    
    
    
    360
    
    
    
    3.8
    
    
    
    (27.6
    )Mobile network
    
    
    295
    
    
    
    381
    
    
    
    434
    
    
    
    29.2
    
    
    
    13.9Other intangible assets
    
    
    70
    
    
    
    98
    
    
    
    103
    
    
    
    40.0
    
    
    
    5.1Buildings
    
    
    2
    
    
    
    6
    
    
    
    13
    
    
    
    200.0
    
    
    
    116.7Other
    
    
    281
    
    
    
    183
    
    
    
    226
    
    
    
    (34.9
    )
    
    
    23.5Total capital expenditure
    
    
    1,127
    
    
    
    1,165
    
    
    
    1,136
    
    
    
    3.4
    
    
    
    (2.5
    )
 Capital expenditure in the fixed network decreased by 27.6% in 2004 compared to 2003, mainly due to
a decrease in capital expenditures for ADSL ports due to lower purchase prices. In addition, a
major part of the increase in the number of ADSL subscriber lines was realized with spare capacity
and did not require additional capital expenditures. Furthermore, the optimization of the voice
switching platform, which was finalized at the end of 2004, required less capital expenditure than
in 2003. Capital expenditure in the fixed network increased by 3.8% in 2003 compared to 2002. The major
areas of investment in the fixed network relate to (i) the rollout of broadband access services,
which Swisscom believes will be a growth area in the future, (ii) the optimization of the voice
switching platform in order to reduce network complexity and to allow longer usage and (iii) the
extension of the access network. Capital expenditure in the mobile network increased by 13.9% in 2004 and by 29.2% in 2003 due to an
increase in expenditures for new network technologies such as UMTS, EDGE and PWLAN in accordance
with Mobiles strategy for an integrated wireless broadband service offering. In 2003, a part of
the increase was also due to expenditures to increase both the capacity and coverage of the GSM
mobile telephony network. Swisscom expects capital expenditure in the fixed network to increase in 2005 as a result of
Swisscoms triple play strategy, which includes the rollout of TV services. After incurring
significant expenditures for the rollout of UMTS and EDGE in 2004, Swisscom expects capital
expenditure in the mobile network to decrease significantly in 2005. Cash used in financing activities Net cash used in financing activities in 2004 reflects primarily dividend payments to Swisscom
shareholders of CHF 861 million and to minority interests of CHF 360 million, the share buy-back of
7.13% of Swisscoms outstanding shares of CHF 1,882 million (excluding part of the related
withholding tax payment of CHF 119 million, which is due in 2005) and the repayment of a short-term
credit facility of CHF 256 million relating to the business with loyalty cards from Billag Card
Services, which was acquired in December 2003. Net cash used in financing activities in 2003 reflects primarily the repayment of debt of CHF 787
million, the par value reduction of CHF 8 per share (totaling CHF 530 million), as well as dividend
payments to Swisscom shareholders of CHF 794 million and to minority interests of CHF 390 million. Net cash used in financing activities in 2002 reflects primarily the share buy-back of 9.99% of
Swisscoms outstanding shares of CHF 4,264 million, a par value reduction of CHF 8 per share
(totaling CHF 529 million) and the repayment of debt of CHF 1,638 million, as well as dividend
payments to Swisscom shareholders of CHF 728 million and to minority interests of CHF 300 million. 107




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Cash used in discontinuing operations Net cash used in discontinuing operations from January 1 to June 8, 2004 of CHF 4 million, resulted
from cash used in investing activities of CHF 19 million and financing activities of CHF 62
million, partially offset by cash from operating activities of CHF 85 million. Net cash used in 2003 of CHF 50 million resulted primarily from investing activities of CHF 23
million and financing activities of CHF 49 million, partially offset by cash provided from
operating activities of CHF 22 million. Net cash used in 2002 of CHF 49 million resulted primarily from investing activities of CHF 94
million and financing activities of CHF 40 million, partially offset by cash provided from
operating activities of CHF 85 million. Sources of liquidity Swisscom expects to be able to meet its financing requirements, including the funding of its
pension obligations, from cash flows from operations and bank borrowings. Financing of any larger
acquisition may also include bond issuances. Capital requirements Capital Expenditure.Swisscom expects capital expenditure to remain relatively stable in 2005 at
approximately CHF 1,200 million, as a significant increase of investment in the fixed network is
expected to be offset by a significant decrease of investment in the mobile network. For more
information, see Capital Expenditure above. Financing activities The key element of Swisscoms return policy is the annual distribution of all freely available
funds, or the so-called Equity Free Cash Flow. For more information on Swisscoms return policy,
see Item 8: Financial information  Dividend
policy. The following table sets forth Swisscoms equity free cash flow: Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,CHF in millions (except percentages)
    
    2002
    
    
    2003
    
    
    2004
    
    
    2003/2002
    
    
    2004/2003(% change)Net cash provided by operating activities
    
    
    3,700
    
    
    
    4,710
    
    
    
    4,068
    
    
    
    27.3
    
    
    
    (13.6
    )Capital expenditure
    
    
    (1,127
    )
    
    
    (1,165
    )
    
    
    (1,136
    )
    
    
    3.4
    
    
    
    (2.5
    )Net (payments) proceeds from investments in
non-current financial assets(1)
    
    
    (84
    )
    
    
    491
    
    
    
    75
    
    
    
    n.a.
    
    
    
    (84.7
    )Proceeds from sale of debitel
    
    
    
    
    
    
    
    
    
    
    616
    
    
    
    0.0
    
    
    
    n.a.Acquisition of the remaining interest in
Swisscom IT Services
    
    
    
    
    
    
    
    
    
    
    (115
    )
    
    
    0.0
    
    
    
    n.a.Repayment (issuance) of debt
    
    
    (1,000
    )
    
    
    (750
    )
    
    
    (256
    )
    
    
    (25.0
    )
    
    
    (65.9
    )Dividends paid to minority interests
    
    
    (300
    )
    
    
    (390
    )
    
    
    (360
    )
    
    
    30.0
    
    
    
    (7.7
    )Other cash flow from investing and financing
activities, net(2)
    
    
    (70
    )
    
    
    17
    
    
    
    21
    
    
    
    n.a.
    
    
    
    23.5Equity free cash flow
    
    
    1,119
    
    
    
    2,913
    
    
    
    2,913
    
    
    
    160.3
    
    
    
    0.0
   (1)
    
    Comprises cash flows from (i) acquisitions and disposals of subsidiaries and affiliated
companies; (ii) the purchase and sale of other non-current financial assets; and (iii) loans
receivable granted and repaid.(2)
    
    Comprises cash flows from (i) proceeds from the sale of fixed assets; (ii) other cash flows
from investing activities; and (iii) net purchase of treasury stock and call options. 108




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On the basis of the equity free cash flow generated, Swisscoms Board of Directors will
propose a dividend of CHF 14 per share (totaling CHF 861 million) to the Annual General Meeting,
which will take place on April 26, 2005. In the course of 2005, Swisscom intends, in accordance
with its return policy, to return to its shareholders the remainder of the equity free cash flow of
approximately CHF 2 billion in the form of a share repurchase.
See Item 8: Financial Information 
Dividend Policy. Contractual Obligations and Commercial Commitments.The following tables show Swisscoms total
contractual obligations and commercial commitments as per December 31, 2004: Payments due by periodContractual Cash Obligations
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    AfterCHF in millions
    
    Total
    
    
    1 year
    
    
    1 - 3 years
    
    
    4 - 5 years
    
    
    5 yearsCross-border tax lease obligations(1)
    
    
    3,325
    
    
    
    73
    
    
    
    285
    
    
    
    120
    
    
    
    2,847Finance lease obligations(2)
    
    
    2,637
    
    
    
    210
    
    
    
    176
    
    
    
    219
    
    
    
    2,032Operating leases(3)
    
    
    544
    
    
    
    113
    
    
    
    127
    
    
    
    100
    
    
    
    204Unconditional purchase obligations(4)
    
    
    134
    
    
    
    124
    
    
    
    10
    
    
    
    
    
    
    
    Total contractual cash obligations(5)
    
    
    6,640
    
    
    
    520
    
    
    
    598
    
    
    
    439
    
    
    
    5,083
   (1)
    
    Represents total future payment commitments for the liability that is recorded on the
balance sheet as described below. Under the terms of the agreements, Swisscom incurred debt
the majority of which it defeased by making cash deposits. At December 31, 2004, the net
present value of the lease obligations is CHF 1,262 million and the amount on deposit is CHF
952 million. The net present value of cash outflows in the future is therefore only CHF 310
million.(2)
    
    Represents total future payment commitments under finance leases. In 2001, Swisscom entered
into two agreements for the sale of real estate and at the same time entered into agreements
to lease back part of the sold property space. A number of the leaseback agreements qualify as
finance leases. Total payments of CHF 2,293 million relating to these finance leases are
included in the table above. Also included in the table above is payments of CHF 344 million
relating to three additional cross border lease transactions. No amounts were placed on
deposit for these leases.(3)
    
    Represents the total future minimum lease payments resulting from operating lease contracts.(4)
    
    Represents primarily total contractual commitments for future capital expenditures.(5)
    
    The total underfunding of Swisscoms pension plan as of December 31, 2004 was CHF 2,050
million, of which CHF 1,118 million was recognized in the balance sheet. This accrued
liability, which is impacted by various actuarial assumptions, is expected to differ from the
future value of estimated payments. For 2005, Swisscom expects to make contributions to the
pension plan in the amount of CHF 196 million. However, Swisscom plans to review the benefits
and contributions under the plan and expects to amend the plan in the course of 2005. These
amendments may require Swisscom to pay a higher amount than currently planned, which could
have a significant negative effect on Swisscoms cashflows from operating activities in 2005.
Swisscom does not expect to have material funding requirements for the plan and the amounts
for future payments are therefore not included in the table above. See Note 9 to the
consolidated financial statements for more information. Off-balance sheet arrangements/Cross border leases Between 1996 and 2002, Swisscom entered into several cross-border sale-leaseback or lease-leaseback
arrangements under the terms of which parts of its fixed and mobile networks were sold or leased on
a long-term basis to US equity trusts which simultaneously leased the equipment back to Swisscom.
The initial sale or lease and the leaseback transactions were settled at the inception of the
agreements, and Swisscom recorded the income from each transaction at the time it was entered into.
No other cash payments are currently expected to be made by Swisscom under the lease agreements. The U.S. equity trusts funded the initial purchase or lease transaction through debt and equity
financing. Swisscom used the proceeds it received from the U.S. equity trusts to defease a major
part of its lease payment obligations by investing a part of the proceeds in highly rated
securities and/or depositing the balance with financial institutions with minimal credit risk. A
major part of these investments were irrevocably placed with trusts and serve to make lease
payments due as set forth in the lease agreement. In one of the transactions, Swisscom was required to provide a letter of credit to secure a part
its obligations to the equity investors. If the Swiss Confederation were to reduce its shareholding
to below a majority, Swisscom would 109




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be required to enter into additional letters of credit to secure its obligations to the equity
investors in the other transactions as well. As of December 31, 2004 the assets and liabilities resulting from these transactions totaled USD
3,713 million (CHF 4,237 million) and USD 3,980 million (CHF 4,547 million), respectively. In
accordance with Interpretation SIC-27 Evaluating the substance of transactions involving the legal
form of a lease, USD 2,878 million (CHF 3,285 million) met the offsetting criteria and both the
asset and the corresponding liability were removed from the balance sheet. The remaining liability
and asset of CHF 1,262 million and CHF 952 million, respectively, recorded in the balance sheet at
December 31, 2004, relate primarily to one lease agreement entered into in 2000. For more
information, see Note 25 to the consolidated financial statements. In connection with these lease transactions, Swisscom agreed that certain securities would continue
to meet minimum credit ratings. Shortly before the end of 2004, the credit rating of a portion of
the securities in one transaction dropped below the minimum rating agreed in the contract. Swisscom
is in the process of replacing the affected collateral with securities meeting the agreed minimum
rating which it estimates will cost CHF 34 million. This expense was recorded in the income
statement in 2004. In the event Swisscom were to default on certain of its obligations, the equity investors would be
entitled to terminate these agreements. In case of early termination, Swisscom would be required
to pay the equity investors a contractually agreed amount that is a percentage of the transaction
value and changes over time, and which could be significant in amount. Inflation Swisscoms results in recent years have not been substantially affected by inflation and changes in
prices related thereto. IFRS compared with U.S. GAAP Swisscoms consolidated financial statements have been prepared in accordance with IFRS, which
differ in certain respects from U.S. GAAP. See Note 42 to the consolidated financial statements for
a reconciliation of Swisscoms net income for the years ended December 31, 2002, 2003 and 2004 and
shareholders equity as of December 31, 2003 and 2004 under IFRS to U.S. GAAP. The following table
sets forth Swisscoms net income and shareholders equity under IFRS and reconciled to U.S. GAAP
for the periods presented: Year Ended December 31,CHF in millions
    
    2002
    
    
    2003
    
    
    2004Net income (loss):IFRS
    
    
    824
    
    
    
    1,569
    
    
    
    1,594U.S. GAAP
    
    
    (863
    )
    
    
    2,096
    
    
    
    2,113Shareholders equity (at period end):IFRS
    
    
    7,299
    
    
    
    7,669
    
    
    
    6,681U.S. GAAP
    
    
    5,587
    
    
    
    6,523
    
    
    
    5,863
 The key differences between IFRS and U.S. GAAP in 2002, 2003 and 2004 relate to (1) the impairment
charge and amortization of goodwill of debitel, (2) the gain on the disposal of debitel, (3) the
treatment of the gain on the sale and leaseback transactions and (4) the treatment of the income
relating to the cross border tax lease transactions.  (1)

Effective January 1, 2002 Swisscom adopted SFAS 142 Goodwill and Other
Intangible Assets. Under SFAS 142, goodwill and indefinite-lived
intangible assets are no longer amortized, but were tested for impairment upon adoption
and will be tested at least annually thereafter. Upon adoption of SFAS 142, Swisscom
recorded an impairment charge of CHF 1,649 million under U.S. GAAP. In 2002, Swisscom
recorded an additional impairment charge of CHF 985 million under U.S. GAAP, which
reduced the carrying value of the goodwill of debitel to zero. The impairment charge
recorded under IFRS in 2002 was CHF 702 million. Goodwill amortization that was
recorded under IFRS of CHF 304 million in 2002, CHF 213 million in 2003 and CHF 106
million in 2004 was reversed under 110




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U.S. GAAP. In 2003, Swisscom recorded an additional impairment charge of CHF 280 million
under IFRS. As the goodwill balance under U.S. GAAP had a value of zero, the impairment
booked under IFRS was reversed under U.S. GAAP.(2)

In 2004, Swisscom disposed of its investment in debitel. Due to the difference
in the carrying amount of Swisscoms investment in debitel between IFRS and U.S. GAAP
and the deferred proceeds receivable under the vendor loans, the sale of debitel
resulted in a gain under U.S. GAAP of CHF 94 million, compared to a loss of CHF 248
million under IFRS. The amount of the gain that was deferred under U.S. GAAP reflects
the value of the two vendor loans as at December 31, 2004 that have been provided by
Swisscom. This amount was deferred, as Swisscoms ability to recognize this portion of
the gain is dependent on debitels ability to repay the vendor loan. This gain will be
realized on receipt of the vendor loans.(3)

Under IFRS, the gain on the sale of buildings in a sale and leaseback
transaction qualifying as an operating lease is recognized immediately. Under U.S.
GAAP, the rules defining when a gain can be realized on sale and leaseback transactions
are different to those under IFRS. Swisscom entered into several such sale and
leaseback transactions, a number of which do not meet the criteria for immediate gain
recognition under U.S. GAAP. The gain on the sale of these buildings has been deferred
and will be amortized over the lease term.(4)

Under IFRS, the profit on the cross-border lease transactions is recorded when
the transaction is closed. Under U.S. GAAP, the profit is recognized over the life of
the leases, which range from 12 to 30 years. New Accounting Pronouncements There are a number of new accounting standards that have been issued that will effect Swisscoms
preparation of its consolidated financial statements in accordance with IFRS and U.S. GAAP.
Swisscom does not expect that the adoption of any of the new accounting pronouncements will have a
material impact on its results of operations, financial position or cash flows. A discussion of
these new standards and their effect on Swisscom, to the extent known, is discussed in Note 42 of
the consolidated financial statements. 111




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ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 
 Directors and Senior Management Board of Directors The TUG provides that the Board of Directors (Verwaltungsrat) of Swisscom has the duties set forth
for Boards of Directors under the Swiss Code of Obligations (Obligationenrecht). The Board of
Directors of a Swiss corporation is ultimately responsible for the policies and management of the
corporation. The Board establishes the strategic, accounting, organizational and financing
policies to be followed by the corporation. The Board further appoints the executive officers and
the authorized signatories of the corporation, and supervises the management of the corporation.
Moreover, the Board is entrusted with shareholders meetings and carrying out shareholders
resolutions. The Board may, pursuant to its regulations, delegate the conduct of day-to-day
business operations to management under its control. All members of Swisscoms Board of Directors
are non-executive officers. Swisscoms Articles of Association provide that the Board of Directors is to consist of seven to
nine members. Directors are elected for a term of office of two years with a maximum total term of
office of eight years. Under Swisscoms Articles, the Confederation has the right to appoint two
Directors as its representatives, although it has currently designated only one such Director.
Currently, Felix Rosenberg is representing the Confederation on the Swisscom Board of Directors.
Under the TUG, Swisscoms employees are entitled to adequate representation on the Board of
Directors, and Swisscoms Articles provide that there must be two representatives of employees on
the Board. The employees are entitled to propose to the Board of Directors the candidates, who are
ultimately elected by the Annual General Meeting. Currently, Jacqueline Françoise Demierre and
Michel Gobet are representing Swisscoms employees on the Board. As authorized by the TUG and the Swiss Code of Obligations, the Board of Directors has delegated
overall executive management of Swisscom to the CEO. The CEO is entitled to delegate his powers to
other members of the Group Executive Board (Gruppenleitung) comprising senior executive officers of
Swisscom. The Board of Directors is also authorized to delegate certain powers to committees or to
individual members of the Board, and pursuant thereto, the Board has established the following
committees:  

The Audit Committee, chaired by Mr. Küpfer, meets five to seven times per year. It
assists the Board in observing its responsibility for ensuring that Swisscoms
financial systems provide accurate and up-to-date information on its financial position
and that Swisscoms published financial statements represent a true and fair reflection
of this position. It also assists the Board in ensuring that appropriate accounting
policies, internal financial controls, risk management controls and compliance
procedures are in place. In particular, the Audit Committee monitors the
implementation of the internal control over financial reporting provisions under
Section 404 of the Sarbanes-Oxley Act of 2002. The Audit Committee has advisory powers,
to the extent permitted by Swiss law, with respect to the appointment, compensation and
retention of Swisscoms auditors. The Audit Committee is also responsible for
overseeing Swisscoms internal and external auditors and for approving any engagement
to render audit or permitted non-audit services.

The Finance Committee, chaired by Mr. Woelki, advises the Board on investment
policies, including decisions regarding acquisitions and divestments, the granting of
loans and financing. The Finance Committee meets an average of three times per year.

The Personnel and Organization Committee, chaired by Mr. Rosenberg, is responsible
for the preparation and execution of decisions relating to personnel matters,
compensation policies and collective bargaining, including determining the compensation
plans of senior management, the granting of loans and guarantees to senior management
as well as management staffing plans. The Personnel and Organization Committee meets
an average of six to eight times per year. 112




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

The Compensation Committee has rotating membership. It advises the Board on overall
compensation policy and meets on an ad hoc basis.

The Nomination Committee nominates members of the Group Executive Board. It also
has rotating membership and meets on an ad hoc basis. Swisscom does not have service contracts with its directors that provide for benefits upon
termination of employment, beyond their legal entitlement in accordance with applicable employment
laws. The members of the Board of Directors of Swisscom and their ages at December 31, 2004, positions
and committee memberships were as follows: First
    
    
    CurrentName
    
    Age
    
    Title
    
    
    Appointed
    
    
    Term EndsMarkus Rauh(1)(2)(3)
    
    65
    
    Chairman
    
    
    1998
    
    
    April 2005André Richoz(3)
    
    57
    
    Vice-Chairman
    
    
    1998
    
    
    April 2005Jacqueline Françoise Demierre(1)^
    
    50
    
    Director
    
    
    1998
    
    
    April 2005Michel Gobet(1)^
    
    50
    
    Director
    
    
    2003
    
    
    April 2005Torsten G. Kreindl(3)
    
    41
    
    Director
    
    
    2003
    
    
    April 2005Peter Küpfer(2)
    
    60
    
    Director
    
    
    1998
    
    
    April 2005Felix Rosenberg(1)*
    
    63
    
    Director
    
    
    1998
    
    
    April 2007Richard Roy(2)
    
    49
    
    Director
    
    
    2003
    
    
    April 2005Helmut Woelki(3)
    
    55
    
    Director
    
    
    1998
    
    
    April 2005
   (1)
    
    Member of the Personnel and Organization Committee(2)
    
    Member of the Audit Committee(3)
    
    Member of the Finance Committee*
    
    Representative of the Confederation^
    
    Employee Representative Dr. Markus Rauhis Chairman of the Board of Directors of Swisscom. He is Chairman of the Board
of Directors of Synthes AG Chur and Anova Holding AG and Vice Chairman of the Board of Directors of
Leica Geosystems AG and Dietiker AG. He is also a member of the Board of Directors of several
Swiss companies, including Unaxis Holding AG, The Generics Group AG, Madison Management AG and St.
Galler Kantonalbank AG. In addition, since 1999, Dr. Rauh has been working as an independent
management consultant. From 1988 until 1999, Dr. Rauh served as President and Chief Executive
Officer of the Leica Group. From 1985 to 1988, he was President and Chief Executive Officer of
Philips Kommunikationsindustrie AG. Dr. Rauh is a member of several industry associations,
including Economiesuisse, and is President of the Board of Trustees of the Institute for Technology
Management at the University of St. Gallen. Dr. Rauh graduated with a doctorate in physics from the
Swiss Institute of Technology (ETH). Dr. André Richozis Vice-Chairman of the Board of Directors of Swisscom. Dr. Richoz is also a
member of the Board of Directors of ING Bank (Schweiz) AG and Batigroup AG. Since the beginning of
2000, he has been Chief Executive Officer of the Rockland Group based in France. From 1998 to
1999, he was Chief Executive Officer of Sika-Group. From 1989 to 1997, he was Member of the
Executive Board of Georg Fischer AG as Head of the Automation Division (Agie Charmilles Group).
From 1981 to 1985, he was plant manager of Sulzer in South Africa and from 1985 to 1989, he was
President of Sulzer Brothers in Japan. A member of the Swiss Academy of Engineering Sciences, Dr.
Richoz obtained a doctorate in physics from the University of Zurich in 1975 and a masters degree
in business administration from INSEAD, Fontainebleau, in 1977. Jacqueline Françoise Demierrehas been a member of the Board of Directors of Swisscom, in her
capacity as an employee representative, since January 1, 1998, having previously served in various
sales and marketing functions in the national and international telecommunications business of PTT
and Swisscom, such as multinational account manager, commercial contract manager and senior sales
manager of corporate accounts. Ms. Demierre is a member 113




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of the Transfair and CASC Unions as well as of the board commission for the deactivation fund for
nuclear power plants (StiF KA) and disposal fund for nuclear power plants (EntsF KKW). Ms. Demierre
has a federal diploma in sales management. Michel Gobetis currently Secretary of the Communications Union as well as Vice President of the
Comité directeur européen des télécommunications of Union Network International. Prior to this, he
had been Central Secretary and Deputy General Secretary of the PTT Union for several years. From
1994 to 1999, Mr. Gobet was a member of the worldwide executive committee of the PTT International.
Mr. Gobet holds a degree in history. Dr. Torsten G. Kreindlhas been a partner of the US venture capital company Copan Inc. since 1999.
Mr. Kreindl has held various positions in the high-tech sector over the past 15 years. From 1996
to 1999, he oversaw the broadband cable business of Deutsche Telekom as senior executive director
and was Chief Executive Director of MSG Media Services GmbH. Prior to this, he was a member of the
German executive board of Booz Allen & Hamilton, where he advised international companies in the
areas of communications, media and technology. Previously, he had worked as area manager at Chemie
Holding AG before moving to W.L. Gore & Associates Inc. as business segment leader. Mr. Kreindl
holds a doctor degree in industrial engineering. Peter Küpferhas been an independent management consultant since 1996. He is also Chairman of the
Board of Directors of Pilatus Aircraft Ltd and a member of the Board of Directors of several large
Swiss companies, including Valora Holding Ltd, Bank Julius Baer AG, Karl Steiner Holding AG, Unaxis
Holding AG and Holcim AG. From 1989 to 1996, he was a member of the Executive Board of CS Holding
in Zurich and has held various other management positions in companies within the CS Holding Group.
Mr. Küpfer is a certified accountant (Diplomierter Wirtschaftsprüfer). Felix Rosenbergis the representative of the Confederation on the Board of Directors of Swisscom.
Mr. Rosenberg is Chairman of the Board of Directors of Voigt AG and De Martin AG. He is also a
member of the Board of Directors of Huser & Peyer AG, Buswil and President of the Board of Trustees
of the Swiss Pro Patria Foundation. He was the CEO of Swiss Telecom PTT from 1989 until the
beginning of 1998. From 1974 to 1989, Mr. Rosenberg was a member of the Cantonal Government of the
canton of Thurgau. Mr. Rosenberg, who is a member of the Fribourg University Senate, obtained a
law degree from the University of Fribourg in 1966. Richard Royhas been an independent management consultant since 2002 and renders consulting
services to a number of companies, including Permira Beteiligungsberatung GmbH. He is also Vice
President of the Supervisory Board of Realtech AG and, as of November 2004, of Premiere AG. He has
spent five years at Microsoft GmbH, Germany as Chief Executive Officer and as Vice President of the
Corporate Strategy Division of Microsoft EMEA. From 1995 to 1997, Richard Roy served as Executive
Vice President and Managing Director of Siemens Nixdorf Informationssysteme AG. From 1981 to 1995,
he worked for Hewlett Packard (HP) in Germany, serving among other things as President of the
Executive Board of various organizations within HP and as member of the Management Board. Mr. Roy
holds a degree in engineering. Helmut Woelkiis currently a consultant to large international companies such as Onex Corporation,
Toronto. He is also a judge in the commercial court (Handelsrichter) in Frankfurt/Main. Until
2001, Mr. Woelki was member of the Supervisory Board of Henkell Söhnlein Sektkellereien and, until
November 2000, Chief Executive Officer of the Management Board of LSG Lufthansa Service Holding AG.
Prior to this, he was Managing Director at SAS Service Partner. Mr. Woelki obtained a degree in
business administration from Johann Wolfgang Goethe University in Frankfurt/Main. Peter Küpfer, Dr. André Richoz and Helmut Woelki will not run for re-election to the Board of
Directors at the next Annual General Meeting to be held on April 26, 2005. Fides P. Baldesberger,
Dr. Anton Scherrer and Othmar Vock are proposed for election to the Board. Mr. Baldesberger is sole
shareholder, CEO and Chairman of the Board of Directors of Outils Rubis SA. Mr. Scherrer holds a
position as Chairman of the Executive Board of the Migros-Genossenschafts-Bund, from which he is
expected to retire at the end of June 2005. Prior to his retirement at the end of 2004, Mr. Vock
worked as Chief Financial Officer of Givaudan SA. 114




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Group Executive Board The Board of Directors has delegated overall executive management of Swisscom to the CEO. The CEO
is entitled to delegate his powers to other members of the Group Executive Board (Gruppenleitung).
Members of the Group Executive Board are appointed by the Board of Directors. The Group Executive
Board is headed by the Chief Executive Officer (CEO, Präsident der Gruppenleitung) and includes the
Chief Financial Officer (CFO, Finanzchef), the CEOs of the strategic group companies as well as the
heads of group functions. In addition to the benefits in their employment contracts, members of the Group Executive Board are
entitled to a termination payment equal to their annual salary (including bonus) should a new
majority shareholder and/or new chairman of the Board of Directors of Swisscom terminate this
employment relationship within 12 months of any takeover. However, those members who were elected
to the Group Executive Board as CEO of a strategic group company are entitled to such a termination
payment only if a new majority shareholder and/or a new chairman of the respective group company
terminate the employment relationship within 12 months following any takeover. The members of Swisscoms Group Executive Board are appointed for an unlimited term. The following
table shows their ages and positions at December 31, 2004: Name
    
    Age
    
    Position
    
    AppointedJens Alder
    
    
    47
    
    
    Chief Executive Officer
    
    December 1999Adrian Bult
    
    
    45
    
    
    CEO of Swisscom Fixnet AG
    
    October 2001Ueli Dietiker
    
    
    51
    
    
    Chief Financial Officer,
Deputy Chief Executive
Officer and Head of Group
Human Resources ad interim
until June 2004
    
    April 2002René Fischer
    
    
    39
    
    
    CEO of Swisscom Systems AG
and CEO of Swisscom
Enterprise Solutions AG since
July 2004(1)
    
    August 2002Stefan Nünlist
    
    
    43
    
    
    Head of Group Communications
    
    July 2001Günter Pfeiffer
    
    
    46
    
    
    Head of Group Human Resources
    
    June 2004Jürg Rötheli
    
    
    41
    
    
    Head of Group Operations &
Related Businesses
    
    July 2001Carsten Schloter
    
    
    41
    
    
    CEO of Swisscom Mobile AG
    
    March 2001Michael Shipton
    
    
    48
    
    
    Chief Strategy Officer
    
    July 2001Urs Stahlberger
    
    
    58
    
    
    CEO of Swisscom IT Services AG
    
    January 2002
   (1)
    
    Effective January 1, 2005, Swisscom Systems and Enterprise Solutions were merged to form
Swisscom Solutions. Jens Alderwas appointed Chief Executive Officer in December 1999. Prior to his appointment
as Chief Executive Officer, Mr. Alder served as Executive Vice President at Swisscom Network
Services, a position he held since January 1998. From 1996 until immediately prior to joining
Swisscom, Mr. Alder was General Manager of the Telecom Unit of Alcatel Switzerland AG. From 1993
until that date, he was Senior Vice President of Network Systems Export of Alcatel STR AG, a
predecessor of Alcatel Switzerland AG. Mr. Alder is president of the Schweizerische Gesellschaft
für Konjunkturforschung and a member of the management board of the Swiss Information and
Communications Technology Association SICTA and the Swiss Employers Federation. Mr. Alder holds a
masters degree in business administration from INSEAD, Fontainebleau (1987) and graduated with a
degree in electrical engineering from the Swiss Federal Institute of Technology (ETH) in 1982. Adrian R. Bultwas appointed CEO of Swisscom Fixnet AG on October 1, 2001 after serving as Head of
the Consumer Communications division (now Fixnet). From September 1997 to December 2000, he was
Head of Corporate Information & Technology (CIT). From 1984 until immediately prior to joining
Swisscom, Mr. Bult was associated with IBM Switzerland, where he was Regional Manager in charge of
Swiss, German, Austrian and Central and Eastern European banks (1995  1997) and Business and Unit
Manager in charge of Swiss banks (1993  1994). Mr. Bult is a member of the board of the Swiss
Marketing Society (Schweizerische Gesellschaft für Marketing) and holds a masters degree in
business administration from the University of St. Gallen (1983). 115




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Ueli Dietikerwas appointed Chief Financial Officer on April 1, 2002 after having served as Head of
Strategic Growth and Related Business since joining Swisscom in September 2001. From July 2003
until June 2004, he served as Head of Group Human Resources on an interim basis. From January 1999
to June 2001, he was Chief Executive Officer and, from January 1995 to December 1998, Chief
Financial Officer of Cablecom Holding AG. Mr. Dietiker is a certified accountant (Diplomierter
Wirtschaftsprüfer). René Fischerwas appointed CEO of Swisscom Systems AG in August 2002 after having served as CFO of
Swisscom Fixnet AG. Since July 2004, Mr Fischer has also been CEO of Swisscom Enterprise Solutions
AG which, effective January 1, 2005, was merged with Swisscom Systems AG to form Swisscom Solutions
AG. From June 1994 until immediately prior to joining Swisscom in December 1998, he served as Chief
Financial Officer at SIG Pack Systems AG. From 1989 to 1994, he held various positions at Telekurs
AG (1992  1994) and at Bank Leu AG (1989  1992). Mr. Fischer holds a degree in business
administration from the University of Zurich (1994). Stefan Nünlistwas appointed to the Group Executive Board in July 2001. Mr. Nünlist has been Chief
Communications Officer of Swisscom since January 2001. Prior to joining Swisscom he held various
positions at Atel AG (1999  2000), the Federal Department of Economic Affairs (Eidgenössisches
Volkswirtschaftsdepartement EVD) (1997  1998) and the Federal Department of Foreign Affairs
(Eidgenössisches Departement für auswärtige Angelegenheiten EDA) (1991  1996). Mr. Nünlist is a
member of the management board of the Swiss Advertisers Federation and member of the Swiss Tourism
Council. Mr. Nünlist holds a degree in law from the University of Fribourg and is an attorney at
law and a notary. Günter Pfeifferwas appointed Head of Group Human Resources in June 2004 after having served as
Head of Participation Management of Swisscom AG since 2000. Prior to this, he held various
management positions at VEBA-Telecom (Vice President Marketing, 1997  1999), T-Mobile (Senior
Director International, 1995-1996) and Detecon (Director Holding Projects, 1988  1995). Mr.
Pfeiffer holds a Ph.D. in economics from the University of Cologne. Jürg Rötheliwas appointed to the Group Executive Board as Head of Group Operations & Related
Businesses on July 1, 2001. Prior to this, he was General Counsel to Swisscom since 1999. From
1993 to 1999, he was partner with the law firm Stampfli, Keller & Partner and from, 1995 to 1999,
also General Counsel to Interdiscount Holding AG and Simeco Holding AG. Mr. Rötheli holds a Ph.D.
in law from the University of Fribourg (1990) and is an attorney at law and a notary. He also
attended the Wharton Advanced Management Program at the University of Pennsylvania in 2001. Carsten Schloterwas appointed CEO of Swisscom Mobile AG in March 2001, after serving as Head of
Public Com and Mobile Com since March 1, 2000. Prior to this, Mr. Schloter held various management
positions at debitel AG. In 1992, Mr. Schloter founded debitel France, where he was member of
management until 1994. He is also Chairman of the Forum Mobil Association. Mr. Schloter
graduated from the University of Paris, Dauphine, with a degree in business administration in 1986. Michael Shiptonwas appointed to the Group Executive Board in July 2001 and has been Chief Strategy
Officer of Swisscom AG since January 1, 2001. From January 1997 to December 2000, he was a member
of the management board of Swisscoms Network Services and Wholesale Division. From 1994 until
1997, Mr. Shipton was Member of the management board of the Division Informatik Telecom of Telecom
PTT. Prior to this, he has held various positions at British Telecom and Ascom. Mr. Shipton holds
a BSc degree in electrical engineering and received a Ph.D. degree in broadband communications
(1980) at the University of Bath, United Kingdom. Urs Stahlbergerwas appointed CEO of Swisscom IT Services AG in January 2002, after serving as CEO
of AGI IT Services AG, which was merged with Swisscoms IT division in 2001. Prior to this, Mr.
Stahlberger held various IT positions at Credit Suisse. He is also a judge in the commercial court
(Handelsgericht) in Zurich. Effective July 1, 2004, Hans-Peter Quadri, former CEO of Enterprise Solutions, left Swisscoms
Group Executive Board, but continued working for Swisscom until October 31, 2004. As a result of
the sale of debitel, Peter Wagner left Swisscoms Group Executive Board effective April 30, 2004. 116




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Compensation The aggregate compensation paid by Swisscom to its Board of Directors as a group in respect of 2004
amounted to CHF 1.9 million. Swisscoms Board of Directors approves its own compensation. The
aggregate compensation paid by Swisscom to its Group Executive Board members as a group in respect
of 2004 amounted to CHF 8.2 million. Such amount included CHF 3.8 million in bonus compensation
and CHF 0.6 million relating to contractual commitments for members either leaving or entering the
Group Executive Board. Total compensation includes fees, salary, bonuses, special pension fund
contribution and additional benefits. 25% of the Group Executive Boards bonuses and 25% of the
Board of Directors fixed compensation was paid pursuant to Swisscoms management incentive plan.
Total compensation paid by Swisscom to the CEO and to the Chairman of the Board of Directors in
respect of 2004 was CHF 1.4 million and CHF 0.5 million, respectively. The total amount accrued in
pension or similar benefits for members of Swisscoms Group Executive Board in 2004 was CHF 1.6
million. See Note 38 to the consolidated financial statements. 
 Employees Overview With 15,477 employees (full-time equivalent) as of December 31, 2004, Swisscom is one of the
largest employers in Switzerland. The following table sets forth the number of Swisscoms
full-time employees in each segment for the periods indicated. As of December 31,2002
    
    
    2003
    
    
    2004Fixnet
    
    
    8,128
    
    
    
    7,775
    
    
    
    7,500Mobile
    
    
    2,358
    
    
    
    2,418
    
    
    
    2,491Enterprise Solutions
    
    
    1,292
    
    
    
    999
    
    
    
    893Other(1)
    
    
    4,374
    
    
    
    3,921
    
    
    
    3,684Corporate(2)
    
    
    1,019
    
    
    
    966
    
    
    
    909Total(3)
    
    
    17,171
    
    
    
    16,079
    
    
    
    15,477
   (1)
    
    Includes 137 and 135 employees in 2003 and 2004, respectively, from the T-Systems Card
Services (now Billag Card Services) acquisition by Billag.(2)
    
    Does not include the participants in the Worklink and PersPec programs.(3)
    
    Excludes apprentices. In recent years, Swisscom has undertaken steps to streamline its organization and improve its
work processes, achieving labor efficiencies which have enabled it to substantially reduce the net
number of its employees. See  Workforce Reduction and Productivity Improvement. Status of Employees Until January 1, 2001, the substantial majority of Swisscoms employees, other than middle and
upper level management, had civil servant status (Beamtenstatus) under Swiss law or were hired
under public law contracts. Since then, in accordance with the TUG, all Swisscom employment
contracts have been governed by private law. In addition, all Swisscom employees, other than middle
and upper level management, temporary employees and trainees, are covered by the collective
bargaining agreement (Gesamtarbeitsvertrag) (GAV). The original GAV, concluded with the trade
unions in July 2000, was effective until the end of 2003 and has been extended with minimal
amendments until the end of 2005. In the course of 2005, Swisscom will engage in further
negotiations with the trade unions with the aim of agreeing on a new GAV effective as of January
2006. Swisscom believes that the GAV offers its employees flexibility and progressive working conditions.
Under the terms of the GAV, an incentive based salary system is used, taking into account personal
performance, team performance and the overall performance of Swisscom. The average work week is 40
hours, with employees entitled to five weeks holiday. In addition, flexible working time models,
such as annual working time 117




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(Jahresarbeitszeit), prolonged flexible working hours (Variable Arbeitszeit) and telecommuting are
provided under the GAV. Under the GAV, Swisscom employees are not permitted to go on strike. However, Swisscom employees
have a right to be heard on a variety of questions, and, in the case of significant rationalization
measures, Swisscom must enter into negotiations with the trade unions in order to agree on a social
plan to minimize or avoid negative consequences for the affected employees. Swisscom is required
to contribute an amount equal to at least 60% of the annual minimum salary of the affected
employees toward the financing of any such plan. The GAV also provides for arbitration in cases of
conflict. Workforce Reduction and Productivity Improvement In 2004, Swisscom eliminated, in line with previous announcements, a total of 602 positions
resulting in a reduction from 16,079 to 15,477 full-time employees. In November 2004, Swisscom
announced that it intends to cut an additional 390 jobs over the course of 2005. These reductions
are designed to improve Swisscoms competitiveness and are being undertaken in connection with
measures to further improve productivity and reduce costs. Swisscom has achieved its workforce reduction goals to date without unilateral termination of
regular employees, using a social plan which features a variety of measures. The main features of
the social plan are an outplacement program (PersPec), and an employment program (Worklink). Only
employees in Switzerland covered by the GAV are entitled to benefit from Swisscoms social plan. The outplacement program PersPec provides employees affected by workforce reduction measures
training and assistance in finding employment outside of Swisscom. At the end of 2004, the
outplacement program counted 411 participants (in full-time positions). In connection with this
program and the early retirement schemes, Swisscom incurred termination charges of CHF 88 million
in 2003 and CHF 48 million in 2004. See Note 7 to the consolidated financial statements. The employment program Worklink aims at finding temporary positions for long-serving Swisscom
employees above a certain age who could not find new employment through PersPec. Worklink is a
joint venture initiated by Swisscom in 2001, together with the personnel service company Manpower
AG and the trade unions. At the end of 2004, Worklink counted 475 participants (in full-time
positions). Under IFRS, the costs of Worklink do not qualify for the creation of provisions, as the
employment relationship with the employees concerned has not been terminated. Salaries and wages
for Worklink participants amounted to CHF 53 million in 2003 and CHF 81 million in 2004. At December 31, 2004, the obligation relating to Worklink participants and other social plan
measures for which provisions cannot be created under IFRS amounted to CHF 196 million. Employee Representation and Labor Relations In conformity with the TUG, which requires that Swisscoms employees be afforded adequate board
representation, Swisscoms Articles provide for two employee representatives on Swisscoms Board of
Directors. Swisscom maintains an open, constructive, fair and sustainable relationship with its employees.
Under the GAV, Swisscom employees have been represented by employees commissions
(Betriebskommissionen) since January 2002. These commissions fulfill an important role in the
direct representation of employees. Swisscom continues to discuss and negotiate issues of central
importance, such as salary increases or amendments to the GAV, with the trade unions. Swisscom
places great value on successful and progressive industrial relations and particularly on good
relationships with its employees and their representatives. 118




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Pensions Swisscoms pension plan, known as comPlan, covers the risks of old age, death and disability in
accordance with Swiss pension legislation. For Swisscoms consolidated financial statements,
calculated based on guidelines established by the International Finance Reporting Standards, the
cost and obligations resulting from sponsoring this defined benefit plan are determined on an
actuarial basis using the projected unit credit method. This method reflects services rendered by
employees to the date of valuation and incorporates assumptions concerning employees projected
salaries. The pension cost in each period is calculated on the basis of a yearly actuarial
valuation. The latest actuarial valuation was performed using base data as of December 31, 2004.
Due to the unfavorable development of the capital markets, Swisscom has an unrecognized actuarial
loss and unrecognized prior service cost of total CHF 932 million, which both are subject to future
recognition as described in Note 2.15 to the consolidated financial statements. The unfavorable
development of the capital markets also led to an underfunding of Swisscoms pension plan in 2002
and 2003. In July 2003, the Board of Trustees of comPlan decided to implement several measures in
order to reduce the underfunding, including a reduction in the rate of return on the funds invested
by the plan members as well as an increase in employee and employer contributions of 1.2% and 1.8%,
respectively, of the insured salaries. For more information on Swisscoms pension plan, see Note 9
to the consolidated financial statements. For 2005, Swisscom expects to make contributions to the comPlan in the amount of CHF 196 million.
However, Swisscom plans to review the benefits and contributions under the comPlan and expects to
amend the plan in the course of 2005. These amendments may require Swisscom to pay a higher amount
than currently planned, which could have a significant negative effect on Swisscoms cashflows from
operating activities in 2005. 
 Share Ownership As of March 31, 2005, the members of Swisscoms Board of Directors and Executive Board owned a
total of approximately 11,000 Swisscom shares and options exercisable for approximately 27,000
Swisscom shares. The members of the Board of Directors and Executive Board beneficially hold
individually and in the aggregate less than 1% of Swisscoms shares. Management Incentive Plans In order to link the interests of Swisscom management with those of shareholders generally,
Swisscom regularly offers shares to management pursuant to management incentive plans. Until 2003, Swisscom typically offered members of middle and upper management, including members of
the Board of Directors and Group Executive Board, the opportunity to invest in a package of
Swisscom shares and options. Each option had a strike price based on the price of the shares at
the time of grant. The outstanding options may be sold or exercised at any time during the
applicable exercise period. The following table provides summary information relating to options granted under these management
incentive plans to the members of Swisscoms Board of Directors in office at December 31, 2004: 2000
    
    2001
    
    2002(3)
    
    2003Exercise Period
    
    
    10/11/2003
- 10/10/2005
    
    
    
    10/10/2004
- 10/09/2006
    
    
    
    
    
    05/01/2006
- 4/25/2008Exchange ratio(1)
    
    
    1:1
    
    
    
    1:1
    
    
    
    
    
    100:1Number of options granted
    
    
    2,830
    
    
    
    2,390
    
    
    
    
    
    492,000Number of options held as of
December 31, 2004
    
    
    1,010
    
    
    
    1,800
    
    
    
    
    
    492,000Exercise price (CHF)
    
    
    472.50
    
    
    
    503.60
    
    
    
    
    
    417.90Market value as of March 31, 2005 (CHF)(2)
    
    
    2.54
    
    
    
    4.56
    
    
    
    
    
    0.51
   (1)
    
    Exchange ratio: Number of options required to purchase one share.(2)
    
    For information purposes only. Calculated based on the closing price of the shares or, in
the case of listed options, of the options on the SWX Swiss Exchange on March 31, 2005. The
closing price of the shares on March 31, 2005 was 119




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CHF 438.50 per share. For those options for which there was no closing price on March 31,
2005, calculated based on the average of bid and ask price on that day.(3)
    
    The Board of Directors did not receive any shares and options in 2002 in order to align the
Board of Directors plan with the plan of the Group Executive Board. The following table provides summary information relating to options granted under these
management incentive plans to the members of Swisscoms Group Executive Board in office at December
31, 2004: 2001
    
    2002
    
    2003Exercise Period
    
    
    05/31/2004
- 05/30/2006
    
    
    
    04/10/2005
- 04/09/2007
    
    
    
    05/01/2006
- 04/25/2008Exchange ratio(1)
    
    
    1:1
    
    
    
    1:1
    
    
    
    100:1Number of options granted
    
    
    4,070
    
    
    
    5,290
    
    
    
    849,000Number of options held as of December 31, 2004
    
    
    4,070
    
    
    
    5,290
    
    
    
    849,000Exercise price (CHF)
    
    
    475.80
    
    
    
    569.10
    
    
    
    417.90Market value as of March 31, 2005 (CHF)(2)
    
    
    7.49
    
    
    
    1.14
    
    
    
    0.51
   (1)
    
    Exchange ratio: Number of options required to purchase one share.(2)
    
    For information purposes only. Calculated based on the closing price of the shares or, in
the case of listed options, of the options on the SWX Swiss Exchange on March 31, 2005. The
closing price of the shares on March 31, 2005 was CHF 438.50 per share. For those options for
which there was no closing price on March 31, 2005, calculated based on the average of bid and
ask price on that day. As of 2004, the management incentive plans are structured as share purchase plans, pursuant to
which members of middle and upper management, including members of the Board of Directors and Group
Executive Board invest in Swisscom shares with a restriction period of three years. Swisscom may
make a contribution on behalf of each participant, except for members of the Group Executive Board,
based on the amount of his or her personal investment in the plan for the purpose of acquiring
additional shares. Under this plan, Swisscom allocated a total of 1,383 shares to the members its
Board of Directors and a total of 2,629 shares to the members of its Group Executive Board in 2004.
For a more detailed description of each of these plans, including information on the plans for
Swisscoms middle and upper management, see Note 8 to the financial statements. Other Arrangements to Involve Employees in Swisscoms Capital In recognition of their contribution to the company and as an incentive, Swisscom regularly
distributes shares to its employees or offers employees the opportunity to purchases shares at a
discount to the market price. In 2004, Swisscom invited its employees (other than management) to
purchase a maximum of ten shares per employee at an offering price of CHF 290 per share.
Approximately 8,000 employees purchased approximately 75,000 shares, which resulted in an expense
of CHF 10 million, reflecting the difference between the market value of the shares and the
consideration received from the employees. 120




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ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 
 Major Shareholders As of March 31, 2005, Swisscom is aware of the following shareholders that are the beneficial
owners of 5% or more of its shares: Percentage ofNumber of shares held
    
    
    outstanding sharesSwiss Confederation
    
    
    40,616,175
    
    
    
    61.4
    %
 On February 11, 2005, Capital Group International, Inc. reported on a Schedule 13G filed with the
U.S. Securities and Exchange Commission (SEC) a beneficial share ownership of 4,820,350 shares,
representing a 7.3% stake in Swisscom. On March 2, 2005, Capital Group Companies, Inc., which is
the parent company of Capital Group International, Inc., and which acts on behalf of funds managed
by Capital Research and Management Company, and clients managed by the Capital Guardian Trust
Company, Capital International Limited, Capital International Inc. and Capital International S.A.,
informed Swisscom and the SWX Swiss Exchange that it held 3,297,865 shares, representing a 4.98%
stake in Swisscom. Upon effectiveness of the planned share capital reduction to be voted on at the
Annual General Meeting on April 26, 2005, Swisscom expects this stake to again exceed the 5%
threshold based on the current shareholding. 
 Relationship and Transactions with the Swiss Confederation Background Historically, Swisscoms operations were a part of the Swiss PTT, a dependent agency of the Swiss
Government which operated the state monopoly for public telecommunications services under the name
Swiss Telecom PTT. A first step in reforming the organizational structure of the Swiss PTT was
taken with the Swiss Telecommunications Act of 1991, which separated the principal regulatory
functions of Swiss Telecom PTT from its commercial operations and transferred such regulatory
functions to a newly created government agency, the Federal Office for Communication (Bundesamt für
Kommunikation) (OfCom, also known by its German acronym, Bakom). The Telecommunications Enterprise Act of 1997 The Telecommunications Enterprise Act of 1997 (Telekommunikationsunternehmungsgesetz) (the TUG),
which took effect as of January 1, 1998, established Swisscom as a special statutory stock
corporation, with the purpose of providing domestic and international telecommunications and
broadcasting services and related products and services. The TUG provides that Swisscom is subject
to the general Swiss corporation law, except as otherwise set forth in the TUG. As of January 1,
1998, Swisscom also became subject to income and other taxes as a private corporation. Under Swisscoms Articles of Incorporation (the Articles), Swisscoms Board of Directors is to
have a total of between seven and nine members. There are currently nine members of the Board of
Directors. The TUG provides that Swisscom employees are entitled to adequate representation on the
Board of Directors, and Swisscoms Articles provide that two members of the Board of Directors are
to be employee representatives. Under the Articles, the Confederation has the right, irrespective
of its voting power as a shareholder, to appoint up to two members of the Board of Directors as
representatives of the Confederation. Pursuant to this right, the Federal Council has appointed one
such Director, Mr. Felix Rosenberg. The Articles state that Directors appointed by the
Confederation have the same rights and duties as the other Directors. See Item 6: Directors,
Senior Management and Employees  Board of Directors. As required by the TUG, on May 13, 1998, the Federal Council (Bundesrat), Switzerlands chief
executive body, approved Swisscoms Articles, its opening balance sheet and the segregation of its
assets and contractual rights from the other PTT operations. 121




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The Confederation as Shareholder The TUG provides that the Confederation must hold a majority of the capital and voting rights of
Swisscom. As the majority shareholder, the Confederation has the power to control any decision at a
shareholders meeting requiring a majority vote, including election of the members of the Board of
Directors and approval of the payment of dividends. In December 2003, the Swiss government issued bonds exchangeable into Swisscom shares in the
aggregate amount of CHF 1.5 billion and with a maturity of four years. In July 2004, the Swiss
government issued bonds exchangeable into Swisscom shares in the aggregate amount of CHF 1.2
billion, which expired in February 2005. The exercise of a part of these bonds by the bondholders
resulted in a decline of the Confederations stake from 62.7% to 61.4%. As a result of the share
buy-back completed in December 2004, the Annual General Meeting to be held on April 26, 2005 will
vote on a share capital reduction which will, if approved and effective, result in the Swiss
governments stake in Swisscom to increase again to 66.1%. In November 2004, the Swiss government
issued bonds exchangeable into Swisscom shares in the aggregate amount of CHF 1.2 billion and with
a maturity of one and a half years. Full exercise of the bonds outstanding would cause the
Confederations stake in Swisscom to decline to 57.2% (assuming effectiveness of the share capital
reduction described above; not taking into account a participation of the Swiss government in
further share buy-backs and subsequent capital reductions). This reduction would be in line with
the announced intention of the Swiss Confederation to reduce its stake in Swisscom to the legal
minimum. Any reduction of the Confederations holding below a majority would require a change in law.
Swisscom may not undertake a capital increase that would otherwise have the effect of decreasing
the Confederations shareholding to less than a majority, unless the Confederation agrees to
participate in the capital increase. Swisscoms ability to raise additional equity capital in the
future therefore could be constrained. In addition, Swisscom is also limited in its ability to
enter into strategic partnerships, either at the parent company level or through subsidiaries. On September 1, 1999, amendments to the Federal Finance Control Act (Bundesgesetz über die
Finanzkontrolle) entered into force which expand the authority of the Federal Finance Control
Administration (Eidgenössische Finanzkontrolle) (FFCA). The FFCA has financial audit and review
authority in Switzerland with respect to governmental and parliamentary departments, agencies and
officials and certain other entities. Under the Amendments, the FFCA gained financial audit and
review authority over corporations in which the Confederation holds more than 50% of the share
capital, such as Swisscom. The FFCA is required to conduct its reviews over such corporations in
consultation with their Boards of Directors, and may also involve the corporations external and
internal auditors. The FFCA is required to provide its reports, if any, on such corporations at the
shareholders meeting as well as to the Federal Council and the Parliaments finance committee. At
the request of a joint committee (Finanzdelegation) of both chambers of the Swiss Parliament in
July 2004, the FFCA submitted a number of questions to the Swisscom Board of Directors regarding
the acquisition, management and sale of Swisscoms participation in debitel AG (debitel) in June
2004. The inquiry was due to the difference of about CHF 3.3 billion between the 1999 acquisition
price and the sale price. See Item 4. Divestments/Discontinued Operations. After evaluating a
report prepared by Ernst & Young, the FFCA concluded that Swisscom had at all times acted within
the law and with due care. Accordingly, the FFCA refrained from instituting formal proceedings. Strategic Goals The TUG requires the Federal Council to set forth goals every four years which the Confederation,
in its capacity as principal shareholder, would like Swisscom to achieve. On February 27, 2002, the
Federal Council announced its strategic goals (the Strategic Goals) for Swisscom for the
2002-2005 period. Swisscom believes that its business strategy is consistent with the Strategic
Goals. The Strategic Goals for the 2006 - 2009 period are not expected to be published until the
end of 2005. In the Strategic Goals, the Federal Council stated that in overseeing the Confederations
shareholding, it has regard for Swisscoms autonomy as an enterprise and as a shareholder
acknowledges the freedom of decision of Swisscoms Board of Directors as to business strategies and
policies. Through publication of the Strategic Goals, the Federal Council has committed itself to
pursue long-term, consistent objectives, thereby enhancing transparency for third-party investors.
The Federal Council recognized that adjustments to the goals may be necessary to take into 122




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account the constantly changing environment in which Swisscom operates. The Federal Council set
forth goals for Swisscom as to strategic direction, financial objectives, personnel policies and
alliances and participations. As to Swisscoms strategic direction, the Federal Council expects Swisscom to: (1) remain a
competitive and value-creating enterprise in the competitive market and to maintain and increase
enterprise value; (2) further improve its customer orientation, speed and flexibility in the
development, production and marketing of new products and services; (3) offer through its group
companies fixed-line and mobile voice and data services and network services for other
telecommunications companies and thereby also respect Switzerlands security interests; and (4)
pursue within the confines of its business a sustainable strategy which is to be governed by
ethical principles. Regarding financial objectives, the Federal Council expects Swisscom to: (1) be capable of
performing through its group companies comparably with the best European telecommunications
companies, with the Swisscom Board of Directors to determine and oversee specific objectives in
this regard; and (2) feature a capital structure which reflects Swisscoms range of activities
performed by its group companies. As to personnel matters, the Strategic Goals state that Swisscom is expected to (1) pursue
progressive and socially responsible personnel policies; (2) build employee trust through its
leadership style, employee development and internal communications, and thereby increase Swisscoms
attractiveness on the Swiss job market; (3) set forth rules regarding the right of employees to
have a voice in Swisscom matters in collective bargaining agreements and further develop this right
together with the relevant workers federations and personnel associations; (4) adequately
compensate its key employees based on performance and market standards, whereby any bonus payments
should be governed by the principles of adequacy, proportionality and transparency and be based on
criteria set forth at the beginning of the year; (5) offer its full-time employees further
education in order to increase their value in the job market; and (6) carry out any further
rationalization measures pursuant to existing or new social plans. In the area of alliances and participations, the Federal Council expects Swisscom to: (1) seek to
enter into strategic participations and alliances in order to strengthen its competitive position
and to maintain and increase enterprise value; and (2) systematically observe the international
market, identify and evaluate opportunities and enter into participations on a holding- or group
company level only if they contribute to increased enterprise value, can be closely managed and
take risks sufficiently into account. The Swisscom Board of Directors has to report annually to the Federal Council as to Swisscoms
progress in achieving the Strategic Goals. As in previous years, in March 2005, Swisscom filed a
report stating that it is in compliance with the strategic goals set forth for the 2002-2005
period. The Confederation as Regulator Swisscoms telecommunications activities are regulated primarily by the Telecommunications Act and
the ordinances promulgated thereunder. Under the Telecommunications Act, OfCom is the agency of the
Government with day-to-day responsibility for overseeing the telecommunications sector. OfCom
reports to the Department of Environment, Transport, Energy and Communication (Eidgenössisches
Departement für Umwelt, Verkehr, Energie und Kommunikation) (UVEK), whose head is a member of the
Federal Council. In order to ensure that the Confederations role as regulator is separate and
distinct from its role as shareholder, the Telecommunications Act created ComCom, a new and
independent regulatory agency. In the area of telecommunications, ComCom is vested with
decision-making authority, particularly as regards matters which are related to the promotion of
open and fair competition. Thus, ComCom acts as the exclusive licensing authority under the
Telecommunications Act, and has responsibility for interconnection, as well as for approving
frequency allocation and numbering plans. OfCom must take directions from ComCom, which cannot be
overruled by UVEK or the Federal Council, with respect to all matters falling within the sphere of
ComComs competence. In addition to ComCom and OfCom with its sector-specific competence, the
Competition Commission ensures that competition in the telecommunication services area is not
restrained. See Item 4: Information on the Company  Regulation. 123




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The Confederation as Customer In the aggregate, the departments and agencies of the Swiss Government comprise Swisscoms largest
customer. In providing services to the Government, Swisscom deals with it in the same manner as
with other large customers. The terms of its arrangements with the Confederation are no more
favorable to Swisscom than arrangements Swisscom could obtain in arms length transactions between
third parties. Net revenue to Swisscom in respect of services provided to all departments and
agencies of the Swiss Government, including federal universities, in the aggregate were
approximately CHF 334 million in 2004. The Confederation and certain other regional and municipal
governmental authorities seek competitive offers for the provision of telecommunication services
from both Swisscom and its competitors. The Confederation as Creditor Historically, Swisscom relied upon the Central Treasury of the PTT for its funding needs. On
January 1, 1998, rights to all of the outstanding loans to Swisscom were assigned by the Central
Treasury of the PTT to the Swiss Post. The TUG provides that the Government is authorized, during a
specified transitional period, to grant further loans to Swisscom and during such period prior to
Swisscoms initial public offering in 1998, Swisscom utilized such borrowings. In the course of
2003, Swisscom repaid its outstanding loan to the Swiss Post in the amount of CHF 750 million. See
Item 5: Operating and Financial Review and Prospects  Liquidity and Capital Resources. 
 ITEM 8: FINANCIAL INFORMATION 
 Financial Statements See Item 18: Financial Statements. 
 Legal Proceedings Swisscom is involved in a number of claims and legal proceedings incidental to the normal conduct
of its businesses. Swisscom does not believe that liabilities related to such claims and
proceedings are likely to be, individually or in the aggregate, material to its consolidated
financial statements. Since the opening of the Swiss market to competition, Swisscom has also faced a number of legal
proceedings relating to the implementation of certain provisions of the Telecommunications Act and
the ordinances promulgated thereunder. Swisscom expects that it will continue to be involved in
such proceedings, particularly in the area of interconnection. For background information on the
regulatory issues raised in such proceedings, see
Item 4: Information on the Company  Regulation. Proceedings Relating to Fixed-Fixed Interconnection In April 2000, diAx (now TDC Switzerland or Sunrise) and MCI WorldCom (now WorldCom) filed two
separate petitions with ComCom. diAx petitioned ComCom to examine whether Swisscoms
interconnection prices comply with the requirement that they be calculated on the basis of long-run
incremental costs and to require Swisscom to reduce them accordingly if they do not. WorldCom
petitioned ComCom to require Swisscom to reduce its prices for terminating, access and transit
interconnection services as well as for network joining, testing and implementation services.
WorldCom has also requested that ComCom order Swisscom to modify its standard interconnection offer
in other respects and that it order injunctive relief taking effect as from January 1, 2000. On
August 16, 2000, ComCom issued a temporary injunction, ordering Swisscom to grant WorldCom the same
interconnection rates offered in its then-current standard offer, with retroactive effect to April
21, 2000, as well as all future reductions Swisscom might grant during the proceeding. In April
2001, the Competition Commission issued an expert opinion relevant for both proceedings, finding
that Swisscom is not dominant in the market for transit and enquiry services, but that it does have
a dominant position in the market for implementation services. In February 2003, the parties in
both proceedings submitted their disputes to arbitration, but were unable to reach a settlement. 124




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In November 2003, ComCom issued decisions in both proceedings, requiring Swisscom to lower
interconnection prices with retroactive effect for the years 2000 to 2003 by 25-35%. Swisscom
lodged an appeal against this decision with the Federal Court. TDC and WorldCom also filed an
appeal demanding further reductions than decided by ComCom. In October 2004, the Federal Court
issued a decision overturning the ComCom decisions on procedural grounds and remanding the
petitions for re-hearing before ComCom, which will consider the pricing issue anew. Swisscom
expects ComCom to issue a decision in May 2005 which could again be appealed by Swisscom and/or its
competitors. Swisscom therefore does not expect a final decision prior to mid-2006. Tele2 and Colt have also filed petitions seeking retroactive price reductions. These petitions have
been suspended pending the final decisions on the Sunrise and WorldCom petitions, which will also
be determinative of Tele2 and Colts petitions. Sunrise, WorldCom, Tele2 and Colt have also submitted complaints regarding the 2004 interconnection
prices for voice services. These proceedings have also been suspended, pending a final decision
regarding the prices for 2000 to 2003. Proceedings Relating to Unbundling of the Local Loop In connection with the adoption of the amendments to the Telecommunications Ordinance, on July 29,
2003, TDC Switzerland (Sunrise) filed a petition with ComCom requiring Swisscom to offer unbundled
access to its local loop and interconnection to leased lines on a cost-oriented basis and on
pre-determined technical and administrative conditions. A petition for a temporary injunction
ordering Swisscom to offer bitstream access and interconnection to leased lines on a cost-oriented
basis was denied by ComCom. On September 24, 2003, Swisscom submitted a written statement to ComCom
requesting dismissal of all claims. Swisscom believes that the amendments to the Telecommunications
Ordinance, which require Swisscom to offer unbundled access to the local loop, as well as
interconnection to leased lines, on a cost-oriented basis, were not adopted on proper legal grounds
and are therefore not effective. Swisscom has not yet implemented these provisions, pending the
adoption of corresponding amendments to the Telecommunications Act or the outcome of the legal
proceedings initiated by Sunrise. On February 19, 2004, ComCom issued a decision requiring Swisscom
to offer full unbundled access to its local loop. On March 22, 2004, Swisscom filed an appeal
against this decision. On November 30, 2004, the Federal Court decided in favor of Swisscom and
decided that the amendments to the Telecommunications Ordinance required a change to the
Telecommunications Act in order to be valid. In a letter dated January 6, 2005, OfCom informed the
interested parties that based on the Federal Courts decision, it had concluded that Sunrises
request for bitstream access and interconnection to leased lines does not have sufficient legal
basis in the current Telecommunications Act and it is expected to request that ComCom reject
Sunrises petition. Other Regulatory Proceedings Under a recent amendment to the Swiss Antitrust Law, the Competition Commission was granted the
power to impose direct sanctions, including monetary fines, simultaneously with the determination
that a company has violated the Antitrust Law. Previously, the Competition Commission could only
impose sanctions if a company violated an order of the Competition Commission subsequentto a
finding of a violation of the Antitrust Law. Until March 31, 2005, a transitional regime was in
place that permitted companies to avoid the imposition of direct sanctions by notifying the
Competition Commission of activities restricting the market or activities by a provider abusing its
market-dominant position and that existed on April 1, 2004. Swisscom notified the Competition
Commission of all pending violation cases. However, the Competition Commission took the position
that the transitional regime would not apply to pending cases. Swisscom appealed this decision to
the Appeals Commission for Competition Matters, which decided on March 18, 2005 that the
transitional regime would apply also to pending cases, including the pending cases described below. Mobile Termination Prices.On October 15, 2002, the Competition Commission initiated proceedings
against Swisscom, Orange and TDC Switzerland (Sunrise) in connection with mobile termination
prices. Swisscom is of the view that it is not dominant in the market for mobile termination and
that its tariffs for mobile termination are not abusive. Swisscom is also of the view that the
Competition Commission does not have jurisdiction over the issue of mobile termination pricing in
this case, since ComCom considered this issue in connection with an earlier proceeding under the
Telecommunications Act, which is the law that is intended to specifically regulate 125




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interconnection pricing. Accordingly, Swisscom Mobile petitioned the Competition Commission on
December 4, 2002 to dismiss the relevant proceeding on the grounds that it lacks jurisdiction over
the subject matter of the dispute. On February 17, 2003, the Competition Commission decided that it
does have jurisdiction and rejected Swisscoms petition. Swisscom has appealed this ruling to the
Appeals Commission for Competition Matters. On April 7, 2003, the Appeals Commission issued a
preliminary order to suspend the Competition Commissions proceedings pending the Appeals
Commissions decision on the question of jurisdiction. On February 6, 2004, the Appeals Commission
decided that the Competition Commission has jurisdiction and, since Swisscom did not appeal this
decision, the Competition Commission is expected to continue its investigation. ADSL Wholesale Prices.Following the tariff reduction for ADSL services provided to retail
customers through Bluewin in March 2002, TDC Switzerland (Sunrise) and Profitel filed a petition
with the Competition Commission on March 22, 2002, alleging that Swisscom is illegally subsidizing
Bluewin and abusing its market dominant position. Under current law, if Swisscom is deemed market
dominant in the market for broadband services by the Competition Commission, Swisscom would have to
offer its wholesale service, i.e., broadband connectivity service, on a non-discriminatory basis
and at fair prices. The Competition Commission reprimanded Swisscom in a similar proceeding in
1997 when the market was not yet liberalized. As market conditions have changed drastically since
then and competition for broadband services has been growing in both the wholesale and retail
market, Swisscom believes that it is not market dominant in the wholesale or retail market for
broadband services, nor is its behavior anti-competitive. On May 6, 2002, the Competition
Commission issued a provisional order requesting that Swisscom offer its competitors the same
discounts it gives to Bluewin and launched an investigation. On December 15, 2003, the Competition
Commission issued a decision, in which it determined that Swisscom had abused its market-dominant
position and enjoined Swisscom from giving any discounts exclusively to Bluewin. On February 2,
2003, Swisscom lodged an appeal against this decision, which is still pending. On February 27,
2004, Swisscom requested that the Competition Commission reconsider the provisional order it had
issued in May 2002 in order to reach an agreement on fair terms regarding discounts for broadband
services. On March 15, 2004, the Competition Commission decided not to reconsider this provisional
order and, on March 29, 2004, Swisscom appealed this decision to the Appeals Commission for
Competition Matters. On December 23, 2004, the Appeals Commission for Competition Matters rejected
Swisscoms appeal and confirmed the application of the provisional order. On January 13, 2005,
Swisscom filed a petition to reconsider the provisional order on the grounds that market conditions
have changed. Access Reselling.On June 24, 2003, TDC Switzerland (Sunrise) filed a petition with the
Competition Commission, accusing Swisscom of abusive behavior in connection with Swisscoms product
Talk&Surf, under which it offered its customers a service package including PSTN/ISDN telephone
connection, broadband Internet access and other services. Swisscoms competitors currently are not
able to offer their customers similar packages due to the fact that Swisscom does not offer access
reselling. The Competition Commission opened a formal investigation against Swisscom on February
12, 2004 to examine whether Swisscom abuses its dominant position in the access market by not
offering wholesale access reselling to its competitors.On August 2, 2004, Swisscom filed a
petition to dismiss the relevant proceeding on the grounds that the Competition Commission lacks
jurisdiction over the subject matter of the dispute. Business Customer Tariffs.On February 16, 2004, the Competition Commission opened an
investigation to determine whether Swisscom has engaged in any abusive, anti-competitive behavior
by offering its business customers lower rates than it charged its competitors on a wholesale
basis. Directories Services Pricing and Conditions.On November 3, 2003, the Competition Commission
launched an investigation against Swisscom Directories to determine whether it was abusing its
market-dominant position by offering its directories database to third parties at prices and on
conditions that prevented the third parties from using the data effectively. On November 22, 2004,
the Competition Commission determined that Swisscom Directories has a market-dominant position, but
decided not to pursue the matter. Swisscom wishes to have the Competition Commission reverse its
determination, and on January 27, 2005 appealed the finding that it has a market-dominant position
to the Appeals Commission for Competition Matters. 126




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Dividend Policy The distribution of dividends proposed by the Board of Directors of Swisscom requires the approval
of the shareholders of Swisscom in a general shareholders meeting. In addition, Swisscoms
statutory auditors are required to declare that the dividend proposal of the Board of Directors is
in accordance with Swiss law. It is expected that the shareholders meeting to approve any
dividends will be held in the second quarter of each year. Dividends, to the extent approved at the
shareholders meeting, will be paid shortly thereafter. According to Swisscoms return policy, which was introduced in March 2003, all freely available
funds of a financial year, the so-called Equity Free Cash Flow is distributed to its shareholders
in the following year. Equity Free Cash Flow consists of net cash from operating activities less
capital expenditure (on fixed and intangible assets and acquisitions), less debt repayments and
issuances, and less dividend payments to minority shareholders. Swisscom expects that distributions
will take the form of a dividend, supplemented by a possible share buy-back. A share buy-back need
not take place concurrently with the dividend distribution. However, there can be no assurance
that any dividend will actually be paid or that available funds will otherwise by returned to
shareholders, whether by share buy-back or other means in any given year. At the Annual General Meeting on April 27, 2004, Swisscoms shareholders approved the Board of
Directors proposal of a dividend of CHF 13 per share in respect of fiscal year 2003. The Board of
Directors has proposed a dividend of CHF 14 per share in respect of fiscal year 2004, which is
subject to approval by the Annual General Meeting to be held on April 26, 2005. For information on
dividends paid to holders of shares and ADSs in the last five years, see Item 3: Key Information -
Selected Financial Data  Dividend Information. In line with its return policy, in December 2004,
Swisscom completed a share repurchase program in which it repurchased 4,720,500 shares at an
average price of CHF 423.68 per share in an aggregate amount of CHF 2 billion representing 7.13% of
its share capital. The Annual General Meeting to be held on April 26, 2005 will vote on a
resolution to reduce Swisscoms share capital accordingly. In March 2005, Swisscom announced that
it intends to launch a share buyback in the amount of CHF 2 million in the course of 2005. Owners of ADSs will be entitled to receive dividends, if any, payable in respect of the underlying
shares. Cash dividends will be paid to the Depositary in Swiss francs. The Deposit Agreement
provides that the Depositary will convert cash dividends received by the Depositary to U.S. dollars
and, after deduction or upon payment of the fees and expenses of the Depositary relating to such
conversion, make payment to the holders of ADSs in U.S. dollars. Fluctuations in the exchange rate
between the Swiss francs and the U.S. dollar will affect the U.S. dollar amounts received by
holders of ADSs on the conversion by the Depositary into U.S. dollars of such cash dividends. See
Item 3: Key Information  Exchange Rate Information. Dividends paid to holders of shares and ADSs will be subject to Swiss withholding tax. See Item
10: Additional Information  Taxation. 127




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ITEM 9: THE OFFER AND LISTING 
 Markets Prior to Swisscoms initial public offering in October 1998, there was no trading in Swisscoms
shares or the ADSs. Since October 5, 1998, the shares have been listed on the SWX Swiss Exchange
(SWX) and the ADSs have been listed on the New York Stock Exchange (NYSE). The shares are included
in the Swiss Market Index (SMI). The SWX was the principal trading market for the shares until
July 2001 when trading in members of the SMI was transferred to virt-x. Trading on the virt-x Since July 2001, all trading in companies which are included in the SMI has been taking place on
virt-x, although these stocks remain listed on the SWX. virt-x is the first platform on which all
European blue chips can be traded electronically and which offers integrated clearing and
settlement. virt-x is a joint venture between the SWX and the TP Group LDC. As an exchange
domiciled in London, virt-x has the status of a Recognized Investment Exchange for the purposes
of the U.K. Financial Services and Markets Act 2000 and operates under the supervision of the U.K.
Financial Services Authority (FSA). As of July 2005, SWX intends to establish a new regime for
shares traded on virt-x, which shall take into account the recent EU regulation over financial
markets (including the EU Transparency Directive, the EU Prospectus Directive and the EU Market
Abuse Directive). SWX plans to offer two segments on virt-x with different regulatory status (EU
Regulated Market and UK Exchange Regulated Market), both operating under the supervision of the
FSA. Trading on the New York Stock Exchange As of December 31, 2004, 10,346,610 ADRs were outstanding, evidencing ADSs representing 1,034,661
shares or approximately 1.56% of the Companys outstanding share capital, and there were 32
registered holders of such ADRs. 128




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Price History The following tables show, for the fiscal periods indicated, the paid high and low market
quotations for the ordinary shares on the SWX Swiss Exchange or virt-x, and the highest and lowest
sales prices of the ADSs on the New York Stock Exchange, all derived from Bloomberg. Following the
share buy back in March 2002, the SWX Stock Exchange retroactively adjusted Swisscoms share price,
reducing all prices back to the date of the IPO by 1.776%. The following tables do not reflect this
adjustment and, as a result, the data presented here may not be consistent with data provided by
certain stock price information services. CHF perOrdinary Share
    
    
    USD per ADSYear Ended December 31,
    
    High
    
    
    Low
    
    
    High
    
    
    Low2000
    
    
    754.00
    
    
    
    361.00
    
    
    
    44.000
    
    
    
    20.3132001
    
    
    492.50
    
    
    
    358.50
    
    
    
    30.750
    
    
    
    20.5502002
    
    
    519.00
    
    
    
    360.00
    
    
    
    31.310
    
    
    
    24.3802003
    
    
    438.50
    
    
    
    367.00
    
    
    
    32.950
    
    
    
    26.6502004
    
    
    454.75
    
    
    
    382.50
    
    
    
    39.900
    
    
    
    30.000
 Year Ended December 31,
    
    High
    
    
    Low
    
    
    High
    
    
    Low2002First Quarter
    
    
    519.00
    
    
    
    457.50
    
    
    
    30.400
    
    
    
    27.750Second Quarter
    
    
    508.00
    
    
    
    416.00
    
    
    
    30.750
    
    
    
    26.920Third Quarter
    
    
    457.00
    
    
    
    360.00
    
    
    
    30.950
    
    
    
    24.380Fourth Quarter
    
    
    457.50
    
    
    
    400.00
    
    
    
    31.310
    
    
    
    27.3002003First Quarter
    
    
    435.00
    
    
    
    385.50
    
    
    
    31.850
    
    
    
    28.050Second Quarter
    
    
    438.50
    
    
    
    381.50
    
    
    
    32.230
    
    
    
    28.230Third Quarter
    
    
    402.50
    
    
    
    367.00
    
    
    
    29.540
    
    
    
    26.650Fourth Quarter
    
    
    411.00
    
    
    
    378.50
    
    
    
    32.950
    
    
    
    27.8502004First Quarter
    
    
    430.00
    
    
    
    403.00
    
    
    
    34.680
    
    
    
    31.910Second Quarter
    
    
    425.00
    
    
    
    382.50
    
    
    
    33.220
    
    
    
    30.000Third Quarter
    
    
    434.00
    
    
    
    402.00
    
    
    
    34.820
    
    
    
    32.380Fourth Quarter
    
    
    454.75
    
    
    
    428.00
    
    
    
    39.900
    
    
    
    34.2602005First Quarter
    
    
    470.00
    
    
    
    438.50
    
    
    
    39.840
    
    
    
    36.720
 Month ended
    
    High
    
    
    Low
    
    
    High
    
    
    LowOctober 31, 2004
    
    
    439.50
    
    
    
    428.00
    
    
    
    36.48
    
    
    
    34.26November 30, 2004
    
    
    448.75
    
    
    
    430.00
    
    
    
    39.58
    
    
    
    35.81December 31, 2004
    
    
    454.75
    
    
    
    443.50
    
    
    
    39.90
    
    
    
    38.20January 31, 2005
    
    
    452.00
    
    
    
    447.75
    
    
    
    39.70
    
    
    
    37.61February 28, 2005
    
    
    470.00
    
    
    
    446.00
    
    
    
    39.84
    
    
    
    36.77March 31, 2005
    
    
    458.75
    
    
    
    438.50
    
    
    
    39.55
    
    
    
    36.72
 129




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ITEM 10: ADDITIONAL INFORMATION 
 Memorandum and Articles of Association Registration and Business Purpose Swisscom AG was registered as a corporation (Aktiengesellschaft) in the commercial register of the
Canton of Berne (Switzerland) on July 27, 1998. Prior to this, Swisscoms operations were a part
of the Swiss PTT. On January 1, 1998, the Swiss Telecom PTT was separated from the Swiss Post and
established as a special statutory stock corporation. The business purpose of Swisscom, as set forth in Section 2 of its articles of incorporation (the
Articles) is to provide telecommunications and radiocommunication services in and outside
Switzerland, and to offer products and services related thereto. Swisscom may enter into all
transactions which the business purpose entails, including the purchase and sale of real estate,
the establishment and acquisition of corporations, and other means of cooperation with third
parties. Conflicts of Interest Swiss law does not have a general provision on conflicts of interests. However, the Swiss Code of
Obligations requires Directors and members of senior management to safeguard the interests of the
corporation and, in this connection, imposes a duty of care and a duty of loyalty on directors and
officers. This rule is generally understood as disqualifying directors and senior officers from
participating in decisions that directly affect them. Directors and officers are personally liable
to the corporation for any breach of these provisions. In addition, Swiss law contains a provision
under which payments such as dividends and bonuses made to a shareholder or a director or any
person(s) associated therewith, other than at arms length, must be repaid to Swisscom if the
shareholder or director was acting in bad faith. Compensation The Articles provide that the members of the Board of Directors are entitled to reimbursement of
all expenses incurred in the interests of the Corporation, as well as a remuneration for their
services that is adequate in view of their function and responsibility. The amount of the
remuneration due is fixed by the Board of Directors. Borrowing Power Neither Swiss law nor the Articles restrict in any way Swisscoms power to borrow and raise funds.
The decision to borrow funds is taken by or under the direction of Swisscoms Board of Directors,
and no shareholders resolution is required. Retirement Members of the Board of Directors who have reached the age of 70 must retire from the Board of
Directors upon the date of the next ordinary shareholders meeting. Transfer of Shares The transfer of shares is effected by corresponding entry in the books of a bank or depository
institution following an assignment in writing by the selling shareholder and notification of such
assignment to Swisscom by the bank or depository institution. The transfer of shares further
requires that the purchaser file a share registration form in order to be registered in the share
register (Aktienbuch) of Swisscom as a shareholder with voting rights. Failing such registration,
the purchaser may not vote at or participate in shareholders meetings. No shareholder may be registered as a shareholder with voting rights in respect of more than 5% of
Swisscoms registered shares (as recorded in the commercial register). If a shareholder purchases
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registered shares, it will be recorded in Swisscoms share registered for the excess shares as a
shareholder without voting rights. The Board of Directors may, however, in exceptional cases allow
shares held in excess of such 5% threshold to be registered with voting rights. For purposes of
the 5% rule, groups of companies and groups of shareholders acting in concert are considered to be
one shareholder. Subject to the foregoing restriction, a purchaser of shares will be recorded in Swisscoms share
register with voting rights upon disclosure of its name, citizenship and address. However,
Swisscom may decline a registration with voting rights if the shareholder does not declare that it
has acquired the shares in its own name and for its own account. If the shareholder refuses to
make such declaration, it will be registered as a shareholder without voting rights. The Articles provide that the Board of Directors may, by issuing appropriate regulations or by way
of agreement, authorize nominees or ADR depositary banks which are subject to banking or financial
market supervision to register shares with voting rights although they hold more than 5% of
Swisscoms share capital. These parties have to declare their status as a fiduciary and must be
able to disclose the names, addresses and the shareholdings of the beneficial owners of the shares
so held. In accordance with this provision of the Articles, Swisscom has agreed, pursuant to the
Deposit Agreement, to register the Depositary or its nominee or the Custodian or its nominee, as
the case may be, in Swisscoms share register with voting rights with respect to the shares
deposits with the Custodian for the benefit of the holders of ADRs. Furthermore, the Board of
Directors has issued regulations for the registration of trustees and nominees in Swisscoms share
register pursuant to which nominees have to file an application and enter into an agreement with
Swisscom in order to be recorded as shareholders with voting rights. In general, a nominee may be
registered with voting rights in the share register for up to 5% of Swisscoms share capital and
has to undertake not to apply for registration as shareholder with voting rights for more than 0.5%
of the registered share capital per individual beneficial owner. In addition, the nominee has to
comply with disclosure requirements. Subject to the limitation on voting rights described above applicable to shareholders generally,
there is no limitation under Swiss law or Swisscoms Articles on the right of non-Swiss residents
or nationals to own or vote Swisscom shares. Shareholders Meeting Under Swiss law, an annual ordinary shareholders meeting must be held within six months after the
end of Swisscoms fiscal year (December 31). Shareholders meetings may be convened by the Board
of Directors or, if necessary, by the statutory auditors. The Board of Directors is further
required to convene an extraordinary shareholders meeting if so resolved by a shareholders
meeting or if so requested by shareholders holding in aggregate at least 10% of the nominal share
capital of Swisscom. Shareholders holding shares with a nominal value of at least CHF 40,000 have
the right to request that a specific proposal be put on the agenda and voted upon at the next
shareholders meeting. A shareholders meeting is convened by publishing a notice in the Swiss Official Commercial Gazette
(Schweizerisches Handelsamtsblatt) at least 20 days prior to such meeting. There is no provision in the Articles requiring a quorum for the holding of shareholders meetings. The Articles provide that resolutions generally require the approval of an absolute majority of the
votes validly cast at any shareholders meeting. Shareholders resolutions requiring a vote by
absolute majority include amendments to the Articles, elections of directors (except directors
appointed as representatives of the Confederation) and statutory auditors, approval of the annual
report and the annual group accounts, setting the annual dividend, decisions to discharge directors
and management from liability for matters disclosed to the shareholders meeting and the ordering
of an independent investigation into the specific matters proposed to the shareholders meeting
(Sonderprüfung). Under Swiss law, a resolution passed at a shareholders meeting with a supermajority of at least
two thirds of the shares represented at such meeting and an absolute majority of the represented
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to Swisscoms business purpose; (2) the creation of shares with privileged voting rights; (3)
changes to restrictions on the transferability of registered shares
(see  Transfer of Shares);
(4) an authorized or conditional increase in Swisscoms share capital; (5) an increase in
Swisscoms share capital by way of capitalization of reserves (Kapitalerhöhung aus Eigenkapital),
against contribution in kind, for the acquisition of assets, or involving the granting of special
privileges; (6) the restriction or elimination of preemptive rights of shareholders; (7) a
relocation of the place of incorporation; and (8) the dissolution of Swisscom other than by
liquidation (for example, by way of a merger). In addition, the Articles provide the same
supermajority voting requirement for the introduction of restrictions on voting rights, the
conversion of registered shares into bearer shares or vice versa and the introduction or abolition
of any provision in the Articles providing for such a supermajority vote. At shareholders meetings, shareholders can be represented by proxy, but only by another
shareholder, a proxy appointed by Swisscom, an independent representative nominated by Swisscom, or
a depository institution. The Chairman of the Board of Directors determines the voting procedure
and may adopt an electronic voting procedure. In case there is no electronic voting procedure in
place, shareholders with at least 10% of the share capital or holding shares with a nominal value
of at least CHF 40,000 or more may request a written ballot. Net Profit and Dividends Swiss law requires that at least 5% of the annual net profits of a corporation must be retained as
general reserves for so long as these reserves amount to less than 20% of the corporations nominal
share capital. Any net profits remaining are at the disposal of the shareholders meeting. Under Swiss law, dividends may only be paid out of retained earnings (Bilanzgewinn) and the
reserves created for such purpose, and only after approval by the shareholders meeting. The Board
of Directors may propose that a dividend be paid out, but cannot itself set the dividend. The
auditors must confirm that the dividend proposal of the Board conforms with statutory law. In
practice, the shareholders meeting usually approves the dividend proposal of the Board of
Directors. The Board of Directors of Swisscom intends to propose a dividend to the shareholders
meeting once a year. See Item 8: Financial Information  Dividend Policy. Dividends are usually due and payable immediately after the shareholders resolution relating to
the allocation of profits has been passed. Under Swiss law, the statute of limitations in respect
of dividend payments is five years. For information about deduction
of withholding taxes, see  Taxation. Preemptive Rights Under Swiss law, any share issue, whether for cash or non-cash consideration or for no
consideration, is subject to the prior approval of the shareholders meeting. Shareholders of a
Swiss corporation have certain preemptive rights to subscribe for new issues of shares in
proportion to the nominal amount of shares held. A resolution adopted at a shareholders meeting
with a supermajority may, however, limit or suspend preemptive rights in certain limited
circumstances. Repurchase of Shares Swiss law limits a corporations ability to hold or repurchase its own shares. Swisscom and its
subsidiaries may only repurchase shares if Swisscom has sufficient free reserves to pay the
purchase price, and if the aggregate nominal value of such shares does not exceed 10% of the
nominal share capital of Swisscom. Furthermore, Swisscom must create a special reserve on its
balance sheet in the amount of the purchase price of the acquired shares. Such shares held by
Swisscom or its subsidiaries do not carry any rights to vote at shareholders meetings, but are
entitled to the economic benefits applicable to Swisscoms shares generally. However, Swisscom has
not received any economic benefits in connection with the repurchase of shares completed in recent
years and does not intend to claim any economic benefits on any shares repurchased in the future. On December 22, 2004, Swisscom completed a share repurchase program in which it repurchased shares
in an aggregate amount of CHF 2 billion representing 7.13% of its share capital. The Annual
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on April 26, 2005 will vote on a resolution to reduce Swisscoms share capital accordingly. See
Item 8: Financial Information  Dividend Policy. Disclosure of Principal Shareholders Under the Swiss Stock Exchange Act, any shareholder or group of shareholders acting in concert who
reaches, exceeds or falls below the threshold of 5%, 10%, 20%, 33 1/3%, 50% or 66 2/3% of the
voting rights of a corporation listed on the SXW Swiss Exchange must notify the corporation and the
exchanges on which such shares are listed in Switzerland in writing within four trading days,
whether or not the voting rights can be exercised. Following receipt of such notification, the
corporation must inform the public within two trading days. An additional disclosure requirement exists under the Swiss Federal Code of Obligations, according
to which Swisscom must disclose the shareholding of any individual shareholder or any group of
shareholders who holds more than 5% of all voting rights and the reason for the shareholding, if
known to Swisscom. Such disclosures must be made once a year in the notes to the financial
statements. Mandatory Tender Offer Under the Swiss Stock Exchange Act, any shareholder or group of shareholders acting in concert who
acquires more than 33 1/3% of the voting rights of a listed Swiss company must make a bid to
acquire all of the listed equity securities of such company. This mandatory bid obligation may be
waived under certain circumstances by the Swiss Takeover Board. If no waiver is granted, the
mandatory takeover bid must be made pursuant to the procedural rules set forth in the Swiss Stock
Exchange Act and the relevant ordinances. As long as the Swiss Confederation holds a majority of
Swisscoms share capital, the mandatory tender offer provisions under Swiss law will not be
relevant to Swisscom. Corporate Governance Legal Corporate Governance Framework in Switzerland The principal sources of corporate governance standards in Switzerland are the SWX-Directive
governing information on corporate governance (the Corporate Governance Directive) and the
Swiss Code of Best Practice of Corporate Governance (the Swiss Code). The Corporate Governance Directive became effective on July 1, 2002 and is legally binding for any
company listed on the Swiss Exchange (SWX) with a registered office in Switzerland. The Corporate
Governance Directive requires issuers to disclose specific information on the management and
control mechanisms at the highest corporate level of the issuer. The only information that an
issuer is required to disclose relates to compensation, shareholdings and loans to the board of
directors and executive management. For all other required information, a comply-or-explain
principle applies, meaning that, if the issuer decides not to disclose certain information, it must
disclose non-compliance and give specific reasons for each instance of non-disclosure. Such
voluntary disclosure covers, among other things, a companys group structure and shareholders
(significant shareholders, cross-shareholdings); its capital structure (authorized and conditional
capital in particular, changes in capital, shares and participation certificates, profit sharing
certificates, limitations on transferability and nominee registrations, convertible bonds and
warrants/options); changes of control and defense measures (duty to make an offer, clauses on
changes of control); and auditors (duration of the mandate and term of office of the lead auditor,
auditing fees, additional fees, supervisory and control instruments pertaining to the audit). The Swiss Code was published in July 2002 by economiesuisse, the largest umbrella organization of
Swiss businesses, and applies to Swiss public limited companies. Although the provisions contained
in the Swiss Code are only recommendations and compliance is therefore voluntary, most Swiss
companies, including Swisscom, follow them. The Swiss Code includes, among other things,
recommendations relating to shareholders (powers of the shareholders, rights of shareholders,
shareholders meeting); board of directors and executive management (function and composition of
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conflicts of interests); committees of the board of directors (audit committee, compensation
committee, nomination committee); and internal control systems dealing with risk and compliance. The full text of the Corporate Governance Directive, including an English translation thereof, is
available on the Internet at http://www.swx.com/admission/cg_intro_en.html. The full text of the
Swiss Code, including an English translation thereof, is available on the Internet at
http://www.economiesuisse.ch. Overview of the Corporate Governance System in Switzerland Similar to U.S. companies, which have two governing bodies  a shareholders meeting and a board of
directors, which typically comprises both executive directors recruited from among the executive
management as well as non-executive directors  Swiss companies also have a shareholders meeting
and a board of directors. In Swisscoms case, all members of its Board of Directors are
non-executive officers. See Item 6: Directors, Senior Management and Employees  Board of
Directors. The respective roles and responsibilities of each of these governing bodies are
primarily defined by Swiss law and, to a lesser extent, by the relevant companys articles of
association. The shareholders meeting of a Swiss company is the supreme corporate body of a stock corporation.
Its inalienable powers include the adoption and amendment of the articles of association; the
election of board members and auditors, the approval of the annual report and accounts and the
dismissal of board members. The board of directors may take decisions on all matters that by law or the articles of association
are not allocated to the shareholders meeting. The board manages the business of the company
insofar as it has not been delegated to the executive management. However, the board of directors
has certain non-transferable and inalienable duties, which include the ultimate management of the
company, the systems of financial controls and the preparation of the annual report and accounts.
As a general rule, the board of directors delegates daily management to individual members of the
executive management. Delegation of management must be authorized in the companys articles of
association and precisely defined in organization regulations to be issued by the board of
directors. In Swisscoms case, the Board of Directors has delegated overall executive management of
Swisscom to the CEO. See Item 6: Directors, Senior Management and Employees. Summary of Significant Differences Between Swiss Corporate Governance Practices and the NYSEs
Corporate Governance Standards The following paragraphs provide a brief, general summary of significant differences between the
corporate governance practices followed by Swiss companies, such as Swisscom, and those required by
the listing standards of the New York Stock Exchange (the NYSE) of U.S. companies that have
common stock listed on the NYSE. The NYSE listing standards are available on the NYSEs website at
http://www.nyse.com. Composition of Board of Directors; Independence; Conflicts of Interest.The NYSE listing standards
provide that the board of directors of a U.S. listed company must consist of a majority of
independent directors and that certain committees must consist solely of independent directors. A
director qualifies as independent only if the board affirmatively determines that the director has
no material relationship with the company, either directly or indirectly. In addition, the listing
standards enumerate a number of relationships that preclude independence. The listing standards do
not specifically deal with the avoidance of conflicts of interest and related party transactions.
These matters are typically governed by the laws of the state in which the listed company is
incorporated. Swiss law does not explicitly require that the members of the management or board of directors of a
Swiss company be independent. In Swisscoms case, the function of the Chairman of its Board of
Directors is independent from the function of its Chief Executive Officer. Furthermore, the Swiss Code establishes a number of principles of general applicability that are
designed to strengthen the independence of board members, to avoid conflicts of interests and to
establish procedures and standards for related party transactions. For example, the Swiss Code
recommends that a majority of the members of certain committees be independent. Independent members
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who never were or were not within the last three years a member of the executive management and
have no, or only minor, business relations with the company. Committees.The NYSE listing standards require that a U.S. listed company must have an audit
committee, a nominating/corporate governance committee and a compensation committee. Each of these
committees must consist solely of independent directors and must have a written charter that
addresses certain matters specified in the listing standards. Under Swiss law, no committee is required by law. However, the Corporate Governance Directive
recommends that the board of directors set up an audit committee, a compensation committee and a
nomination committee. In addition, it recommends that the board of directors appoint committees
from amongst its members responsible for carrying out an in-depth analysis of specific
business-related or personnel matters for the full board in preparation for passing resolutions or
exercising its supervisory function. The NYSE listing standards contain detailed requirements for the audit committees of U.S. listed
companies. Starting on July 31, 2005, some, but not all, of these requirements, will also apply to
non-U.S. listed companies, such as Swisscom. For the time being, however, the NYSE listing
standards do not require that non-U.S. listed companies, such as Swisscom, have an audit committee. The Corporate Governance Directive recommends that covered companies form an audit committee that
is responsible for, among other things, questions of accounting and risk management, ensuring the
independence of the companys auditor, engaging the auditor for the audit of the companys
financial statements, determining the focus of the audit, and agreeing the audit fees. Although the
audit committee related provisions of the Corporate Governance Directive are less detailed than
those contained in the NYSE listing standards, the NYSE listing standards and the Corporate
Governance Directive share the goal of establishing a system for overseeing the companys
accounting that is independent from management and of ensuring the auditors independence. As a
result, they address similar topics, and there is some overlap. One structural difference between the legal status of the audit committee of a U.S. listed company
and that of a Swiss company concerns the degree of the committees involvement in managing the
relationship between the company and its auditor. While the NYSE listing standards require that
the audit committee of a U.S. listed company must have direct responsibility for the appointment,
compensation, retention, and oversight of the work of the auditor, under Swiss law, the election
and dismissing the auditor is the responsibility of the shareholders meeting. It may thereby rely
on proposals submitted to it by the board of directors and, if an audit committee exists, by the
audit committee. After the shareholders meeting elects the auditor, the audit committee is,
through delegation by the board of directors, responsible for engaging the auditor, setting the
terms of the engagement and administering the engagement on a day-to-day basis. Disclosure.The NYSE listing standards require U.S. listed companies to adopt, and post on their
websites, a set of corporate governance guidelines. The guidelines must address, among other
things: director qualification standards, director responsibilities, director access to management
and independent advisers, director compensation, director orientation and continuing education,
management succession, and an annual performance evaluation itself. In addition, the CEO of a U.S.
listed company must certify to the NYSE annually that he or she is not aware of any violations by
the company of the NYSEs corporate governance listing standards. The certification must be
disclosed in the companys annual report to shareholders. Under the Swiss law, as discussed above, the executive management and board of directors are
required to declare annually either that they are in compliance with the recommendations set forth
in the Corporate Governance Directive or, alternatively, which recommendations they have not
followed and give reasons therefore. Code of Business Conduct and Ethics.The NYSE listing standards require each U.S. listed company
to adopt, and post on its website, a code of business conduct and ethics for its directors,
officers and employees. There is no similar requirement or recommendation under Swiss law.
However, under the SECs rules and regulations, all companies required to submit periodic reports
to the SEC, including Swisscom, must disclose in their annual reports whether they have adopted a
code of ethics for their senior financial officers. In addition, they must file a copy of the code
with the SEC, post the text of the code on their website or undertake to provide a copy upon
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person without charge. There is significant, though not complete, overlap between the code of
ethics required by the NYSE listing standards and the code of ethics for senior financial officers
required by the SECs rules. 
 Exchange Controls Other than in connection with government sanctions imposed on Côte dIvoire, Iraq, Yugoslavia,
Sierra Leone, Zimbabwe, Liberia, Myanmar and certain persons and entities associated with Osama bin
Laden, the Al-Qaida network and the Taliban, there are currently no government laws, decrees or
regulations in Switzerland that restrict the export or import of capital, including Swiss foreign
exchange controls on the payment of dividends, interests or liquidation proceeds, if any, to
non-resident holders of capital stock of Swiss corporations. 
 Taxation Overview The following is a summary of the material Swiss and United States federal income tax consequences
of the ownership of Swisscom shares or ADSs by an investor that holds the shares or ADSs as capital
assets. This summary does not purport to address all tax consequences of the ownership of shares
or ADSs, and does not take into account the specific circumstances of any particular investors
(such as tax-exempt entities, certain insurance companies, broker-dealers, traders in securities
that elect to mark to market, investors liable for alternative minimum tax, investors that actually
or constructively own 10% or more of the voting stock of Swisscom, investors that hold shares or
ADSs as part of a straddle or a hedging or conversion transaction, shareholders that received their
shares or ADSs as part of an employee stock option plan or otherwise as compensation or investors
whose functional currency is not the U.S. dollar), some of which may be subject to special rules.
This summary is based on the tax laws of Switzerland and the United States (including the Internal
Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations
thereunder, published rulings and court decisions) as in effect on the date hereof, as well as on
the Convention Between the United States of America and Switzerland (the Treaty), all of which
are subject to change (or change in interpretation), possibly with retroactive effect. In
addition, the summary is based in part upon the representations of the Depositary and the
assumption that each obligation in the Deposit Agreement and any related agreement will be
performed in accordance with its terms. For purposes of this discussion, a U.S. Holder is any beneficial owner of Swisscom shares or ADSs
that is (1) a citizen or resident of the United States, (2) a corporation organized under the laws
of the United States or any State, (3) an estate the income of which is subject to United States
federal income tax without regard to its source or (4) a trust if a court within the United States
is able to exercise primary supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the trust. The discussion does not address any aspects of United States taxation other than federal income
taxation or any aspects of Swiss taxation other than income and capital taxation. Prospective
investors are urged to consult their tax advisors regarding the United States federal, state and
local and the Swiss and other tax consequences of owning and disposing of the shares and ADSs. In general, and taking into account the earlier assumptions, for Swiss tax and United States
federal income tax purposes, holders of ADRs evidencing ADSs will be treated as the owners of the
shares represented by those ADRs, and exchanges of shares for ADRs, and ADRs for shares, will not
be subject to Swiss tax or to United States federal income tax. Swiss Taxation Withholding Tax on Dividends and Distributions. Dividends paid and similar cash or in-kind
distributions made by Swisscom to a holder of the shares or ADSs (including dividends on
liquidation proceeds and stock dividends) are subject to a federal withholding tax (the
Withholding Tax) at a rate of 35%. The Withholding Tax must be withheld by Swisscom from the
gross distribution, and be paid to the Swiss Federal Tax Administration. The Withholding Tax is
refundable in full to a Swiss resident who receives a distribution if such resident is the
beneficial owner of the payment and duly reports the gross distribution received on his personal
tax return. 136




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Income Tax on Dividends. A Swiss resident who receives dividends and similar distributions
(including stock dividends and liquidation proceeds) from Swisscom is generally required to include
such amounts in his personal income tax return. A Swiss shareholder who itself is a corporation
may, under certain circumstances, benefit from a partial exemption of the dividend from income
taxation (Beteiligungsabzug). Capital Gains Tax upon Disposal of Shares. Under current Swiss tax law, a Swiss resident
individual who holds shares as part of his private property will generally not be subject to any
Swiss federal, cantonal or municipal income taxation on gains realized upon the sale or other
disposal of shares. However, private gains realized upon a repurchase of shares by Swisscom may be
re-characterized as taxable dividend income if certain conditions are met. Capital gains realized on shares held as part of the business property of a Swiss resident (whether
an individual or business association) are included in the taxable income of such person. However,
corporations may, under certain circumstances, benefit from a partial exemption of the dividend
from income taxation (Beteiligungsabzug). Obtaining a Refund of Swiss Withholding Tax. Currently, Switzerland has entered into bilateral
treaties for the avoidance of double taxation with respect to income taxes with a number of
countries including the United States, whereby a part of the above-mentioned Withholding Tax may be
refunded (subject to the limitations set forth in such treaties). The Treaty provides for a mechanism whereby an individual that qualifies for Treaty benefits (a
U.S. resident) or U.S. corporations can seek a refund of the Swiss Withholding Tax paid on
dividends in respect of shares of Swisscom, to the extent such withholding exceeds 15% (or 5% in
case of a qualified U.S. corporation, i.e., a U.S. corporation holding at least 10% of the shares
of a Swiss corporation). The Depositary intends to make use of informal procedures under which it
will submit a certificate to the Swiss Federal Tax Administration in respect of all U.S. holders
who have provided certifications of their entitlement to Treaty benefits. So long as these
procedures remain available, it generally should be possible for qualifying U.S. holders to recover
on a timely basis Withholding Tax in excess of the 15% rate (or 5% rate in case of a qualified U.S.
corporation) as provided in the Treaty. There can be no assurance that these informal procedures
will remain available. Alternatively, a U.S. resident may apply for a refund of the Withholding Tax withheld in excess of
the 15% Treaty rate (or a 5% tax rate in case of a qualified U.S corporation). The claim for
refund must be filed with the Swiss Federal Tax Administration, Eigerstrasse 65, 3003 Berne,
Switzerland. The form used for obtaining a refund is Swiss Tax Form 82 (82C for companies; 82E for
other entities; 82I for individuals), which may be obtained from any Swiss Consulate General in the
United States or from the Swiss Federal Tax Administration at the address above. The form must be
filled out in triplicate with each copy duly completed and signed before a notary public in the
United States. The form must be accompanied by evidence of the deduction of Withholding Tax
withheld at the source. Furthermore, the Swiss Government has decided that, starting January 1, 2005, Swiss corporations
may, alternatively, in case of a qualified U.S. corporation apply to report dividend payments to
the Swiss Federal Tax Administration and to only withhold the net amount of 5 % Withholding Tax. An
application form (Form 823, confirmed by a notary public or a consular officer) must be filed with
the Swiss Federal Tax Administration. If approved, dividend payments for the following three years
may be paid gross (deduction of only 5%) to the qualified U.S. corporation after having reported
the payment to the Swiss Federal Tax Administration (Form 108). Stamp Duties upon Transfer of Securities (Umsatzabgabe). The sale of Swisscom shares, whether by
Swiss resident or non-resident holders, may be subject to a Swiss securities transfer stamp duty of
up to 0.15% calculated on the sale proceeds if it occurs through or with a Swiss bank or other
Swiss securities dealer as defined in the Swiss Federal Stamp Tax Act. In addition to the stamp
duty, the sale of shares by or through a member of the Swiss Exchange or virt-x may be subject to a
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United States Federal Income Taxation Taxation of Dividends. Under the United States federal income tax laws, and subject to the passive
foreign investment company (PFIC) rules discussed below, U.S. Holders will include in gross
income the gross amount of any dividend paid (before reduction for Swiss withholding taxes) by
Swisscom out of its current or accumulated earnings and profits (as determined for United States
federal income tax purposes) when the dividend is actually or constructively received by the U.S.
Holder, in the case of shares, or by the Depositary, in the case of ADSs. U.S. Holders must
include any Swiss tax withheld from the dividend payment in this gross amount even if they do not
in fact receive it. Dividends paid to a noncorporate U.S. Holder in taxable years beginning before January 1, 2009 that
constitute qualified dividend income are taxable at a maximum tax rate of 15% provided that the
shares or ADSs are held for more than 60 days during the 121-day period beginning 60 days before
the ex-dividend date and meet other holding period requirements. Dividends paid by Swisscom with
respect to the shares or ADSs generally will be qualified dividend income. The dividend will not be eligible for the dividends-received deduction generally allowed to United
States corporations in respect of dividends received from other United States corporations. The
amount of the dividend distribution includible in income of a U.S. Holder will be the U.S. dollar
value of the Swiss francs payments made, determined at the spot Swiss francs/U.S. dollar rate on
the date such dividend distribution is includible in the income of the U.S. Holder, regardless of
whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting
from currency exchange fluctuations during the period from the date the dividend payment is
includible in income to the date such payment is converted into U.S. dollars will be treated as
ordinary income or loss and will not be eligible for the special tax rate applicable to qualified
dividend income. Such gain or loss will generally be income or loss from sources within the United
States for foreign tax credit limitation purposes. Distributions in excess of current and
accumulated earnings and profits, as determined for United States federal income tax purposes, will
be treated as a return of capital to the extent of the U.S. Holders basis in the shares or ADSs
and thereafter as capital gain. Subject to certain limitations, the Swiss tax withheld in accordance with the Treaty and paid over
to Switzerland will be creditable against the U.S. Holders United States federal income tax
liability. Special rules apply in determining the foreign tax credit limitation with respect to
dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld
is available to a U.S. Holder under the laws of Switzerland or under the Treaty, the amount of tax
withheld that is refundable will not be eligible for credit against the U.S. Holders United States
federal income tax liability. See Swiss Taxation  Obtaining a Refund of Swiss Withholding Tax,
above, for the procedures for obtaining a refund of tax. For foreign tax credit limitation purposes, the dividend will be income from sources without the
United States, but dividends paid in taxable years beginning before January 1, 2007 generally will
be passive or financial services income, and dividends paid in taxable years beginning after
December 31, 2006 will, depending on your circumstances, be passive or general income which, in
either case, is treated separately from other types of income for purposes of computing the foreign
tax credit allowable to you. Distributions of additional shares to U.S. Holders with respect to their shares or ADSs that are
made as part of a pro rata distribution to all shareholders of Swisscom generally will not be
subject to United States federal income tax. U.S. Holders that receive a stock dividend that is
subject to Swiss tax but not U.S. tax may not have enough foreign income for U.S. tax purposes to
receive the benefit of the foreign tax credit associated with such tax, unless the holder has
foreign income from other sources. Taxation of Capital Gains. Subject to the PFIC rules discussed below, upon a sale or other
disposition of the shares or ADSs, a U.S. Holder will recognize capital gain or loss for United
States federal income tax purposes in an amount equal to the difference between the U.S. dollar
value of the amount realized and the U.S. Holders tax basis (determined in U.S. dollars) in such
shares or ADSs. Capital gain of a noncorporate U.S. holder that is recognized before January 1,
2009 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than
one year. The gain or loss will generally be income or loss from sources within the United States
for foreign tax credit limitation purposes. 138




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Additional Tax Considerations: PFIC Rules. Swisscom believes that the shares and ADSs should not
be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is
a factual determination made annually and thus may be subject to change. In general, Swisscom will
be a PFIC with respect to a U.S. Holder if, for any taxable year in which the U.S. Holder held
Swisscoms ADSs or shares, either (1) at least 75% of the gross income of Swisscom for the taxable
year is passive income or (2) at least 50% of the value (determined on the basis of a quarterly
average) of Swisscoms assets is attributable to assets that produce or are held for the production
of passive income. If Swisscom were to be treated as a PFIC, unless a U.S. Holder makes a
mark-to-market election, gain realized on the sale or other disposition of the shares or ADSs would
in general not be treated as capital gain, and a U.S. Holder would be treated as if such holder had
realized such gain and certain excess distributions ratably over the holders holding period for
the shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which
the gain was allocated, together with an interest charge in respect of the tax attributable to each
such year. With certain exceptions, shares or ADSs will be treated as shares in a PFIC if Swisscom
was a PFIC at any time during a U.S. Holders holding period in the shares of ADSs. Dividends
received from Swisscom will not be eligible for the favorable tax rates applicable to qualified
dividend income or long-term capital gains if Swisscom is treated as a PFIC with respect to a U.S.
Holder in either the taxable year of the distribution or the preceding taxable year, but instead
will be taxable at rates applicable to ordinary income. 
 Documents on Display It is possible to read and copy documents referred to in this annual report on Form 20-F that have
been filed with the SEC at the SECs public reference room located at 450 Fifth Street, NW,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms and their copy charges. 139




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ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Disclosures about market risk Swisscoms derivative financial instruments comprise primarily cross-currency interest rate swaps,
interest rate swaps and foreign exchange forwards to hedge interest rate risk and foreign exchange
risk with respect to USD relating to the finance lease arrangements entered into in 1996 and 1997
and the cross-border lease arrangements entered into in 2000 and 2002. The remaining period of time
hedged is 4 years for the finance lease arrangements entered into in 1996 and 1997 and 24 years for
the arrangements entered into in 2000 and 2002. Also included are foreign exchange contracts with
respect to Swisscoms exposure to EUR and USD, which are primarily designated to hedge the future
transactions in connection with the purchase of mobile equipment and international call
settlements. The contracts are in EUR and USD. The forecasted transactions are expected to occur in
2005. For further detail of Swisscoms derivative financial instruments see Note 32 to the
consolidated financial statements. Interest rate risk Swisscom is subject to market rate risks due to fluctuations in interest rates. Substantially all
of Swisscoms long-term debt is in the form of fixed-rate loans with varying degrees of maturity.
Accordingly, movements in interest rates could lead to fluctuations in the fair value of such debt
instruments but will neither impact net income or future cash flows. The table below provides
information about Swisscoms risk exposure associated with changing interest rates on long-term
debt obligations that impact the fair value of these obligations: CHF in millions
    
    Expected Maturity Date
    
    
    As at December 31, 2004(except percentages)(1)
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    Total
    
    
    Fair valueLong term debt:Fixed rate:Financial liability from
cross-border lease (USD)(1)
(2)
    
    
    9
    
    
    
    1
    
    
    
    106
    
    
    
    26
    
    
    
    12
    
    
    
    1,108
    
    
    
    1,262
    
    
    
    1,674Average interest rate (%)
    
    
    7.36
    
    
    
    7.36
    
    
    
    7.36
    
    
    
    7.36
    
    
    
    7.36
    
    
    
    7.36
    
    
    
    7.36Finance lease obligation (real
estate) (CHF)(1)
    
    
    9
    
    
    
    8
    
    
    
    7
    
    
    
    8
    
    
    
    8
    
    
    
    670
    
    
    
    710
    
    
    
    1,192Average interest rate (%)
    
    
    6.61
    
    
    
    6.61
    
    
    
    6.61
    
    
    
    6.61
    
    
    
    6.61
    
    
    
    6.61
    
    
    
    6.61Finance lease obligation (cross-border lease)
(USD)(1)
    
    
    145
    
    
    
    20
    
    
    
    35
    
    
    
    125
    
    
    
    0
    
    
    
    0
    
    
    
    325
    
    
    
    325Average interest rate (%)
    
    
    5.60
    
    
    
    5.60
    
    
    
    5.60
    
    
    
    5.60
    
    
    
    
    
    
    
    
    
    
    
    5.60Non-current financial assets:Fixed rate:Cross-border lease
(USD)(1)(2)
    
    
    1
    
    
    
    1
    
    
    
    106
    
    
    
    7
    
    
    
    10
    
    
    
    827
    
    
    
    952
    
    
    
    1,317Average interest rate (%)
    
    
    8.20
    
    
    
    8.20
    
    
    
    8.20
    
    
    
    8.20
    
    
    
    8.20
    
    
    
    8.20
    
    
    
    8.20
   (1)
    
    All amounts in the table are in CHF and in millions (except percentages); the USD indication
refers to the currency of the underlying exposure.(2)
    
    Under the terms of the agreements, Swisscom incurred debt and placed the majority on deposit.
At December 31, 2004, the value of the financial liability from cross-border lease is CHF
1,262 million and the amount on deposit, recorded under non-current financial assets, is CHF
952 million. See Note 25 to the consolidated financial statements. Foreign exchange risk Swisscom has entered into various foreign exchange contracts to minimize the possible effect of
currency on anticipated transactions. However, there is no assurance that transactions will take
place. Swisscom has a net exchange exposure, in particular on international telephone settlements
that are expected to be settled within one year and on the purchase of mobile equipment. At
December 31, 2004, foreign exchange contracts were outstanding 140




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to purchase EUR 25 million (CHF 28 million) and to sell USD 20 million (CHF 23 million). The
positive and negative fair values of these contracts offset each other, resulting in a net fair
value CHF 0 million at December 31, 2004 and 2003. Swisscom has entered into foreign exchange contracts as hedges of USD denominated leases. The
total cross-border lease obligation at December 31, 2004, amounted to CHF 635 million (CHF 740
million and CHF 886 million at December 31, 2003 and 2002, respectively). It is Swisscoms policy
to hedge all currency related exposure (fair value risks and interest rate risks in foreign
currencies) on such liabilities with foreign currency derivative instruments such as swaps and
foreign exchange contracts. The terms and conditions of the swaps and foreign exchange contracts
match the terms and conditions of the underlying cross-border lease obligations disclosed in Notes
25 and 29 of the consolidated financial statements. Accordingly all foreign exchange gains and
losses on the lease obligations are completely offset by foreign exchange gains and losses on the
financial instruments. Swisscom does not undertake speculative trading using derivative
instruments. 
 ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 141




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PART II 
 ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Not applicable. 
 ITEM 14: MATERIAL MODIFICATIONS Not applicable. 
 ITEM 15: CONTROLS AND PROCEDURES Swisscom performed an evaluation of the effectiveness of its disclosure controls and procedures
effective as of year-end 2004. Disclosure controls and procedures are designed to ensure that the
material financial and non-financial information required to be disclosed in documents filed with
the Securities and Exchange Commission is recorded, processed, summarized and reported in a timely
manner. The evaluation was conducted by Swisscoms disclosure committee, which consists of
appropriate members of Swisscoms management and is headed by Swisscoms Chief Financial Officer
(Ueli Dietiker), and by Swisscoms Chief Executive Officer (Jens Alder). In designing and
evaluating the disclosure controls and procedures, management and the disclosure committee
recognized that any controls and procedures, no matter how well designed and operated, can provide
only reasonable, rather than absolute, assurance of achieving the desired control objectives, and
that management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Moreover, it should be noted that the design of
any system of controls is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Based on the foregoing, Swisscoms management, including
the CEO and CFO, concluded that Swisscoms disclosure controls and procedures were effective.
There have been no changes in Swisscoms internal control over financial reporting that occurred
during fiscal year 2004 that have materially affected, or are reasonably likely to materially
affect, Swisscoms internal control over financial reporting. It should be noted that Swisscom also has investments in certain unconsolidated entities. As
Swisscom does not control or manage these entities, its disclosure controls and procedures with
respect to such entities are necessarily more limited than those it maintains with respect to its
consolidated subsidiaries. In addition, companies that are acquired by Swisscom may have internal
controls over financial reporting that do not meet the standards Swisscom applies to its internal
control over financial reporting and that may need to be adapted accordingly. 
 ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT Swisscoms Board of Directors has determined that Peter Küpfer qualifies as a financial expert
within the meaning of Section 407 of the Sarbanes-Oxley Act of 2002. 
 ITEM 16B: CODE OF ETHICS On November 18, 2003, Swisscom adopted a code of ethics that applies to the CEO and CFO of Swisscom
AG, the CEOs and CFOs of its group companies, the members of the Disclosure Committee and other
specified senior financial, accounting or controlling officer of Swisscom. The code of ethics is
published on Swisscoms website in the section for Investor Relations  Shareholder Information.
(http://www.swisscom.com/GHQ/content/Investor_Relations/Aktionaersinformationen/?lang=en) 142




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ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES Based on a tender conducted in early 2004, Swisscoms Board of Directors proposed to the Annual
General Meeting that KPMG Klynveld Peat Marwick Goerdeler SA (KPMG) be appointed as new statutory
and group auditors. At the Annual General Meeting on April 27, 2004, Swisscoms shareholders
approved this proposal. The following table shows, in respect of each of the last two fiscal years, information concerning
the fees billed for professional services rendered by KPMG, Swisscoms principal accountant for
fiscal year 2004, and PricewaterhouseCoopers AG (PwC), Swisscoms principal accountant for fiscal
year 2003. Year ended December 31,CHF in thousands
    
    2003
    
    
    2004Audit Fees
    
    
    7,241
    
    
    
    3,600Audit-Related Fees
    
    
    3,185
    
    
    
    648Tax Fees
    
    
    375
    
    
    
    3All Other Fees
    
    
    556
    
    
    
    39Total
    
    
    11,357
    
    
    
    4,290
 Audit Fees consisted of fees billed by KPMG or PwC for services rendered in connection with the
audit of Swisscom consolidated annual financial statements, review of interim financial
statements, and other services usually provided in connection with statutory and regulatory
filings. Audit-Related Fees consisted of fees billed by KPMG or PwC for assurance and related services
that traditionally are performed by the independent accountant, such as due diligence related to
mergers and acquisitions, accounting consultations and audits in connection with acquisitions,
internal control review, attest services that are not required by statute or regulation and
consultation concerning financial accounting and reporting standards. Tax Fees consisted of fees billed by KPMG or PwC for tax compliance and tax planning services,
and other tax services. All Other Fees consisted of fees billed by KPMG or PwC for special training services regarding
new developments in financial accounting and reporting standards and providing support for
reporting processes. Under Swiss law, a companys independent auditor must be elected and can only be removed by the
shareholders at the Annual General Meeting. The Board of Directors has delegated to the Audit
Committee responsibility for engaging the auditor, setting the terms of the engagements and
administering the engagement on a day-to-day basis. The Audit Committee is also responsible for
the design of the supervisory and control instruments employed by the Board of Directors to
evaluate the independent auditors work. Under its charter, the Audit Committee is responsible for pre-approving all audit and non-audit
services to be performed by Swisscoms independent auditor. The Audit Committee has adopted
guidelines for the pre-approval of these services. Under these guidelines, Swisscoms independent
auditor may not perform any audit or permitted non-audit service unless the Audit Committee or a
designated member of the Audit Committee has pre-approved the engagement. The guidelines also set
forth policies and procedures for the pre-approval of audit and permitted non-audit services.
Under these policies and procedures, which are reviewed regularly and updated at least once
annually, Swisscoms independent auditor may be engaged to perform designated services in each of
four categories: audit services, audit-related services, tax services and other permitted
non-audit services. The policies and procedures provide that the fee for each individual
engagement in respect of a particular designated service may not exceed a Swiss franc amount, which
varies in accordance with the service. In addition, the policies and procedures limit the total
amount of fees that may be charged for services pre-approved in each of the four categories. If
the fee for any engagement exceeds that maximum fee pre-approved for the particular service or
would cause the aggregate amount of fees pre-approved for services in any category to exceed the
maximum amount pre-approved for such category, the engagement must be pre-approved by the Audit
Committee or a designated member of the Audit Committee. 143




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ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Swisscom does not currently avail itself of any exemption from the listing standards for its Audit
Committee. 
 ITEM 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Issuer Purchases of Equity Shares (d) Maximum Number(or Approximate(c) Number of Shares
    
    Dollar Value) of(or Units) Purchased
    
    Shares (or Units)(a) Total Number of
    
    (b) Average Price
    
    as Part of Publicly
    
    that May Yet BeShares (or Units)
    
    Paid per Share
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Purchased
    
    (or Units) (CHF)
    
    Programs
    
    Plans or Programs1/1/04 - 1/31/04
    
    
    
    
    
    2/1/04 - 2/29/04
    
    5(1)
    
    422
    
    3/1/04 - 3/31/04
    
    230(1)
    
    412
    
    4/1/04 - 4/30/04
    
    98,715(1) (2)
    
    422.28
    
    5/1/04 - 5/31/04
    
    150,050(2)(3)
    
    393.56
    
    150,000(3)6/1/04 - 6/30/04
    
    1,014,000(3)
    
    401.42
    
    1,014,000(3)7/1/04 - 7/31/04
    
    641,005(1) (3)
    
    414.58
    
    641,000(3)8/1/04 - 8/31/04
    
    250,000(3)
    
    417.96
    
    250,000(3)9/1/04 - 9/30/04
    
    1,055,000(3)
    
    426.19
    
    1,055,000(3)10/1/04 - 10/31/04
    
    617,000(3)
    
    435.15
    
    617,000(3)11/1/04 - 11/30/04
    
    487,000(3)
    
    446.04
    
    487,000(3)12/1/04 - 12/31/04
    
    507,090(1) (3)
    
    450.83
    
    506,500(3)Total
    
    4,820,095
    
    423.66
    
    4,720,500
    
    
    0
   (1)
    
    A total of 845 shares have been purchased by Swisscom Finance Ltd. in Jersey (Cayman Island)
within a passive asset management mandate in the Swiss Market Index.(2)
    
    98,750 Shares have been purchased for distribution in connection with the various stock
option plans for management and employees. See Item 6: Directors, Senior Management and
Employees  Share Ownership.(3)
    
    On March 24, 2004, Swisscom announced a share repurchase program, in which it repurchased
4,720,500 shares in an aggregate amount of CHF 2 billion representing 7.13% of its share
capital. On December 22, 2004, Swisscom completed this share repurchase program. A resolution
to reduce Swisscoms share capital accordingly will be proposed to the Annual General Meeting
to be held on April 26, 2005. For more information see Item 8: Financial Information  Dividend Policy. PART III 
 ITEM 17: FINANCIAL STATEMENTS Not applicable. 144




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ITEM 18: FINANCIAL STATEMENTS Index to Financial Statements PageConsolidated financial statements:Reports of Group Auditors
    
    
    F-1Consolidated income statement for each of the three years ended
December 31, 2004, 2003 and 2002
    
    
    F-3Consolidated balance sheet at December 31, 2004 and 2003
    
    
    F-4Consolidated cash flow statement for each of the three years ended
December 31, 2004, 2003 and 2002
    
    
    F-5Consolidated statement of shareholders equity for each of the three years ended December 31, 2004, 2003 and 2002
    
    
    F-6Notes to the consolidated financial statements
    
    
    F-7
 145




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Report of Independent Registered Public Accounting Firm To the Board of Directors Swisscom AG Ittigen - (Berne) We have audited the accompanying consolidated balance sheet of Swisscom AG and its
subsidiaries as of December 31, 2004, and the related consolidated statements of income,
cash flows and shareholders equity for the year then ended. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based
on our audit. We confirm that we meet the Swiss legal requirements concerning
professional qualification and independence. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States), with the auditing standards promulgated by the Swiss
profession, and with the International Standards on Auditing (ISA). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our
opinion. In our opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Swisscom and its subsidiaries as of
December 31, 2004 and the results of their operations and their cash flows for the year
then ended in accordance with International Financial Reporting Standards and comply
with Swiss law. International Financial Reporting Standards vary in certain significant respects from
accounting principles generally accepted in the United States of America. Information
relating to the nature and effect of such differences is presented in Note 42 to the
consolidated financial statements. KPMG Klynveld Peat Marwick Goerdeler SA Hanspeter Stocker
    
    Christoph SchwarzSwiss Certified Accountant
    
    Swiss Certified AccountantAuditor in Charge
 Gümligen-Berne, April 19, 2005 F-1




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Report of Independent Registered Public Accounting Firm To the Board of Directors Swisscom AG Ittigen - (Berne) We have audited the accompanying consolidated balance sheets of Swisscom AG and its
subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of
income, of cash flows and of changes in shareholders equity for each of the two years
in the period ended December 31, 2003. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based
on our audits. We confirm that we meet the Swiss legal requirements concerning
professional qualification and independence. We conducted our audits in accordance with auditing standards promulgated by the Swiss
profession, with International Standards on Auditing and with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Swisscom and its subsidiaries at
December 31, 2003 and 2002 and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 2003 in accordance with
International Financial Reporting Standards. International Financial Reporting Standards vary in certain significant respects from
accounting principles generally accepted in the United States of America. Information
relating to the nature and effect of such differences is presented in Note 42 to the
consolidated financial statements. PricewaterhouseCoopers AG Peter Wittwer
    
    Julie Fitzgerald
 Berne, March 22, 2004, except for Note 39, which is April 19, 2005 F-2




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Swisscom Consolidated income statement Year ended December 31,CHF in millions, except per share amount
    
    Note
    
    
    2002
    
    
    2003
    
    
    2004Net revenue
    
    
    4
    
    
    
    10,415
    
    
    
    10,026
    
    
    
    10,057Other income
    
    
    5
    
    
    
    230
    
    
    
    233
    
    
    
    197Total
    
    
    
    
    
    
    10,645
    
    
    
    10,259
    
    
    
    10,254Goods and services purchased
    
    
    6
    
    
    
    2,073
    
    
    
    1,706
    
    
    
    1,847Personnel expenses
    
    
    7,8,9
    
    
    
    2,329
    
    
    
    2,266
    
    
    
    2,194Other operating expenses
    
    
    10
    
    
    
    1,989
    
    
    
    1,783
    
    
    
    1,809Depreciation
    
    
    21
    
    
    
    1,552
    
    
    
    1,543
    
    
    
    1,548Amortization
    
    
    23
    
    
    
    114
    
    
    
    142
    
    
    
    151Total operating expenses
    
    
    
    
    
    
    8,057
    
    
    
    7,440
    
    
    
    7,549Operating income
    
    
    
    
    
    
    2,588
    
    
    
    2,819
    
    
    
    2,705Financial expense
    
    
    11
    
    
    
    (508
    )
    
    
    (196
    )
    
    
    (285
    )Financial income
    
    
    12
    
    
    
    197
    
    
    
    170
    
    
    
    141Income before income taxes, equity in net income of
affiliated companies and minority interest
    
    
    
    
    
    
    2,277
    
    
    
    2,793
    
    
    
    2,561Income tax expense
    
    
    13
    
    
    
    (313
    )
    
    
    (467
    )
    
    
    (394
    )Income before equity in net income of affiliated
companies and minority interest
    
    
    
    
    
    
    1,964
    
    
    
    2,326
    
    
    
    2,167Equity in net income of affiliated companies
    
    
    22
    
    
    
    94
    
    
    
    (9
    )
    
    
    22Minority interest
    
    
    30
    
    
    
    (301
    )
    
    
    (340
    )
    
    
    (352
    )Income from continuing operations
    
    
    
    
    
    
    1,757
    
    
    
    1,977
    
    
    
    1,837Income from discontinued operation (debitel)
    
    
    39
    
    
    
    (933
    )
    
    
    (408
    )
    
    
    5Loss on sale from discontinued operation (debitel) including
write-off of accumulated currency translation loss
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    (248
    )Net income
    
    
    
    
    
    
    824
    
    
    
    1,569
    
    
    
    1,594Basic earnings per share (in CHF) from continuing operations
    
    
    
    
    
    
    25.97
    
    
    
    29.86
    
    
    
    28.39 from discontinued operation (debitel)
    
    
    
    
    
    
    (13.79
    )
    
    
    (6.16
    )
    
    
    (3.76
    ) net income
    
    
    15
    
    
    
    12.18
    
    
    
    23.70
    
    
    
    24.63Diluted earnings per share (in CHF) from continuing operations
    
    
    
    
    
    
    25.95
    
    
    
    29.85
    
    
    
    28.39 from discontinued operation (debitel)
    
    
    
    
    
    
    (13.78
    )
    
    
    (6.16
    )
    
    
    (3.76
    ) net income
    
    
    15
    
    
    
    12.17
    
    
    
    23.69
    
    
    
    24.63
 The accompanying notes form an integral part of these financial statements. F-3




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##### Table of Contents



Swisscom Consolidated balance sheet At December 31,CHF in millions
    
    Note
    
    
    2002
    
    
    2003
    
    
    2004AssetsCurrent assetsCash and cash equivalents
    
    
    16
    
    
    
    1,512
    
    
    
    3,104
    
    
    
    2,387Current financial assets
    
    
    17
    
    
    
    266
    
    
    
    251
    
    
    
    1,285Trade accounts receivable
    
    
    18
    
    
    
    2,059
    
    
    
    1,831
    
    
    
    1,767Inventories
    
    
    19
    
    
    
    131
    
    
    
    93
    
    
    
    120Other current assets
    
    
    20
    
    
    
    270
    
    
    
    636
    
    
    
    646Current tax assets
    
    
    
    
    
    
    145
    
    
    
    4
    
    
    
    Total current assets
    
    
    
    
    
    
    4,383
    
    
    
    5,919
    
    
    
    6,205Non-current assetsProperty, plant and equipment
    
    
    21
    
    
    
    7,491
    
    
    
    6,971
    
    
    
    6,395Investments in affiliated companies
    
    
    22
    
    
    
    682
    
    
    
    41
    
    
    
    58Goodwill and other intangible assets
    
    
    23
    
    
    
    369
    
    
    
    402
    
    
    
    416Non-current financial assets
    
    
    24
    
    
    
    1,531
    
    
    
    1,337
    
    
    
    1,275Deferred tax assets
    
    
    13
    
    
    
    367
    
    
    
    185
    
    
    
    99Total non-current assets
    
    
    
    
    
    
    10,440
    
    
    
    8,936
    
    
    
    8,243Assets from discontinued operation (debitel)
    
    
    39
    
    
    
    2,135
    
    
    
    1,685
    
    
    
    Total assets
    
    
    
    
    
    
    16,958
    
    
    
    16,540
    
    
    
    14,448Liabilities and shareholders equityCurrent liabilitiesShort-term debt
    
    
    25
    
    
    
    960
    
    
    
    516
    
    
    
    384Trade accounts payable
    
    
    
    
    
    
    600
    
    
    
    605
    
    
    
    511Current tax liabilities
    
    
    
    
    
    
    117
    
    
    
    124
    
    
    
    342Accrued liabilities
    
    
    26
    
    
    
    237
    
    
    
    323
    
    
    
    214Other current liabilities
    
    
    27
    
    
    
    1,216
    
    
    
    1,167
    
    
    
    1,247Total current liabilities
    
    
    
    
    
    
    3,130
    
    
    
    2,735
    
    
    
    2,698Long-term liabilitiesLong-term debt
    
    
    25
    
    
    
    1,482
    
    
    
    1,338
    
    
    
    1,253Finance lease obligation
    
    
    29
    
    
    
    1,192
    
    
    
    1,070
    
    
    
    898Accrued pension cost
    
    
    9
    
    
    
    1,101
    
    
    
    1,113
    
    
    
    1,118Accrued liabilities
    
    
    26
    
    
    
    484
    
    
    
    409
    
    
    
    634Deferred tax liabilities
    
    
    13
    
    
    
    296
    
    
    
    383
    
    
    
    234Other long-term liabilities
    
    
    28
    
    
    
    307
    
    
    
    298
    
    
    
    269Total long-term liabilities
    
    
    
    
    
    
    4,862
    
    
    
    4,611
    
    
    
    4,406Liabilities from discontinued operation (debitel)
    
    
    39
    
    
    
    886
    
    
    
    794
    
    
    
    Total liabilities
    
    
    
    
    
    
    8,878
    
    
    
    8,140
    
    
    
    7,104Minority interest
    
    
    30
    
    
    
    781
    
    
    
    731
    
    
    
    663Shareholders equityShare capital
    
    
    31
    
    
    
    596
    
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    
    
    
    
    572
    
    
    
    572
    
    
    
    572Retained earnings
    
    
    
    
    
    
    6,491
    
    
    
    7,296
    
    
    
    8,029Treasury stock
    
    
    31
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2,002
    )Fair value and other reserves
    
    
    33
    
    
    
    (359
    )
    
    
    (264
    )
    
    
    16Total shareholders equity
    
    
    
    
    
    
    7,299
    
    
    
    7,669
    
    
    
    6,681Total liabilities and shareholders equity
    
    
    
    
    
    
    16,958
    
    
    
    16,540
    
    
    
    14,448
 The accompanying notes form an integral part of these financial statements. F-4




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##### Table of Contents



Swisscom Consolidated cash flow statement Cash flow statement from continuing operations Year ended December 31,CHF in millions
    
    Note
    
    
    2002
    
    
    2003
    
    
    2004Cash flows from operating activitiesCash generated from operations
    
    
    34
    
    
    
    4,162
    
    
    
    4,664
    
    
    
    4,355Interest paid
    
    
    
    
    
    
    (221
    )
    
    
    (152
    )
    
    
    (159
    )Income taxes paid
    
    
    
    
    
    
    (442
    )
    
    
    (56
    )
    
    
    (239
    )Interest received
    
    
    
    
    
    
    164
    
    
    
    107
    
    
    
    110Dividends received
    
    
    
    
    
    
    9
    
    
    
    147
    
    
    
    1Gain from cross-border tax lease transaction
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    
    
    
    
    3,700
    
    
    
    4,710
    
    
    
    4,068Cash flows from investing activitiesCapital expenditure
    
    
    21,23
    
    
    
    (1,127
    )
    
    
    (1,165
    )
    
    
    (1,136
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    26
    
    
    
    33
    
    
    
    35Proceeds from the sale of discontinued operation (debitel)*
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    616Proceeds from sale of other subsidiaries
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    Acquisition of the remaining interest in Swisscom IT Services AG
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    (115
    )Acquisition of subsidiaries, net of cash acquired
    
    
    
    
    
    
    (34
    )
    
    
    (34
    )
    
    
    3Proceeds from sale of affiliated companies
    
    
    22
    
    
    
    39
    
    
    
    510
    
    
    
    Investments in affiliated companies
    
    
    
    
    
    
    (37
    )
    
    
    (11
    )
    
    
    Repayment of loans receivable
and sale of non-current financial assets
    
    
    24
    
    
    
    23
    
    
    
    44
    
    
    
    108Loans receivable granted
and investments in non-current financial assets
    
    
    24
    
    
    
    (103
    )
    
    
    (33
    )
    
    
    (36
    )Purchase and sale of current financial assets, net
    
    
    17
    
    
    
    2,869
    
    
    
    8
    
    
    
    (829
    )Other cash flow from investing activities, net
    
    
    
    
    
    
    10
    
    
    
    8
    
    
    
    Net cash provided by (used in) investing activities
    
    
    
    
    
    
    1,666
    
    
    
    (625
    )
    
    
    (1,354
    )Cash flows from financing activitiesRepayment of short-term debt
    
    
    
    
    
    
    (602
    )
    
    
    (2
    )
    
    
    (256
    )Issuance of long-term debt
    
    
    
    
    
    
    94
    
    
    
    16
    
    
    
    11Repayment of long-term debt
    
    
    
    
    
    
    (1,036
    )
    
    
    (787
    )
    
    
    Proceeds from finance lease obligations
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Repayments of cross-border tax lease transactions
    
    
    
    
    
    
    (37
    )
    
    
    (58
    )
    
    
    (60
    )Purchase and sale of treasury stock and options, net
    
    
    31
    
    
    
    
    
    
    
    (12
    )
    
    
    (14
    )Share buy-back
    
    
    31
    
    
    
    (4,302
    )
    
    
    
    
    
    
    (1,882
    )Dividends paid
    
    
    
    
    
    
    (728
    )
    
    
    (794
    )
    
    
    (861
    )Dividends paid to minority interests
    
    
    30
    
    
    
    (300
    )
    
    
    (390
    )
    
    
    (360
    )Capital reduction
    
    
    
    
    
    
    (529
    )
    
    
    (530
    )
    
    
    Net cash used in financing activities
    
    
    
    
    
    
    (7,432
    )
    
    
    (2,557
    )
    
    
    (3,422
    )Net (decrease) increase in cash and cash equivalents
    
    
    
    
    
    
    (2,066
    )
    
    
    1,528
    
    
    
    (708
    )Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    3,565
    
    
    
    1,512
    
    
    
    3,104Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (5
    )
    
    
    18
    
    
    
    (3
    )Cash flows with discontinued operations
    
    
    
    
    
    
    18
    
    
    
    46
    
    
    
    (6
    )Cash and cash equivalent at end of year
    
    
    
    
    
    
    1,512
    
    
    
    3,104
    
    
    
    2,387
 Cash flow statement from discontinued operation (debitel) CHF in millions
    
    Note
    
    
    2002
    
    
    2003
    
    
    2004Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    223
    
    
    
    170
    
    
    
    133Net (decrease) increase in cash and cash equivalents
    
    
    39
    
    
    
    (49
    )
    
    
    (50
    )
    
    
    4Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (4
    )
    
    
    13
    
    
    
    (6
    )Cash and cash equivalent at closing date
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    (131
    )Cash and cash equivalent at end of year
    
    
    
    
    
    
    170
    
    
    
    133
    
    
    
    
 *
    
    Net proceeds from the sale of discontinued operation (debitel) less cash and cash equivalents left in debitel amounted to CHF 485 million. Significant non-cash investing and financing transactions are described in Note 34. The accompanying notes form an integral part of these financial statements. F-5




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##### Table of Contents



Swisscom Consolidated statement of shareholders equity Additional
    
    
    
    
    
    
    
    
    
    
    Fair value
    
    
    TotalShare
    
    
    paid-in
    
    
    Retained
    
    
    Treasury
    
    
    and other
    
    
    shareholdersCHF in millions
    
    Note
    
    
    capital
    
    
    capital
    
    
    earnings
    
    
    stock
    
    
    reserves 1)
    
    
    equityBalance at December 31, 2001
    
    
    
    
    
    
    1,250
    
    
    
    2,395
    
    
    
    8,711
    
    
    
    (2
    )
    
    
    (285
    )
    
    
    12,069Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (18
    )Transfers of fair value adjustments
to income statement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Fair value adjustments
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    (61
    )Gains and losses directly recognized in equity,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    (74
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividend relating to 2001
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    (728
    )
    
    
    
    
    
    
    
    
    
    
    (728
    )Share buy-back
    
    
    
    
    
    
    (125
    )
    
    
    (1,823
    )
    
    
    (2,316
    )
    
    
    
    
    
    
    
    
    
    
    (4,264
    )Purchase of treasury stock and options
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71
    )
    
    
    
    
    
    
    (71
    )Sale of treasury stock and options
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    72Capital reduction
    
    
    31
    
    
    
    (529
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (529
    )Balance at December 31, 2002
    
    
    
    
    
    
    596
    
    
    
    572
    
    
    
    6,491
    
    
    
    (1
    )
    
    
    (359
    )
    
    
    7,299Translation adjustments
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    115Transfers of fair value adjustments
to income statement
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    (19
    )Fair value adjustments
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Gains and losses directly recognized in equity,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    95Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,569
    
    
    
    
    
    
    
    
    
    
    
    1,569Dividend relating to 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (794
    )
    
    
    
    
    
    
    
    
    
    
    (794
    )Purchase of treasury stock and options
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (31
    )Sale of treasury stock and options
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    31Exercise of IPO LEAPs and SuperShares
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Capital reduction
    
    
    
    
    
    
    (530
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (530
    )Balance at December 31, 2003
    
    
    
    
    
    
    66
    
    
    
    572
    
    
    
    7,296
    
    
    
    (1
    )
    
    
    (264
    )
    
    
    7,669Translation adjustments
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (21
    )Transfers of fair value adjustments
to income statement
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    23Transfer of the accumulated
currency translation loss
from the sale of debitel
to the income statement
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238
    
    
    
    238Fair value adjustments
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    40Gains and losses directly recognized in equity,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    280
    
    
    
    280Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,594
    
    
    
    
    
    
    
    
    
    
    
    1,594Dividend relating to 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (861
    )
    
    
    
    
    
    
    
    
    
    
    (861
    )Share buy-back
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,001
    )
    
    
    
    
    
    
    (2,001
    )Purchase of treasury stock
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    (42
    )Sale of treasury stock
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    42Balance at December 31, 2004
    
    
    
    
    
    
    66
    
    
    
    572
    
    
    
    8,029
    
    
    
    (2,002
    )
    
    
    16
    
    
    
    6,681
 1)
    
    See Note 33. The accompanying notes form an integral part of these financial statements. F-6




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##### Table of Contents



Notes to the consolidated financial statements  1.

Description of business and relationship with the Swiss Confederation1.1

Description of businessSwisscom AG is a stock corporation incorporated in Switzerland, domiciled in Ittigen
(Berne) and 62.7% owned by the Swiss Confederation (Confederation), based on the shares
issued at December 31, 2004. Swisscom AG and its subsidiaries (referred to as Swisscom)
is the principal provider of telecommunication services in Switzerland, offering a
comprehensive range of services to residential and business customers. Swisscom major
lines of business include Fixnet, comprising the provision of national and international
fixed-line voice telecommunication services to residential and business customers and
the reselling of network services to other national and international telecommunications
providers; Mobile, comprising the provision of mobile voice communications and other
mobile telecommunication services; Enterprise Solutions, comprising national and
international voice communications for business customers, leased lines, managed
bandwidth services and integrated data communications solutions.1.2

Relationship with the ConfederationThe Confederation is the majority shareholder of Swisscom. The Telecommunications
Enterprise Act (TUG) states that the Confederation must hold a majority of the capital
and voting rights in Swisscom. Any reduction of the Confederations holding below a
majority would require a change-in-law necessitating action by the Federal Assembly,
which in some circumstances may also be subject to a referendum by Swiss voters. As the
majority shareholder, the Confederation has the power to control any decisions taken at
general meetings including the election of the members of the Board of Directors and the
approval of dividend payments.1.3

Transactions with the ConfederationSwisscom supplies telecommunication services to and procures services from various
departments and agencies of the Confederation. All such transactions are made within
normal customer/supplier relationships on the same terms and conditions as available to
independent third parties. In aggregate, the departments and agencies of the
Confederation comprise one of Swisscoms largest customers.In providing services to the departments and agencies of the Confederation, Swisscom
deals with them as individual customers. Services provided to any one governmental
department or agency or in total do not represent a significant component of
Swisscomrevenues.2.

Summary of significant accounting policies2.1

Basis of presentationThe consolidated financial statements of Swisscom have been prepared in accordance with
International Financial Reporting Standards (IFRS) and comply with the legal provisions
of the Swiss Code of Obligations. The consolidated financial statements have been
prepared on historical cost convention except as disclosed in the accounting policies
below.The preparation of financial statements in accordance with generally accepted accounting
principles requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period.2.2

Principles of consolidationThe consolidated financial statements of Swisscom include the operations of Swisscom AG
and all its direct and indirect subsidiaries in which Swisscom AG controls more than 50%
of the votes.Investments and joint ventures where Swisscom exercises significant influence but do not
have control are accounted for using the equity method. Under the equity method,
investments are disclosed as investments in affiliated companies and presented at their
fair value as at the date of acquisition adjusted for Swisscoms share in earnings
(losses) resulting after the date of acquisition.A schedule with all significant subsidiaries and investments in affiliated companies is
presented in Note 40.Subsidiaries, investments and joint ventures acquired or disposed of during the year are
included in the consolidated financial statements from the date of acquisition and
excluded from the date of sale, respectively. F-7




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##### Table of Contents



Since April 1, 2004, the purchase price on acquisitions where a controlling majority is
acquired must be allocated to the fair value of identifiable assets and liabilities in
accordance with IFRS 3 Business Combinations. For acquisitions before April 1, 2004,
differences between the purchase price and the fair value of net assets acquired were
classified as goodwill.All intercompany balances, transactions and intercompany profits are eliminated on
consolidation.Significant balances and transactions with investments and joint ventures accounted for
using the equity method are separately disclosed as items with affiliated companies.2.3

Goodwill and other intangible assetsGoodwill
Goodwill recorded on acquisitions after April 1, 2004 is not amortized whereas goodwill
related to acquisitions prior to March 31, 2004, continued to be amortized through
December 31, 2004 over an estimated useful life of three to ten years. As of January 1,
2005, goodwill will not be amortized but will be tested for impairment annually.Research and development
Research and development expenditure is recognized as an expense as incurred.
Development costs are capitalized under intangible assets, if they entail probable
future economic benefits. Any capitalized development costs are amortized using the
straight-line method over their estimated useful life. Development costs that do not
fulfill the requirements for capitalization are recognized as an expense as incurred.Software development costs
Development costs are recognized as an intangible asset if it will generate probable
future economic benefits and are amortized using the straight-line method over their
estimated useful life of three to five years. Expenditure which enhances or extends the
performance of computer software programs beyond their original specifications is
recognized as a capital improvement and added to the original cost of the software.Other intangible assets
Other intangible assets, which comprise primarily mobile license fees and purchased
software, are capitalized at cost and amortized using the straight-line method over the
estimated useful life, starting when the network becomes operational.Impairment of intangible assets
If there is an indication that intangible asset may be impaired, Swisscom determines the
estimated recoverable amount. Goodwill is assessed for possible impairment annually. If
the recoverable amount of the asset is less than its carrying amount, the carrying
amount is reduced to the recoverable amount, with the difference representing an
impairment charge.2.4

Foreign currency translationThe consolidated financial statements are prepared in Swiss francs (CHF). Foreign
currency transactions are accounted for at the exchange rates prevailing at the date of
the transaction. Assets and liabilities in foreign currencies are translated into Swiss
francs at the rates prevailing at the balance sheet date and the resulting gains and
losses are recognized in the income statement, except when the assets and liabilities
are hedged by qualifying fair value hedges, in which case the gains and losses on the
assets and liabilities are offset against the changes in market value of the financial
instrument.Foreign currency transactions are translated into the functional currency using the
exchange rates prevailing at the dates of the transactions. Foreign exchange gains and
losses resulting from the settlement of such transactions and from the translation at
year-end exchange rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the income statement, except when deferred in equity as
qualifying cash flow hedges and qualifying net investment hedges.Assets and liabilities of subsidiaries and affiliated companies accounted for using the
equity method reporting in currencies other than Swiss francs are translated at the
rates of exchange prevailing on the balance sheet date. Goodwill and fair value
adjustments arising on the acquisition of foreign entities are treated as assets of the
foreign entities and translated at the rate prevailing on the balance sheet date.
Income, cash flows and other transaction positions are translated at the average
exchange rates for the period. Translation gains and losses are recorded as cumulative
translation adjustments in shareholders equity. On disposal of a foreign entity,
accumulated exchange differences are recognized in the income statement as part of the
gain or loss on sale. F-8




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The exchange rates used in the consolidated financial statements were: Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Average31.12.02
    
    
    2002
    
    
    31.12.03
    
    
    2003
    
    
    31.12.04
    
    
    20041 EUR
    
    
    1.47
    
    
    
    1.47
    
    
    
    1.56
    
    
    
    1.52
    
    
    
    1.55
    
    
    
    1.541 GBP
    
    
    2.34
    
    
    
    2.33
    
    
    
    2.21
    
    
    
    2.20
    
    
    
    2.19
    
    
    
    2.271 USD
    
    
    1.56
    
    
    
    1.55
    
    
    
    1.24
    
    
    
    1.34
    
    
    
    1.14
    
    
    
    1.24
  2.5

Cash and cash equivalentsCash includes petty cash, cash at banks and cash on deposit. Cash equivalents include
term deposits with financial institutions, as well as short-term money-market
investments with original maturity dates of three months or less.2.6

Financial assetsInvestments are classified as available-for-sale or financial assets held for trading
purposes or loans and receivables originated by the entity. The trade date is the date
that Swisscom commits to purchase the financial assets. Cost of purchase includes
transaction costs. Management determines the appropriate classification of its
investments at the time of the purchase and re-evaluates such designation on a regular
basis.Available-for-sale investments
Investments intended to be held for an indefinite period of time, which may be sold in
response to needs for liquidity or changes in interest rates, are classified as
available-for-sale. These investments are included in non-current financial assets
unless management has the expressed intention of holding the investment for less than
twelve months from the balance sheet date or unless they will need to be sold to raise
operating capital, in which case they are included in current financial assets.
Available-for-sale investments are subsequently carried at fair value, with all changes
in unrealized fair values recorded in equity. When the available-for-sale investments
are sold, impaired or otherwise disposed of, the cumulative gains and losses previously
recognized in equity are included in financial income or expense. The financial assets
are assessed for possible impairment at each balance-sheet date. If there is an
indication that the cost basis is greater than the recoverable amount, Swisscom
estimates the recoverable amount of that asset. If the recoverable amount is below the
cost basis, Swisscom recognizes an impairment loss.Financial assets held for trading
Assets held for a short or medium-term can be sold in quick response to needs for
liquidity. These assets are valued at fair value and realized gains and losses arising
from changes in the fair value are included in the income statement.Loans and receivables originated by the enterprise
This position contains loans and term deposits with maturity dates greater than three
months which Swisscom provide directly to the borrower or to a subparticipation agent.
The financial assets will initially be recorded at fair value and in the following
periods using the effective interest method. Foreign exchange gains and losses are
recognized in the income statement. The loans are assessed for possible impairment at
each balance sheet date. An impairment charge is recorded where there is objective
evidence of impairment, such as where the issuer is in bankruptcy, default or other
significant financial difficulty.2.7

Trade accounts receivablesTrade accounts receivable are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts at the year end.
Bad debts are written off when recognized.2.8

InventoriesInventories consist primarily of customer premises equipment for resale and supplies
used in constructing and maintaining the network. Inventories are valued at the lower of
cost and net realizable value using the weighted average method. Allowances are made for
obsolete and slow-moving items. Net realizable value is the estimated selling price in
the ordinary course of business, less the costs of completion and selling expenses.2.9

Property, plant and equipmentLand, buildings, machinery and equipment are recorded at cost less accumulated
depreciation.Leasehold improvements are depreciated over the shorter of their estimated useful life
and the remaining term of the lease.Repairs and maintenance are expensed as incurred, while major renovations and
improvements are capitalized as property, plant and equipment and depreciated over their
estimated useful lives. Borrowing costs incurred during the construction of property,
plant and equipment are expensed as incurred. F-9




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Depreciation is computed using the straight-line method based on estimated useful lives
which are unchanged in a year-to-year comparison: YearsBuildings
    
    
    15-40Cable and ducts
    
    
    14-20Transmission equipment
    
    
    4-12Switching equipment
    
    
    5-10Customer premises equipment
    
    
    4-10Broadcasting equipment and other network assets
    
    
    3-10Vehicles
    
    
    5-7Machinery, office and auxiliary equipment
    
    
    4-15Information technology equipment
    
    
    3-5Software for technical equipment
    
    
    3
  Leases
Assets acquired under leasing agreements which effectively transfer substantially all
the risks and benefits incidental to ownership from the lessor to the lessee are
classified as finance leases. Finance leases are recorded at amounts equivalent to the
estimated net present value of the future minimum lease payments, which approximate the
fair value at the inception of the lease. The estimated net present value of the future
minimum lease payments are recorded correspondingly as a finance lease obligation.
Assets under finance leases are amortized over the shorter of their estimated useful
lives and the lease term. Gains on sale and leaseback transactions resulting in finance
leases are deferred and amortized over the term of the lease, while losses on sale and
leaseback transactions are recognized immediately. Gains and losses on sale and
leaseback transactions resulting in operating leases are recognized immediately.Impairment of property, plant and equipment
Property, plant and equipment are assessed for possible impairment at every balance
sheet date. If there are signs of impairment, the recoverable amount of an asset or a
group of assets (cash-generating unit) are determined. The recoverable amount is the
higher of the two amounts arising from net selling price and value in use. An impairment
is recorded if the carrying amount exceeds the recoverable amount.2.10

ProvisionsProvisions are recognized when Swisscom has a present legal or constructive obligation
as a result of past events, it is probable that an outflow of resources will be required
to settle the obligation and a reliable estimate of the amount can be made.Termination benefits
Costs relating to special termination plans for headcount reduction are recorded in the
income statement in the period when management commits itself to a plan, it is probable
that a liability has been incurred and the amount can be reasonably estimated. Such
benefits are recognized only after an appropriate public announcement has been made
specifying the terms of redundancy and the number of employees affected, or after
individual employees have been advised of the specific terms.Dismantlement and restoration costs
Swisscom has a legal obligation to dismantle transmitter stations and to restore the
property owned by third parties on which the stations are situated. The cost associated
with the dismantling of these sites are recorded under property, plant and equipment and
depreciated over the life of the asset. The total provision required to dismantle and
restore these sites, discounted to its present value, is recorded under accrued
liabilities.2.11

Revenue recognitionRevenue consists principally of monthly subscription fees charged for providing access
services, revenue from installation and connection fees, charges to customers for calls
from the fixed and mobile networks, revenue generated by Swisscoms Business Numbers,
charges for Internet services, revenue from providing network services to other
telecommunications companies, revenue from national and international leased lines, as
well as revenue from private network services and intranet services and the sale and
maintenance of customer equipment.Revenue from subscription fees is recognized ratably over the subscription period.
Revenue from installation and connection activities is recognized at the time of
installation or connection, as the direct costs associated with these activities exceed
the revenue.Revenue from telephony traffic is recorded at the time the call is made. Revenue from
prepaid calling cards is deferred and recognized at the time the customer makes a call.
Revenue from leased lines is recognized over the rental period. F-10




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Revenue from the sale of equipment is recognized at the point of sale. Revenue from the
maintenance of equipment is recognized ratably over the life of the contract.When Swisscom acts as principal in a transaction, revenue is recorded on a gross basis.
However, when Swisscom acts as an agent or broker on behalf of third parties, revenue is
reported net of direct costs.2.12

Revenue received in advanceRevenue received in advance consists of rentals of private branch exchange systems
received from customers in advance and prepaid telephone cards. Such revenue received in
advance is deferred and recognized when services are provided.2.13

Capitalized costSwisscoms consolidated statement of operations is prepared using the nature of expense
method commonly used in Switzerland. Costs to be capitalized and expensed in future
periods, such as costs capitalized on construction projects, are classified in the
statement of operations as other operating income with a corresponding amount included
in expenses, such that the net effect on income is zero.2.14

Stock-based compensationCompensation cost for shares issued to employees, members of the Executive Board and
members of the Board of Directors is measured at the date of transaction, this being the
date the shares are issued, as the excess of the quoted market price of Swisscoms stock
over the purchase price. These costs are recorded as personnel expenses in the period
the distribution is approved.Stock options and stock appreciation rights are valued at market value on the grant date
and recorded over the vesting period under personnel expenses, with the effect that
personnel expenses reflect all costs of compensating employees and members of the
Executive Board. There is no effect on the income statement when the options are
exercised.2.15

Retirement benefitsThe majority of Swisscoms employees are covered by defined benefit pension plans.
Swisscom contributes to the defined benefit scheme of comPlan for the majority of its
employees in Switzerland. comPlan covers the risks of old age, death and disability in
accordance with Swiss pension legislation.The cost and obligations relating to the defined benefit plan are determined on an
actuarial basis using the projected unit credit method, which reflects service rendered
by employees to the date of valuation and incorporates assumptions concerning employees
projected salaries. The pension cost in each period is calculated on the basis of a
yearly actuarial valuation. The latest actuarial valuation was performed using data base
as at December 31, 2004. Current service costs are charged to income in the periods in
which the services are rendered. The effects of changes in actuarial assumptions are
systematically charged or credited to income over a period approximating the average
expected remaining working lives of participating employees. The portion of actuarial
gains and losses recognized is defined as the excess of the net cumulative unrecognized
actuarial gains and losses at the end of the previous reporting period over the greater
of 10% of the present value of the defined benefit obligation at that date (before
deducting plan assets) or 10% of the fair value of any plan assets at that date. Past
service cost attributable to plan amendments is recognized as an expense on a
straight-line basis over the average period until the benefits become vested. To the
extent the benefits immediately vest, the costs associated with the amendment are
recognized immediately.2.16

Customer acquisition costsSwisscom pays commissions to dealers for the acquisition and retention of mobile
subscribers. The amount of commission payable is dependent on the type of subscription.
Customer acquisition costs are recorded immediately in the income statement.2.17

Income taxesDeferred income taxes are determined using the comprehensive liability method whereby
deferred tax is recognized on all temporary differences. Temporary differences between
the carrying value of an asset or liability used for tax purposes and that used for
financial reporting purposes arise in one period and reverse in one or more subsequent
periods. Deferred tax assets and liabilities are determined using the tax rates that are
expected to apply when the asset is realized or the liability is settled. The deferred
tax assets or liabilities are disclosed as long-term assets or liabilities with those
changes being recorded in the income statement or directly to the statement of
shareholders F-11




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##### Table of Contents



equity. Deferred tax assets are recognized if it is probable that benefits will be realized in the future.2.18

Transactions with related partiesUnder IFRS, transactions with the Confederation, including with its departments and
agencies, are not subject to the disclosure requirements for related parties.In December 2004, Swisscom acquired 100% of the shares in AGI Holding AG. AGI Holding AG
held 28.9% of the shares in Swisscom IT Services AG. As a result of the transaction
Swisscom holds 100% of the shares in Swisscom IT Services AG. The shareholders of AGI
Holding AG comprised eight cantonal banks, which were considered related parties under
IFRS. Swisscom IT Services AG renders IT services to these banks.Vodafone plc holds 25% of Swisscom Mobile AG and is therefore a related party. Swisscom
renders services to, and buys services from, Vodafone plc on an arms length basis.2.19

Earnings per shareBasic earnings per share is computed by dividing net income by the weighted-average
number of shares outstanding for the year. The weighted-average number of shares
outstanding excludes any treasury shares. Diluted earnings per share is similar to basic
earnings per share, except that the weighted-average number of shares outstanding is
increased to include the number of additional shares that would have been outstanding if
potential dilutive shares had been issued.2.20

ComparativesWhere necessary, comparative figures have been adjusted to conform to changes in
presentation in the current year.3.

Financial risk managementSwisscoms activities expose it to a variety of financial risks, including the effects
of foreign currency exchange rates and interest rates. Swisscoms overall financial risk
management program seeks to minimize potential adverse effects on the financial
performance of Swisscom. Swisscom uses derivative financial instruments such as foreign
exchange contracts and interest rate swaps to hedge certain exposures resulting from the
Groups commercial activities.Financial risk management is carried out by the Group Treasury department under policies
approved by the Board of Directors. Group Treasury identifies, evaluates and hedges
financial risks in close cooperation with the operating units. Group Treasury has
guidelines approved by the Board of Directors for overall risk management, as well as
written policies covering specific areas, such as foreign exchange risk management, cash
management, interest rate risk, credit risk, use of counterparties, use of derivative
financial instruments and investing excess liquidity.3.1

Foreign exchange riskSwisscom is exposed to foreign exchange risk, being the transaction risk arising from
various currency exposures primarily with respect to USD and EUR. The transaction risk
is the risk arising due to currency fluctuations between the date of agreement and the
actual cash flow. Swisscom uses various forward exchange contracts and options to hedge
their exposure to foreign currency. Swisscom hedges its long-term leasing commitments in
USD. Hedge accounting is applied where appropriate.3.2

Interest rate riskInterest rate risks arise from fluctuation in market rates, which could have a negative
impact on the financial position of Swisscom. Changes in interest rates cause variation
in interest income and expense and the fair value of financial assets and liabilities
with fixed interest. Swisscom uses interest-rate-swaps to manage its interest rate risk.
The use of such financial instruments had no material impact on the financial position
of Swisscom.3.3

Credit riskSwisscom has no significant concentrations of credit risk. The Group has policies in
place to ensure that products and services are sold to creditworthy customers. Swisscom
also has policies that limit the amount of credit exposure to any one financial
institution. F-12




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3.4

Accounting for derivative financial instrumentsDerivative financial instruments are initially recognized in the balance sheet at cost
and subsequently remeasured at their fair value. The method of recognizing the resulting
gain or loss is dependent on the nature of the item being hedged and the intention
regarding its purchase or issue. On the date a derivative contract is entered into,
Swisscom designates certain derivatives as either a hedge of the fair value of a
recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction
or of a firm commitment (cash flow hedge).Changes in the fair value of derivatives that are designated and qualify as fair value
hedges and that are highly effective, are recorded in the income statement, along with
any changes in the fair value of the hedged asset or liability that is attributable to
the hedged risk.The effective portion of the changes in the fair value of derivatives that are
designated and qualify as cash flow hedges and that are highly effective, are recognized
in equity. The ineffective portion of the changes in the fair value is immediately
recognized in the income statement. Where the forecasted transaction or firm commitment
results in the recognition of an asset or of a liability, the gains and losses
previously deferred in equity are transferred from equity and included in the initial
measurement of the cost of the asset or liability. Otherwise, amounts deferred in equity
are transferred to the income statement and classified as revenue or expense in the same
periods during which the hedged firm commitment or forecasted transaction affects the
income statement.Changes in the fair value of derivative instruments that do not qualify for hedge
accounting under IAS 39 are recognized immediately in the income statement.When a hedging instrument expires or is sold, or when a hedge no longer meets the
criteria for hedge accounting under IAS 39, any cumulative gain or loss existing in
equity at that time remains in equity and is recognized when the committed or forecasted
transaction ultimately is recognized in the income statement. However, if a committed or
forecasted transaction is no longer expected to occur, the cumulative gain or loss that
was reported in equity is immediately transferred to the income statement.Swisscom documents at the inception of the transaction the relationship between hedging
instruments and hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes linking all derivatives
designated as hedges to specific assets and liabilities or to specific firm commitments
or forecast transactions. Swisscom also documents its assessment, both at the hedge
inception and on an ongoing basis, of whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash flows of
hedged items.3.6

Fair value estimationThe fair value of publicly traded derivatives and trading and available-for-sale
securities is based on quoted market prices at the balance sheet date. The fair value of
interest rate swaps is calculated as the present value of the estimated future cash
flows. The fair value of forward foreign exchange contracts is determined using forward
exchange market rates at the balance sheet date. The fair value of foreign exchange
options is determined using option pricing models.4.

Net revenue CHF in millions
    
    2002
    
    
    2003
    
    
    2004Fixnet
    
    
    4,907
    
    
    
    4,601
    
    
    
    4,555Mobile
    
    
    3,434
    
    
    
    3,511
    
    
    
    3,679Enterprise Solutions
    
    
    1,167
    
    
    
    1,081
    
    
    
    987Other
    
    
    833
    
    
    
    761
    
    
    
    768Corporate
    
    
    74
    
    
    
    72
    
    
    
    68Total net revenue
    
    
    10,415
    
    
    
    10,026
    
    
    
    10,057
  Included within Other is CHF 174 million, CHF 165 million and CHF 145 million in
2002, 2003 and 2004, respectively, of revenue recorded by Swisscom IT Services AG from
eight cantonal banks, which qualify as related parties. F-13




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5.

Other income CHF in millions
    
    2002
    
    
    2003
    
    
    2004Capitalized cost
    
    
    116
    
    
    
    159
    
    
    
    151Gain on sale of fixed assets
    
    
    14
    
    
    
    21
    
    
    
    9Income from employment company Worklink (personnel hire)
    
    
    
    
    
    
    10
    
    
    
    13Other income
    
    
    100
    
    
    
    43
    
    
    
    24Total other income
    
    
    230
    
    
    
    233
    
    
    
    197
  Capitalized cost includes labor costs related to the construction of technical
equipment and the development of software, with no interest allocation included under
manufacturing costs.Included in Other income is the amortization of the deferred gain on sale and leaseback
transactions. In 2002, Other income includes CHF 70 million resulting from the
elimination of a liability which was established in 1997 for payments to a third party.
This liability is no longer legally owed, as the rights to payment expired in 2002.6.

Goods and services purchased CHF in millions
    
    2002
    
    
    2003
    
    
    2004Raw material, supplies and services purchased
    
    
    141
    
    
    
    132
    
    
    
    114Customer premises equipment
    
    
    453
    
    
    
    458
    
    
    
    520National traffic fees
    
    
    563
    
    
    
    383
    
    
    
    431International traffic fees
    
    
    780
    
    
    
    716
    
    
    
    782Network fees for international subsidiaries
    
    
    136
    
    
    
    17
    
    
    
    Total goods and services purchased
    
    
    2,073
    
    
    
    1,706
    
    
    
    1,847
  7.

Personnel expenses CHF in millions
    
    2002
    
    
    2003
    
    
    2004Salaries and wages
    
    
    1,704
    
    
    
    1,632
    
    
    
    1,607Termination benefits
    
    
    92
    
    
    
    88
    
    
    
    48Salaries and wages Worklink participants
    
    
    32
    
    
    
    53
    
    
    
    81Social security expenses
    
    
    162
    
    
    
    142
    
    
    
    138Pension cost. See note 9.
    
    
    203
    
    
    
    257
    
    
    
    219Employee stock ownership program. See Note 8.
    
    
    39
    
    
    
    12
    
    
    
    14Other personnel expenses
    
    
    97
    
    
    
    82
    
    
    
    87Total personnel expenses
    
    
    2,329
    
    
    
    2,266
    
    
    
    2,194
  Swisscom tries to help the personnel affected by workforce reduction through three
programs incorporated in a social compensation plan  the outplacement program PersPec,
the starter program Co-Motion and the employment company Worklink AG. In addition,
Swisscom introduced a voluntary partial retirement scheme in 2001 for employees born
between 1946 and 1950.In 2002, 2003 and 2004, Swisscom took various steps to reduce the number of employees
and incurred termination charges of CHF 92 million, CHF 88 million and CHF 48 million in
2002, 2003 and 2004, respectively. The costs of the program include the following: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Outplacement program PersPec
    
    
    94
    
    
    
    82
    
    
    
    52Partial retirement program
    
    
    
    
    
    
    18
    
    
    
    Revision of prior provision
    
    
    (2
    )
    
    
    (12
    )
    
    
    (4
    )Total termination benefits
    
    
    92
    
    
    
    88
    
    
    
    48
  Outplacement program
In the outplacement program, employees are trained for new jobs and receive assistance
in finding new employment within Swisscom or outside the Group. Employees who reach the
age of 50 or who are medically unfit to work more than 60% are entitled to stay in the
outplacement program for 18 months. For all other employees this period is limited to
twelve months. At December 31, 2002, 2003 and 2004, 985, 723 and 411 full-time
equivalent employees participated in the program. In connection with this program,
Swisscom incurred expenses of CHF 94 million, CHF 82 million and CHF 52 million in 2002,
2003 and 2004, respectively. The amount of the expense relates only to the costs for
those employees that are not expected to continue working with Swisscom. F-14




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Employment company Worklink AG
Employees born in 1950 or before, or who have worked with Swisscom since before January
1, 1989 are entitled to transfer to Worklink AG until the age of 60 within the framework
of the outplacement program. After this they may take early retirement. Employees who
only fulfil one of the criteria mentioned above may only participate in Worklink AG for
a maximum period of 24 months.Worklink seeks to hire these employees out on a temporary basis. The employees receive
an average of 70% of their final salary from Swisscom, irrespective of whether work can
be found for them. The total wages and social security payments for these employees were
CHF 32 million, CHF 53 million and CHF 81 million in 2002, 2003 and 2004, respectively.
This includes the expenditure for the time spent in the outplacement program before
their transfer to the employment company. Under IFRS these costs do not qualify for the
recognition of a liability because the employment relationship with the employees has
not been terminated. The average number of participants (in full-time equivalent
employees) in Worklink in 2002, 2003 and 2004 was 218, 295 and 433 employees,
respectively, and the number of participants (in full-time equivalent employees) in
Worklink at year-end was 252, 360 and 475 employees, respectively.Partial retirement
The partial retirement expense relates to a voluntary plan that was established for
employees born between 1946 and 1950. Those employees that entered into an agreement
with Swisscom prior to year-end will work 50% for a period of 5 years and will receive
approximately 75% of their previous salary. The expense represents the discounted
present value, using a rate of 2.5%, of the difference between the 75% salary these
employees receive and the 50% they actually work for the 5-year period.8.

Stock based compensation CHF in millions
    
    2002
    
    
    2003
    
    
    2004Expenditure for TopShare
    
    
    34
    
    
    
    7
    
    
    
    10Expenditure for Management Incentive Plan (MIP)
    
    
    5
    
    
    
    5
    
    
    
    4Total expenditure for stock based compensation
    
    
    39
    
    
    
    12
    
    
    
    14
  Swisscom offers a number of stock based plans to its non-management employees,
management, members of the Executive Board and Board of Directors, as detailed below.TopShare
TopShare is a share purchase scheme available to non-management staff. The Board of
Directors determines the conditions of the scheme on an annual basis. Each year,
employees are offered up to ten shares at preferential conditions. The shares purchased
are subject to a one-year blocking period from the grant date, after which time they can
be freely disposed of. The difference between the market value and the consideration
received from employees has been recognized under personnel expenses.In 2002, 2003 and 2004, the exercise price, the number of shares allocated and the expense recorded were as follows: Numberof allocated
    
    
    Market price
    
    
    Offering price
    
    
    Cost inYear of allocation
    
    shares
    
    
    in CHF
    
    
    in CHF
    
    
    CHF millions2002
    
    
    119,372
    
    
    
    500
    
    
    
    240
    
    
    
    342003
    
    
    44,946
    
    
    
    434
    
    
    
    300
    
    
    
    72004
    
    
    74,921
    
    
    
    423
    
    
    
    290
    
    
    
    10
  Leveraged Executive Plan (LEAP)
The LEAP was offered only to members of the Board of Directors and Executive Board until
2002. Members of the Executive Board had to invest 25% of their bonus in the LEAP each
year. Members of the Board of Directors had to, with the exception of 2002, invest 25%
of their annual compensation in the LEAP.Each LEAP package comprises one share and ten options and provides stock appreciation
rights whereby the participant will receive additional shares if the market price of a
share during the exercise period is greater than 120% of the share price at the grant
date. Each LEAP vests immediately at grant date. The options can be exercised or sold
for a two-year period following a blocking period of three years from the grant date.Management Incentive Plan (MIP)
The MIP is available for members of management, whereby they can voluntarily invest 25%
of their annual bonus. For members of management who participate in this program,
Swisscom makes a contribution of 50% of the amount invested by management. Since 2003,
the members of the Board of Directors and Executive Board have participated in this
program and must invest annually 25% of their compensation or bonus, respectively.Each MIP package comprises one Swisscom share and 1,000 options, where 100 options give
an entitlement to one Swisscom share at the exercise price. The exercise price
corresponds to the share price at the grant date. Each MIP F-15




---



##### Table of Contents



vests immediately at grant date. The options can be exercised or sold for a two-year
period following a blocking period of three years from the grant date.In 2002, allocated shares and options are the following: Number
    
    
    
    
    
    
    Number
    
    
    Exercise
    
    
    Endedof options
    
    
    Exchange
    
    
    of allocated
    
    
    price of
    
    
    blocking
    
    
    Maturity ofParticipant
    
    allocated
    
    
    ratio 1)
    
    
    shares
    
    
    options
    
    
    period
    
    
    optionsBoard of Directors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Group Executive Board
    
    
    5,620
    
    
    
    1:1
    
    
    
    562
    
    
    
    569.10
    
    
    
    09.04.05
    
    
    
    09.04.07Management
    
    
    5,656,000
    
    
    
    1:100
    
    
    
    5,656
    
    
    
    467.37
    
    
    
    25.04.05
    
    
    
    16.04.07
 1)
    
    Exchange ratio: number of options required to purchase a share.
  In 2003, allocated shares and options are the following: Number
    
    
    
    
    
    
    Number
    
    
    Exercise
    
    
    Endedof options
    
    
    Exchange
    
    
    of allocated
    
    
    price of
    
    
    blocking
    
    
    Maturity ofParticipant
    
    allocated
    
    
    ratio 1)
    
    
    shares
    
    
    options
    
    
    period
    
    
    optionsBoard of Directors
    
    
    643,000
    
    
    
    1:100
    
    
    
    643
    
    
    
    417.90
    
    
    
    30.04.06
    
    
    
    25.04.08Group Executive Board
    
    
    884,000
    
    
    
    1:100
    
    
    
    884
    
    
    
    417.90
    
    
    
    30.04.06
    
    
    
    25.04.08Management
    
    
    7,166,000
    
    
    
    1:100
    
    
    
    7,166
    
    
    
    417.90
    
    
    
    30.04.06
    
    
    
    25.04.08
 1)
    
    Exchange ratio: number of options required to purchase a share.
  In 2004 MIP was transformed from an option and share plan into a share plan. The
investment opportunities remain unchanged. The allocated shares are blocked for three
years.In 2004, allocated shares are the following: Numberof allocated
    
    
    Market price
    
    
    Offering price
    
    
    Cost inParticipant
    
    shares
    
    
    in CHF
    
    
    in CHF
    
    
    CHF millionsBoard of Directors
    
    
    1,383
    
    
    
    423
    
    
    
    236
    
    
    
    0.2Group Executive Board
    
    
    2,629
    
    
    
    423
    
    
    
    236
    
    
    
    0.4Management
    
    
    20,495
    
    
    
    423
    
    
    
    236
    
    
    
    2.9Total
    
    
    24,507
    
    
    
    423
    
    
    
    236
    
    
    
    3.5
  Leveraged Executive Asset Plan (LEAP) and SuperShare Plan relating to the IPO
In conjunction with the initial public offering in October 1998, members of middle and
senior management as well as the members of the Board of Directors and Executive Board
were able to participate in the LEAP program whereby they could purchase shares with
appreciation rights at the IPO price. Employees were able to invest in the SuperShare
Plan, which was similar to the LEAP program and enabled them to purchase shares with
appreciation rights at the IPO price. In October 2003, 5 years after the issuance date,
the participants received 39,300 additional shares and CHF 4 million in cash for
fractional shares, which represented the increase between the market price on that date
and the base appreciation price. The costs associated with these plans were recognized
over the vesting period under personnel expenses and a corresponding liability of CHF 30
million was recorded. In 2003 this liability was reversed against equity at the time the
options were exercised.Stock options and stock appreciation rights outstanding
Movements in the number of stock options and stock appreciation rights outstanding were as follows: 2002
    
    
    2003
    
    
    2004At beginning of year
    
    
    312,173
    
    
    
    374,345
    
    
    
    209,270Granted
    
    
    62,180
    
    
    
    86,930
    
    
    
    Lapsed
    
    
    (8
    )
    
    
    (9,552
    )
    
    
    Exercised
    
    
    
    
    
    
    (240,953
    )
    
    
    Sold by participants
    
    
    
    
    
    
    (1,500
    )
    
    
    (40,220
    )At end of year
    
    
    374,345
    
    
    
    209,270
    
    
    
    169,050
  9.

Retirement benefitsRetired employees of PUBLICA
Effective January 1, 1999, all Swisscom employees, who were members of PUBLICA (former
PKB), the pension plan of the Swiss Government, were transferred to a successor plan
called comPlan. All retired employees at that date remained members of PUBLICA. Swisscom
settled the liability relating to these retired employees as at December 31, 1998, but
retained a liability for pension indexation. Swisscom must pay PUBLICA the difference
between the actual return on plan assets and the Government prescribed discount rate
increased by an account maintenance fee. The liability was determined based on an
assumed payment of 1% over the life of the retired employees. At January F-16




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##### Table of Contents



1, 2005 new legislation was introduced to abolish the previously guaranteed pension
increases. In view of this new legislation the expected annual increase in pensions used
as a basis for the calculation of the liability was reduced to 0.5%. At December 31,
2004, included in the present value of obligations are CHF 169 million for these retired
employees. Differences between the actual and estimated payments are deferred as part of
the actuarial gain or loss. In 2003, Swisscom amended the agreement with PUBLICA.
Starting from June 1, 2003, Swisscom compensated PUBLICA for their administration costs
related to these pensioners, which resulted in CHF 17 million being recognized as an
expense, as it was immediately vested.Pension plans of Swisscom
Net periodic pension cost of the plan in Switzerland includes the following components: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Current service cost
    
    
    178
    
    
    
    182
    
    
    
    165Interest cost
    
    
    261
    
    
    
    255
    
    
    
    254Expected return on plan assets
    
    
    (248
    )
    
    
    (227
    )
    
    
    (220
    )Past service cost
    
    
    12
    
    
    
    22
    
    
    
    11Amortization of actuarial loss
    
    
    
    
    
    
    25
    
    
    
    9Net pension cost
    
    
    203
    
    
    
    257
    
    
    
    219
  At December 31, 2004, unrecognized actuarial losses exceeded the present value of
the defined benefit obligation by more than 10%. From 2005 the excess amount of CHF 110
million will be recognized as a pension expense over the expected average remaining
working lives of the employees.The status of the pension plan is as follows: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Amounts recognized in the balance sheetPresent value of funded obligations
    
    
    6,726
    
    
    
    6,903
    
    
    
    7,259Fair value of plan assets
    
    
    (4,559
    )
    
    
    (4,893
    )
    
    
    (5,209
    )Benefit obligation in excess of plan assets
    
    
    2,167
    
    
    
    2,010
    
    
    
    2,050Unrecognized actuarial losses
    
    
    (946
    )
    
    
    (788
    )
    
    
    (836
    )Unrecognized prior service cost
    
    
    (120
    )
    
    
    (109
    )
    
    
    (96
    )Amounts recognized in the balance sheet
    
    
    1,101
    
    
    
    1,113
    
    
    
    1,118
  At December 31, 2002, 2003 and 2004, pension plan assets include Swisscom shares
with a fair value of CHF 7.0 million, CHF 6.8 million and CHF 6.4 million, respectively. CHF in millions
    
    2002
    
    
    2003
    
    
    2004Movement in the amounts recognized in the balance sheetAt beginning of year
    
    
    1,218
    
    
    
    1,101
    
    
    
    1,113Net pension cost
    
    
    203
    
    
    
    257
    
    
    
    219Contributions paid
    
    
    (320
    )
    
    
    (253
    )
    
    
    (214
    )Acquisition of subsidiaries
    
    
    
    
    
    
    8
    
    
    
    Balance at end of year
    
    
    1,101
    
    
    
    1,113
    
    
    
    1,118
  In 2003, the pension plan obligation and plan assets increased by CHF 22 million
and CHF 14 million, respectively as a result of the acquisition of T-Systems Card
Services AG (now Billag Card Services AG). See Note 14.The following weighted-average assumptions were used in accounting for the defined benefit plan: 2002
    
    
    2003
    
    
    2004Discount rate at December 31
    
    
    3.90
    %
    
    
    3.75
    %
    
    
    3.15
    %Rate of increase in future compensation levels
    
    
    3.1
    %
    
    
    3.1
    %
    
    
    2.3
    %Expected long-term rate of return on plan assets
    
    
    5.5
    %
    
    
    5.0
    %
    
    
    4.5
    %Rate of increase in future pension contribution
    
    
    1.0
    %
    
    
    1.0
    %
    
    
    0.5
    %
  The actual loss on plan assets was CHF 195 million in 2002 and a return of CHF 341
million and CHF 284 million in 2003 and 2004, respectively. F-17




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##### Table of Contents



10.

Other operating expenses CHF in millions
    
    2002
    
    
    2003
    
    
    2004Rent
    
    
    212
    
    
    
    234
    
    
    
    216Maintenance
    
    
    264
    
    
    
    229
    
    
    
    225Loss on disposal of fixed assets
    
    
    66
    
    
    
    39
    
    
    
    27Energy cost
    
    
    59
    
    
    
    54
    
    
    
    60Information-technology costs
    
    
    200
    
    
    
    174
    
    
    
    172Advertising and promotion
    
    
    254
    
    
    
    194
    
    
    
    179Commissions
    
    
    223
    
    
    
    225
    
    
    
    225Contractors and consultancy expenses
    
    
    269
    
    
    
    212
    
    
    
    233General and administration
    
    
    145
    
    
    
    183
    
    
    
    186Miscellaneous operating expenses
    
    
    297
    
    
    
    239
    
    
    
    286Total other operating expenses
    
    
    1,989
    
    
    
    1,783
    
    
    
    1,809
  11.

Financial expense CHF in millions
    
    2002
    
    
    2003
    
    
    2004Interest on debt and finance lease obligations
    
    
    239
    
    
    
    166
    
    
    
    153Present value adjustment on accrued liabilities
    
    
    26
    
    
    
    (38
    )
    
    
    24Fair value losses on avaiable-for-sale investments
    
    
    152
    
    
    
    55
    
    
    
    36Write off of loans receivable
    
    
    
    
    
    
    
    
    
    
    11Provision for cross-border tax lease arrangements
    
    
    
    
    
    
    
    
    
    
    34Foreign exchange losses
    
    
    70
    
    
    
    
    
    
    
    Other financial expenses
    
    
    21
    
    
    
    13
    
    
    
    27Total financial expense
    
    
    508
    
    
    
    196
    
    
    
    285
  Swisscom records a provision for the dismantlement of analogue transmitter
stations, which is based on the present value of future estimated costs. In 2003,
Swisscom extended the expected timing of the dismantlement by ten years. This resulted
in a reduction of the present value of the provision by CHF 43 million, which was
recorded in the income statement under present value adjustment on accrued liabilities.
See Note 26.In 2002, the fair value losses on available-for-sale investments include impairments of
CHF 41 million on Swisscoms investments in Swiss International Airlines Ltd (Swiss) and
CHF 111 million in Infonet Services Corp. (Infonet). In 2003, these include impairment
charges of CHF 33 million in Swiss and CHF 22 million on other available-for-sale
investments. An impairment charge of CHF 32 million was recorded in 2004 relating to
Infonet Services Corp. and CHF 4 million on other available-for-sale investments. See
Notes 17 and 24.In connection with cross-border tax lease arrangements, a provision of CHF 34 million
was recognized in 2004. See Note 25.12.

Financial income CHF in millions
    
    2002
    
    
    2003
    
    
    2004Interest
    
    
    160
    
    
    
    108
    
    
    
    122Dividends
    
    
    8
    
    
    
    4
    
    
    
    4Gain on disposal of financial assets
    
    
    
    
    
    
    9
    
    
    
    10Foreign exchange gains
    
    
    
    
    
    
    48
    
    
    
    5Gain on cross-border tax lease transactions
    
    
    28
    
    
    
    
    
    
    
    Other financial income
    
    
    1
    
    
    
    1
    
    
    
    Total financial income
    
    
    197
    
    
    
    170
    
    
    
    141
 F-18




---



##### Table of Contents



13.

Income tax expense CHF in millions
    
    2002
    
    
    2003
    
    
    2004Current income tax expense
    
    
    76
    
    
    
    192
    
    
    
    461Deferred income tax (benefit) expense
    
    
    237
    
    
    
    275
    
    
    
    (67
    )Total income tax expense
    
    
    313
    
    
    
    467
    
    
    
    394
  Current income taxes are calculated based on taxable income of the period.The income tax expense on income before income taxes, equity in net income of affiliated
companies and minority interest is reconciled to the reported income tax expense as
follows: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Income before income taxes, equity in net income of
affiliated companies and minority interest
    
    
    2,277
    
    
    
    2,793
    
    
    
    2,561Weighted-average statutory tax rate
    
    
    23.0
    %
    
    
    23.0
    %
    
    
    22.3
    %Income tax expense at the weighted average statutory
tax rate
    
    
    524
    
    
    
    642
    
    
    
    571Increase (decrease) in income taxes resulting fromEffect of impairment of investment in debitel
    
    
    (207
    )
    
    
    (80
    )
    
    
    Effect of recognition of deferred tax asset
    
    
    
    
    
    
    
    
    
    
    (113
    )Effect on deferred taxes due to change in tax rate
    
    
    115
    
    
    
    
    
    
    
    (22
    )Effect of income tax of other periods
    
    
    
    
    
    
    
    
    
    
    (10
    )Amortization of goodwill
    
    
    6
    
    
    
    9
    
    
    
    11Income of subsidiaries not taxable
    
    
    (13
    )
    
    
    (30
    )
    
    
    (2
    )Income not taxable
    
    
    (3
    )
    
    
    (8
    )
    
    
    Other
    
    
    (109
    )
    
    
    (66
    )
    
    
    (41
    )Total income tax expense
    
    
    313
    
    
    
    467
    
    
    
    394
  The weighted-average statutory tax rate includes federal, cantonal and local
taxes. Taxable income in Switzerland is allocated among the cantons, and each canton has
a different tax rate. The allocation of taxable income among the cantons changed in 2002
as a result of the transition from Swisscom AG to a holding structure. The tax rules for
inter-cantonal tax allocation were also changed. This resulted in a decrease in the
weighted-average tax rate from 25% to 23%. The deferred tax assets and liabilities were
adjusted to reflect these changes, resulting in a one-time charge in 2002 of CHF 115
million. In 2002, 2003 and 2004 weighted-average statutory tax rate, calculated on the
basis of the largest group companies was 23.0%, 23.0% and 22.3%, respectively. The
decline in the weighted-average tax rate in 2004 is due to a lower tax rate for a major
subsidiary.The effect of the recognition of a deferred tax asset of CHF 113 million consists of
three parts. First, at December 31, 2004, Swisscom decided to merge certain of its
subsidiaries, that have unrecognized loss carry forwards, with profitable subsidiaries.
As a result of this proposed merger, the recognition of these loss carry forwards of CHF
79 million is now probable. Second, another subsidiary utilized a previously
unrecognized loss carry forward during 2004 and recorded a benefit of CHF 22 million,
and third, this same subsidiary recognized a previously unrecognized deferred tax asset
of CHF 12 million because recognition is probable based on recent profitability.The tax loss carry-forwards are as follows: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Expiration in 2007
    
    
    52
    
    
    
    52
    
    
    
    52Expiration in 2008
    
    
    81
    
    
    
    81
    
    
    
    81Expiration in 2009
    
    
    148
    
    
    
    148
    
    
    
    148Expiration in 2010
    
    
    411
    
    
    
    132
    
    
    
    132Expiration after 2010
    
    
    
    
    
    
    86
    
    
    
    145Total tax loss carry-forwards
    
    
    692
    
    
    
    499
    
    
    
    558Thereof capitalized
    
    
    (346
    )
    
    
    (7
    )
    
    
    (343
    )Total non-capitalized tax loss carry-forwards
    
    
    346
    
    
    
    492
    
    
    
    215
 F-19




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##### Table of Contents



The tax effects of temporary differences that give rise to deferred tax assets and liabilities were as follows: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Deferred tax assetsIntangible assets
    
    
    343
    
    
    
    164
    
    
    
    Accrued pension cost
    
    
    119
    
    
    
    118
    
    
    
    129Tax losses
    
    
    80
    
    
    
    2
    
    
    
    76Other current and non-current assets
    
    
    36
    
    
    
    38
    
    
    
    45Total deferred tax assets
    
    
    578
    
    
    
    322
    
    
    
    250Deferred tax liabilitiesProperty, plant and equipment
    
    
    (402
    )
    
    
    (398
    )
    
    
    (266
    )Accrued liabilities
    
    
    (21
    )
    
    
    (36
    )
    
    
    (18
    )Other long-term liabilities
    
    
    (67
    )
    
    
    (65
    )
    
    
    (62
    )Other current assets and intangible assets
    
    
    (17
    )
    
    
    (21
    )
    
    
    (39
    )Total deferred tax liabilities
    
    
    (507
    )
    
    
    (520
    )
    
    
    (385
    )Net deferred tax assets (liabilities)
    
    
    71
    
    
    
    (198
    )
    
    
    (135
    )
  The movement in deferred tax assets and liabilities (prior to offsetting) is as follows: AccruedIntangible
    
    
    pensionCHF in millions
    
    assets
    
    
    cost
    
    
    Tax losses
    
    
    Other
    
    
    TotalDeferred tax assetsBalance at December 31, 2001
    
    
    744
    
    
    
    127
    
    
    
    (12
    )
    
    
    30
    
    
    
    889(Charged) credited to income statement
    
    
    (401
    )
    
    
    (8
    )
    
    
    92
    
    
    
    17
    
    
    
    (300
    )Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Reclassification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )Balance at December 31, 2002
    
    
    343
    
    
    
    119
    
    
    
    80
    
    
    
    36
    
    
    
    578(Charged) to income statement
    
    
    (179
    )
    
    
    (3
    )
    
    
    (80
    )
    
    
    (2
    )
    
    
    (264
    )Acquisition of subsidiaries
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    4Credited to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Balance at December 31, 2003
    
    
    164
    
    
    
    118
    
    
    
    2
    
    
    
    38
    
    
    
    322(Charged) credited to income statement
    
    
    (164
    )
    
    
    11
    
    
    
    74
    
    
    
    8
    
    
    
    (71
    )Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Charged to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Balance at December 31, 2004
    
    
    
    
    
    
    129
    
    
    
    76
    
    
    
    45
    
    
    
    250
 Property,
    
    
    
    
    
    
    Otherplant and
    
    
    Accrued
    
    
    long-termCHF in millions
    
    equipment
    
    
    liabilities
    
    
    liabilities
    
    
    Other
    
    
    TotalDeferred tax liabilitiesBalance at December 31, 2001
    
    
    437
    
    
    
    14
    
    
    
    75
    
    
    
    63
    
    
    
    589Charged (credited) to income statement
    
    
    (35
    )
    
    
    7
    
    
    
    (8
    )
    
    
    (27
    )
    
    
    (63
    )Credited to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Reclassification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )Balance at December 31, 2002
    
    
    402
    
    
    
    21
    
    
    
    67
    
    
    
    17
    
    
    
    507Charged (credited) to income statement
    
    
    (4
    )
    
    
    15
    
    
    
    (3
    )
    
    
    3
    
    
    
    11Charged to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Balance at December 31, 2003
    
    
    398
    
    
    
    36
    
    
    
    64
    
    
    
    22
    
    
    
    520Charged (credited) to income statement
    
    
    (132
    )
    
    
    (18
    )
    
    
    (2
    )
    
    
    14
    
    
    
    (138
    )Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Charged to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Balance at December 31, 2004
    
    
    266
    
    
    
    18
    
    
    
    62
    
    
    
    39
    
    
    
    385
  Deferred income tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities and when
the deferred income taxes relate to the same tax authority. The following amounts,
determined after appropriate offsetting, are shown in the consolidated balance sheet: CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Deferred tax assets
    
    
    367
    
    
    
    185
    
    
    
    99Deferred tax liabilities
    
    
    (296
    )
    
    
    (383
    )
    
    
    (234
    )
 F-20




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##### Table of Contents



14.

Acquisitions of subsidiariesAcquisitions 2003
As of December 19, 2003, Swisscom acquired 100% of T-Systems Card Services AG from
T-Systems Switzerland AG. T-Systems Card Services AG was renamed Billag Card Services AG
at the time of acquisition. Billag Card Services AG is a general contractor providing
customer retention and loyalty concepts based on customer cards, including cards with
credit functionality. The company is responsible for managing customer data and
receivable accounts on behalf of its customers.In February 2003, Swisscom Eurospot, Swisscoms European Public Wireless LAN provider,
acquired 100% of WLAN AG, Munich (Germany) and Megabeam Networks Ltd, London (UK),
followed in April 2003 by a 100% acquisition of Aervik B.V., Amsterdam (Netherlands).
The acquisitions form part of Swisscoms strategy to set up a pan-European WLAN
business.All acquisitions were recorded in the consolidated financial statements using the
purchase method and the resulting goodwill is amortized on a straight-line basis over a
period of three to five years. The deferred purchase consideration payment of CHF 15
million will fall due on June 30, 2005.Acquisitions 2004
As of September 30, 2004, Swisscom Systems AG acquired 100% of Itelpro Solutions AG, a
service-provider in the area of telephone switching equipment. The Company has now been
merged with Swisscom Systems AG.As of December 22, 2004, Swisscom Broadcast AG acquired 84.4% of Tele Rätia AG. Tele
Rätia AG is a service-provider in the area of radio and television channel transmission
in the Canton Graubünden. Furthermore Swisscom IT Services AG acquired 100% of e4life AG
as of December 1, 2004.No material net revenue or net income were recorded from these transactions in 2004. The
pro forma net revenue and net income of the acquired subsidiaries amounted to CHF 6
million and CHF 1 million respectively.The table below shows the aggregated fair values of the assets acquired, which
correspond with the book values under IFRS of the acquired subsidiaries, and the impact
of the acquisitions on cash flow: CHF in millions
    
    2003
    
    
    2004Cash and cash equivalents
    
    
    38
    
    
    
    5Other receivables
    
    
    370
    
    
    
    Other current assets
    
    
    5
    
    
    
    Property, plant and equipment and other intangible assets
    
    
    10
    
    
    
    12Goodwill
    
    
    73
    
    
    
    Deferred tax assets
    
    
    4
    
    
    
    2Financial liabilities
    
    
    (256
    )
    
    
    Accrued pension cost
    
    
    (8
    )
    
    
    Accrued liabilities
    
    
    (9
    )
    
    
    (3
    )Other short- and long-term liabilities
    
    
    (140
    )
    
    
    (4
    )Purchase price
    
    
    87
    
    
    
    12Less cash acquired
    
    
    (38
    )
    
    
    (5
    )Deferred purchase price
    
    
    (15
    )
    
    
    (10
    )Net cash outflow (inflow)
    
    
    34
    
    
    
    (3
    )
  Acquisition of the remaining interest in Swisscom IT Services AG
Effective December 31, 2004, Swisscom AG acquired 100% of AGI Holding AG. AGI Holding AG
held 28.9% of the shares in Swisscom IT Services AG. As a result of the transaction
Swisscom holds 100% of the shares in Swisscom IT Services AG. The purchase price of AGI
Holding AG was CHF 115 million which was offset against the minority interest of CHF 60
million at the time of the acquisition. Goodwill of CHF 55 million was recorded on the
transaction. F-21




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##### Table of Contents



15.

Earnings per shareIncome available to shareholders used in calculating both basic and diluted earnings per
share is Swisscoms reported net income for each year.Basic earnings per share is calculated by dividing net income by the weighted-average
number of ordinary shares in issue during the year, excluding ordinary shares purchased
by Swisscom and held as treasury shares. The basic earnings per share are calculated as
follows: 2002
    
    
    2003
    
    
    2004Net income (CHF in millions)
    
    
    824
    
    
    
    1,569
    
    
    
    1,594Weighted-average number of ordinary shares issued
    
    
    67,647,928
    
    
    
    66,199,789
    
    
    
    64,715,609Basic earnings per share (CHF)
    
    
    12.18
    
    
    
    23.70
    
    
    
    24.63
  The difference between basic and diluted weighted-average shares results from the
assumption that dilutive stock options and stock appreciation rights outstanding were
exercised. All outstanding stock appreciation rights were used for purposes of
calculating the weighted-average shares outstanding as they had a dilutive effect. The
purchased call options were not included in calculating dilutive earnings per share as
their effect was antidilutive. The diluted earnings per share are calculated as follows: 2002
    
    
    2003
    
    
    2004Net income (CHF in millions)
    
    
    824
    
    
    
    1,569
    
    
    
    1,594Weighted-average number of ordinary shares issued
    
    
    67,647,928
    
    
    
    66,199,789
    
    
    
    64,715,609Adjustment for stock options and appreciation rights
    
    
    70,132
    
    
    
    40,591
    
    
    
    569Weighted-average number of ordinary
shares for diluted earnings per share
    
    
    67,718,060
    
    
    
    66,240,380
    
    
    
    64,716,178Diluted earnings per share (CHF)
    
    
    12.17
    
    
    
    23.69
    
    
    
    24.63
  16.

Cash and cash equivalents CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Cash deposits
    
    
    832
    
    
    
    1,304
    
    
    
    875Term deposits with maturity within 90 days
    
    
    680
    
    
    
    1,800
    
    
    
    1,512Total cash and cash equivalents
    
    
    1,512
    
    
    
    3,104
    
    
    
    2,387
  The weighted-average effective interest rate on short-term deposits was 1.67% in
2002, 0.26% in 2003 and 0.29% in 2004 and the deposits outstanding at December 31, 2004
have an average maturity of 27 days. F-22




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##### Table of Contents



17.

Current financial assets Held
    
    
    Available-
    
    
    DerivativeLoans and
    
    
    for trading
    
    
    for-sale
    
    
    financialCHF in millions
    
    receivables
    
    
    investments
    
    
    instruments
    
    
    instruments
    
    
    TotalBalance at January 1, 2001
    
    
    2,950
    
    
    
    
    
    
    
    170
    
    
    
    150
    
    
    
    3,270Additions
    
    
    135
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    142Disposals
    
    
    (3,011
    )
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (3,012
    )Interests
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Revaluation deficit included in equity. See Note 33.
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    (8
    )
    
    
    (37
    )Revaluation (deficit) surplus included in income statement
    
    
    (3
    )
    
    
    
    
    
    
    (4
    )
    
    
    (70
    )
    
    
    (77
    )Balance at December 31, 2002
    
    
    55
    
    
    
    
    
    
    
    139
    
    
    
    72
    
    
    
    266Additions
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Disposals
    
    
    (11
    )
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (16
    )Revaluation deficit included in equity. See Note 33.
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    19Revaluation deficit included in income statement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    (26
    )Balance at December 31, 2003
    
    
    44
    
    
    
    
    
    
    
    161
    
    
    
    46
    
    
    
    251Additions
    
    
    599
    
    
    
    113
    
    
    
    168
    
    
    
    
    
    
    
    880Disposals
    
    
    (44
    )
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (51
    )Reclassification from non-current financial assets
    
    
    
    
    
    
    
    
    
    
    193
    
    
    
    
    
    
    
    193Revaluation deficit included in equity. See Note 33.
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    2
    
    
    
    43Revaluation deficit included in income statement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    (31
    )Balance at December 31, 2004
    
    
    599
    
    
    
    113
    
    
    
    556
    
    
    
    17
    
    
    
    1,285
  Loans and receivables originated by the entity at December 31, 2004 comprise
solely term deposits repayable between three and twelve months after the balance sheet
date.The reclassification from non-current available-for-sale investments includes
investments in Infonet Services Corp. (Infonet) and Intelsat Ltd., which were sold in
2005. See Note 24.At December 31, 2002, the cost basis of certain of Swisscoms available-for-sale
investments exceeded their market value. Based on the short period of time and the
amount that the cost basis exceeded the market price, Swisscom concluded that there was
no impairment and the excess of CHF 29 million was recorded against equity. At December
31, 2003, the cost basis of a number of these investments continued to exceed the market
value. Swisscom believed that the substantial decline in value and the length of time
that they were below cost provided objective evidence that these investments were
impaired and accordingly, removed CHF 22 million from equity and recorded it under
financial expense. At December 31, 2004, the cost basis of certain of Swisscoms
available-for-sale investments exceeded their market value. In view of the substantial
decline in value and the length of time that they were below cost the impairment was
classified as permanent. Consequently an impairment charge CHF 4 million was recorded
under financial expense in 2004. See Note 11.Included within available-for-sale investments at December 31, 2003 and 2004, are
investments whose cost basis of CHF 53 million and CHF 139 million exceeded their market
value by CHF 5 million and CHF 22 million, respectively. Swisscom concluded that these
investments were not impaired. Therefore, the excess net of unrealized gains was
recorded against equity.Derivative financial instruments comprise cross-currency interest rate swaps, interest
rate swaps and forward exchange contracts. See Note 32.18.

Trade accounts receivable CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Trade accounts receivable, gross
    
    
    2,255
    
    
    
    2,017
    
    
    
    1,935Allowance for bad debts
    
    
    (196
    )
    
    
    (186
    )
    
    
    (168
    )Total trade accounts receivable, net
    
    
    2,059
    
    
    
    1,831
    
    
    
    1,767
 F-23




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19.

Inventories CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Raw material and supplies
    
    
    77
    
    
    
    67
    
    
    
    54Customer premises equipment for resale
    
    
    82
    
    
    
    77
    
    
    
    97Work in progress
    
    
    17
    
    
    
    9
    
    
    
    16Total inventories, gross
    
    
    176
    
    
    
    153
    
    
    
    167Allowance for obsolete and slow-moving items
    
    
    (45
    )
    
    
    (60
    )
    
    
    (47
    )Total inventories, net
    
    
    131
    
    
    
    93
    
    
    
    120
  20.

Other current assets CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Other receivables and accrued income
    
    
    203
    
    
    
    207
    
    
    
    235Other receivables from collecting activities (Billag Group)
    
    
    65
    
    
    
    428
    
    
    
    409Interest receivable
    
    
    2
    
    
    
    1
    
    
    
    2Total other current assets
    
    
    270
    
    
    
    636
    
    
    
    646
 F-24




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##### Table of Contents



21.

Property, plant and equipment Vehicles andLand and
    
    
    Technical
    
    
    otherCHF in millions
    
    buildings
    
    
    equipment
    
    
    equipment
    
    
    TotalAt costBalance at December 31, 2001
    
    
    3,347
    
    
    
    20,780
    
    
    
    1,761
    
    
    
    25,888Additions
    
    
    3
    
    
    
    782
    
    
    
    273
    
    
    
    1,058Disposals
    
    
    (16
    )
    
    
    (644
    )
    
    
    (207
    )
    
    
    (867
    )Reclassifications
    
    
    (120
    )
    
    
    (283
    )
    
    
    406
    
    
    
    3Translation adjustments
    
    
    
    
    
    
    (5
    )
    
    
    2
    
    
    
    (3
    )Balance at December 31, 2002
    
    
    3,214
    
    
    
    20,630
    
    
    
    2,235
    
    
    
    26,079Additions
    
    
    6
    
    
    
    818
    
    
    
    244
    
    
    
    1,068Disposals
    
    
    (57
    )
    
    
    (777
    )
    
    
    (214
    )
    
    
    (1,048
    )Reclassifications
    
    
    (4
    )
    
    
    (3
    )
    
    
    7
    
    
    
    Acquisition/disposal of subsidiary, net
    
    
    
    
    
    
    (2
    )
    
    
    17
    
    
    
    15Balance at December 31, 2003
    
    
    3,159
    
    
    
    20,666
    
    
    
    2,289
    
    
    
    26,114Additions
    
    
    13
    
    
    
    870
    
    
    
    150
    
    
    
    1,033Disposals
    
    
    (60
    )
    
    
    (1,557
    )
    
    
    (138
    )
    
    
    (1,755
    )Reclassifications
    
    
    (1
    )
    
    
    102
    
    
    
    (109
    )
    
    
    (8
    )Acquisition of subsidiary
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Translation adjustments
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Balance at December 31, 2004
    
    
    3,111
    
    
    
    20,080
    
    
    
    2,192
    
    
    
    25,383Accumulated depreciationBalance at December 31, 2001
    
    
    2,155
    
    
    
    14,587
    
    
    
    1,086
    
    
    
    17,828Depreciation
    
    
    47
    
    
    
    1,255
    
    
    
    250
    
    
    
    1,552Disposals
    
    
    (11
    )
    
    
    (596
    )
    
    
    (184
    )
    
    
    (791
    )Reclassifications
    
    
    (75
    )
    
    
    (121
    )
    
    
    196
    
    
    
    Translation adjustments
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Balance at December 31, 2002
    
    
    2,116
    
    
    
    15,124
    
    
    
    1,348
    
    
    
    18,588Depreciation
    
    
    44
    
    
    
    1,233
    
    
    
    266
    
    
    
    1,543Disposals
    
    
    (50
    )
    
    
    (752
    )
    
    
    (193
    )
    
    
    (995
    )Reclassifications
    
    
    
    
    
    
    10
    
    
    
    (10
    )
    
    
    Acquisition/disposal of subsidiary, net
    
    
    
    
    
    
    (2
    )
    
    
    9
    
    
    
    7Balance at December 31, 2003
    
    
    2,110
    
    
    
    15,613
    
    
    
    1,420
    
    
    
    19,143Depreciation
    
    
    38
    
    
    
    1,092
    
    
    
    263
    
    
    
    1,393Impairment
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    155Disposals
    
    
    (46
    )
    
    
    (1,534
    )
    
    
    (122
    )
    
    
    (1,702
    )Reclassifications
    
    
    
    
    
    
    99
    
    
    
    (99
    )
    
    
    Translation adjustments
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Balance at December 31, 2004
    
    
    2,102
    
    
    
    15,424
    
    
    
    1,462
    
    
    
    18,988Net book valueAt December 31, 2001
    
    
    1,192
    
    
    
    6,193
    
    
    
    675
    
    
    
    8,060At December 31, 2002
    
    
    1,098
    
    
    
    5,506
    
    
    
    887
    
    
    
    7,491At December 31, 2003
    
    
    1,049
    
    
    
    5,053
    
    
    
    869
    
    
    
    6,971At December 31, 2004
    
    
    1,009
    
    
    
    4,656
    
    
    
    730
    
    
    
    6,395
 F-25




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Included within property, plant and equipment are the following: CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Assets under construction
    
    
    200
    
    
    
    286
    
    
    
    362Technical equipment acquired under finance leaseAt cost
    
    
    567
    
    
    
    567
    
    
    
    566Accumulated depreciation
    
    
    (342
    )
    
    
    (399
    )
    
    
    (453
    )Net book value
    
    
    225
    
    
    
    168
    
    
    
    113Buildings relating to the sales leasebackAt cost
    
    
    1,185
    
    
    
    1,185
    
    
    
    1,185Accumulated depreciation
    
    
    (474
    )
    
    
    (494
    )
    
    
    (514
    )Net book value
    
    
    711
    
    
    
    691
    
    
    
    671
  As a result of increased competition in the international termination and transit
business, which resulted in a decline of prices and margins, Swisscom reassessed its
strategy in this business area. Swisscom entered into discussions with Belgacom in 2004
and, in February 2005, signed an agreement with them whereby both Fixnet and Belgacom
will transfer their international wholesale businesses into a newly formed company with
effect from July 1, 2005. Fixnet will have a minority stake in this new company. As a
result of the planned transfer, this business was redefined as an independent cash
generating unit in 2004. Swisscom recorded an impairment charge of CHF 155 million
relating to the assets of the business, which are primarily long-term utilization rights
to sea cables. This impairment charge, which was recorded in the Fixnet segment,
represents the difference between the carrying value of the assets of CHF 190 million
and the value in use of CHF 35 million. The value in use amount represents the
forecasted cash flows discounted at 10.9% and approximates the value at which the assets
will be transferred into the new Company.22.

Investments in affiliated companies Goodwillfrom
    
    
    TotalEquity in
    
    
    investments
    
    
    investmentsaffiliated
    
    
    in affiliated
    
    
    in affiliatedCHF in millions
    
    companies
    
    
    companies
    
    
    companiesNet carrying valueBalance at December 31, 2001
    
    
    562
    
    
    
    29
    
    
    
    591Additions
    
    
    31
    
    
    
    6
    
    
    
    37Equity in net result of operations
    
    
    100
    
    
    
    (1
    )
    
    
    99Disposals
    
    
    (5
    )
    
    
    (34
    )
    
    
    (39
    )(Loss) gain on disposal
    
    
    (12
    )
    
    
    7
    
    
    
    (5
    )Translation adjustments
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Balance at December 31, 2002
    
    
    675
    
    
    
    7
    
    
    
    682Additions
    
    
    17
    
    
    
    
    
    
    
    17Dividends received
    
    
    (135
    )
    
    
    
    
    
    
    (135
    )Equity in net result of operations
    
    
    69
    
    
    
    
    
    
    
    69Disposals
    
    
    (511
    )
    
    
    
    
    
    
    (511
    )Loss on disposal
    
    
    (71
    )
    
    
    (7
    )
    
    
    (78
    )Translation adjustments
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Balance at December 31, 2003
    
    
    41
    
    
    
    
    
    
    
    41Dividends received
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Equity in net result of operations
    
    
    22
    
    
    
    
    
    
    
    22Balance at December 31, 2004
    
    
    58
    
    
    
    
    
    
    
    58
 F-26




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##### Table of Contents



Equity in net income of affiliated companies CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Equity in net result of operations
    
    
    99
    
    
    
    69
    
    
    
    22Loss on disposal of affiliated companies
    
    
    (5
    )
    
    
    (78
    )
    
    
    Total equity in net income of affiliated companies
    
    
    94
    
    
    
    (9
    )
    
    
    22
  Year ended December 31, 2002Additions
Additions for 2002 of CHF 37 million comprise primarily an additional investment in
AUCS.Equity in net result of operations
Equity in net result of operations comprises primarily Swisscoms share of net income
from Cesky Telecom and the gain on AUCS.Unisource and its shareholders entered into a three-year management agreement with
Infonet Services Corp, which expired on September 30, 2002, whereby they guaranteed
minimum losses of AUCS for that period. Swisscoms consideration for this transaction
was the purchase of Infonet shares at a reduced price. Swisscoms share of the gain on
this transaction of CHF 352 million, which represents the difference between the gain on
the shares purchased and the minimum guaranteed losses, was amortized into income over
the three-year period.Year ended December 31, 2003Additions
Additions for 2003 of CHF 17 million primarily comprise a capital increase at AUCS.Dividends received
Dividends received of CHF 135 million comprise primarily an extraordinary dividend of
CHF 121 million received from Cesky Telecom prior to its sale.Equity in net result of operations
Equity in net result of operations comprises primarily Swisscoms share of net income
from Cesky Telecom for the period up to its sale in December 2003 and the gain on AUCS
(see above). At December 31, 2002 Swisscom recorded its share of liquidation costs which
were expected to be incurred by AUCS. In 2003, a portion of this liability, which was no
longer required, was reversed to income.Loss on disposal
In December 2003, Swisscom sold its investment in Cesky Telecom, which was held by
Telsource, to international investors, in an accelerated book building process. The
sales price after transaction costs was CHF 510 million. Swisscom recorded a loss on
disposal of CHF 71 million, after recognizing cumulated translation gains of CHF 41
million. Telsource ceased to operate after the sale of Cesky Telecom.Year ended December 31, 2004Equity in net result of operations
Equity in net result of operations comprises primarily Swisscoms share of net income
from Publidirect and AUCS.Selected aggregated key data
The following schedule provides selected aggregated key data of Swisscoms proportionate
interest in joint ventures including AUCS and TelSource. CHF in millions
    
    2002
    
    
    2003
    
    
    2004Income statementNet revenue
    
    
    65
    
    
    
    29
    
    
    
    Total operating expenses
    
    
    (79
    )
    
    
    (101
    )
    
    
    1Operating (loss) income
    
    
    (14
    )
    
    
    (72
    )
    
    
    1Net (loss) income
    
    
    (105
    )
    
    
    (72
    )
    
    
    1Balance sheet (at end of year)Current assets
    
    
    23
    
    
    
    20
    
    
    
    21Fixed assets
    
    
    676
    
    
    
    1
    
    
    
    Current liabilities
    
    
    36
    
    
    
    9
    
    
    
    4Long-term liabilities
    
    
    34
    
    
    
    8
    
    
    
    8Shareholders equity
    
    
    629
    
    
    
    4
    
    
    
    9
 F-27




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##### Table of Contents



23.

Goodwill and other intangible assets Internally
    
    
    Othergenerated
    
    
    intangibleCHF in millions
    
    Goodwill
    
    
    software
    
    
    assets
    
    
    TotalAt costBalance at December 31, 2001
    
    
    114
    
    
    
    154
    
    
    
    190
    
    
    
    458Additions
    
    
    36
    
    
    
    39
    
    
    
    30
    
    
    
    105Disposals
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    (3
    )Reclassifications
    
    
    
    
    
    
    10
    
    
    
    (13
    )
    
    
    (3
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Balance at December 31, 2002
    
    
    150
    
    
    
    201
    
    
    
    205
    
    
    
    556Additions
    
    
    
    
    
    
    33
    
    
    
    64
    
    
    
    97Disposals
    
    
    
    
    
    
    (6
    )
    
    
    (3
    )
    
    
    (9
    )Reclassifications
    
    
    
    
    
    
    (2
    )
    
    
    2
    
    
    
    Acquisition of subsidiaries
    
    
    73
    
    
    
    
    
    
    
    2
    
    
    
    75Translation adjustments
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    6Balance at December 31, 2003
    
    
    225
    
    
    
    226
    
    
    
    274
    
    
    
    725Additions
    
    
    55
    
    
    
    27
    
    
    
    76
    
    
    
    158Disposals
    
    
    
    
    
    
    (1
    )
    
    
    (20
    )
    
    
    (21
    )Reclassifications
    
    
    
    
    
    
    5
    
    
    
    3
    
    
    
    8Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Balance at December 31, 2004
    
    
    280
    
    
    
    257
    
    
    
    344
    
    
    
    881Accumulated amortizationBalance at December 31, 2001
    
    
    9
    
    
    
    39
    
    
    
    25
    
    
    
    73Amortization
    
    
    26
    
    
    
    58
    
    
    
    30
    
    
    
    114Disposals
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Reclassifications
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    Translation adjustments
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Balance at December 31, 2002
    
    
    36
    
    
    
    97
    
    
    
    54
    
    
    
    187Amortization
    
    
    41
    
    
    
    65
    
    
    
    36
    
    
    
    142Disposals
    
    
    
    
    
    
    (5
    )
    
    
    (2
    )
    
    
    (7
    )Reclassifications
    
    
    
    
    
    
    (1
    )
    
    
    1
    
    
    
    Translation adjustments
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Balance at December 31, 2003
    
    
    78
    
    
    
    156
    
    
    
    89
    
    
    
    323Amortization
    
    
    49
    
    
    
    44
    
    
    
    58
    
    
    
    151Disposals
    
    
    
    
    
    
    (1
    )
    
    
    (8
    )
    
    
    (9
    )Reclassifications
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    Balance at December 31, 2004
    
    
    127
    
    
    
    200
    
    
    
    138
    
    
    
    465Net book valueAt December 31, 2001
    
    
    105
    
    
    
    115
    
    
    
    165
    
    
    
    385At December 31, 2002
    
    
    114
    
    
    
    104
    
    
    
    151
    
    
    
    369At December 31, 2003
    
    
    147
    
    
    
    70
    
    
    
    185
    
    
    
    402At December 31, 2004
    
    
    153
    
    
    
    57
    
    
    
    206
    
    
    
    416
  Acquisition of subsidiaries
The additions of Swisscoms goodwill in 2003 relate to acquisitions of Billag Card
Services AG (previously T-Systems Card Services AG) and its acquisitions of Swisscom
Eurospot SA in Germany, the UK and the Netherlands in connection with the development of
its European WLAN-business. See Note 14.Addition in Goodwill
In 2004, addition in goodwill relates to the acquisition of AGI Holding AG. See Note 14. F-28




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##### Table of Contents



24. Non-current financial assets FinancialAvailable-
    
    
    Loans and
    
    
    assets from
    
    
    Otherfor-sale
    
    
    receivables
    
    
    cross-border
    
    
    financialCHF in millions
    
    investments
    
    
    originated
    
    
    tax leases
    
    
    assets
    
    
    TotalBalance at December 31, 2001
    
    
    448
    
    
    
    111
    
    
    
    1,295
    
    
    
    27
    
    
    
    1,881Additions
    
    
    
    
    
    
    33
    
    
    
    26
    
    
    
    
    
    
    
    59Disposals
    
    
    
    
    
    
    (23
    )
    
    
    (1
    )
    
    
    (10
    )
    
    
    (34
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    (216
    )
    
    
    
    
    
    
    (216
    )Write-off of loans receivable
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Revaluation deficit included in equity. See Note 33.
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Revaluation deficit included in income statement
    
    
    (152
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (152
    )Balance at December 31, 2002
    
    
    293
    
    
    
    117
    
    
    
    1,104
    
    
    
    17
    
    
    
    1,531Additions
    
    
    
    
    
    
    9
    
    
    
    29
    
    
    
    
    
    
    
    38Disposals
    
    
    (2
    )
    
    
    (38
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (44
    )Translation adjustments
    
    
    1
    
    
    
    
    
    
    
    (119
    )
    
    
    
    
    
    
    (118
    )Write-off of loans receivable
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Revaluation deficit included in equity. See Note 33.
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )Revaluation deficit included in income statement
    
    
    (33
    )
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (35
    )Balance at December 31, 2003
    
    
    228
    
    
    
    84
    
    
    
    1,011
    
    
    
    14
    
    
    
    1,337Additions
    
    
    
    
    
    
    306
    
    
    
    28
    
    
    
    
    
    
    
    334Disposals
    
    
    (18
    )
    
    
    (83
    )
    
    
    (1
    )
    
    
    (6
    )
    
    
    (108
    )Reclassification to current financial assets
    
    
    (193
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (193
    )Translation adjustments
    
    
    
    
    
    
    2
    
    
    
    (86
    )
    
    
    
    
    
    
    (84
    )Write-off of loans receivable
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )Revaluation deficit included in equity. See Note 33.
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Balance at December 31, 2004
    
    
    16
    
    
    
    298
    
    
    
    952
    
    
    
    9
    
    
    
    1,275
  The market value of Swisscoms investment in Swiss International Airlines Ltd
(Swiss) amounted to CHF 38 million on December 31, 2002 and CHF 5 million on March 31,
2003. Swisscom determined that the significant decline in the market value of the
investment provided objective evidence that the asset was impaired. Accordingly, in 2002
and the first quarter of 2003 CHF 41 million and CHF 33 million, respectively were
removed from equity and recorded under financial expense. The CHF 3 million that was
recorded in equity in 2001 was reversed in 2002. At December 31, 2003 and 2004, the
market value exceeded the cost basis by CHF 12 million and CHF 11 million, respectively.
This fair value adjustment was recorded against equity.In 2002, the shares of Infonet Services Corp. (Infonet), like many other companies in
the telecommunications sector, declined sharply. At December 31, 2002 Swisscoms cost
basis exceeded its market value by CHF 111 million. Swisscom believed the substantial
declines in the value of the shares and the length of time that they were below cost
provided objective evidence that this investment was impaired. Accordingly, at December
31, 2002 Swisscom removed the CHF 111 million, from equity and recorded it under
financial expense. At December 31, 2003, the market value of Infonet had decreased by
CHF 53 million to CHF 175 million. No impairment was recorded because the market price
exceeded the cost basis just before and after year-end. The excess of the cost basis
over the market value of CHF 53 million was therefore recorded against equity.In 2004, Swisscom signed an agreement for the sale of its investment in Infonet for CHF
196 million. The transaction was completed on February 25, 2005. The CHF 32 million
difference between the fair value, which was the agreed sales price, and carrying amount
was removed from equity in the fourth quarter of 2004 and recorded under financial
expense.The reclassifications to current available-for-sale investments comprise Swisscoms
investments in Infonet Services Corp. and Intelsat Ltd. which were sold in 2005. See
Note 17. This item now only includes the investment in Swiss.Additions of CHF 306 million in 2004 under loans and receivables originated by the
entity are mainly attributable to the granting of two vendor loan notes in connection
with the sale of debitel. See Note 39.Swisscom entered into cross-border tax lease arrangements in 1999 and 2000. The
financial assets of these arrangements are recorded in USD and were valued using the
exchange rate on the balance sheet date. This valuation resulted in a translation
adjustment of CHF 86 million in 2004. Financial assets from cross-border tax lease
arrangements represent those assets that were not offset with corresponding liabilities.
See Note 25. F-29




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##### Table of Contents



25.

DebtShort-term debt CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Short-term loans
    
    
    11
    
    
    
    
    
    
    
    Short-term bank credit (Billag Group)
    
    
    
    
    
    
    256
    
    
    
    Current portion of long-term debt
    
    
    750
    
    
    
    1
    
    
    
    9Employee savings deposits
    
    
    2
    
    
    
    
    
    
    
    Short-term loans payable to affiliated companies
    
    
    3
    
    
    
    3
    
    
    
    6Current portion of finance lease obligations. See Note 29.
    
    
    63
    
    
    
    61
    
    
    
    137Derivative financial instruments. See Note 32.
    
    
    131
    
    
    
    195
    
    
    
    232Total short-term debt
    
    
    960
    
    
    
    516
    
    
    
    384
  Long-term debt
Long-term debt consists primarily of unsecured fixed interest rate loans, denominated in
Swiss francs, granted by the Swiss Post and financial liabilities from cross-border tax
lease arrangements, denominated in USD. Maturities are as follows: CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Swiss Post loan
    
    
    750
    
    
    
    
    
    
    
    Financial liability from
Cross-border tax lease arrangements
    
    
    1,463
    
    
    
    1,339
    
    
    
    1,262Other long-term debt
    
    
    19
    
    
    
    
    
    
    
    Total
    
    
    2,232
    
    
    
    1,339
    
    
    
    1,262Less current portion
    
    
    (750
    )
    
    
    (1
    )
    
    
    (9
    )Total long-term debt
    
    
    1,482
    
    
    
    1,338
    
    
    
    1,253
  Between 1996 and 2002, Swisscom entered into cross-border tax lease arrangements
under the terms of which parts of its fixed and mobile networks were to be sold or
leased long-term to US American Trusts and leased back with terms of up to 30 years.
Swisscom has an early buyout option on these assets after a contractually agreed period.Swisscom defeased a major part of the lease obligations through highly rated financial
assets and payment undertaking agreements. The financial assets were irrevocably placed
with trusts. The payment undertaking agreements were signed with financial institutions
with minimal credit risk. In accordance with Interpretation SIC-27 Evaluating the
substance of transactions involving the legal form of a lease these financial assets or
payment undertaking agreements and the liabilities in the same amount are offset in the
balance sheet if the criteria for offsetting of assets and liabilities are met. One of
the transactions entered into in 2000 does not meet the criteria of SIC-27 and is
consequently reported in the balance sheet.As of December 31, 2004, the liabilities and assets resulting from these transactions
totalled USD 3,980 million (CHF 4,547 million) and USD 3,713 million (CHF 4,237
million), respectively. Of this amount USD 2,878 million (CHF 3,285 million) are not
reported in the balance sheet in accordance with SIC-27. Of the liabilities reported in
the amount of CHF 1,262 million, CHF 952 million is covered by financial assets.The gains from the transactions were recognized as financial income in the period the
transactions were closed. In 2002, Swisscom recorded a gain of CHF 28 million under
financial income.In the transaction concluded in 2002 Swisscom was required to provide a letter-of-credit
to secure a part of its obligations to the equity investors in the event of the
transaction being terminated prematurely due to the fault of Swisscom. Swisscom is
obliged to issue further letters-of-credit if the Swiss Confederation gives up its
majority shareholding in Swisscom.In connection with these lease transactions Swisscom committed to meet minimum credit
ratings. Shortly before the end of 2004 the credit rating of some financial assets
dropped below the minimum rating agreed in the contracts. Swisscom is in the process of
replacing these assets with securities meeting the agreed minimum rating which it
estimates will cost CHF 34 million. As a result, a provision was recognized as financial
expense. F-30




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##### Table of Contents



Future minimum payments resulting from cross-border tax lease arrangements are due as follows: CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Within one year
    
    
    66
    
    
    
    65
    
    
    
    73Within 1-2 years
    
    
    72
    
    
    
    75
    
    
    
    63Within 2-3 years
    
    
    87
    
    
    
    64
    
    
    
    222Within 3-4 years
    
    
    73
    
    
    
    237
    
    
    
    104Within 4-5 years
    
    
    77
    
    
    
    108
    
    
    
    16After 5 years
    
    
    4,041
    
    
    
    3,016
    
    
    
    2,847Total future payment commitments
    
    
    4,416
    
    
    
    3,565
    
    
    
    3,325Less future interest charges
    
    
    (2,963
    )
    
    
    (2,232
    )
    
    
    (2,068
    )Total liability from cross-border tax lease arrangements
    
    
    1,453
    
    
    
    1,333
    
    
    
    1,257Fair value adjustments
    
    
    10
    
    
    
    6
    
    
    
    5Long-term liability
from cross-border tax lease arrangements
    
    
    1,463
    
    
    
    1,339
    
    
    
    1,262
  Average interest rates of financial liabilities
The weighted-average effective interest rates at the balance sheet date were as follows: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Short-term loans
    
    
    5.62
    %
    
    
    
    
    
    
    Short-term bank credit (Billag Group)
    
    
    
    
    
    
    
    
    
    
    1.08
    %Employee savings deposits
    
    
    2.45
    %
    
    
    
    
    
    
    Swiss Post loan
    
    
    3.65
    %
    
    
    3.72
    %
    
    
    Short-term loans payable to affiliated companies
    
    
    4.64
    %
    
    
    2.13
    %
    
    
    1.29
    %Financial liability
from cross-border tax lease arrangements
    
    
    6.78
    %
    
    
    6.71
    %
    
    
    7.36
    %
  26.

Accrued liabilities DismantlementandTermination
    
    
    restorationCHF in millions
    
    benefits
    
    
    costs
    
    
    Environmental
    
    
    Other
    
    
    TotalBalance at December 31, 2001
    
    
    76
    
    
    
    349
    
    
    
    32
    
    
    
    127
    
    
    
    584Additional provisions
    
    
    94
    
    
    
    3
    
    
    
    
    
    
    
    117
    
    
    
    214Present value adjustment
    
    
    3
    
    
    
    22
    
    
    
    1
    
    
    
    
    
    
    
    26Reversal of unused provisions
    
    
    (2
    )
    
    
    (3
    )
    
    
    (5
    )
    
    
    (14
    )
    
    
    (24
    )Utilized during year
    
    
    (53
    )
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    (78
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Balance at December 31, 2002
    
    
    118
    
    
    
    371
    
    
    
    28
    
    
    
    204
    
    
    
    721Additional provisions
    
    
    100
    
    
    
    4
    
    
    
    5
    
    
    
    167
    
    
    
    276Present value adjustment
    
    
    1
    
    
    
    (39
    )
    
    
    
    
    
    
    
    
    
    
    (38
    )Reversal of unused provisions
    
    
    (12
    )
    
    
    (22
    )
    
    
    
    
    
    
    (77
    )
    
    
    (111
    )Utilized during year
    
    
    (90
    )
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (125
    )Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    9Balance at December 31, 2003
    
    
    117
    
    
    
    314
    
    
    
    33
    
    
    
    268
    
    
    
    732Additional provisions
    
    
    45
    
    
    
    6
    
    
    
    
    
    
    
    188
    
    
    
    239Present value adjustment
    
    
    1
    
    
    
    22
    
    
    
    1
    
    
    
    
    
    
    
    24Reversal of unused provisions
    
    
    (4
    )
    
    
    (5
    )
    
    
    (1
    )
    
    
    (36
    )
    
    
    (46
    )Utilized during year
    
    
    (69
    )
    
    
    
    
    
    
    (4
    )
    
    
    (30
    )
    
    
    (103
    )Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Balance at December 31, 2004
    
    
    90
    
    
    
    337
    
    
    
    29
    
    
    
    392
    
    
    
    848Less current portion
    
    
    (69
    )
    
    
    
    
    
    
    
    
    
    
    (145
    )
    
    
    (214
    )Total non-current accrued liabilities
    
    
    21
    
    
    
    337
    
    
    
    29
    
    
    
    247
    
    
    
    634
  For further information concerning termination benefits see Note 7.Included within other accrued liabilities is a provision recorded for possible
liabilities relating to interconnection procedures. See Note 35. F-31




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##### Table of Contents



Provisions for dismantlement and restoration costs
Provisions for dismantlement and restoration costs relate to the dismantlement of mobile
stations and analog transmitter stations and restoration of property owned by third
parties on which the transmitters are located. In 2003, Swisscom extended the expected
timing of the dismantlement as a result of a major customer deciding, contrary to
previous intentions, to continue to use these stations for a longer period. The
dismantlements are now expected to be incurred mainly after 2010. This resulted in a
reduction in the present value of CHF 43 million. The provision is based on future
estimated costs and is discounted using a discount rate of 3.0% in 2002 and 2003 and
2.5% in 2004. The amount of the present value adjustment includes amounts arising from
the change in the discount rate in 2002, 2003 and 2004 of CHF 11 million, CHF 4 million
and CHF 12 million, respectively. In 2003, provisions were reduced by CHF 22 million due
to the elimination of the liability resulting from the sale of stations.27.

Other current liabilities CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Interest payable
    
    
    2
    
    
    
    1
    
    
    
    1VAT payable
    
    
    120
    
    
    
    111
    
    
    
    122Social security payable
    
    
    13
    
    
    
    12
    
    
    
    18Accrual for overtime and unused vacation
    
    
    72
    
    
    
    58
    
    
    
    67Accrued expense and other current liabilities
    
    
    677
    
    
    
    518
    
    
    
    546Withholding tax from share buy-back. See Note 34.
    
    
    
    
    
    
    
    
    
    
    119Liabilities from collecting activities (Billag Group)
    
    
    
    
    
    
    213
    
    
    
    201Revenue received in advance
    
    
    332
    
    
    
    254
    
    
    
    173Total other current liabilities
    
    
    1,216
    
    
    
    1,167
    
    
    
    1,247
  Revenue from the sale of telephone cards for the fixed network, which are valid
for three years, is deferred and recognized either when the services are provided or
once the card is no longer valid. Historically Swisscom was not able to reliably track
the total amount of unutilized credit for cards that were no longer valid. In 2003,
however, Swisscom implemented changes to the system to allow them to reliably track this
amount. As a result, in 2003 Swisscom released CHF 72 million to revenue, of which CHF
68 million relate to 2002 and earlier.28.

Other long-term liabilities CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Revenue received in advance
    
    
    23
    
    
    
    15
    
    
    
    13Deposits received from customers
    
    
    44
    
    
    
    36
    
    
    
    31Deferred gain on sale and leaseback of real estate
    
    
    232
    
    
    
    228
    
    
    
    223Other long-term liabilities
    
    
    8
    
    
    
    19
    
    
    
    2Total other long-term liabilities
    
    
    307
    
    
    
    298
    
    
    
    269
  The amortization of the deferred gain on sale and leaseback transactions is
included in other income. F-32




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##### Table of Contents



29.

Lease obligationThe cross-border tax lease transactions from the years 1996 and 1997 mentioned in Note
25 are reported in the balance sheet as liabilities from finance leases. Liabilities
relating to these transactions are included in the table below.In 2001, Swisscom entered into two agreements for the sale of real estate and at the
same time entered into agreements to lease back part of the sold property space. A
number of the leaseback agreements qualify as finance leases. The gain of CHF 239
million on the sale of these properties has been deferred and will be released to income
over the individual lease terms. The liability relating to these finance leases is
included in the table below. The remaining buildings have been leased back under
operating leases over periods ranging from 5 to 20 years.Future minimum payments relating to these transactions are due as follows: CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Within one year
    
    
    133
    
    
    
    121
    
    
    
    210Within 1-2 years
    
    
    129
    
    
    
    223
    
    
    
    81Within 2-3 years
    
    
    243
    
    
    
    84
    
    
    
    95Within 3-4 years
    
    
    87
    
    
    
    99
    
    
    
    167Within 4-5 years
    
    
    104
    
    
    
    177
    
    
    
    52After 5 years
    
    
    2,276
    
    
    
    2,092
    
    
    
    2,032Total future payment commitments
    
    
    2,972
    
    
    
    2,796
    
    
    
    2,637Less future interest charges
    
    
    (1,787
    )
    
    
    (1,712
    )
    
    
    (1,631
    )Total finance lease obligations (according to contract)
    
    
    1,185
    
    
    
    1,084
    
    
    
    1,006Fair value adjustments
    
    
    32
    
    
    
    18
    
    
    
    7Accrued interest
    
    
    38
    
    
    
    29
    
    
    
    22Total finance lease obligations
    
    
    1,255
    
    
    
    1,131
    
    
    
    1,035Less current portion. See Note 25.
    
    
    (63
    )
    
    
    (61
    )
    
    
    (137
    )Long-term finance lease obligation
    
    
    1,192
    
    
    
    1,070
    
    
    
    898
  The present value of finance lease liabilities is as follows: CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Within one year
    
    
    63
    
    
    
    61
    
    
    
    137Within 1-2 years
    
    
    60
    
    
    
    148
    
    
    
    29Within 2-3 years
    
    
    164
    
    
    
    30
    
    
    
    43Within 3-4 years
    
    
    32
    
    
    
    46
    
    
    
    119Within 4-5 years
    
    
    50
    
    
    
    129
    
    
    
    8After 5 years
    
    
    816
    
    
    
    670
    
    
    
    670Total finance lease obligations (according to contract)
    
    
    1,185
    
    
    
    1,084
    
    
    
    1,006
  The weighted-average effective interest rates for obligations from finance lease
amounted to 4.93%, 5.16% and 6.29% for 2002, 2003 and 2004, respectively.Payments for operating leases amounted to CHF 84 million, CHF 87 million and CHF 110
million in 2002, 2003 and 2004, respectively. Future minimum lease payments resulting
from operating lease contracts are due as follows: CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Within one year
    
    
    77
    
    
    
    86
    
    
    
    113Within 1-5 years
    
    
    245
    
    
    
    201
    
    
    
    227After 5 years
    
    
    218
    
    
    
    179
    
    
    
    204Total future payment commitments from operating leases
    
    
    540
    
    
    
    466
    
    
    
    544
 F-33




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##### Table of Contents



30.

Minority interests CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Balance at beginning of year
    
    
    770
    
    
    
    781
    
    
    
    731Share of net profit of subsidiaries
    
    
    301
    
    
    
    340
    
    
    
    352Effect of acquisitions and divestitures
    
    
    10
    
    
    
    
    
    
    
    (60
    )Dividends paid to minority interests
    
    
    (300
    )
    
    
    (390
    )
    
    
    (360
    )Balance at end of year
    
    
    781
    
    
    
    731
    
    
    
    663
  31.

Shareholders equityShares issued at December 31, 2002, 2003 and 2004, totalled 66,203,261. Each share has a
par value of CHF 9 (2002) and CHF 1 (2003 and 2004). All issued shares are fully paid.
Each share entitles the holder to one vote.The number of treasury stock and shares outstanding is as follows: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Issued shares at beginning of year
    
    
    73,550,000
    
    
    
    66,203,261
    
    
    
    66,203,261Treasury stock at beginning of year
    
    
    (3,431
    )
    
    
    (1,605
    )
    
    
    (2,272
    )Balance of shares outstanding at beginning of year
    
    
    73,546,569
    
    
    
    66,201,656
    
    
    
    66,200,989Purchase and sale, net
    
    
    (123,442
    )
    
    
    (54,306
    )
    
    
    (99,519
    )Sale of treasury stock in share purchase schemes. See Note 8.
    
    
    125,268
    
    
    
    53,639
    
    
    
    99,364Share buy-back
    
    
    
    
    
    
    
    
    
    
    (4,720,500
    )Balance of treasury stock at end of year
    
    
    (1,605
    )
    
    
    (2,272
    )
    
    
    (4,722,927
    )Shares bought back and cancelled
    
    
    (7,346,739
    )
    
    
    
    
    
    
    Balance of shares outstanding at end of year
    
    
    66,201,656
    
    
    
    66,200,989
    
    
    
    61,480,334
  The average and transaction price for treasury stock was: Number
    
    
    Average price in CHF
    
    
    CHF in millionBalance at December 31, 2001
    
    
    3,431
    
    
    
    437
    
    
    
    2Purchase and sale, net
    
    
    123,442
    
    
    
    500
    
    
    
    62Sale of treasury stock in share purchase schemes. See Note 8.
    
    
    (125,268
    )
    
    
    500
    
    
    
    (63
    )Share buy-back
    
    
    7,346,739
    
    
    
    580
    
    
    
    4,264Capital reduction
    
    
    (7,346,739
    )
    
    
    580
    
    
    
    (4,264
    )Balance at December 31, 2002
    
    
    1,605
    
    
    
    435
    
    
    
    1Purchase and sale, net
    
    
    54,306
    
    
    
    434
    
    
    
    23Sale of treasury stock in share purchase schemes. See Note 8.
    
    
    (53,639
    )
    
    
    434
    
    
    
    (23
    )Balance at December 31, 2003
    
    
    2,272
    
    
    
    435
    
    
    
    1Purchase and sale, net
    
    
    99,519
    
    
    
    423
    
    
    
    42Sale of treasury stock in share purchase schemes. See Note 8.
    
    
    (99,364
    )
    
    
    423
    
    
    
    (42
    )Share buy-back
    
    
    4,720,500
    
    
    
    424
    
    
    
    2,001Balance at December 31, 2004
    
    
    4,722,927
    
    
    
    424
    
    
    
    2,002
 F-34




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##### Table of Contents



32.

Financial instruments CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Foreign exchange derivativesForward exchange contracts in USD
    
    
    273
    
    
    
    262
    
    
    
    162Forward exchange contracts in EUR
    
    
    254
    
    
    
    42
    
    
    
    23Forward exchange swaps in EUR
    
    
    
    
    
    
    468
    
    
    
    16Forward exchange swaps in USD
    
    
    21
    
    
    
    
    
    
    
    Cross currency interest rate swaps in USD*
    
    
    667
    
    
    
    558
    
    
    
    479Total foreign exchange derivatives
    
    
    1,215
    
    
    
    1,330
    
    
    
    680Interest rate derivativesInterest rate swaps in USD
    
    
    320
    
    
    
    236
    
    
    
    175Cross currency interest rate swaps in USD*
    
    
    369
    
    
    
    319
    
    
    
    254Total interest rate derivatives
    
    
    689
    
    
    
    555
    
    
    
    429Total derivative financials instruments
    
    
    1,904
    
    
    
    1,885
    
    
    
    1,109
  *

Separated in foreign exchange and interest rate components. CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    31.12.04Contracts with positive fair valuesFair value hedges
    
    
    33
    
    
    
    18
    
    
    
    6Cash flow hedges
    
    
    
    
    
    
    (1
    )
    
    
    Non qualifying derivative financial instruments
    
    
    39
    
    
    
    29
    
    
    
    11Total. See Note 17.
    
    
    72
    
    
    
    46
    
    
    
    17Contracts with negative fair valuesFair value hedges
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Cash flow hedges
    
    
    29
    
    
    
    20
    
    
    
    19Non qualifying derivative financial instruments
    
    
    102
    
    
    
    181
    
    
    
    219Total. See Note 25.
    
    
    131
    
    
    
    195
    
    
    
    232
  Included in the derivative financial instruments are primarily cross-currency
interest rate swaps, interest rate swaps and foreign exchange forwards to hedge interest
rate risks and foreign exchange risks with respect to USD relating to the cross-border
lease arrangements entered into in 1996, 1997, 2000 and 2002. The maximum length of time
hedged is four years for cross-border lease arrangements entered into in 1996 and 1997,
24 years for arrangements entered into in 2000 and nine years for arrangements entered
into in 2002.Also included are foreign exchange forwards for EUR and USD contained in derivative
instruments designated to hedge future transactions in connection with the procurement
of mobile equipment and obligations arising from international telephone traffic. They
are classified as non qualifying derivative financial instruments as they do not qualify
as cash flow hedges. F-35




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##### Table of Contents



Fair value of financial instrumentsThe following table presents the carrying amounts and fair values of Swisscoms
financial instruments outstanding at December 31, 2002, 2003 and 2004. The carrying
amounts in the table are included in the balance sheet under the indicated captions. The
fair value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a forced or
liquidated sale. Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairCHF in millions
    
    amount 2002
    
    
    value 2002
    
    
    amount 2003
    
    
    value 2003
    
    
    amount 2004
    
    
    value 2004Financial assetsCash and cash equivalents
    
    
    1,512
    
    
    
    1,512
    
    
    
    3,104
    
    
    
    3,104
    
    
    
    2,387
    
    
    
    2,387Current financial assets
    
    
    266
    
    
    
    266
    
    
    
    251
    
    
    
    251
    
    
    
    1,285
    
    
    
    1,285Trade accounts receivable
    
    
    2,059
    
    
    
    2,059
    
    
    
    1,831
    
    
    
    1,831
    
    
    
    1,767
    
    
    
    1,767Other current assets
    
    
    270
    
    
    
    270
    
    
    
    636
    
    
    
    636
    
    
    
    646
    
    
    
    646Non-current financial assets*
    
    
    1,531
    
    
    
    2,073
    
    
    
    1,337
    
    
    
    1,787
    
    
    
    1,275
    
    
    
    1,640Financial liabilitiesShort-term debt*
    
    
    960
    
    
    
    970
    
    
    
    516
    
    
    
    515
    
    
    
    384
    
    
    
    384Trade accounts payable
    
    
    600
    
    
    
    600
    
    
    
    605
    
    
    
    605
    
    
    
    511
    
    
    
    511Long-term debt*
    
    
    1,482
    
    
    
    2,088
    
    
    
    1,338
    
    
    
    1,804
    
    
    
    1,253
    
    
    
    1,665Finance lease obligation*
    
    
    1,192
    
    
    
    1,670
    
    
    
    1,070
    
    
    
    1,480
    
    
    
    898
    
    
    
    1,381
  *

The difference between carrying value and net fair value relates
principally to the interest rate movements.  Estimation of fair valuesTrade accounts receivable, trade accounts payable and other current assets
The carrying amounts are a reasonable estimate of the fair value because of the short
maturity of such instruments.Cash and cash equivalents, current financial assets and non-current financial assets
The carrying amounts of cash and loans receivable correspond to fair value. The fair
value of available-for-sale investments is based on stock exchange quoted bid prices or
other market prices. The fair value of financial assets from cross-border tax lease
arrangements included in non-current financial assets is calculated using the expected
future payments discounted at market interest rates.Finance lease obligations
The fair value of finance lease obligations is estimated using the expected future
payments discounted at market interest rates.Debt
The fair value of fixed rate debt is estimated using the expected future payments
discounted at market interest rates. F-36




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##### Table of Contents



33.

Fair value and other reserves Hedging
    
    
    Fair value
    
    
    TranslationCHF in millions
    
    reserve
    
    
    reserve
    
    
    reserve
    
    
    TotalBalance at December 31, 2001
    
    
    3
    
    
    
    1
    
    
    
    (288
    )
    
    
    (284
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (18
    )Transfers to income statement
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Revaluation
    
    
    (37
    )
    
    
    (32
    )
    
    
    
    
    
    
    (69
    )Tax effect
    
    
    7
    
    
    
    1
    
    
    
    
    
    
    
    8Balance at December 31, 2002
    
    
    (23
    )
    
    
    (30
    )
    
    
    (306
    )
    
    
    (359
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    115Write-off of translation gain from sale of investment in Cesky Telecom
    
    
    
    
    
    
    
    
    
    
    (41
    )
    
    
    (41
    )Fair value adjustments of current available-for-sale investments
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    19Fair value adjustments of
non-current available-for-sale investments
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (31
    )Impairment of current available-for-sale investments
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    22Fair value adjustments of derivative financial instruments
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    9Transfers in equity
    
    
    
    
    
    
    (7
    )
    
    
    7
    
    
    
    Tax effect
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Balance at December 31, 2003
    
    
    (14
    )
    
    
    (25
    )
    
    
    (225
    )
    
    
    (264
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (21
    )Write-off of translation loss from sale of debitel
    
    
    
    
    
    
    
    
    
    
    238
    
    
    
    238Fair value adjustments of current available-for-sale investments
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    41Fair value adjustments
of non-current available-for-sale investments
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Impairment of investment in Infonet Services Corp.
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    32Gain on sale of investment in Eutelsat
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (9
    )Impairment of current available-for-sale investments
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Fair value adjustments of derivative financial instruments
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Tax effect
    
    
    (2
    )
    
    
    (4
    )
    
    
    
    
    
    
    (6
    )Balance at December 31, 2004
    
    
    (14
    )
    
    
    38
    
    
    
    (8
    )
    
    
    16
  For further information on impairments see Notes 17 and 24. Revaluation and fair
value adjustments comprise primarily the effect on fair value adjustments,
cross-currency interest rate swaps, interest rate swaps and foreign exchange forwards
for the cross-border tax lease transactions and to the current and non-current
available-for-sale investments. See Notes 17 and 24.34.

Cash generated from operations and significant non-cash investing and financing
transactions Year ended December 31CHF in millions
    
    Note
    
    
    2002
    
    
    2003
    
    
    2004Net Income
    
    
    
    
    
    
    824
    
    
    
    1,569
    
    
    
    1,594Adjustments for Discontinued operation (debitel)
    
    
    39
    
    
    
    933
    
    
    
    408
    
    
    
    243Minority interest
    
    
    30
    
    
    
    301
    
    
    
    340
    
    
    
    352Equity in net income of affiliated companies
    
    
    22
    
    
    
    (94
    )
    
    
    9
    
    
    
    (22
    )Income tax expense
    
    
    13
    
    
    
    313
    
    
    
    467
    
    
    
    394Depreciation
    
    
    21,23
    
    
    
    1,552
    
    
    
    1,543
    
    
    
    1,548Amortization
    
    
    23
    
    
    
    114
    
    
    
    142
    
    
    
    151Issuance of shares and options to management and employees
    
    
    8
    
    
    
    39
    
    
    
    12
    
    
    
    14Net loss on disposal of fixed assets
    
    
    5,10
    
    
    
    52
    
    
    
    18
    
    
    
    18Financial expense
    
    
    11
    
    
    
    508
    
    
    
    196
    
    
    
    285Financial income
    
    
    12
    
    
    
    (197
    )
    
    
    (170
    )
    
    
    (141
    )4,345
    
    
    
    4,534
    
    
    
    4,436Changes in operating assets and liabilities, net of effects
of acquisitions and disposals of subsidiariesDecrease in trade accounts receivable
    
    
    
    
    
    
    37
    
    
    
    229
    
    
    
    64Decrease (increase) in inventories
    
    
    
    
    
    
    49
    
    
    
    39
    
    
    
    (27
    )Decrease (increase) in other current assets
    
    
    
    
    
    
    1
    
    
    
    6
    
    
    
    (21
    )Decrease in trade accounts payable
    
    
    
    
    
    
    (78
    )
    
    
    (18
    )
    
    
    (95
    )(Decrease) increase in other current and accrued liabilities
    
    
    
    
    
    
    (48
    )
    
    
    (106
    )
    
    
    7Decrease in other long-term liabilities
    
    
    
    
    
    
    (27
    )
    
    
    (25
    )
    
    
    (14
    )(Decrease) increase in accrued pension cost
    
    
    
    
    
    
    (117
    )
    
    
    5
    
    
    
    5Cash generated from operations
    
    
    
    
    
    
    4,162
    
    
    
    4,664
    
    
    
    4,355
 F-37




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##### Table of Contents



Significant non-cash investing and financing transactions
At the end of May 2004, Swisscom launched a scheme to buy back up to CHF 2 billion worth
of shares. The seller receives the selling price of the share less the withholding tax
of 35%. As of December 31, 2004, shares had been bought back for a total of CHF 2,001
million, of which 35% or CHF 700 million is due in withholding tax. Until December 31,
2004, CHF 581 million had been paid to the tax authorities. The outstanding CHF 119
million, included under other current liabilities, will be paid in the first quarter of
2005. In the cash flow statement, the outstanding withholding tax is not presented as a
change in other current liabilities.In connection with the sale of debitel Swisscom granted the buyer for a portion of the
purchase price two vendor loan notes with a total nominal value of EUR 210 million. The
vendor loan notes are initially recognized at fair value of CHF 254 million under
non-current financial assets. Until December 2004, the carrying amount of the loans had
increased by CHF 19 million through application of the effective interest rate method.
See Note 39.35.

Commitments and contingenciesContractual commitments for future capital expenditures and investments
Contractual commitments for future capital expenditures at December 31, 2004, amounted
to CHF 134 million, of which CHF 124 million will be due in 2005.Proceedings relating to Fixed-Fixed Interconnection
Swisscom provides interconnection to other telecommunications service providers in
Switzerland. In 2000 two telecommunications service providers filed petitions with the
Federal Communications Commission (ComCom) demanding that interconnection conditions be
laid down by the court and cost-oriented prices be fixed. On November 6, 2003, ComCom
issued decisions in both proceedings, requiring Swisscom to lower interconnection prices
with retroactive effect for the years 2000 to 2003 by 25% to 35%. Swisscom lodged an
appeal against the ComCom decision with the Federal Court. The two competitors also
filed an appeal demanding further reductions than decided by ComCom, without specifying
an amount.In their judgment of October 1, 2004, the Federal Court approved the appeals of the
parties, overturned the ComCom decisions on procedural grounds and referred the matter
back to ComCom for a new decision. On January 28, 2005, BAKOM (Federal Agency for
Communication) served the new proposal to ComCom to the parties. BAKOM proposes a
reduction in interconnection prices of 25% to 35% depending on the product. Swisscom and
the two petitioners have now been given the opportunity to make a statement on the
matter before ComCom makes a decision on the disputed interconnection prices.In 2004 the two petitioners and two further competitors filed petitions requesting
cost-oriented prices for 2004. In addition, the two new petitioners, based on ComComs
ruling of November 6, 2003, applied for a retroactive reduction from the year 2000.
These proceedings have currently been suspended.In addition to the interconnection prices for 2000 to 2003, ComCom will also rule on
individual contractual provisions, including the question of the effect of decisions of
authorities on third parties. Swisscom may also lodge an appeal against these new
rulings with the Federal Court. The final decision and the settlement of these
obligations are not expected prior to mid-2006.Swisscom has recorded a provision representing managements best estimate, since the
lawsuits were filed. However, Swisscom could be required to incur amounts in excess of
managements estimate and such additional amounts could be material. Swisscom assumes
that a ruling will only be valid for the petitioners for the period for which they have
submitted their petition and that other parties will not be able to benefit from such a
ruling.The information required by IAS 37 Provision, Contingent Liabilities and Contingent
Assets with respect of the financial effect and uncertainties relating to the amount
has not been disclosed, since a disclosure of the information would seriously prejudice
the position of Swisscom in the current legal proceedings. F-38




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##### Table of Contents



36.

Segment reportingSince the beginning of 2004, Enterprise Solutions has been selling its services to
customers requiring complex telecommunication solutions including 4,000 Swiss large
companies, whereas Fixnet provides standardized telecommunication services for
residential and business customers. For this reason, Fixnet took over from Enterprise
Solutions some 46,000 customers. At the same time over 100 employees transferred from
Enterprise Solutions to Fixnet. As a result of this change the previous years figures
were restated to take into account the new structure.The Fixnet segment provides primarily access services to residential and business
customers, fixed retail telephony traffic in respect of residential and business
customers, wholesale traffic services offered to national and international
telecommunication providers and payphone services, operator services and prepaid calling
cards. Fixnet also provides leased lines, sells customer equipment and operates a
directories database.Mobile consists principally of mobile telephony, which includes domestic and
international traffic for calls made in Switzerland or abroad by Swisscoms customers
and roaming by foreign operators whose customers use their GSM mobile telephones over
Swisscoms networks. It also consists of value-added services numbers, data traffic as
well as the sale of mobile handsets.Enterprise Solutions provides primarily national and international fixed-line voice
telephony services to business customers, networking which includes primarily national
and international leased lines, intranet services as well as national and, through
Infonet Switzerland, international private network services, revenue from inhouse and
processes, which include primarily business numbers and revenue from a variety of other
services, including consulting, business internet services and public data network
services.The segment Other mainly comprises Swisscom Systems AG, Swisscom IT Services AG,
Swisscom Broadcast AG, as well as the Billag and the Swisscom Eurospot Group.Corporate covers the costs of headquarters, the real-estate company, the employment
company Worklink and costs not directly allocable to a segment.Following the sale, the debitel segment is reported separately as a discontinued
business. See Note 39.Swisscom Systems merged with Swisscom Enterprise Solutions as of January 1, 2005, and
will be disclosed as the Swisscom Solutions segment from 2005 onwards.Intersegment revenue is determined on the basis of annually agreed internal transfer
prices. Costs are allocated to the individual segments based on various factors
determined by management and commensurate with the level of usage. Costs relating to
termination benefits are calculated per segment for the employees participating in one
of the workforce reduction programs and are recorded as part of that segments expense.
Not all of the costs relating to termination benefits recorded by the segments meet the
criteria for recognition under IFRS on the Group level, and consequently CHF 119
million, CHF 106 million and CHF 18 million was eliminated in 2002, 2003 and 2004,
respectively, in the Corporate segment in the consolidated financial statements.Intersegment profits and losses may occur as a result of billing intersegment services
and sales of assets. These are eliminated in the consolidated financial statements and
disclosed in segment reporting in the column Elimination. Segment assets include all
operating assets used by a segment and comprise receivables, inventories, other current
assets, property, plant and equipment and intangibles. Segment liabilities include all
operating liabilities and comprise primarily accounts payable, accrued pension costs,
accrued liabilities and other liabilities.Swisscoms operations are focused mainly in Switzerland, where it provides a full range
of telecommunication services. After the sale of debitel, Swisscom has no significant
business activity abroad. F-39




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##### Table of Contents



2002
    
    
    
    
    
    
    
    
    
    EnterpriseCHF in millions
    
    Fixnet
    
    
    Mobile
    
    
    Solutions
    
    
    Other
    
    
    Corporate
    
    
    Elimination
    
    
    TotalNet revenue from external customers
    
    
    4,907
    
    
    
    3,434
    
    
    
    1,167
    
    
    
    833
    
    
    
    74
    
    
    
    
    
    
    
    10,415Intersegment net revenue
    
    
    1,320
    
    
    
    678
    
    
    
    174
    
    
    
    630
    
    
    
    630
    
    
    
    (3,432
    )
    
    
    Net revenue
    
    
    6,227
    
    
    
    4,112
    
    
    
    1,341
    
    
    
    1,463
    
    
    
    704
    
    
    
    (3,432
    )
    
    
    10,415Goods and services purchased
    
    
    (1,069
    )
    
    
    (767
    )
    
    
    (93
    )
    
    
    (143
    )
    
    
    (1
    )
    
    
    
    
    
    
    (2,073
    )Personnel expenses
    
    
    (1,069
    )
    
    
    (269
    )
    
    
    (196
    )
    
    
    (686
    )
    
    
    (109
    )
    
    
    
    
    
    
    (2,329
    )Other operating expenses
    
    
    (700
    )
    
    
    (476
    )
    
    
    (56
    )
    
    
    (357
    )
    
    
    (397
    )
    
    
    (3
    )
    
    
    (1,989
    )Intersegment expenses
    
    
    (1,540
    )
    
    
    (644
    )
    
    
    (958
    )
    
    
    (171
    )
    
    
    (100
    )
    
    
    3,413
    
    
    
    Other income
    
    
    84
    
    
    
    18
    
    
    
    
    
    
    
    5
    
    
    
    101
    
    
    
    22
    
    
    
    230Segment expenses
    
    
    (4,294
    )
    
    
    (2,138
    )
    
    
    (1,303
    )
    
    
    (1,352
    )
    
    
    (506
    )
    
    
    3,432
    
    
    
    (6,161
    )Operating income before
depreciation and amortization (EBITDA)
    
    
    1,933
    
    
    
    1,974
    
    
    
    38
    
    
    
    111
    
    
    
    198
    
    
    
    
    
    
    
    4,254Margin in %
    
    
    31.0
    
    
    
    48.0
    
    
    
    2.8
    
    
    
    7.6
    
    
    
    28.1
    
    
    
    
    
    
    
    40.8Depreciation and amortization
    
    
    (1,049
    )
    
    
    (289
    )
    
    
    (32
    )
    
    
    (205
    )
    
    
    (65
    )
    
    
    
    
    
    
    (1,640
    )Operating
income before
goodwill amortization
    
    
    884
    
    
    
    1,685
    
    
    
    6
    
    
    
    (94
    )
    
    
    133
    
    
    
    
    
    
    
    2,614Amortization of goodwill
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (26
    )Operating income (EBIT)
    
    
    878
    
    
    
    1,685
    
    
    
    6
    
    
    
    (114
    )
    
    
    133
    
    
    
    
    
    
    
    2,588Segment assets
    
    
    6,310
    
    
    
    2,073
    
    
    
    337
    
    
    
    778
    
    
    
    1,424
    
    
    
    (716
    )
    
    
    10,206Affiliated companies
    
    
    43
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    630
    
    
    
    
    
    
    
    682Not allocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,935Discontinued operation (debitel)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,135Total assets
    
    
    6,353
    
    
    
    2,073
    
    
    
    346
    
    
    
    778
    
    
    
    2,054
    
    
    
    (716
    )
    
    
    16,958Segment liabilities
    
    
    1,738
    
    
    
    623
    
    
    
    377
    
    
    
    618
    
    
    
    1,304
    
    
    
    (716
    )
    
    
    3,944Not allocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,048Discontinued operation (debitel)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    886Total liabilities
    
    
    1,738
    
    
    
    623
    
    
    
    377
    
    
    
    618
    
    
    
    1,304
    
    
    
    (716
    )
    
    
    8,878Capital expenditure
    
    
    585
    
    
    
    392
    
    
    
    23
    
    
    
    103
    
    
    
    24
    
    
    
    
    
    
    
    1,127Depreciation and amortization
    
    
    1,055
    
    
    
    289
    
    
    
    32
    
    
    
    225
    
    
    
    65
    
    
    
    
    
    
    
    1,666(Loss) gain on disposal of assets
    
    
    (50
    )
    
    
    (3
    )
    
    
    (1
    )
    
    
    (7
    )
    
    
    9
    
    
    
    
    
    
    
    (52
    )Income from affiliated companies
    
    
    15
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    94
  Geographical Segments Additions toproperty, plantCarrying amount
    
    
    and equipment and2002
    
    Net revenue
    
    
    of assets
    
    
    intangible assetsSwitzerland
    
    
    10,180
    
    
    
    14,436
    
    
    
    1,125International activities
    
    
    235
    
    
    
    387
    
    
    
    2Discontinued operation (debitel)
    
    
    
    
    
    
    2,135
    
    
    
    Total
    
    
    10,415
    
    
    
    16,958
    
    
    
    1,127
 F-40




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##### Table of Contents



2003
    
    
    
    
    
    
    
    
    
    EnterpriseCHF in millions
    
    Fixnet
    
    
    Mobile
    
    
    Solutions
    
    
    Other
    
    
    Corporate
    
    
    Elimination
    
    
    TotalNet revenue from external customers
    
    
    4,601
    
    
    
    3,511
    
    
    
    1,081
    
    
    
    761
    
    
    
    72
    
    
    
    
    
    
    
    10,026Intersegment net revenue
    
    
    1,180
    
    
    
    629
    
    
    
    129
    
    
    
    543
    
    
    
    631
    
    
    
    (3,112
    )
    
    
    Net revenue
    
    
    5,781
    
    
    
    4,140
    
    
    
    1,210
    
    
    
    1,304
    
    
    
    703
    
    
    
    (3,112
    )
    
    
    10,026Goods and services purchased
    
    
    (690
    )
    
    
    (801
    )
    
    
    (77
    )
    
    
    (138
    )
    
    
    
    
    
    
    
    
    
    
    (1,706
    )Personnel expenses
    
    
    (1,017
    )
    
    
    (297
    )
    
    
    (203
    )
    
    
    (585
    )
    
    
    (164
    )
    
    
    
    
    
    
    (2,266
    )Other operating expenses
    
    
    (643
    )
    
    
    (473
    )
    
    
    (40
    )
    
    
    (283
    )
    
    
    (339
    )
    
    
    (5
    )
    
    
    (1,783
    )Intersegment expenses
    
    
    (1,411
    )
    
    
    (599
    )
    
    
    (809
    )
    
    
    (160
    )
    
    
    (71
    )
    
    
    3,050
    
    
    
    Other income
    
    
    108
    
    
    
    14
    
    
    
    
    
    
    
    18
    
    
    
    26
    
    
    
    67
    
    
    
    233Segment expenses
    
    
    (3,653
    )
    
    
    (2,156
    )
    
    
    (1,129
    )
    
    
    (1,148
    )
    
    
    (548
    )
    
    
    3,112
    
    
    
    (5,522
    )Operating income before
depreciation and amortization (EBITDA)
    
    
    2,128
    
    
    
    1,984
    
    
    
    81
    
    
    
    156
    
    
    
    155
    
    
    
    
    
    
    
    4,504Margin in %
    
    
    36.8
    
    
    
    47.9
    
    
    
    6.7
    
    
    
    12.0
    
    
    
    22.0
    
    
    
    
    
    
    
    44.9Depreciation and amortization
    
    
    (1,076
    )
    
    
    (310
    )
    
    
    (33
    )
    
    
    (164
    )
    
    
    (61
    )
    
    
    
    
    
    
    (1,644
    )Operating
income before
goodwill amortization
    
    
    1,052
    
    
    
    1,674
    
    
    
    48
    
    
    
    (8
    )
    
    
    94
    
    
    
    
    
    
    
    2,860Amortization of goodwill
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    (41
    )Operating income (EBIT)
    
    
    1,045
    
    
    
    1,674
    
    
    
    48
    
    
    
    (42
    )
    
    
    94
    
    
    
    
    
    
    
    2,819.Segment assets
    
    
    5,787
    
    
    
    2,153
    
    
    
    294
    
    
    
    1,176
    
    
    
    1,255
    
    
    
    (732
    )
    
    
    9,933Affiliated companies
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    41Not allocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,881Discontinued operation (debitel)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,685
    
    
    
    1,685Total assets
    
    
    5,826
    
    
    
    2,153
    
    
    
    294
    
    
    
    1,176
    
    
    
    1,257
    
    
    
    953
    
    
    
    16,540Segment liabilities
    
    
    1,660
    
    
    
    704
    
    
    
    349
    
    
    
    779
    
    
    
    1,155
    
    
    
    (732
    )
    
    
    3,915Not allocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,431Discontinued operation (debitel)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    794
    
    
    
    794Total liabilities
    
    
    1,660
    
    
    
    704
    
    
    
    349
    
    
    
    779
    
    
    
    1,155
    
    
    
    62
    
    
    
    8,140Capital expenditures
    
    
    583
    
    
    
    431
    
    
    
    13
    
    
    
    119
    
    
    
    19
    
    
    
    
    
    
    
    1,165Depreciation and amortization
    
    
    1,083
    
    
    
    310
    
    
    
    33
    
    
    
    198
    
    
    
    61
    
    
    
    
    
    
    
    1,685(Loss) gain on disposal of assets
    
    
    (14
    )
    
    
    (10
    )
    
    
    (4
    )
    
    
    (5
    )
    
    
    15
    
    
    
    
    
    
    
    (18
    )Income from affiliated companies
    
    
    10
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (9
    )
  Geographical Segments Additions toproperty, plant2003
    
    
    
    
    
    Carrying amount
    
    
    and equipment andCHF in millions
    
    Net revenue
    
    
    of assets
    
    
    intangible assetsSwitzerland
    
    
    9,993
    
    
    
    14,751
    
    
    
    1,149International activities
    
    
    33
    
    
    
    104
    
    
    
    16Discontinued operation (debitel)
    
    
    
    
    
    
    1,685
    
    
    
    Total
    
    
    10,026
    
    
    
    16,540
    
    
    
    1,165
 F-41




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##### Table of Contents



2004
    
    
    
    
    
    
    
    
    
    EnterpriseCHF in millions
    
    Fixnet
    
    
    Mobile
    
    
    Solutions
    
    
    Other
    
    
    Corporate
    
    
    Elimination
    
    
    TotalNet revenue from external customers
    
    
    4,555
    
    
    
    3,679
    
    
    
    987
    
    
    
    768
    
    
    
    68
    
    
    
    
    
    
    
    10,057Intersegment net revenue
    
    
    1,160
    
    
    
    677
    
    
    
    139
    
    
    
    527
    
    
    
    540
    
    
    
    (3,043
    )
    
    
    Net revenue
    
    
    5,715
    
    
    
    4,356
    
    
    
    1,126
    
    
    
    1,295
    
    
    
    608
    
    
    
    (3,043
    )
    
    
    10,057Goods and services purchased
    
    
    (693
    )
    
    
    (971
    )
    
    
    (85
    )
    
    
    (106
    )
    
    
    
    
    
    
    8
    
    
    
    (1,847
    )Personnel expenses
    
    
    (954
    )
    
    
    (310
    )
    
    
    (155
    )
    
    
    (522
    )
    
    
    (253
    )
    
    
    
    
    
    
    (2,194
    )Other operating expenses
    
    
    (580
    )
    
    
    (505
    )
    
    
    (28
    )
    
    
    (327
    )
    
    
    (368
    )
    
    
    (1
    )
    
    
    (1,809
    )Intersegment expenses
    
    
    (1,403
    )
    
    
    (610
    )
    
    
    (778
    )
    
    
    (142
    )
    
    
    (53
    )
    
    
    2,986
    
    
    
    Other income
    
    
    85
    
    
    
    16
    
    
    
    
    
    
    
    12
    
    
    
    29
    
    
    
    55
    
    
    
    197Segment expenses
    
    
    (3,545
    )
    
    
    (2,380
    )
    
    
    (1,046
    )
    
    
    (1,085
    )
    
    
    (645
    )
    
    
    3,048
    
    
    
    (5,653
    )Operating income before
depreciation and amortization (EBITDA)
    
    
    2,170
    
    
    
    1,976
    
    
    
    80
    
    
    
    210
    
    
    
    (37
    )
    
    
    5
    
    
    
    4,404Margin in %
    
    
    38.0
    
    
    
    45.4
    
    
    
    7.1
    
    
    
    16.2
    
    
    
    -6.1
    
    
    
    
    
    
    
    43.8Depreciation and amortization
    
    
    (910
    )
    
    
    (359
    )
    
    
    (14
    )
    
    
    (159
    )
    
    
    (54
    )
    
    
    1
    
    
    
    (1,495
    )Impairment on fixed assets
    
    
    (155
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (155
    )Operating
income before
goodwill amortization
    
    
    1,105
    
    
    
    1,617
    
    
    
    66
    
    
    
    51
    
    
    
    (91
    )
    
    
    6
    
    
    
    2,754Amortization of goodwill
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    
    
    
    
    (49
    )Operating income (EBIT)
    
    
    1,098
    
    
    
    1,617
    
    
    
    66
    
    
    
    9
    
    
    
    (91
    )
    
    
    6
    
    
    
    2,705..Segment assets
    
    
    4,967
    
    
    
    2,335
    
    
    
    230
    
    
    
    1,187
    
    
    
    1,182
    
    
    
    (557
    )
    
    
    9,344Affiliated companies
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58Not allocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,046Total assets
    
    
    5,025
    
    
    
    2,335
    
    
    
    230
    
    
    
    1,187
    
    
    
    1,182
    
    
    
    (557
    )
    
    
    14,448Segment liabilities
    
    
    1,578
    
    
    
    604
    
    
    
    263
    
    
    
    758
    
    
    
    1,353
    
    
    
    (563
    )
    
    
    3,993Not allocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,111Total liabilities
    
    
    1,578
    
    
    
    604
    
    
    
    263
    
    
    
    758
    
    
    
    1,353
    
    
    
    (563
    )
    
    
    7,104Capital expenditures
    
    
    433
    
    
    
    513
    
    
    
    16
    
    
    
    164
    
    
    
    19
    
    
    
    (9
    )
    
    
    1,136Depreciation and amortization
and impairment
    
    
    1,072
    
    
    
    359
    
    
    
    14
    
    
    
    201
    
    
    
    54
    
    
    
    (1
    )
    
    
    1,699(Loss) gain on disposal of assets, net
    
    
    (14
    )
    
    
    (5
    )
    
    
    
    
    
    
    (4
    )
    
    
    7
    
    
    
    (2
    )
    
    
    (18
    )Income from affiliated companies
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    22
  Geographical Segments Additions toproperty, plant2004
    
    
    
    
    
    Carrying amount
    
    
    and equipment andCHF in millions
    
    Net revenue
    
    
    of assets
    
    
    intangible assetsSwitzerland
    
    
    10,048
    
    
    
    14,315
    
    
    
    1,085International activities
    
    
    9
    
    
    
    133
    
    
    
    51Total
    
    
    10,057
    
    
    
    14,448
    
    
    
    1,136
 F-42




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##### Table of Contents



37.

Research and developmentResearch and development expenditure not including software development costs amounted
to CHF 41 million and CHF 39 million in 2003 and 2004, respectively.38.

Executive Board and Board of DirectorsTotal compensation paid by Swisscom to the Board of Directors in 2002, 2003 and 2004
amounted to CHF 1.7 million, CHF 1.9 million and CHF 1.9 million, respectively. Total
compensation paid by Swisscom to Executive Board members in 2002, 2003 and 2004 amounted
to CHF 9.2 million, CHF 9.9 million and CHF 8.2 million, respectively, including CHF 0.5
million, CHF 0.7 million and CHF 0.6 million relating to contractual commitments for
departing members. Total compensation includes fees, salary, bonuses, special pension
fund contributions and other contractual obligations. In addition, for the benefit of
its Board of Directors Swisscom made social security contributions of CHF 0.2 million
and CHF 0.3 million and CHF 0.2 million in 2002, 2003 and 2004, respectively. For the
benefit of its Executive Board members Swisscom made social security and ordinary
pension fund contributions and insurance payments CHF 1.1 million in 2002, CHF 1.4
million in 2003 and CHF 1.4 million in 2004. In 2002, 2003 and 2004, the Executive Board
consisted of 13, 12 and 10 members, respectively. In 2002 and 2003, 25% of the Executive
Boards bonus was paid in stock and stock options. In 2004, for the first time no
options were given and 25% of the bonus was paid in shares. In 2002 and 2003, 25% of the
Board of Directors fixed compensation was also paid in stock and stock options. As with
the members of the Executive Board, the members of the Board of Directors were also
remunerated in shares in 2004 and no options were given. See Note 8.39.

Discontinued operation (debitel)On April 29, 2004, Swisscom entered into an agreement to sell its stake in debitel to
Telco Holding S.à.r.l. Luxembourg. Telco Holding S.à.r.l. is owned by funds advised by
the private equity company Permira. On June 8, 2004, Swisscom completed the sale of its
stake in debitel to Telco Holding S.à.r.l. Luxemburg for a total of EUR 640 million. In
April 2004, before the sale, Swisscom acquired 2% of debitel shares from
Electronic-Partner (EP) thus increasing its investment in debitel to 95% prior to
entering into the sale agreement. Of the selling price EUR 430 million was paid in cash
in 2004 (before deduction of cash and cash equivalents of CHF 131 million left in
debitel). For the remaining part of the selling price of EUR 210 million Swisscom
granted a 100% subsidiary of Telco Holding S.à.r.l. two vendor loan notes, of EUR 105
million each.The repayments of the loans of EUR 210 million in total are scheduled in seven and eight
years, respectively. The loans were initially recorded at their fair value of CHF 254
million in total and in the following periods will be recorded using the effective
interest rate method. The fair value evaluation was based on an interest rate of 12.5%.Swisscom has also agreed to bear risk of and indemnify the purchaser for some financial
liabilities which may arise at one of debitels subsidiaries including the provision of
ongoing financial assistance. However, if certain conditions are met, the purchase
agreement provides Swisscom with the right to take control over this subsidiary in order
to minimize its liability. The buyer also has during a specific period the right to sell
this subsidiary back to Swisscom, at the earliest in 2006.Swisscom also agreed to certain representations and warranties, and other
indemnifications to the buyer. From the current perspective the maximum risks amount to
approximately EUR 110 million. At December 31, 2004, no related provisions for
guarantees were recorded.Revenue and the period result of debitel up to the completion of the transaction
amounted to CHF 4,111 million, CHF 4,555 million and CHF 1,917 million in 2002, 2003 and
2004, respectively, and losses of CHF 933 million and CHF 408 million in 2002 and 2003,
respectively, and a profit of CHF 5 million in 2004. Amortization of goodwill of CHF
979 million, CHF 452 million and CHF 57 million is included in this figure in 2002, 2003
and 2004, respectively.As a result of the transaction a loss on the sale of CHF 248 million was recorded. This
includes the write-off of the currency translation loss of CHF 238 million accumulated
since the acquisition of debitel in 1999 and recorded in the consolidated statement of
shareholders equity under other reserves.As a result of its sale, debitel is disclosed in the consolidated financial statements
as a discontinued operation. The prior-year figures have been restated for comparative
purposes. F-43




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##### Table of Contents



The table below shows the balance sheets, income statement and cash flow statement from
operating activities for debitel until the closing of the transaction: CHF in millions
    
    2002
    
    
    2003
    
    
    1.1. - 8.6.2004Income statementNet revenue
    
    
    4,111
    
    
    
    4,555
    
    
    
    1,917Operating expenses
    
    
    (3,952
    )
    
    
    (4,418
    )
    
    
    (1,830
    )Depreciation and amortization
    
    
    (62
    )
    
    
    (68
    )
    
    
    (26
    )Amortization of goodwill
    
    
    (277
    )
    
    
    (172
    )
    
    
    (57
    )Impairment of goodwill
    
    
    (702
    )
    
    
    (280
    )
    
    
    Operating income
    
    
    (882
    )
    
    
    (383
    )
    
    
    4Financial result
    
    
    (1
    )
    
    
    12
    
    
    
    31Income tax expense
    
    
    (48
    )
    
    
    (33
    )
    
    
    (30
    )Equity in net income of affiliated companies
    
    
    
    
    
    
    2
    
    
    
    3Minority interest
    
    
    (2
    )
    
    
    (6
    )
    
    
    (3
    )Income (loss) of the period of discontinued operation
    
    
    (933
    )
    
    
    (408
    )
    
    
    5
 CHF in millions
    
    31.12.02
    
    
    31.12.03
    
    
    8.6.2004Balance sheetCash and cash equivalents
    
    
    170
    
    
    
    133
    
    
    
    131Other current assets
    
    
    640
    
    
    
    583
    
    
    
    576Goodwill and other intangible assets
    
    
    1,175
    
    
    
    808
    
    
    
    733Other non-current assets
    
    
    150
    
    
    
    161
    
    
    
    172Total assets
    
    
    2,135
    
    
    
    1,685
    
    
    
    1,612Financial liabilities
    
    
    79
    
    
    
    81
    
    
    
    76Other liabilities
    
    
    792
    
    
    
    693
    
    
    
    638Minority interest
    
    
    15
    
    
    
    20
    
    
    
    18Total liabilities and minority interest
    
    
    886
    
    
    
    794
    
    
    
    732Total net assets
    
    
    1,249
    
    
    
    891
    
    
    
    880
 CHF in millions
    
    2002
    
    
    2003
    
    
    1.1. - 8.6.2004Cash flow statementNet cash provided by operating activities
    
    
    85
    
    
    
    22
    
    
    
    85Net cash used in investing activities
    
    
    (94
    )
    
    
    (23
    )
    
    
    (19
    )Net cash used in financing activities
    
    
    (40
    )
    
    
    (49
    )
    
    
    (62
    )Net (decrease) increase in cash and cash equivalents
    
    
    (49
    )
    
    
    (50
    )
    
    
    4
  The loss on the sale of debitel comprises the following: CHF in millionsCash payment
    
    
    658Acquisition of additional shares in debitel
    
    
    (31
    )Transaction costs
    
    
    (11
    )Net receipts
    
    
    616Fair value of granted loans (vendor loan notes)
    
    
    254Net proceeds from the sale
    
    
    870Net assets sold
    
    
    (880
    )Write-off of accumulated translation loss out of equity
    
    
    (238
    )Loss on the sale
    
    
    (248
    )
 F-44




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##### Table of Contents



40.

Significant subsidiaries and affiliated companies Interest in
    
    
    Consolidation
    
    
    
    
    Share CapitalCompany name
    
    Location, country
    
    percent
    
    
    method
    
    
    
    
    in thousands
    
    
    SegmentSwitzerlandAGI Holding AG 1
    
    St. Gallen, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    43,350
    
    
    CorporateBillag AG
    
    Fribourg, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    100
    
    
    OtherBillag Card Services AG
    
    Brüttisellen, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    350
    
    
    OtherBluewin AG
    
    Zurich, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    20,000
    
    
    Fixnetcablex AG
    
    Berne, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    5,000
    
    
    Fixnete4life AG 1
    
    Berne, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    1,500
    
    
    OtherInfonet Schweiz AG
    
    Berne, Switzerland
    
    
    90
    
    
    Full
    
    CHF
    
    
    1,500
    
    
    Enterprise SolutionsPersPec AG
    
    Berne, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    500
    
    
    CorporatePubliDirect Holding AG
    
    Zurich, Switzerland
    
    
    49
    
    
    Equity
    
    CHF
    
    
    10,000
    
    
    FixnetSICAP AG 2
    
    Köniz, Switzerland
    
    
    75
    
    
    Full
    
    CHF
    
    
    2,000
    
    
    MobileSwisscom Broadcast AG
    
    Berne, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    25,000
    
    
    OtherSwisscom Directories AG
    
    Berne, Switzerland
    
    
    51
    
    
    Full
    
    CHF
    
    
    1,500
    
    
    FixnetSwisscom Enterprise Solutions AG
    
    Berne, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    75,000
    
    
    Enterprise SolutionsSwisscom Eurospot SA 3
    
    Geneva Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    10,000
    
    
    OtherSwisscom Fixnet AG
    
    Berne, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    1,000,000
    
    
    FixnetSwisscom Immobilien AG
    
    Berne, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    100,000
    
    
    CorporateSwisscom IT Services AG
    
    Berne, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    150,000
    
    
    OtherSwisscom Mobile AG
    
    Berne, Switzerland
    
    
    75
    
    
    Full
    
    CHF
    
    
    100,000
    
    
    MobileSwisscom Systems AG
    
    Biel-Bienne, Switzerland
    
    
    100
    
    
    Full
    
    CHF
    
    
    70,000
    
    
    OtherTele Rätia AG 1
    
    Bonaduz, Switzerland
    
    
    84.4
    
    
    Full
    
    CHF
    
    
    1,000
    
    
    OtherWorklink AG 4
    
    Berne, Switzerland
    
    
    40
    
    
    Full
    
    CHF
    
    
    100
    
    
    CorporateOther countriesAUCS CommunicationsServices v.o.f. 5
    
    Hoofddorp, Netherlands
    
    
    33.33
    
    
    Equity
    
    EUR
    
    
    
    
    
    CorporateSwisscom (Belgium) N.V.
    
    Brussels, Belgium
    
    
    100
    
    
    Full
    
    EUR
    
    
    62
    
    
    FixnetSwisscom Carrier Services S.p.A.
    
    Milan, Italy
    
    
    100
    
    
    Full
    
    EUR
    
    
    300
    
    
    FixnetSwisscom (Deutschland) GmbH
    
    Stuttgart, Germany
    
    
    100
    
    
    Full
    
    EUR
    
    
    26
    
    
    FixnetSwisscom (France) S.A.
    
    Paris, France
    
    
    100
    
    
    Full
    
    EUR
    
    
    50
    
    
    FixnetSwisscom Finance Ltd.
    
    St. Helier, Jersey
    
    
    100
    
    
    Full
    
    EUR
    
    
    64,468
    
    
    CorporateSwisscom (Netherlands) B.V.
    
    Amsterdam, Netherlands
    
    
    100
    
    
    Full
    
    EUR
    
    
    45,018
    
    
    Fixnet/Corp.Swisscom North America, Inc.
    
    Washington D.C., USA
    
    
    100
    
    
    Full
    
    USD
    
    
    
    
    
    FixnetSwisscom Re AG
    
    Vaduz, Liechtenstein
    
    
    100
    
    
    Full
    
    CHF
    
    
    1,000
    
    
    CorporateSwisscom (UK) Ltd.
    
    London, UK
    
    
    100
    
    
    Full
    
    GBP
    
    
    
    
    
    FixnetTelSource N.V. 5
    
    Den Haag, Netherlands
    
    
    49
    
    
    Equity
    
    EUR
    
    
    
    
    
    Corporate
  1)

Acquisition in 2004. See Note 14.2)

Fully owned subsidiary of Swisscom Mobile AG.3)

Swisscom Eurospot S.A. has subsidiaries in Germany, France, United Kingdom, the
Netherlands, Luxembourg, Spain, Portugal, Italy and Austria.4)

Worklink AG is the employment company of Swisscom. Although Swisscom only holds
40% in voting rights and capital in Worklink AG, the company is fully consolidated
because, from a economic viewpoint, Swisscom carries the major financials risks and also
obtains the major benefits.5)

Joint venture.  In 2004 the fully consolidated subsidiary debitel was sold. See Note 39. For
further information on acquisitions in 2003 and 2004 see Note 14. F-45




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##### Table of Contents



41.

Post Balance sheet eventsApproval of financial statements
Swisscoms Chief Executive Officer (CEO) and Chief Financial Officer (CFO) approved
these financial statements on April 19, 2005 after they had been reviewed by Swisscoms
Disclosure Committee.Dividend
At the General Meeting of Shareholders on April 26, 2005, a dividend of CHF 14 per
share, amounting to a total income distribution of CHF 861 million, is to be proposed
for 2004. In these financial statements this dividend payable is not disclosed as a
liability. It is accounted for as a dividend contribution against shareholders equity
in 2005. The dividends declared at the 2004 General Meeting of Shareholders in respect
of 2003 was CHF 861 million (2002: CHF 728 million; 2003: CHF 794 million).Share buy-back
The Board of Directors announced that it intends to launch a share buy-back scheme in
the course of 2005 in the amount of around CHF 2 billion in order to distribute the
entire equity free cash flow.Convertible bond of the Swiss Confederation on Swisscom shares
About one third of the convertible bonds of the Swiss Confederation related to Swisscom shares, which mature at the end of February 2005, were exercised by the maturity date.
According to the Swiss Confederation authorities, of the 2.67 million shares included in
the convertible bond, around 915,000 shares were converted. As a result of the
conversion the share of the Swiss Confederation in Swisscom fell from 62.7% to 61.4%. On
April 26, 2005 the Board of Directors applied to the Shareholders Meeting for a capital
reduction. Taking this into account the share of Swiss Confederation in Swisscom is now
66.1%.Merger of international wholesale business with Belgacom
On February 23, 2005, Belgacom and Swisscom Fixnet signed a joint venture agreement in
which Belgacom holds 72%. Swisscom Fixnet will incorporate its international carrier
business into the company and in return receive 28% of the capital. The transaction is
expected to be concluded at the end of June 2005.Acquisition of 49% stake in Cinetrade
On April 8, 2005, Swisscom acquired a 49% strategic stake in CT Cinetrade AG, a Swiss
media company whose activities include a pay-TV channel, video and DVD film rights as
well as movie theaters. F-46




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##### Table of Contents



42.

Differences between International Financial Reporting Standards and U.S. Generally
Accepted Accounting PrinciplesThe consolidated financial statements of Swisscom have been prepared in accordance with
International Financial Reporting Standards (IFRS), which differ in certain respects
from generally accepted accounting principles in the United States (U.S. GAAP).
Application of U.S. GAAP would have affected the balance sheet as of December 31, 2002,
2003 and 2004 and net income for each of the years in the three-year period ended
December 31, 2004 to the extent described below. A description of the material
differences between IFRS and U.S. GAAP as they relate to Swisscom are discussed in
further detail below.Reconciliation of net income from IFRS to U.S. GAAP
The following schedule illustrates the significant adjustments to reconcile net income
in accordance with IFRS to the amounts determined in accordance with U.S. GAAP for each
of the three years ended December 31. CHF in millions
    
    2002
    
    
    2003
    
    
    2004Net income according to IFRS
    
    
    824
    
    
    
    1,569
    
    
    
    1,594U.S. GAAP adjustments:a)
    
    Capitalization of interest cost
    
    
    (1
    )
    
    
    (1
    )
    
    
    (4
    )b)
    
    Retirement benefits
    
    
    (17
    )
    
    
    (12
    )
    
    
    (21
    )c)
    
    Stock based compensation
    
    
    9
    
    
    
    6
    
    
    
    d)
    
    Termination benefits
    
    
    (20
    )
    
    
    11
    
    
    
    (10
    )e)
    
    Impairment of investments
    
    
    
    
    
    
    
    
    
    
    f)
    
    Cross-border tax leases
    
    
    (13
    )
    
    
    15
    
    
    
    49g)
    
    debitel purchase accounting
    
    
    (82
    )
    
    
    (86
    )
    
    
    (23
    )h)
    
    Sale of debitel
    
    
    
    
    
    
    
    
    
    
    342h)
    
    Deferred interest
    
    
    
    
    
    
    
    
    
    
    (21
    )i)
    
    Revenue recognition
    
    
    9
    
    
    
    31
    
    
    
    56j)
    
    Site restoration
    
    
    14
    
    
    
    18
    
    
    
    15k)
    
    Telephone poles
    
    
    4
    
    
    
    7
    
    
    
    l)
    
    Goodwill amortization
    
    
    304
    
    
    
    213
    
    
    
    106l)
    
    Goodwill impairment
    
    
    (1,932
    )
    
    
    280
    
    
    
    m)
    
    Derivative accounting
    
    
    (21
    )
    
    
    
    
    
    
    n)
    
    Sale and leaseback transaction
    
    
    30
    
    
    
    24
    
    
    
    26o)
    
    Onerous contracts
    
    
    
    
    
    
    
    
    
    
    10p)
    
    Income taxes
    
    
    29
    
    
    
    21
    
    
    
    (6
    )Net (loss) income according to U.S. GAAP
    
    
    (863
    )
    
    
    2,096
    
    
    
    2,113Additional disclosures required by U.S. GAAPIncome from continuing operations, net of tax
    
    
    1,780
    
    
    
    2,066
    
    
    
    1,968(Loss) gain from discontinued operations, net of tax
    
    
    (994
    )
    
    
    (8
    )
    
    
    145Cumulative effect of accounting change,
net of tax. See Notes j, k, l.
    
    
    (1,649
    )
    
    
    38
    
    
    
    Net (loss) income according to U.S. GAAP
    
    
    (863
    )
    
    
    2,096
    
    
    
    2,113
  Presented below is a reconciliation of discontinued operations from IFRS to U.S. GAAP: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Net loss for discontinued operations under IFRS
    
    
    (933
    )
    
    
    (408
    )
    
    
    (243
    )debitel purchase accounting
    
    
    (82
    )
    
    
    (86
    )
    
    
    (23
    )Sale of debitel
    
    
    
    
    
    
    
    
    
    
    342Goodwill impairment
    
    
    (283
    )
    
    
    280
    
    
    
    Goodwill amortization
    
    
    277
    
    
    
    172
    
    
    
    57Income taxes
    
    
    27
    
    
    
    34
    
    
    
    12Net (loss) income for discontinued operations
according to U.S. GAAP
    
    
    (994
    )
    
    
    (8
    )
    
    
    145
 F-47




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##### Table of Contents



The U.S. GAAP basic and diluted earnings (loss) per share is as follows: CHF
    
    2002
    
    
    2003
    
    
    2004Earnings (loss) per basic shareEarnings from continuing operations
    
    
    26.31
    
    
    
    31.21
    
    
    
    30.41(Loss) earnings from discontinued operations
    
    
    (14.69
    )
    
    
    (0.12
    )
    
    
    2.24Cumulative effect of accounting change, net of tax
    
    
    (24.38
    )
    
    
    0.57
    
    
    
    (Loss) earnings per basic share
    
    
    (12.76
    )
    
    
    31.66
    
    
    
    32.65Earnings (loss) per diluted shareEarnings from continuing operations
    
    
    26.29
    
    
    
    31.19
    
    
    
    30.41(Loss) earnings from discontinued operations
    
    
    (14.68
    )
    
    
    (0.12
    )
    
    
    2.24Cumulative effect of change in accounting principle
    
    
    (24.35
    )
    
    
    0.57
    
    
    
    (Loss) earnings per diluted share
    
    
    (12.74
    )
    
    
    31.64
    
    
    
    32.65
  The shares outstanding used to calculate basic and diluted earnings per share
under U.S. GAAP are the same as that used under IFRS.Reconciliation of shareholders equity from IFRS to U.S. GAAP
The following is a reconciliation of the significant adjustments necessary to reconcile
shareholders equity in accordance with IFRS to the amounts in accordance with U.S. GAAP
as at December 31, 2002, 2003 and 2004. CHF in millions
    
    2002
    
    
    2003
    
    
    2004Shareholders equity according to IFRS
    
    
    7,299
    
    
    
    7,669
    
    
    
    6,681U.S. GAAP adjustments:a)
    
    Capitalization of interest cost
    
    
    49
    
    
    
    48
    
    
    
    44b)
    
    Retirement benefits
    
    
    (136
    )
    
    
    11
    
    
    
    (295
    )c)
    
    Stock based compensation
    
    
    4
    
    
    
    
    
    
    
    d)
    
    Termination benefits
    
    
    30
    
    
    
    41
    
    
    
    31e)
    
    Impairment of investments
    
    
    (9
    )
    
    
    (9
    )
    
    
    (20
    )f)
    
    Cross-border tax leases
    
    
    (313
    )
    
    
    (298
    )
    
    
    (249
    )g)
    
    debitel purchase accounting
    
    
    107
    
    
    
    28
    
    
    
    h)
    
    Sale of debitel
    
    
    
    
    
    
    
    
    
    
    (254
    )h)
    
    Deferred interest
    
    
    
    
    
    
    
    
    
    
    (21
    )i)
    
    Revenue recognition
    
    
    (223
    )
    
    
    (192
    )
    
    
    (136
    )j)
    
    Site restoration
    
    
    (25
    )
    
    
    (7
    )
    
    
    8k)
    
    Telephone poles
    
    
    (7
    )
    
    
    
    
    
    
    l)
    
    Goodwill
    
    
    (1,050
    )
    
    
    (633
    )
    
    
    117m)
    
    Derivative accounting
    
    
    
    
    
    
    
    
    
    
    n)
    
    Sale and leaseback transaction
    
    
    (256
    )
    
    
    (232
    )
    
    
    (206
    )o)
    
    Onerous contracts
    
    
    
    
    
    
    
    
    
    
    10p)
    
    Income taxes
    
    
    117
    
    
    
    97
    
    
    
    153Shareholders equity according to U.S. GAAP
    
    
    5,587
    
    
    
    6,523
    
    
    
    5,863
  Presented below is a reconciliation of the net assets (liabilities) of discontinued operations from IFRS to U.S. GAAP: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Under IFRS:Assets from discontinued operations
    
    
    2,135
    
    
    
    1,685
    
    
    
    Liabilities from discontinued operations
    
    
    (886
    )
    
    
    (794
    )
    
    
    Net assets from discontinued operations
    
    
    1,249
    
    
    
    891
    
    
    
    Adjustments:debitel purchase accounting
    
    
    107
    
    
    
    28
    
    
    
    debitel goodwill
    
    
    (1,077
    )
    
    
    (701
    )
    
    
    Income taxes
    
    
    
    
    
    
    53
    
    
    
    Net assets (liabilities) from discontinued operations
under U.S. GAAP
    
    
    279
    
    
    
    271
    
    
    
    
 F-48




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##### Table of Contents



a)

Capitalization of interest costSwisscom expenses all interest costs as incurred. U.S. GAAP requires interest costs
incurred during the construction of property, plant and equipment to be capitalized.The U.S. GAAP reconciliation includes adjustments arising from the application of the
method prescribed by Statement of Financial Accounting Standards (SFAS) No. 34,
Capitalization of Interest Cost.The effect of capitalization of interest cost and the corresponding additional
depreciation expense on the increased amount of property, plant and equipment and the
disposal of property would be as follows: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Interest capitalized during year
    
    
    8
    
    
    
    8
    
    
    
    6Depreciation expense
    
    
    (9
    )
    
    
    (9
    )
    
    
    (10
    )Net income statement effect
    
    
    (1
    )
    
    
    (1
    )
    
    
    (4
    )
 CHF in millions
    
    2002
    
    
    2003
    
    
    2004Gross amount capitalized
    
    
    96
    
    
    
    104
    
    
    
    110Accumulated depreciation
    
    
    (47
    )
    
    
    (56
    )
    
    
    (66
    )Net amount capitalized
    
    
    49
    
    
    
    48
    
    
    
    44
  b)

Retirement benefitsFor purposes of U.S. GAAP, pension costs for defined benefit plans are accounted for in
accordance with SFAS No. 87 Employers Accounting for
Pensions and the disclosure is
presented in accordance with SFAS 132(R) Employers Disclosures about Pensions and
Other Postretirement Benefits. Presented below are the disclosures required by U.S.
GAAP that are different from that provided under IFRS. Except as described below, the
plan liabilities and assets are the same under U.S. GAAP as IFRS. The difference in the
balance sheet and income statement amounts are attributable to how and when the
respective standards were implemented, and the recognition of a minimum liability in
2002, 2003 and 2004 under U.S. GAAP as well as differences in accounting for prior
service costs.The following weighted average assumptions were used in accounting for the defined benefit plan under U.S. GAAP: 2002
    
    
    2003
    
    
    2004Weighted average discount rate
    
    
    3.90
    %
    
    
    3.75
    %
    
    
    3.15
    %Rate of increase in future compensation levels
    
    
    3.1
    %
    
    
    3.1
    %
    
    
    2.3
    %Expected long-term rate of return on plan assets
    
    
    5.5
    %
    
    
    5.0
    %
    
    
    4.5
    %
  Net periodic pension cost includes the following components: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Service cost on benefits earned
    
    
    178
    
    
    
    182
    
    
    
    165Interest cost on projected benefit obligation
    
    
    261
    
    
    
    255
    
    
    
    254Expected return on plan assets
    
    
    (248
    )
    
    
    (227
    )
    
    
    (220
    )Amortization of prior service cost
    
    
    29
    
    
    
    29
    
    
    
    28Amortization of actuarial loss
    
    
    
    
    
    
    30
    
    
    
    13Net periodic pension cost under U.S. GAAP
    
    
    220
    
    
    
    269
    
    
    
    240Net periodic pension cost under IFRS. See Note 9.
    
    
    203
    
    
    
    257
    
    
    
    219Difference between U.S. GAAP and IFRS
    
    
    (17
    )
    
    
    (12
    )
    
    
    (21
    )
 F-49




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##### Table of Contents



The status of the pension plans are as follows: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Benefit obligation:At beginning of year
    
    
    6,316
    
    
    
    6,726
    
    
    
    6,903Service cost on benefits earned
    
    
    178
    
    
    
    182
    
    
    
    165Interest cost on projected benefit obligation
    
    
    261
    
    
    
    255
    
    
    
    254Contributions of plan participants
    
    
    88
    
    
    
    97
    
    
    
    109Net transfers
    
    
    (3
    )
    
    
    (160
    )
    
    
    (102
    )Benefits paid
    
    
    (214
    )
    
    
    (211
    )
    
    
    (189
    )Actuarial loss (gain)
    
    
    100
    
    
    
    (19
    )
    
    
    121Plan amendments
    
    
    
    
    
    
    10
    
    
    
    (2
    )Acquisition
    
    
    
    
    
    
    23
    
    
    
    Benefit obligation at end of year
    
    
    6,726
    
    
    
    6,903
    
    
    
    7,259Plan assets at fair value:At beginning of year
    
    
    4,562
    
    
    
    4,559
    
    
    
    4,893Actual return on plan assets
    
    
    (195
    )
    
    
    341
    
    
    
    284Employer contributions
    
    
    321
    
    
    
    253
    
    
    
    214Contributions of plan participants
    
    
    88
    
    
    
    97
    
    
    
    109Net transfers
    
    
    (3
    )
    
    
    (160
    )
    
    
    (102
    )Benefits paid
    
    
    (214
    )
    
    
    (211
    )
    
    
    (189
    )Acquisition
    
    
    
    
    
    
    14
    
    
    
    Plan assets at fair value at end of year
    
    
    4,559
    
    
    
    4,893
    
    
    
    5,209Benefit obligation in excess of plan assets
    
    
    2,167
    
    
    
    2,010
    
    
    
    2,050Minimum liability adjustment
    
    
    683
    
    
    
    506
    
    
    
    743Unrecognized actuarial loss
    
    
    (993
    )
    
    
    (830
    )
    
    
    (874
    )Unrecognized prior service cost
    
    
    (310
    )
    
    
    (292
    )
    
    
    (261
    )Accrued pension cost under U.S. GAAP
    
    
    1,547
    
    
    
    1,394
    
    
    
    1,658Accrued pension cost under IFRS. See Note 9.
    
    
    1,101
    
    
    
    1,113
    
    
    
    1,118Difference between U.S. GAAP and IFRS
    
    
    (446
    )
    
    
    (281
    )
    
    
    (540
    )
  The difference between U.S. GAAP and IFRS is allocated in 2002 to intangible
assets of CHF 310 million, pension liability of CHF 446 million and a reduction of
equity of CHF 136 million. In 2003 the adjustment is allocated to intangible assets of
CHF 292 million, pension liability of CHF 281 million and an increase in equity of CHF
11 million. In 2004 the adjustment is allocated to intangible assets of CHF 245 million,
pension liability of CHF 540 million and a reduction of equity of CHF 295 million.In contrast to the projected benefit obligation, the accumulated benefit obligation,
which amounted to CHF 6,106 million in 2002, CHF 6,283 million in 2003 and CHF 6,758
million in 2004, does not include an assumption about future compensation levels in
determining the actuarial present value of benefits based on employee service and
compensation as of a certain date. Under U.S. GAAP, the pension liability cannot be less
than the amount by which the accumulated benefit obligation exceeds plan assets as
determined for each individual plan. If an additional minimum liability is recognized,
an intangible asset up to the amount of the unrecognized prior service cost for each
plan is also recognized and the remaining amount is recorded as part of other
comprehensive income (reduction of equity) net of income taxes.A minimum liability adjustment of CHF 683 million was recorded for U.S. GAAP purposes in
2002, of which CHF 310 million, reflecting the unrecognized prior service cost, was
recorded as an intangible asset and the remaining CHF 373 million was recorded, net of
tax of CHF 86 million, in other comprehensive income (reduction of equity).A minimum liability adjustment of CHF 506 million was recorded for U.S. GAAP purposes in
2003, of which CHF 292 million, reflecting the unrecognized prior service cost, was
recorded as an intangible asset and the remaining CHF 214 million was recorded, net of
tax of CHF 48 million, in other comprehensive income (reduction of equity).A minimum liability adjustment of CHF 743 million was recorded for U.S. GAAP purposes in
2004, of which CHF 245 million, reflecting the unrecognized prior service cost, was
recorded as an intangible asset and the remaining CHF 498 million was recorded, net of
tax of CHF 111 million, in other comprehensive income (reduction of equity).Net transfers represents the net amount of transfers out, which represent payments made
on behalf of former employees to the pension plans of their new employer that reduce
both the plan assets and liabilities, and transfers in, which represent the increase to
both the asset and liabilities when employees join Swisscom and transfer assets and
liabilities from their previous employer. F-50




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##### Table of Contents



Plan assets consist of equity investments, obligations of governmental agencies, and
other interest-bearing investments. Actual allocations in the Companys pension plans
at December 31, 2002, 2003 and 2004 and target allocations were as follows: Target
    
    
    2002
    
    
    2003
    
    
    2004Debt Securities
    
    
    62.5
    %
    
    
    65.3
    %
    
    
    60.6
    %
    
    
    58.8
    %Equity securities
    
    
    30.0
    %
    
    
    24.0
    %
    
    
    30.9
    %
    
    
    32.0
    %Real estate and other
    
    
    7.5
    %
    
    
    10.7
    %
    
    
    8.5
    %
    
    
    9.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Investment policies and strategies for comPlan are approved periodically by the
pension trustees, having regard to the potential risks and returns offered by investment
in the various assets available. Target asset allocation and investment return criteria
are established by the trustees with the overriding objective of stable earnings growth.
Actual results are monitored against those targets and the trustees are required to
report to the members of the plan, including an analysis of investment performance on an
annual basis at a minimum. Day to day asset management is performed by third party
asset management companies, reporting to the pension trustees. The long-term rate of
return on plan asset assumptions used to determine pension expense under U.S. GAAP
reflects asset allocations, investment strategy and the view of Swisscoms investment
manager as well as historical returns. Swisscoms asset returns were 4.3% in 2002, 7.5%
in 2003 and 5.8% in 2004.comPlan expects to make the following benefit payments: CHF in millions
    
    2004In 2005
    
    
    308In 2006
    
    
    307In 2007
    
    
    310In 2008
    
    
    319In 2009
    
    
    331From 2010 to 2014
    
    
    1,771
  In 2005, the Company expects to make normal employer pension contributions of CHF
196 million to comPlan.c)

Stock based compensationStock Appreciation Rights
Until December 31, 2000, Swisscom did not recognize any expenses associated with stock
appreciation rights under IFRS. Effective January 1, 2001, Swisscom changed its
accounting for stock options granted to employees and members of the Executive Board and
Board of Directors. Stock options and stock appreciation rights are valued at fair value
on the grant date and recorded over the full vesting period under personnel expenses.As a consequence of the change in accounting under IFRS, management decided to change
from the intrinsic-value-based method under Accounting Principles Board Opinion No. 25
(APB 25) to the fair-value-based method under SFAS 123 for purposes of U.S. GAAP. SFAS
123 requires the change to be made prospectively, and, therefore, SFAS 123 is applied
only to stock appreciation rights granted since 2001 and there is no difference between
IFRS and U.S. GAAP relating to these grants. However, grants made prior to January 1,
2001 continued to be accounted for under APB 25, which requires that compensation costs
be recognized on appreciation rights measured as the current period appreciation in the
share price over the vesting period. Accordingly, the difference in accounting between
IFRS and APB 25 of the 2002 depreciation of CHF 9 million has been recorded as a
reduction of personnel expenses. During 2003, the options that were accounted for under
APB 25 were exercised resulting in a depreciation of CHF 6 million, which was recorded
under personnel expenses. As these options were exercised in 2003, there is no longer a
difference between IFRS and U.S. GAAP. F-51




---



##### Table of Contents



A summary of Swisscoms stock based compensation transactions is shown below: Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exercise2002
    
    
    price
    
    
    2003
    
    
    price
    
    
    2004
    
    
    priceOutstanding at January 1
    
    
    312,173
    
    
    
    336
    
    
    
    374,345
    
    
    
    362
    
    
    
    209,270
    
    
    
    425Options granted
    
    
    62,180
    
    
    
    492
    
    
    
    86,930
    
    
    
    418
    
    
    
    
    
    
    
    Options lapsed
    
    
    (8
    )
    
    
    316
    
    
    
    (9,552
    )
    
    
    400
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    (240,953
    )
    
    
    318
    
    
    
    
    
    
    
    Options sold
    
    
    
    
    
    
    
    
    
    
    (1,500
    )
    
    
    485
    
    
    
    (40,220
    )
    
    
    375Outstanding at December 31
    
    
    374,345
    
    
    
    362
    
    
    
    209,270
    
    
    
    425
    
    
    
    169,050
    
    
    
    437
  As of December 31, 2004, 22,650 stock options were exercisable.The following table summarizes information about Swisscoms stock based compensation outstanding at December 31, 2004: Number
    
    
    Weighted
    
    
    Weightedoutstanding at
    
    
    average
    
    
    averageDecember 31,
    
    
    remaining
    
    
    exerciseRange of exercise prices
    
    2004
    
    
    contractual life
    
    
    priceCHF 350 - CHF 400
    
    
    14,850
    
    
    
    1.3
    
    
    CHF 368CHF 401 - CHF 450
    
    
    86,930
    
    
    
    3.3
    
    
    CHF 418CHF 451 - CHF 500
    
    
    59,420
    
    
    
    2.2
    
    
    CHF 468CHF 501 - CHF 550
    
    
    2,120
    
    
    
    1.8
    
    
    CHF 504CHF 551 - CHF 600
    
    
    5,730
    
    
    
    2.3
    
    
    CHF 569169,050
    
    
    
    2.7
    
    
    CHF 437
  At December 31, 2004, options exercisable had a weighted average exercise price of
CHF 408.As Swisscom followed the intrinsic-value approach prescribed in APB 25 for accounting
for appreciation rights until December 31, 2000, the fair-value disclosure requirements
of SFAS 123 will continue to be presented for awards outstanding under those plans. Had
Swisscom accounted for those stock appreciation rights in accordance with SFAS 123, net
income and earnings per share would have been adjusted to the pro forma amounts
indicated below: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Net (loss) incomeAs reported
    
    
    (863
    )
    
    
    2,096
    
    
    
    2,113Pro forma
    
    
    (872
    )
    
    
    2,090
    
    
    
    2,113
 CHFBasic (loss) earnings per shareAs reported
    
    
    (12.76
    )
    
    
    31.66
    
    
    
    32.65Pro forma
    
    
    (12.89
    )
    
    
    31.57
    
    
    
    32.65Diluted (loss) earnings per shareAs reported
    
    
    (12.74
    )
    
    
    31.64
    
    
    
    32.65Pro forma
    
    
    (12.88
    )
    
    
    31.55
    
    
    
    32.65
  The fair value of the stock appreciation rights issued was calculated at the grant
date and was based upon the call options purchased from a third party to settle the
appreciation rights. Assumptions used in the calculation of the fair value for purposes
of this transaction were as follows: dividend yield of 3.33%, expected volatility of
50%, risk free interest rate of 2.46%, and expected life of 5 years. The weighted
average fair-value of stock appreciation rights granted was CHF 124. For a further
description of stock based compensation plans see Note 8.Put Options
In connection with the 1998 Leveraged Executive Asset Plan
(LEAP), Swisscom issued
23,276 shares to employees that give them the option of putting the shares back to
Swisscom at the initial offering price if the market price of the share on the exercise
date is less than the initial public offering price. For U.S. GAAP
purposes these shares, with a carrying value of CHF 8 million, were considered to be temporary equity,
and had been reclassified to be excluded from shareholders equity. In 2003, these
options expired and the shares, previously classified as temporary equity under U.S.
GAAP, were reclassified to shareholders equity. F-52




---



##### Table of Contents



d)

Termination benefitsPartial retirement program
In 2001 and 2003, Swisscom offered to certain employees born between 1946 and 1950 an
early retirement plan. The CHF 50 million in 2001 and the CHF 18 million in 2003 that
were recognized under IFRS represent the present value, discounted using a rate of 2.5%,
of the amount that will be paid to the employees over the period that they are not
providing service to Swisscom or the difference between the 75% salary these employees
receive and the 50% they actually work. Under U.S. GAAP the costs are to be accrued over
the remaining service period of the employees. As the plan was introduced at the end of
2001, the entire amount recorded under IFRS in 2001 was reversed under U.S. GAAP. In
2002, Swisscom revised its estimate under IFRS downwards by CHF 13 million to CHF 37
million and recorded interest expense of CHF 2 million. The amount accrued under U.S.
GAAP in 2002 was CHF 9 million.In 2003, Swisscom recognized a further CHF 18 million under IFRS, of which CHF 9 million
was utilized during 2003. The liability outstanding at December 31, 2003 of CHF 9
million was reversed under U.S. GAAP. In addition, Swisscom reversed interest expense of
CHF 1 million and accrued CHF 11 million under U.S. GAAP relating to those employees who
entered the plan in 2001.In 2004, the amount accrued under U.S. GAAP for these employees was CHF 17 million. In
addition, Swisscom reversed interest expense of CHF 1 million.Outplacement program
Termination benefits are not immediately accrued if employees are required to render
service until they are terminated. The liability is recognized ratably over the future
service period.Under IFRS, Swisscom accrued termination benefits relating to its outplacement program.
Under U.S. GAAP at December 31, 2003 and 2004, Swisscom has reversed termination benefit
accruals of CHF 12 million and CHF 17 million, respectively. Under U.S. GAAP, these
expenses will be recognized over the future service period of these employees. In 2004,
Swisscom recognized CHF 11 million related to termination benefit accruals reversed in
2003.The U.S. GAAP adjustments that impact the balance sheet consist of the following: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Accrued liabilities under IFRS
    
    
    118
    
    
    
    117
    
    
    
    90Accrued liabilities under U.S. GAAP
    
    
    88
    
    
    
    76
    
    
    
    59Difference
    
    
    30
    
    
    
    41
    
    
    
    31
  The U.S. GAAP adjustments that impact the income statement consist of the following: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Operating expense
    
    
    90
    
    
    
    87
    
    
    
    47Interest expense
    
    
    2
    
    
    
    1
    
    
    
    1Total IFRS expense
    
    
    92
    
    
    
    88
    
    
    
    48Total U.S. GAAP expense
    
    
    112
    
    
    
    77
    
    
    
    58Difference
    
    
    (20
    )
    
    
    11
    
    
    
    (10
    )
 F-53




---



##### Table of Contents



e)

Impairment of investmentsUnder IFRS, Swisscom reversed a write-down of CHF 9 million relating to its investment
in Intelsat in 2000. Under U.S. GAAP once a cost method security (non FAS 115 security)
is written down the new value becomes its carrying value and it is not subsequently
reversed.In 2004, Swisscom entered into negotiations regarding the disposal of its investment in
Intelsat. Under IFRS, Swisscom increased the value of its investment in Intelsat to
reflect the expected sales proceeds and recorded an unrealized gain of CHF 11 million in
equity in 2004. Under U.S. GAAP, this investment is valued at cost and the unrealized
gain was reversed.The following table shows the gross unrealized losses and fair value of available for
sale investments, aggregated by length of time that individual securities have been in a
continuous unrealized loss position as of December 31, 2004: Less than
    
    
    
    
    
    
    Greater than12 months
    
    
    Unrealized
    
    
    12 months
    
    
    Unrealized
    
    
    Total
    
    
    UnrealizedCHF in millions
    
    Fair Value
    
    
    loss
    
    
    Fair Value
    
    
    loss
    
    
    Fair Value
    
    
    lossCurrent financial assets
    
    
    103
    
    
    
    (3
    )
    
    
    32
    
    
    
    (2
    )
    
    
    135
    
    
    
    (5
    )Non-current financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    103
    
    
    
    (3
    )
    
    
    32
    
    
    
    (2
    )
    
    
    135
    
    
    
    (5
    )Number of securities with an unrealized loss
    
    
    92
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    145
    
    
    
    
  When evaluating the Companys investments for possible impairment, the Company
reviews factors such as the length of time and extent to which fair value has been below
cost basis, the financial condition of the investee, and the Companys ability and
intent to hold the investment for a period of time which may be sufficient for
anticipated recovery in market value. The declines in the above securities are
considered to be temporary in nature and, accordingly, the Company does not believe
these securities are impaired as of December 31, 2004.f)

Cross-border tax leasesAs described in Note 25, Swisscom entered into a series of transactions in 1999, 2000
and 2002, in which it placed funds into trusts or entered into non-refundable payment
undertaking agreements with financial institutions with minimal credit risk. Swisscom
concluded that these transactions lacked economic substance under IFRS and were not
recognized as the definition of an asset and liability had not been met. Under U.S. GAAP
both the asset and liability of CHF 3,786 million, CHF 3,491 million and CHF 3,285
million at December 31, 2002, 2003 and 2004, respectively were recorded on the balance
sheet. Future minimum lease payments relating to these leases as of December 31, 2004
are: CHF in millions2005
    
    
    2432006
    
    
    1662007
    
    
    3532008
    
    
    4432009
    
    
    107after 2009
    
    
    7,620Total minimum lease payments
    
    
    8,932Less future interest charges
    
    
    (5,647
    )Present value of lease payments
    
    
    3,285Less current portion
    
    
    85Non-current lease obligations
    
    
    3,200
  The difference between the cash proceeds from the sale and the present value of
the future minimum lease payments represents a gain on the sale of a tax benefit. The
net cash effect resulting from these transactions was a gain from the sale of the tax
benefits of CHF 108 million in 1999, CHF 204 million in 2000 and CHF 28 million in 2002.
Under IFRS, Swisscom recorded these gains in the period the transactions closed. Under
U.S. GAAP, Swisscom is amortizing these amounts over the term of the lease, which ranges
from 12 to 30 years, and accordingly recognized income of CHF 15 million in 2002, 2003
and 2004. There are no expected net cash receipts or payments in the future as both the
assets and liabilities will decline equally over the term of the lease. The
corresponding interest income and expense, which are also equal, of CHF 281 million, CHF
273 million and CHF 258 million were recognized in 2002, 2003 and 2004, respectively. F-54




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In connection with these lease transactions Swisscom committed that the financial assets
placed into trusts would meet minimum credit ratings. Shortly before the end of 2004,
the credit rating of some financial assets decreased below the minimum rating agreed in
the contracts. Swisscom is in the process of replacing these assets with securities
meeting the agreed minimum rating which it estimates will cost CHF 34 million. This cost
represents the difference between the estimated sales proceeds of these securities and
the estimated cost of the securities which meet the minimum rating. Under IFRS, Swisscom
recorded an expense of CHF 34 million in 2004. As no transaction has taken place and the
financial assets market value has not been impaired, no amount has been recorded under
U.S. GAAP and the loss recorded under IFRS was reversed. The expense that Swisscom
actually incurs to restore the minimum rating will be recorded under U.S. GAAP in future
years as appropriate.g)

debitel purchase accountingDuring the years ended December 31, 2002 and 2003 and for the period to June 8, 2004,
the date of the sale of debitel, amortization expense relating to the customer list was
CHF 82 million, CHF 86 million and CHF 23 million and the unamortized balance was CHF
107 million, CHF 28 million and CHF 5 million, respectively. As described in l) below,
the entire amount of goodwill relating to debitel was impaired during 2002. Under IFRS,
no amount was allocated to customer list, and accordingly, there is no balance or
amortization expense. These amounts were therefore recorded under U.S. GAAP. The
remaining CHF 5 million was included in the determination of the gain on the sale of
debitel. See Note h.h)

Sale of debitelAs disclosed in Note 39, during 2004, Swisscom sold its interest in debitel, which
resulted in a loss on disposal under IFRS of CHF 248 million. As a result of the
difference in the carrying amount of Swisscoms investment in debitel between IFRS and
U.S. GAAP, as more fully discussed in Note l) below and the deferred proceeds receivable
under vendor loans discussed below, the sale of debitel resulted in a gain under U.S.
GAAP of CHF 94 million.As discussed more fully in Note 39, EUR 210 million of the EUR 640 million proceeds from
the sale of debitel was in the form of two vendor loans. As a result, in accordance with
Staff Accounting Bulletin Topic 5 U, Gain Recognition On The Sale Of A Business Or
Operating Assets To A Highly Leveraged Entity, CHF 254 million (which represents the
fair value of these loans on the date of disposal) of this sales proceeds has been
deferred as Swisscoms ability to recognize this portion of the sales proceeds is
dependent on debitels ability to repay the vendor loans from operations or refinancing.
Furthermore under U.S. GAAP an international subsidiary of debitel (international
subsidiary) did not qualify for sale treatment.Swisscom has agreed to bear the risk of, and to indemnify the purchaser for, any losses
which may arise in the future at this international subsidiary. However, if certain
funding thresholds are exceeded, the agreement provides Swisscom with the option to buy
back this subsidiary for EUR 1 and enable it to control the operations. The buyer has
the right to cancel this option if they release Swisscom from any future funding
obligations. The buyer also has the right to require Swisscom to buy back this
subsidiary for EUR 1 during January 2006.Under IFRS, this subsidiary was considered to be disposed of at the date of sale and is
no longer consolidated. Under U.S. GAAP, this transfer did not qualify as a sale due to
Swisscoms continuing involvement and Swisscoms obligations related to this subsidiary
as described above. In accordance with FASB Interpretation No. 46 (revised) (FIN 46R)
Swisscom has consolidated this subsidiary at December 31, 2004 for U.S. GAAP purposes
and will continue to consolidate this subsidiary until the applicable contingencies are
resolved. Swisscom records losses as incurred and does not record gains as all profits
remain with the buyer.Presented below is a condensed balance sheet and income statement of this international subsidiary: CHF in millions
    
    2003
    
    
    1.1.-8.6.2004
    
    
    9.6.-31.12.2004Income statementNet revenue
    
    
    817
    
    
    
    322
    
    
    
    314Total operating expenses
    
    
    (841
    )
    
    
    (322
    )
    
    
    (311
    )Net (loss) income
    
    
    (24
    )
    
    
    
    
    
    
    3Balance sheetCurrent assets
    
    
    133
    
    
    
    89
    
    
    
    112Non-current assets
    
    
    6
    
    
    
    4
    
    
    
    3Current liabilities
    
    
    137
    
    
    
    91
    
    
    
    101Non-current liabilities
    
    
    2
    
    
    
    2
    
    
    
    11Shareholders equity
    
    
    
    
    
    
    
    
    
    
    3
  As this subsidiary recorded net income in the period from the date of sale to
December 31, 2004, this amount was not recognized in the consolidated financial
statements under U.S. GAAP. F-55




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The U.S. GAAP adjustments related to the sale of debitel that impact the income statement consist of the following: CHF in millions
    
    2004Loss on sale from discontinued operation (debitel) under IFRS
    
    
    (248
    )U.S. GAAP Adjustments:Difference in carrying value of goodwill at 8 June 2004. See Note l.
    
    
    629Difference in carrying value of customer list at 8 June 2004. See Note g.
    
    
    (5
    )Difference in Currency Translation Adjustment at 8 June 2004
    
    
    (28
    )Gain deferred under U.S. GAAP at the time of sale
    
    
    (254
    )Gain recorded under U.S. GAAP
    
    
    94Difference
    
    
    342
  In addition, the discount between the fair value and the face value of the vendor
loans described above will be accrued over the life of the loan. In accordance with the
agreement, interest accruing on these loans will be paid when the loans become due. The
accretion of the discount and unpaid interest will not be recognized as income under
U.S. GAAP. Under IFRS the interest is recorded to income as earned. In the period from
the date of sale to December 31, 2004, the interest recorded was CHF 21 million including foreign currency effects, which
is reversed under U.S. GAAP. The gain on sale and interest income will be deferred and
recognized on receipt of the vendor loans under U.S. GAAP.Debitel, excluding the international subsidiary mentioned above, also qualifies as a
variable interest entity in accordance with FIN 46 (R). Swisscom has determined that it
is not the primary beneficiary of debitel. Swisscom has no exposure to loss under U.S.
GAAP as the entire amount of the vendor loan at December 31, 2004, of CHF 275 million
has been deferred.Debitel, excluding the international subsidiary described above, recorded revenue of EUR
1,220 million from the date of the sale through December 31, 2004.i)

Revenue recognitionIn 2004, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin 104 which replaced SAB 101. Under this guidance, revenue earned from access and
similar charges should be recognized over the estimated life of the customer
relationship. Under IFRS, this revenue is recognized immediately upon connection or
similar activity. In 2002, 2003 and 2004, the effect of the deferred and released
revenue from prior periods amounted to CHF 9 million, CHF 31 million and CHF 56 million,
respectively, which has been recorded as an addition to net revenue. SAB 104 allows
companies to defer costs directly associated with revenue that has been deferred.
Swisscom has elected not to defer any such costs.In November 2002, the EITF reached a consensus on Issue
No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance
on how to account for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21
applied to revenue arrangements entered into by Swisscom after January 1, 2004. Based on
managements assessment, Swisscom concluded that the impact on the consolidated
financial statements is not material. F-56




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##### Table of Contents



j)

Site restorationAs described in Note 26, under IAS 37 Swisscom discounted the total provision for
dismantlement of analog transmitter stations and mobile stations to its present value
using a discount rate of 4.5% and recorded the cost and accumulated depreciation at
January 1, 2000 to property, plant and equipment. In previous years, Swisscom accrued
the cost of dismantlement under U.S. GAAP over the estimated useful life of the
transmitter and mobile stations. In addition, under U.S. GAAP, a corresponding
adjustment was not recorded relating to property, plant and equipment.Effective January 1, 2003, Swisscom adopted SFAS 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the related asset
retirement costs. The statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and the
carrying amount of the long-lived asset be increased by the same amount. When a
liability is initially recorded, the entity capitalizes the cost by increasing the
carrying value of the related long-lived asset. The liability accretion to its present
value and the asset depreciation are recorded over the useful life of the related asset.
Upon settlement of the liability, a gain or loss is recorded. As of January 1, 2003,
there is no material difference between the asset retirement obligation under IFRS
compared to U.S. GAAP, as there is no significant difference in the discount rate. The
liability under U.S. GAAP was accordingly increased by CHF 7 million to CHF 371 million,
the amount of the provision under IFRS, at January 1, 2003. The corresponding cost and
accumulated depreciation of the asset, which was also recorded under property, plant and
equipment under U.S. GAAP, differed to that recorded under IFRS due to the difference in
discount rate used. At January 1, 2003, the net book value of the asset capitalized
under U.S. GAAP was CHF 38 million and CHF 32 million under IFRS. The net impact of
adopting SFAS 143, which was a credit to the income statement of CHF 31 million, was
recorded as a cumulative effect of accounting change at January 1, 2003.As described in Note 26, during 2003 Swisscom extended the expected timing of the
dismantlement of its analog transmitter stations and the resulting reduction in the
present value of the provision of CHF 43 million was recognized as income under IFRS.
Under U.S. GAAP, changes resulting from revisions to the timing should be recorded as an
increase or decrease in the carrying amount of the asset. The carrying value of this
asset under U.S. GAAP prior to this revision was CHF 12 million. In 2003, Swisscom
therefore reduced the carrying value of the asset to zero and recorded the remaining CHF
31 million against income.As described in Note 26, in 2004, Swisscom reduced the discount rate and recorded a net
present value adjustment in accordance with IAS 37. Under U.S. GAAP, the interest rate
used to measure the liability is the rate that existed when the liability was initially
measured. Therefore, the effect of the interest rate change of CHF 12 million recorded
under IFRS was eliminated.The difference between asset retirement obligation and net asset capitalized between
IFRS and U.S. GAAP consist of the following: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Net asset capitalized under IFRS
    
    
    32
    
    
    
    28
    
    
    
    24Retirement obligation under IFRS
    
    
    (371
    )
    
    
    (314
    )
    
    
    (338
    )Net liability under IFRS
    
    
    (339
    )
    
    
    (286
    )
    
    
    (314
    )Net asset capitalized under U.S. GAAP
    
    
    
    
    
    
    21
    
    
    
    19Retirement obligation under U.S. GAAP
    
    
    (364
    )
    
    
    (314
    )
    
    
    (325
    )Net liability under U.S. GAAP
    
    
    (364
    )
    
    
    (293
    )
    
    
    (306
    )Difference
    
    
    (25
    )
    
    
    (7
    )
    
    
    8
  The difference between the components for site restoration expense between IFRS and U.S. GAAP consist of the following: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Operating expenses
    
    
    (3
    )
    
    
    
    
    
    
    (1
    )Depreciation expense
    
    
    5
    
    
    
    9
    
    
    
    8Financial expense (income)
    
    
    22
    
    
    
    (39
    )
    
    
    22Total IFRS expense (income)
    
    
    24
    
    
    
    (30
    )
    
    
    29Operating expenses
    
    
    
    
    
    
    10
    
    
    
    (1
    )Depreciation expense
    
    
    
    
    
    
    
    
    
    
    6Financial expense (income)
    
    
    10
    
    
    
    (27
    )
    
    
    9Cumulative effect of first time adoption
    
    
    
    
    
    
    (31
    )
    
    
    Total U.S. GAAP expense (income)
    
    
    10
    
    
    
    (48
    )
    
    
    14Difference1)
    
    
    14
    
    
    
    18
    
    
    
    15
 1)
    
    In 2003, CHF 31 million income was recorded as a cumulative effect of
accounting change, with no tax benefit and CHF 13 million was included in operating
expenses.
 F-57




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##### Table of Contents



k)

Telephone polesUnder IAS 37, Swisscom discounted the accrual for dismantlement of telephone poles to
its present value. This resulted in a reduction of the liability and an increase in
equity in 2000. Under U.S. GAAP, this adjustment was reversed, as the liability was not
discounted. For the year ended December 31, 2002, the interest expense recorded as an
addition to the liability in the amount of CHF 1 million for 2002 under IFRS was
reversed. A reassessment of the liability in 2002 resulted in a decrease of the
liability and additional income recorded in the amount of CHF 3 million. Effective
January 1, 2003, Swisscom adopted SFAS 143 Accounting for
Asset Retirement Obligations which resulted in a reduction of the liability of CHF 7 million. This adjustment was
recorded as a cumulative effect of accounting change in 2003. As a result of this
adjustment there is no longer a difference between IFRS and U.S. GAAP for this item.l)

Goodwill amortization and impairmentUpon the adoption of SFAS 142 on January 1, 2002, Swisscom performed an impairment
assessment under U.S. GAAP of its goodwill balance of CHF 2,778 million, which primarily
related to debitel. The process to determine the amount of the impairment under U.S.
GAAP consists of two steps. The first step compares the fair value of debitel to
Swisscoms carrying value of debitel. The determination of the fair value was the same
as that described in Note 23 for IFRS. At January 1, 2002, Swisscoms carrying value
exceeded the fair value, which required the second step to be performed.Under the second step, an impairment charge is recorded for the amount that the carrying
value exceeds the implied fair value. The implied fair value of goodwill is determined
as if the acquisition of debitel took place on January 1, 2002. This process required
Swisscom to allocate the fair value at that date to all of the assets and liabilities of
debitel. The number of customers at debitel had increased significantly since the
original purchase price allocation. Consequently, a greater portion of the fair value at
January 1, 2002, was allocated to customer lists. As the overall fair value had declined
and a greater percentage was allocated to customer lists, a smaller amount was
attributed to the implied fair value of goodwill. Accordingly, Swisscom recorded an
impairment charge of CHF 1,649 million on adoption of SFAS 142 on January 1, 2002.Under IFRS, Swisscom recorded an impairment charge of CHF 702 million in 2002. Under
U.S. GAAP, Swisscom went through the two-step process described above. As the overall
fair value had declined further, the implied fair value of goodwill at December 31, 2002
was zero, and Swisscom recorded an impairment charge of CHF 985 million under U.S. GAAP.In 2003 Swisscom recorded an additional impairment charge of CHF 280 million under IFRS.
As the goodwill balance under U.S. GAAP had a value of zero, the impairment booked under
IFRS was reversed under U.S. GAAP.Under IFRS, CHF 304 million, CHF 213 million and CHF 106 million of amortization expense
relating to goodwill was recognized in 2002, 2003 and 2004 respectively. Under U.S.
GAAP, goodwill is not amortized and these amounts were therefore reversed.The difference between the impairment charge under IFRS and U.S. GAAP is summarized below: CHF in millions
    
    2002
    
    
    2003
    
    
    2004IFRS Impairment charge
    
    
    702
    
    
    
    280
    
    
    
    U.S. GAAP impairment charge on adoption of SFAS 142
    
    
    1,649
    
    
    
    
    
    
    
    U.S. GAAP impairment charge during the year
    
    
    985
    
    
    
    
    
    
    
    Total U.S. GAAP impairment charge
    
    
    2,634
    
    
    
    
    
    
    
    Difference1)
    
    
    (1,932
    )
    
    
    280
    
    
    
    
 1)
    
    In 2002. CHF 1,649 million was recorded as a cumulative effect of
accounting change, with no tax benefit and an additional CHF 283 million was
recorded as operating expense under U.S. GAAP.
  At December 31, 2004, the U.S. GAAP adjustments that impact the balance sheet consist of the following: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Decrease debitel goodwill
    
    
    (1,077
    )
    
    
    (701
    )
    
    
    Reversal of other goodwill amortization
    
    
    27
    
    
    
    68
    
    
    
    117Effect on shareholders equity
    
    
    (1,050
    )
    
    
    (633
    )
    
    
    117
  The difference in the amount of goodwill relating to debitel between IFRS and U.S.
GAAP at the date of sale was CHF 629 million. This represents the balance at the
beginning of the year of CHF 701 million, less amortization expense of CHF 57 million
and a decrease recorded directly to equity of CHF 15 million for cumulative translation
adjustment, which were recorded under IFRS. This difference was included in the gain on
the sale of debitel. See Note h. F-58




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##### Table of Contents



The changes in the carrying amount of goodwill for the year ended December 31, 2004 are as follows: CHF in millions
    
    TotalJanuary 1, 2004
    
    
    215Additions
    
    
    56December 31, 2004
    
    
    271
  Swisscoms intangible assets that are subject to amortization, the amortization
expense in 2004 and the expected amortization expense for the 5 years ended December 31,
2009 are summarized below: Gross carrying
    
    
    AccumulatedCHF in millions
    
    amount
    
    
    AmortizationAmortized intangible assets:At December 31, 2004Internally developed software
    
    
    257
    
    
    
    (200
    )Other
    
    
    344
    
    
    
    (138
    )Total
    
    
    601
    
    
    
    (338
    )Aggregate amortization expense:For year ended December 31, 2004
    
    
    
    
    
    
    102Estimated amortization expense:For year ended December 31, 2005
    
    
    
    
    
    
    91For year ended December 31, 2006
    
    
    
    
    
    
    68For year ended December 31, 2007
    
    
    
    
    
    
    42For year ended December 31, 2008
    
    
    
    
    
    
    18For year ended December 31, 2009
    
    
    
    
    
    
    10
  m)

Derivative accountingIn 2001 Swisscom purchased shares in Swiss that were considered to be a derivative
instrument under IFRS, which resulted in the recognition of financial expense of CHF 21
million. Under U.S. GAAP, in accordance with the guidance contained in SFAS 133
Implementation Issue No. A14, this investment did not qualify as a derivative
instrument. Therefore, the CHF 21 million expense recognized under IFRS, representing
the difference in commitment price and market price at the date of the issue was
recorded in equity as a fair value adjustment under U.S. GAAP and not taken to the
income statement. At December 31, 2002, Swisscom determined that its investment in Swiss
was impaired and recorded an impairment charge of CHF 41 million in the income
statement. Under U.S. GAAP, the CHF 21 million that was recorded in equity in 2001 was
removed from equity and taken to the income statement. F-59




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##### Table of Contents



n)

Sale and leaseback transactionIn March 2001 Swisscom entered into two master agreements for the sale of real estate.
The first relates to the sale of 30 commercial and office properties for CHF 1,272
million to a consortium led by Credit Suisse Asset Management. The second concerns the
sale of 166 commercial and office properties for CHF 1,313 million to PSP Real Estate AG
and WTF Holding (Switzerland) Ltd. At the same time Swisscom entered into agreements to
lease back part of the sold property space. The gain on the sale of the properties after
transaction costs of CHF 105 million and including the reversal of environmental
provisions, was CHF 807 million under IFRS.A number of the leaseback agreements are accounted for as finance leases under IFRS and
the gain on the sale of these properties of CHF 239 million is deferred and released to
income over the individual lease terms. The accounting is similar under U.S. GAAP. The
remaining gain of CHF 568 million represents the gain on the sale of buildings which
were either sold outright or which under IFRS qualify as operating leases. Under IFRS,
the gain on a leaseback accounted for as an operating lease is recognized immediately.
Under U.S. GAAP, in general the gain is deferred and amortized over the lease term. If
the lease back was minor, the gain was immediately recognized. In addition, certain of
the agreements did not qualify as sale and leaseback accounting because of continuing
involvement in the form of purchase options. These transactions are accounted for under
the finance method and the sales proceeds are reported as a financing obligation and the
properties remain on the balance sheet and continue to be depreciated as in the past.
The lease payments are split between interest and amortization of the obligation.The differences are the following: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Amounts recorded in the balance sheet under IFRS:Property, plant and equipment
    
    
    711
    
    
    
    691
    
    
    
    671Deferred gain
    
    
    (232
    )
    
    
    (228
    )
    
    
    (223
    )Finance lease obligation
    
    
    (728
    )
    
    
    (719
    )
    
    
    (710
    )Total under IFRS
    
    
    (249
    )
    
    
    (256
    )
    
    
    (262
    )Amounts recorded in the balance sheet under U.S. GAAP:Property, plant and equipment
    
    
    423
    
    
    
    407
    
    
    
    392Deferred gain
    
    
    (245
    )
    
    
    (219
    )
    
    
    (192
    )Finance obligation/Capital lease obligation
    
    
    (683
    )
    
    
    (676
    )
    
    
    (668
    )Total under U.S. GAAP
    
    
    (505
    )
    
    
    (488
    )
    
    
    (468
    )Difference on balance sheet items
    
    
    (256
    )
    
    
    (232
    )
    
    
    (206
    )
  Differences on income statement items: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Additional gain released under U.S. GAAP
    
    
    27
    
    
    
    22
    
    
    
    22Reduction in depreciation expense
    
    
    4
    
    
    
    4
    
    
    
    5Reduction in interest expense
    
    
    1
    
    
    
    
    
    
    
    1Additional rental expense
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Total difference in the income statement
    
    
    30
    
    
    
    24
    
    
    
    26
  Under IFRS, for the buildings qualifying as finance leases, when the transaction
was first recorded in March 2001, Swisscom adjusted the carrying value of the fixed
assets to the selling price, increasing the carrying value by the gain of CHF 239
million. The increase in the value of the asset is deferred and is included within other
long-term liabilities. Under U.S. GAAP, for the transactions accounted for under the
finance method, Swisscom has netted the deferred gain against the asset. As a result,
property, plant and equipment was reduced by CHF 288 million, CHF 284 million and CHF
279 million in 2002, 2003 and 2004, respectively.Swisscom deferred an additional CHF 260 million under U.S. GAAP, of which CHF 27 million
was released in 2002, CHF 22 million in 2003, and CHF 22 million in 2004.o)

Onerous ContractsUnder IFRS, Swisscom recorded a provision for onerous contracts of CHF 10 million
related to rental agreements in 2004. Under U.S. GAAP, the conditions of FAS 146
Accounting for Costs Associated with Exit or Disposal Activitieswere not met at
December 31, 2004, and the provision was reversed. F-60




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##### Table of Contents



p)

Income taxesPrior to January 1, 1998 Swisscom was not required to pay income taxes. Effective
January 1, 1998, Swisscom is subject to normal corporate taxation and up to the end of
2001 its income was subject to a weighted average statutory rate of 25%. In 2002,
Swisscom transferred its operations from Swisscom AG to newly formed subsidiaries, which
are each subject to individual tax rates. This resulted in a decrease in the weighted
average statutory rate from 25% to 23%. The deferred tax assets and liabilities were
adjusted to reflect these changes resulting in a one-time charge of CHF 115 million.In 2004, the weighted-average statutory tax rate is reduced from 23% to 22.3%. The
decline in the weighted-average tax rate is due to a lower tax rate for a major
subsidiary. The deferred tax assets and liabilities were adjusted to reflect these
changes resulting in a one-time charge of CHF 3 million.Income before income taxes, equity in net income (loss) of affiliated companies,
minority interest and change in accounting principle on continuing operations consists
of the following: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Switzerland
    
    
    2,138
    
    
    
    2,802
    
    
    
    2,823Foreign
    
    
    160
    
    
    
    93
    
    
    
    (92
    )Total
    
    
    2,298
    
    
    
    2,895
    
    
    
    2,731
  Income tax expenses would be allocated as follows: CHF in millions
    
    2002
    
    
    2003
    
    
    2004CurrentSwitzerland
    
    
    74
    
    
    
    191
    
    
    
    460Foreign
    
    
    2
    
    
    
    1
    
    
    
    1Total current
    
    
    76
    
    
    
    192
    
    
    
    461DeferredSwitzerland
    
    
    235
    
    
    
    291
    
    
    
    (49
    )Foreign
    
    
    
    
    
    
    (3
    )
    
    
    Total deferred
    
    
    235
    
    
    
    288
    
    
    
    (49
    )Total income taxes
    
    
    311
    
    
    
    480
    
    
    
    412
 F-61




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##### Table of Contents



The components of deferred taxes under U.S. GAAP at December 31, 2002, 2003 and 2004 are presented below: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Deferred tax asset:Current liabilities
    
    
    51
    
    
    
    44
    
    
    
    30Accrued pension cost
    
    
    152
    
    
    
    117
    
    
    
    195Intangible assets
    
    
    346
    
    
    
    164
    
    
    
    Other current and non current assets
    
    
    66
    
    
    
    59
    
    
    
    65Tax losses
    
    
    159
    
    
    
    110
    
    
    
    126Less: allowance for tax losses
    
    
    (80
    )
    
    
    (108
    )
    
    
    (50
    )Total deferred tax asset continuing operations
    
    
    694
    
    
    
    386
    
    
    
    366Other current and non current assets
    
    
    22
    
    
    
    39
    
    
    
    Tax losses
    
    
    31
    
    
    
    27
    
    
    
    Less: allowance for tax losses
    
    
    (9
    )
    
    
    (1
    )
    
    
    Total deferred tax asset discontinued operations
    
    
    44
    
    
    
    65
    
    
    
    Total deferred tax asset
    
    
    738
    
    
    
    451
    
    
    
    366Deferred tax liabilities:Property, plant and equipment
    
    
    (406
    )
    
    
    (403
    )
    
    
    (282
    )Trade receivables and other current assets
    
    
    (6
    )
    
    
    (5
    )
    
    
    Other non-current assets
    
    
    (23
    )
    
    
    (21
    )
    
    
    (39
    )Accrued liabilities
    
    
    (28
    )
    
    
    (46
    )
    
    
    (27
    )Total deferred tax liabilities continuing operations
    
    
    (463
    )
    
    
    (475
    )
    
    
    (348
    )Other non-current assets
    
    
    (44
    )
    
    
    (12
    )
    
    
    Total deferred tax liabilities discontinued operations
    
    
    (44
    )
    
    
    (12
    )
    
    
    Total deferred tax liabilities
    
    
    (507
    )
    
    
    (487
    )
    
    
    (348
    )Net deferred tax asset (liability) under U.S. GAAP
    
    
    231
    
    
    
    (36
    )
    
    
    18Net deferred tax asset (liability) under IFRS1)
    
    
    114
    
    
    
    (133
    )
    
    
    (135
    )Difference
    
    
    117
    
    
    
    97
    
    
    
    153
 1)
    
    Included in this caption is deferred tax asset related to discontinued
operations of CHF 44 million and CHF 65 million for the years ended December 31,
2002 and 2003, respectively.
  The components of income tax expense are: Current tax expense
    
    
    76
    
    
    
    192
    
    
    
    461Deferred tax expense (benefit)
    
    
    235
    
    
    
    288
    
    
    
    (49
    )Income tax expense under U.S. GAAP
    
    
    311
    
    
    
    480
    
    
    
    412Total income tax expense under IFRS
    
    
    313
    
    
    
    467
    
    
    
    394Difference continuing operations
    
    
    2
    
    
    
    (13
    )
    
    
    (18
    )Current tax expense
    
    
    47
    
    
    
    49
    
    
    
    20Deferred tax benefit
    
    
    (26
    )
    
    
    (50
    )
    
    
    (2
    )Income tax expense (benefit) under U.S. GAAP
    
    
    21
    
    
    
    (1
    )
    
    
    18Total income tax expense under IFRS
    
    
    48
    
    
    
    33
    
    
    
    30Difference discontinued operations
    
    
    27
    
    
    
    34
    
    
    
    12Total difference
    
    
    29
    
    
    
    21
    
    
    
    (6
    )
  Deferred income tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities and when
the deferred income taxes relate to the same tax authority. The following amounts,
determined after appropriate offsetting are shown in the consolidated balance sheet at
December 31, 2004: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Deferred tax assets (current)
    
    
    249
    
    
    
    162
    
    
    
    125Deferred tax assets (non-current)
    
    
    398
    
    
    
    221
    
    
    
    90Deferred tax liabilities (current)
    
    
    (4
    )
    
    
    (6
    )
    
    
    (2
    )Deferred tax liabilities (non-current)
    
    
    (412
    )
    
    
    (413
    )
    
    
    (195
    )Net deferred tax asset (liability) under U.S. GAAP
    
    
    231
    
    
    
    (36
    )
    
    
    18
 F-62




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Other DisclosuresSFAS 133  Accounting for Derivative Instruments
and Hedging ActivitiesEffective January 1, 2001, Swisscom adopted FASB Statement
No. 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). The application of this standard is
similar, as it applies to Swisscom, to IAS 39. See Note 32. There are differences in how
the standards are adopted. SFAS 133 requires the change to record certain financial
instruments to fair value to be presented as a cumulative change in accounting
principle. Under IFRS the change for these financial instruments was recorded as an
adjustment to retained earnings. There is no difference in the carrying value on the
balance sheet at December 31, 2002, 2003 and 2004. As the effect of recording these
financial instruments was only CHF 3 million, Swisscom has not presented this as a
reconciling item.InvestmentsThe following schedule provides on a U.S. GAAP basis selected aggregated key data of
Swisscoms equity investees as required by Rule 4-08(g) of Regulation S-X. CHF in millions
    
    2002
    
    
    2003
    
    
    2004Statement of operations:Net revenues
    
    
    278
    
    
    
    313
    
    
    
    120Total operating expenses
    
    
    (318
    )
    
    
    (422
    )
    
    
    (83
    )Operating loss
    
    
    (40
    )
    
    
    (109
    )
    
    
    37Net income (loss)
    
    
    266
    
    
    
    (115
    )
    
    
    28Balance sheet:Current assets
    
    
    139
    
    
    
    119
    
    
    
    145Non-current assets
    
    
    1,464
    
    
    
    56
    
    
    
    54Current liabilities
    
    
    148
    
    
    
    45
    
    
    
    39Long-term liabilities
    
    
    106
    
    
    
    36
    
    
    
    33Shareholders equity
    
    
    1,349
    
    
    
    94
    
    
    
    127
  The largest entity included in the information above is Swisscoms 49% interest in
TelSource NV whose only asset is a 27% interest in Cesky Telecom, a company that is
publicly traded in the Czech Republic. As described in Note 22, TelSource N.V. sold its
investment in Cesky Telecom in December 2003. F-63




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##### Table of Contents



Related party transactionsU.S. GAAP in SFAS 57 Related Party Disclosures considers that transactions with the
Confederation, its departments and other agencies to be related party transactions.
Under IFRS, these transactions are excluded from the scope of IAS 24 Related Party
Disclosures. The additional disclosures required under U.S. GAAP are as follows:Transactions between Swisscom and the PUBLICA have been disclosed in Note 9 to the
financial statements. Loans payable to the Swiss Post and the Federal Treasury are
disclosed in Note 25.Significant amounts attributable to transactions with the Confederation, its departments and agencies: ExpenseCHF in millions
    
    2002
    
    
    2003
    
    
    2004Swiss Post
    
    
    52
    
    
    
    11
    
    
    
    
  Significant amounts payable to the Confederation, its departments and agencies: PayableCHF in millions
    
    2002
    
    
    2003
    
    
    2004Swiss Post
    
    
    750
    
    
    
    
    
    
    
    
  Transactions with VodafoneOn March 30, 2001, Swisscom sold a 25% stake in Swisscom Mobile AG to Vodafone. Related
party transactions between Swisscom Mobile AG and Vodafone consist of roaming fees for
Mobile customers using the network of Vodafone and vice versa. Revenue earned from
services provided to Vodafone total CHF 36 million in 2002, CHF 66 million in 2003 and
CHF 80 million in 2004. Services purchased from Vodafone during the same periods total
CHF 57 million, CHF 111 million and CHF 137, respectively.Transactions with DangaardThrough debitel, Swisscom held 21.1% of DANGAARD Telecom Holding A/S, a distributor of
mobile equipment. Debitel delivers prepaid products and hardware to Dangaard and makes
payments to Dangaard for logistic services as well as commissions for hardware and
advertising-cost refunds.The following are the related party income statement transactions between Dangaard and
Swisscoms subsidiary debitel for the period to the date of sale of debitel: CHF in millions
    
    2002
    
    
    2003
    
    
    1.1.-8.6.2004Revenue
    
    
    375
    
    
    
    241
    
    
    
    71Expenses
    
    
    16
    
    
    
    17
    
    
    
    4Interest income
    
    
    1
    
    
    
    1
    
    
    
    
  The following are the related party balance sheet transactions between Dangaard and Swisscoms subsidiary debitel: CHF in millions
    
    2002
    
    
    2003
    
    
    2004Accounts receivable
    
    
    35
    
    
    
    19
    
    
    
    Loan receivable
    
    
    39
    
    
    
    39
    
    
    
    
  Restrictions on the payment of dividendsUnder Swiss company law, the maximum amount of shareholders equity that may be
distributed is CHF 4,503 million. F-64




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Schedule II  Valuation and Qualifying AccountsPresented below is a schedule of valuation and qualifying accounts determined using
balances in accordance with IFRS: Allowance for bad
    
    
    TerminationCHF in millions
    
    Restructuring
    
    
    and doubtful debts
    
    
    benefitsLiability at December 31, 2001
    
    
    18
    
    
    
    222
    
    
    
    76Amounts written off
    
    
    
    
    
    
    (50
    )
    
    
    Increase in provision
    
    
    
    
    
    
    27
    
    
    
    92Reclassification
    
    
    
    
    
    
    (3
    )
    
    
    Cash payments
    
    
    (7
    )
    
    
    
    
    
    
    (50
    )Liability at December 31, 2002
    
    
    11
    
    
    
    196
    
    
    
    118Amounts written off
    
    
    
    
    
    
    (43
    )
    
    
    Increase in provision
    
    
    
    
    
    
    33
    
    
    
    88Cash payments
    
    
    (4
    )
    
    
    
    
    
    
    (89
    )Liability at December 31, 2003
    
    
    7
    
    
    
    186
    
    
    
    117Amounts written off
    
    
    
    
    
    
    (49
    )
    
    
    Increase in provision
    
    
    
    
    
    
    31
    
    
    
    42Cash payments
    
    
    (2
    )
    
    
    
    
    
    
    (69
    )Liability at December 31, 2004
    
    
    5
    
    
    
    168
    
    
    
    90
 F-65




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Effect of new accounting pronouncements: International Financial Reporting Standards In December 2003, the IASB released IAS 32, «Financial Instruments: Disclosure and
Presentation» and IAS 39, «Financial Instruments: Recognition and Measurement». These
standards replace IAS 32 (revised 2000), and supersedes IAS 39 (revised 2000), and
should be applied for annual periods beginning on or after January 1, 2005. The
amendments are not expected to have a material impact on the Groups financial
statements. In December 2003, as part of the IASBs project to improve International Accounting
Standards, the IASB released revisions to the following standards that supersede the
previously released versions of those standards: IAS 1, Presentation of Financial
Statements; IAS 2, Inventories; IAS 8, Accounting Policies, Changes in Accounting
Estimates and Errors, IAS 10, Events after Balance Sheet Date; IAS 16, Property, Plant
and Equipment; IAS 21, The Effects of Changes in Foreign Exchange Rates; IAS 24, Related
Party Disclosures; IAS 27, Consolidated and Separate Financial Statements; IAS 28,
Investments in Associates; IAS 31, Interests in Joint Ventures; IAS 33, Earnings per
Share and IAS 40, Investment Property. The revised standards should be applied for
annual periods beginning on or after January 1, 2005. The amendments are not expected
to have a material impact on the Groups consolidated financial statements. In December 2003, the IASB released IAS 17 (revised) «leases». In accordance with IAS 17
(revised), long-term leases of real estate must be classified and disclosed separately
for land and buildings. The land element normally has an indefinite economic life and,
if title is not expected to pass to the lessee by the end of the lease term, the lessee
normally does not receive substantially all of the risks and rewards incidental to
ownership, in which case the lease of land will be an operating lease. In 2001, Swisscom
sold buildings and leased them back for different lease terms. Some of these sale and
leaseback agreements are classified as finance leases. No distinction was made between
the leasebacks for land and buildings. In accordance with IAS 17 (revised), in 2005, the
land element for those leases accounted for as finance leases will be reclassified as
operating leases. Swisscom is currently assessing the impact of this standard on its
consolidated financial statements In February 2004, the IASB issued IFRS 2, Share-based Payment. The standard requires the
recognition of share-based payment transactions in financial statements, including
transactions with employees or other parties to be settled in cash, other assets, or
equity instruments of Swisscom AG. Currently Swisscom has only share-based payment
transactions with employees to be settled in equity instruments of Swisscom AG. The
services received, and the corresponding increase in equity, are measured by reference
to the fair value of the equity instruments granted. The compensation is recognized as
an expense in the profit and loss account over the service period. IFRS 2 is effective
for fiscal years beginning on or after January 1, 2005 and applies to grants of shares,
share options or other equity instruments that were granted after November 7, 2002 and
had not yet vested at the effective date of the standard. Swisscom does not expect the
adoption of this standard to have a material impact on the Groups consolidated
financial statements. In March 2004, the IASB issued IFRS 3, Business Combinations, and the revised standards
IAS 36, Impairment of Assets, and IAS 38, Intangible Assets. IFRS 3 is required to be
applied to all business combinations for which the agreement date is on or after March
31, 2004. The standard requires that all business combinations be accounted for by the
purchase method, provides specific criteria for recognizing intangible assets acquired
in a business combination and also prohibits the amortization of goodwill and instead
requires it to be tested for impairment annually, in accordance with the revised IAS 36.
Any excess of acquirers interest in the net fair value of acquirees identifiable
assets, liabilities and contingent liabilities over cost is recognized immediately as a
gain. Goodwill related to acquisitions prior to March 31, 2004 continued to be
amortized through December 31, 2004 as required in the transition guidance. Goodwill
related to acquisitions subsequent to March 31, 2004 is not amortized. Intangible assets
with definite useful lives will continue to be amortized over their respective estimated
useful lives. Intangible assets with indefinite useful lives are not amortized.
Currently Swisscom does not have indefinitely lived intangible assets. The revised
standards IAS 36 and IAS 38 are effective for fiscal years beginning on or after January
1, 2005. Swisscom does not expect the adoption of these standards to have a material
impact on the Groups consolidated financial statements. In March 2004, the IASB issued IFRS 5, Non-current Assets Held for Sale and Discontinued
Operations, which addresses financial accounting and reporting for the disposal of
non-current assets. The standard supersedes IAS 35, Discontinuing Operations. IFRS 5
introduces the concept of a disposal group and adopts the classification held for
sale. IFRS 5 retains the requirement to report separately discontinued operations. An
asset classified as held for sale, or included within a disposal group that is
classified as held for sale, is not depreciated. IFRS 5 is effective for fiscal years
beginning on or after January 1, 2005. Swisscom does not expect the adoption of this
standard will have a material impact on the Groups consolidated financial statements. F-66




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U.S. GAAP In March 2004, the EITF reached consensus on Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments (EITF
03-1). EITF 03-1 provides guidance on other-than-temporary impairment models for
marketable debt and equity securities and non-marketable securities accounted for under
the cost method. On September 30, 2004, the FASB issued FASB
Staff Position (FSP) No. EITF Issue 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments, delaying the effective date for the recognition
and measurement guidance in EITF 03-1, until certain implementation issues are
addressed and a final FSP is issued. The disclosure requirements in EITF 03-1 remain
effective. In December 2004, the
FASB issued FASB Statement No. 123 (revised 2004), Share-Based
Payments (SFAS 123(R)). The statement requires the measurement and recognition of the cost of employee
services received in exchange for an award of equity instruments based on fair value of
the award at the grant-date. The cost is recognized over the period during which an
employee is required to provide service in exchange for the award. The standard
supersedes APB 25, Accounting for Stock Issued to
Employees, and prohibits the use of
the intrinsic value method of accounting for share-based payment transactions. SFAS
123(R) is effective as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005; however, early application is possible. Swisscom has
not yet assessed the impact of the adoption of the standard on the Groups consolidated
financial statements. In December 2004, the
FASB issued FASB Statement No. 153, Exchanges of Non-monetary
Assets (SFAS 153). SFAS 153 was a result of a joint effort by the FASB and the IASB to improve
financial reporting by eliminating certain narrow differences between their existing
accounting standards. One such difference was the exception from fair value measurement
in APB Opinion No. 29, Accounting for Non-monetary Transactions, for non-monetary
exchanges of similar productive assets. SFAS 153 replaces this exception with a general
exception from fair value measurement for exchanges of non-monetary assets that do not
have commercial substance. A non-monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 shall be applied prospectively and is effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of
SFAS 153 is not expected to have a material impact on the Groups consolidated financial
statements. In March 2005, the FASB issued FASB Interpretation No. 47 Accounting for Asset
Retirement Obligations, which is an interpretation of FASB Statement No. 143 Accounting for Asset
Retirement Obligations. This interpretation provides guidance with respect to the
timing and liability recognition for legal obligations associated with the retirement of
tangible long-lived assets when the timing and/or the matter of settlement are
conditional on a future event. This interpretation is applicable for the year ending
December 31, 2005. Swisscom has not yet evaluated the implications of this guidance. On March 29, 2005, the SEC staff issued Staff Accounting Bulletin No. 107, Share-Based
Payment (SAB 107), to address the application of SFAS 123(R). SAB 107
provides interpretive guidance related to the interaction between SFAS 123(R) and
certain SEC rules and regulations and provides the SEC staffs views about the valuation
of share-based payment arrangements and other specific areas. The Company is currently
evaluating the impact that SAB 107 will have on the consolidated financial
statements. F-67




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ITEM 19: EXHIBITS Index to Exhibits  Exhibit 1

Articles of Incorporation (Statuten) in English translation
(incorporated by reference to Swisscoms Annual Report on Form 20-F
for the year ended December 31, 2003, filed with the SEC on May 4,
2004).Exhibit 8

Subsidiaries: See Note 40 to the consolidated financial statementsExhibit 12

Certifications pursuant to Section 302 of Sarbanes-Oxley Act of 2002Exhibit 13

Certifications pursuant to Section 906 of Sarbanes-Oxley Act of 2002 146




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SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant
certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this
annual report to be signed on its behalf by the undersigned, thereunto duly authorized. Swisscom AG
(Registrant)By:
    /s/ Ueli DietikerUeli DietikerChief Financial Officer Date: April 20, 2005 147