##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION    FORM 20-F o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)OF THE SECURITIES EXCHANGE ACT OF 1934ORx
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
               
to
 Commission file number
    1-14860
 Swisscom 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, 2003: 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  x
    
    No  o
 Indicate by check mark which financial statement item the registrant has elected to follow. Item 17  o
    
    Item 18  x




---



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
    
    
    18Overview
    
    
    18Fixnet
    
    
    21Mobile
    
    
    33Enterprise Solutions
    
    
    39debitel
    
    
    46Other
    
    
    50Corporate
    
    
    52Participations
    
    
    52Networks and Technology
    
    
    54Property, Plant and Equipment
    
    
    59Research and Development
    
    
    60Regulation
    
    
    61ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    72ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    118Directors and Senior Management
    
    
    118Compensation
    
    
    123Employees
    
    
    123Share Ownership
    
    
    125ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    127Major Shareholders
    
    
    127Relationship and Transactions with the Swiss Confederation
    
    
    127ITEM 8: FINANCIAL INFORMATION
    
    
    130Financial Statements
    
    
    130Legal Proceedings
    
    
    130Dividend Policy
    
    
    133ITEM 9: THE OFFER AND LISTING
    
    
    134Markets
    
    
    134Price History
    
    
    135ITEM 10: ADDITIONAL INFORMATION
    
    
    136Memorandum and Articles of Association
    
    
    136Exchange Controls
    
    
    142Taxation
    
    
    142Documents on Display
    
    
    145ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    146ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    147ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    148ITEM 14: MATERIAL MODIFICATIONS
    
    
    148ITEM 15: CONTROLS AND PROCEDURES
    
    
    148ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    148ITEM 16B: CODE OF ETHICS
    
    
    148ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    149ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    150ITEM 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    150ITEM 17: FINANCIAL STATEMENTS
    
    
    150ITEM 18: FINANCIAL STATEMENTS
    
    
    151ITEM 19: EXHIBITS
    
    
    152SIGNATURE
    
    
    153Exhibit 1Exhibit 12Exhibit 13




---



##### Table of Contents



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 heading Item 4:
Information on the Company  debiteland Item 4: Information on the Company 
Participations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;




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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, 1999, 2000, 2001, 2002 and 2003
and for each of the years in the five-year period ended December 31, 2003, have
been extracted or derived from, and are qualified by reference to, the
Financial Statements of Swisscom which have been audited by
PricewaterhouseCoopers AG, independent auditors. The Financial Statements were
prepared in accordance with IFRS, which differs 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. Year Ended December 31,CHF in millions
    
    1999(1)
    
    2000
    
    2001
    
    2002
    
    2003Consolidated Income Statement Data:Amounts in accordance with IFRS:Net revenue
    
    
    11,038
    
    
    
    14,060
    
    
    
    14,174
    
    
    
    14,526
    
    
    
    14,581Other operating income
    
    
    88
    
    
    
    125
    
    
    
    213
    
    
    
    266
    
    
    
    256Total
    
    
    11,126
    
    
    
    14,185
    
    
    
    14,387
    
    
    
    14,792
    
    
    
    14,837Goods and services purchased
    
    
    1,916
    
    
    
    4,423
    
    
    
    4,513
    
    
    
    4,959
    
    
    
    4,834Personnel expenses
    
    
    2,531
    
    
    
    2,512
    
    
    
    2,461
    
    
    
    2,593
    
    
    
    2,535Other operating expenses
    
    
    2,499
    
    
    
    3,216
    
    
    
    3,004
    
    
    
    2,827
    
    
    
    2,827Depreciation
    
    
    1,612
    
    
    
    1,850
    
    
    
    1,702
    
    
    
    1,578
    
    
    
    1,564Amortization
    
    
    91
    
    
    
    353
    
    
    
    472
    
    
    
    427
    
    
    
    361Total operating expenses
    
    
    8,649
    
    
    
    12,354
    
    
    
    12,152
    
    
    
    12,384
    
    
    
    12,121Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (1,130
    )(1)
    
    
    (702
    )(1)
    
    
    (280
    )(1)Gain on sale of real estate
    
    
    
    
    
    
    
    
    
    
    568
    (2)
    
    
    
    
    
    
    Gain on partial sale of
Swisscom Mobile AG
    
    
    
    
    
    
    
    
    
    
    3,837
    (2)
    
    
    
    
    
    
    Operating income
    
    
    2,477
    
    
    
    1,831
    
    
    
    5,510
    
    
    
    1,706
    
    
    
    2,436Financial expense
    
    
    (259
    )
    
    
    (329
    )
    
    
    (771
    )
    
    
    (517
    )
    
    
    (154
    )Financial income
    
    
    220
    
    
    
    490
    
    
    
    416
    
    
    
    206
    
    
    
    140Income before income taxes,
equity in net result of
affiliated companies and
minority interest
    
    
    2,438
    
    
    
    1,992
    
    
    
    5,155
    
    
    
    1,395
    
    
    
    2,422Income tax (expense) benefit(3)
    
    
    (532
    )
    
    
    (640
    )
    
    
    15
    
    
    
    (361
    )
    
    
    (500
    )Equity in net result of
affiliated companies
    
    
    301
    
    
    
    1,749
    
    
    
    32
    
    
    
    95
    
    
    
    (7
    )Minority interest
    
    
    (7
    )
    
    
    (14
    )
    
    
    (238
    )
    
    
    (305
    )
    
    
    (346
    )Net income from continuing
operations
    
    
    2,200
    
    
    
    3,087
    
    
    
    4,964
    
    
    
    824
    
    
    
    1,569Discontinuing operations
    
    
    183
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    2,383
    
    
    
    3,156
    
    
    
    4,964
    
    
    
    824
    
    
    
    1,569
 -4-




---



##### Table of Contents



Year Ended December 31,CHF in millions except per Shareand ADS amounts
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003Basic earnings per share(4)on continuing operations
    
    
    29.91
    
    
    
    41.97
    
    
    
    67.50
    
    
    
    12.18
    
    
    
    23.70on discontinuing operations
    
    
    2.49
    
    
    
    0.94
    
    
    
    
    
    
    
    
    
    
    
    net income
    
    
    32.40
    
    
    
    42.91
    
    
    
    67.50
    
    
    
    12.18
    
    
    
    23.70Diluted earnings per share(4)on continuing operations
    
    
    29.88
    
    
    
    41.93
    
    
    
    67.46
    
    
    
    12.17
    
    
    
    23.69on discontinuing operations
    
    
    2.48
    
    
    
    0.94
    
    
    
    
    
    
    
    
    
    
    
    net income
    
    
    32.36
    
    
    
    42.87
    
    
    
    67.46
    
    
    
    12.17
    
    
    
    23.69Basic and diluted earnings per
ADS(4)
    
    
    3.24
    
    
    
    4.29
    
    
    
    6.75
    
    
    
    1.21
    
    
    
    2.37Amounts in accordance with U.S.
GAAP:Net revenue
    
    
    11,032
    
    
    
    14,035
    
    
    
    14,192
    
    
    
    14,535
    
    
    
    14,612Net income from continuing
operations
    
    
    1,801
    
    
    
    2,257
    
    
    
    5,702
    
    
    
    786
    
    
    
    2,058Cumulative effect of a change in
accounting policy
    
    
    
    
    
    
    (169
    )
    
    
    
    
    
    
    (1649
    )
    
    
    38Net income (loss)
    
    
    1,801
    
    
    
    2,088
    
    
    
    5,702
    
    
    
    (863
    )
    
    
    2,096Basic earnings (loss) per sharebefore accounting change
    
    
    24.49
    
    
    
    30.69
    
    
    
    77.53
    
    
    
    11.62
    
    
    
    31.09Cumulative effect of a change in
accounting policy
    
    
    
    
    
    
    (2.30
    )
    
    
    
    
    
    
    (24.38
    )
    
    
    0.57net income
    
    
    24.49
    
    
    
    28.39
    
    
    
    77.53
    
    
    
    (12.76
    )
    
    
    31.66Diluted earnings (loss) per sharebefore accounting change
    
    
    24.46
    
    
    
    30.66
    
    
    
    77.49
    
    
    
    11.61
    
    
    
    31.07Cumulative effect of a change in
accounting policy
    
    
    
    
    
    
    (2.30
    )
    
    
    
    
    
    
    (24.35
    )
    
    
    0.57net income
    
    
    24.46
    
    
    
    28.36
    
    
    
    77.49
    
    
    
    (12.74
    )
    
    
    31.64Basic earnings per ADS(4)
    
    
    2.45
    
    
    
    2.84
    
    
    
    7.75
    
    
    
    (1.28
    )
    
    
    3.17Diluted earnings per ADS(4)
    
    
    2.45
    
    
    
    2.84
    
    
    
    7.75
    
    
    
    (1.27
    )
    
    
    3.16
 -5-




---



##### Table of Contents



Year Ended December 31,CHF in millions
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003Consolidated Balance Sheet Data:(end of period)Amounts in accordance with IFRS:Cash and cash equivalents
    
    
    1,211
    
    
    
    2,265
    
    
    
    3,788
    
    
    
    1,682
    
    
    
    3,237Other current assets
    
    
    3,762
    
    
    
    3,957
    
    
    
    6,586
    
    
    
    3,511
    
    
    
    3,398Property, plant and equipment
    
    
    10,723
    
    
    
    9,946
    
    
    
    8,104
    
    
    
    7,536
    
    
    
    7,009Investments in affiliated
companies
    
    
    713
    
    
    
    512
    
    
    
    603
    
    
    
    691
    
    
    
    53Other non-current assets
    
    
    4,404
    
    
    
    5,323
    
    
    
    5,268
    
    
    
    3,538
    
    
    
    2,843Total assets
    
    
    20,813
    
    
    
    22,003
    
    
    
    24,349
    
    
    
    16,958
    
    
    
    16,540Short-term debt
    
    
    4,049
    (5)
    
    
    2,685
    (5)
    
    
    1,757
    (5)
    
    
    1,016
    (5)
    
    
    576
    (5)Trade accounts payable and
other current liabilities
    
    
    3,485
    
    
    
    4,049
    
    
    
    3,507
    
    
    
    2,947
    
    
    
    2,892Long-term debt and finance
lease obligation
    
    
    3,605
    (5)
    
    
    3,782
    (5)
    
    
    3,743
    (5)
    
    
    2,697
    (5)
    
    
    2,444Accrued pension cost
    
    
    2,248
    
    
    
    1,925
    
    
    
    1,218
    
    
    
    1,101
    
    
    
    1,113Accrued liabilities and other
long-term liabilities
    
    
    727
    
    
    
    931
    
    
    
    1,272
    
    
    
    1,102
    
    
    
    1,095Total liabilities
    
    
    14,114
    
    
    
    13,372
    
    
    
    11,497
    
    
    
    8,863
    
    
    
    8,120Minority interest
    
    
    31
    
    
    
    61
    
    
    
    783
    
    
    
    796
    
    
    
    751Shareholders equity
    
    
    6,668
    
    
    
    8,570
    
    
    
    12,069
    
    
    
    7,299
    
    
    
    7,669Amounts in accordance with U.S.
GAAP:Total assets
    
    
    26,256
    
    
    
    25,718
    
    
    
    28,098
    
    
    
    19,819
    
    
    
    19,372Long term debt and finance
lease obligation
    
    
    5,947
    
    
    
    5,622
    
    
    
    7,283
    
    
    
    6,438
    
    
    
    5,892Shareholders equity
    
    
    9,392
    
    
    
    8,110
    
    
    
    12,294
    
    
    
    5,587
    
    
    
    6,523Consolidated Cash Flow Data:Amounts in accordance with IFRS:Net cash provided by operating
activities
    
    
    3,716
    
    
    
    3,821
    
    
    
    3,389
    
    
    
    3,785
    
    
    
    4,732Capital expenditures:Fixed-line networks
    
    
    513
    
    
    
    485
    
    
    
    470
    
    
    
    479
    
    
    
    497Mobile networks
    
    
    308
    
    
    
    286
    
    
    
    258
    
    
    
    295
    
    
    
    381UMTS/GSM licenses
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    Other intangibles
    
    
    
    
    
    
    118
    
    
    
    163
    
    
    
    137
    
    
    
    135Buildings
    
    
    145
    
    
    
    18
    
    
    
    28
    
    
    
    3
    
    
    
    6Other
    
    
    502
    
    
    
    423
    
    
    
    315
    
    
    
    309
    
    
    
    194Total capital expenditures
    
    
    1,468
    
    
    
    1,450
    
    
    
    1,234
    
    
    
    1,222
    
    
    
    1,213Investments in affiliated
companies
    
    
    8
    
    
    
    113
    
    
    
    2
    
    
    
    37
    
    
    
    11
 -6-




---



##### Table of Contents



Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Statistical Data:Fixed-line access lines(6)(end of period, in thousands)PSTN lines
    
    
    3,621
    
    
    
    3,382
    
    
    
    3,240
    
    
    
    3,163
    
    
    
    3,086ISDN lines
    
    
    529
    
    
    
    723
    
    
    
    857
    
    
    
    911
    
    
    
    924Total fixed-line access lines
    
    
    4,150
    
    
    
    4,105
    
    
    
    4,097
    
    
    
    4,074
    
    
    
    4,010Traffic (in millions of minutes):National fixed-line
telephony(7)
    
    
    16,849
    
    
    
    15,274
    
    
    
    14,317
    
    
    
    12,316
    
    
    
    10,957Outgoing international
fixed-line telephony(8)
    
    
    1,381
    
    
    
    1,306
    
    
    
    1,399
    
    
    
    1,394
    
    
    
    1,341Mobile telephony(9)
    
    
    2,030
    
    
    
    2,977
    
    
    
    3,296
    
    
    
    3,331
    
    
    
    3,335Bluewin on-line service
subscribers (end of period, in
thousands)(10)
    
    
    307
    
    
    
    550
    
    
    
    734
    
    
    
    860
    
    
    
    944Swisscom Mobile subscribers(11)
(end of period, in thousands)
    
    
    2,282
    
    
    
    2,961
    
    
    
    3,373
    
    
    
    3,605
    
    
    
    3,796debitel subscribers in Germany
(end of period, in thousands)
    
    
    3,096
    
    
    
    6,374
    
    
    
    7,647
    
    
    
    7,729
    
    
    
    8,300Number of full-time equivalent
employees (end of period)
    
    
    21,777
    
    
    
    20,604
    
    
    
    21,238
    
    
    
    20,470
    
    
    
    19,207
 Notes to Selected Consolidated Financial and Statistical Data  (1)
    
    Effective October 1999, Swisscom acquired a total of 74.2% of the shares
of debitel AG, the largest network-independent mobile service provider in
Germany for CHF 3.4 billion. debitel was fully consolidated for the fourth
quarter 1999. In 2001, Swisscom acquired a further 20% of debitels shares
for CHF 928 million. In 2002, Swisscom reduced its share in debitel from
94.2% to 93%. In 2001 and 2002, Swisscom wrote down the value of the
goodwill associated with the debitel acquisition by CHF 1.1 billion and
CHF 702 million, respectively. In connection with the discussions
concerning the disposal of its shareholding in debitel, Swisscom recorded
a further goodwill impairment charge in the amount of CHF 280 million in
2003, reflecting the net amount that was expected from the sale. On April
29, 2004, Swisscom sold its stake in debitel for a purchase price of EUR
640 million (equity value).(2)
    
    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.(3)
    
    Prior to its incorporation effective January 1, 1998, Swisscom was not
subject to income taxes. Subsequent to its transformation into a stock
corporation, Swisscom became subject to normal corporate income taxation
and up to the end of 2001, its income was subject to a weighted average
statutory 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 2003, the
weighted average tax rate was again 23%. See Note 16 to the consolidated
financial statements.(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 1999, 2000,
2001, 2002 and 2003 was 73,550,000, 73,540,974, 73,543,972, 67,647,928 and
66,199,789, 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.(5)
    
    Total debt at December 31, 1999, 2000, 2001 and 2002 includes debt
outstanding to the Swiss Post and the Federal Treasury in the aggregate
principal amount of CHF 4.2 billion, 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.
Short-term debt at December 31, 1999 includes a loan outstanding of CHF
1.7 billion. This loan was part of the financing measures taken for the
acquisition of debitel and was repaid in the first half of 2000. -7-




---



##### Table of Contents



(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 Mobile 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.(11)
    
    Beginning in 2001, Swisscom no longer includes accounts of any prepaid
customer with inactivity of more than twelve months in its subscriber
figures. In December 2001, this resulted in the deactivation of 207,000
inactive prepaid customers.  Dividend InformationThe 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)1999
    
    
    15
    
    
    
    8.882000
    
    
    11
    
    
    
    6.172001(1)
    
    
    11
    
    
    
    6.782002(1)
    
    
    12
    
    
    
    9.152003(1)(2)
    
    
    13
    
    
    
    10.01
  (1)
    
    In each of 2001, 2002 and 2003, shareholders received in addition a
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)
    
    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. -8-




---



##### 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 at April 30, 2004 was CHF 1.2984. Year Ended December 31,
    
    Average Rate(1)1999
    
    
    1.51392000
    
    
    1.69302001
    
    
    1.69442002
    
    
    1.54972003
    
    
    1.3374
  (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
    
    LowNovember 2003
    
    
    1.3737
    
    
    
    1.2917December 2003
    
    
    1.3003
    
    
    
    1.2380January 2004
    
    
    1.2659
    
    
    
    1.2190February 2004
    
    
    1.2680
    
    
    
    1.2269March 2004
    
    
    1.3038
    
    
    
    1.2560April 2004
    
    
    1.3202
    
    
    
    1.2627
 -9-




---



##### Table of Contents



RISK FACTORS Risks Related to Swisscoms Business Swisscom may not be able to maintain its current level of profitability for
traditional telecommunications services provided in Switzerland 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 full competition. The
Telecommunications Act contains numerous provisions designed to facilitate
competition, including provisions relating to interconnection, carrier
pre-selection and number portability. These provisions primarily affect the
traditional telecommunications services Swisscom offers, such as fixed-line
voice and mobile telephony and data services. In these core business areas,
which continue to account for the majority of Swisscoms revenues, margins have
come under pressure and profitability has declined. Moreover, recent amendments
to the Telecommunications Ordinance and proposed amendments to the
Telecommunication Act are likely to further increase competition in these areas
and put additional pressure on margins.  
    
    In the area of fixed network telephony and related services, Swisscom
faces intense competition, particularly in the national long distance and
international calling markets. Over the last several years, Swisscom has
had to significantly reduce its interconnection prices, tariffs have come
under pressure and margins have declined substantially. Moreover, in
November 2003, ComCom issued two decisions requiring Swisscom to lower
interconnection prices by 25-35% with retroactive effect for the years
2000 to 2003. In connection with these proceedings, there are currently
appeals pending at the Federal Court, which, if decided against Swisscom,
could result in a further reduction in interconnection prices.While Swisscom has been able to maintain relatively high margins from the
provision of non-regulated access services and from local area calls,
margins have also begun to decline in respect of these services and Swisscom
expects further margin erosion and loss of market share in the future. Under
the amended Telecommunications Ordinance, Swisscom has been required to
offer unbundled access to its local loop on a cost-oriented basis, which may
significantly accelerate this trend.Moreover, the traditional fixed-line telephony services sector is declining
in importance due to technological developments and the emergence of
alternative means of carrying voice traffic. With mobile penetration rates
having reached 82% in Switzerland, mobile telephony is increasingly used as
a substitute for fixed-line telephony. Recently, new competitors such as
cable operators, in particular Cablecom, the largest cable operator in
Switzerland, and Internet service providers have begun to offer Internet
telephony (known as voice over IP) services. As the quality of Internet
telephony improves, it is becoming a viable alternative to traditional
fixed-line telephony as well, a trend Swisscom expects to continue and
intensify in the future.
    
    In its mobile business, Swisscom faces competition primarily 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. Moreover, with strong competition and the high rate
of mobile penetration in Switzerland, customer retention costs have
increased substantially which is putting additional pressure on
margins. In connection with the planned introduction of broadband
mobile services such as UMTS, Swisscom would be adversely affected if
its competitors were able to rollout such services before Swisscom is
able to do so. Swisscoms profitability may also be affected by
regulatory initiatives, which could include regulation of mobile
termination tariffs as well as access to certain mobile services.
    
    Swisscom faces particularly intense competition in the provision of
basic telecommunication services to business customers. Leased lines
and conventional data transmission have become a commodity business
characterized by low margins. In addition, under the amended
Telecommunications Ordinance, Swisscom has been required to offer
competitors interconnection to leased lines on a cost-oriented basis,
which is putting additional pressure on margins. -10-




---



##### Table of Contents



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 April 29, 2004, Swisscom entered into an agreement to sell its 95% stake in
debitel AG, including 2% it acquired from ElectronicPartner in connection with
this transaction, 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 will be 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, to be assumed by debitel
Konzernfinanzierungs GmbH, an indirect 100% owned subsidiary of the entity to
be acquired by Permira Funds in the transaction. Consideration from the sale
including the vendor loan notes will be recorded at fair value at closing of
the transaction. Swisscom expects the fair value of the vendor loan notes to be
lower than their face value. After deduction of the deferred portion of the
purchase price, Swisscom expects to receive EUR 430 million in cash at closing.
Pending the closing of the transaction, Swisscoms debitel shares will be held
in a blocked account to prevent Swisscom from selling these shares otherwise
than to the Permira Funds pursuant to the purchase agreement. A portion of the purchase price is also being 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. 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 under certain conditions with the right to take control over this
subsidiary in order to minimize its liability under this indemnity. If the level of demand for ADSL services is lower than expected or if Swisscom
were forced to significantly reduce its access tariffs for ADSL services due to
strong competition, the revenues and profitability of its Fixnet business would
be adversely affected Swisscom believes that the provision of broadband access based on ADSL
technology will be a future source of growth. However, Swisscom faces strong
competition in the market for broadband access, particularly from cable network
operators, including Cablecom. If Cablecom and other cable operators are
successful in promoting broadband access over their networks in Switzerland,
Swisscom may not be able to grow its broadband business as quickly as it
currently anticipates and its fixed-line business would suffer. In addition,
future wireless services using broadband technologies may, when they become
commercially available, partially substitute ADSL services. In order to compete with other broadband access operators more effectively,
Swisscom has had to reduce its ADSL access tariffs significantly. Further price
reductions due to the increasing competition from Cablecom or other broadband
access providers would adversly affect the revenues and profitability of
Swisscoms fixed-line business. The level of 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 upgrade its existing network 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 UMTS. 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. -11-




---



##### Table of Contents



Swisscom has begun to build out its UMTS network and to develop related
products and services and expects to incur substantial capital expenditures in
connection with this process. However, the development of UMTS technology is
taking longer than anticipated and deficiencies continue to exist both with
respect to handsets and network components, which may further delay the
introduction of commercial UMTS services. For instance, network operators are
currently experiencing difficulty in handing over calls between the UMTS
network and the GSM network due to technical problems which have to be resolved
before commercial UMTS services can be introduced on a wide scale. Once
commercial services based on UMTS technology are introduced, there is also a
risk that they will not 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, the breadth and quality of available
content and the geographical availability of UMTS. Furthermore, the level of
demand for UMTS services could be lower than expected as a result of increased
use of alternative mobile broadband technologies, such as public wireless LAN.
If the introduction of UMTS services is further delayed or UMTS fails to
achieve the expected advantages over existing technologies, Swisscoms mobile
business will suffer and Swisscom may be unable to recoup its investment in
UMTS technology. The level of demand for integrated communication solutions and IT services,
which Swisscom has identified as a source of future growth, may not increase as
quickly as anticipated 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 lies in the provision of enhanced business
solutions. Accordingly, it has invested in upgrading its data networks,
enabling the provision of integrated data and voice services with greater
flexibility, scalability and performance. However, demand for such integrated
communications solutions may not develop as quickly as Swisscom had
anticipated. The slowdown of the global economy has led to a decline in
corporate spending which has been particularly pronounced in the IT area.
While Swisscom expects corporate spending in this area to pick up as the
economy improves, the timing of any such improvement in the level of demand
cannot be predicted with assurance. 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 the market. 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 and switching, routing and data collection
systems and 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 support next generation technologies, such as ADSL and UMTS.
While Swisscom seeks to diversify its suppliers, it currently has only one
supplier of ADSL and one supplier of UMTS equipment. In the case of UMTS,
Swisscom expects that there will be intense demand for UMTS equipment as UMTS
licensees compete to build out their UMTS networks. Because Swisscom is
relatively small in comparison with other UMTS licensees in Europe, it may be
more strongly affected in case there are supply shortages or delays. Swisscom
would be adversely affected if its UMTS supplier were to delay shipment of
network components as this could enable its competitors to rollout services
before Swisscom is able to do so. Swisscom also depends on the timely supply of
mobile handsets which can be used in the UMTS network. Network failures may result in loss of traffic, reduced revenue and may harm
Swisscoms reputation Modern telecommunication networks are vulnerable to damage or interruption
caused by system failures, hardware or software failures, computer viruses or
by external events such as storms, floods, avalanches, fires, power loss or
intentional wrongdoing. In July 2001, Swisscoms mobile network was disrupted
for several hours due to a string of contingencies and a software failure, and
in August 2001, a part of Swisscoms fixed-line network was disrupted due to a
hardware failure. In response to these events, Swisscom initiated a series of
internal and external audits to carefully analyze its networks in order to
reduce the probability of network failures in the future as well as to limit
the damage in case a network failure does occur. While there were no major
network failures in 2003, the risk of -12-




---



##### Table of Contents



network failures can never be entirely eliminated and should such failures
occur in the future, this may harm Swisscoms reputation and could result in
customer dissatisfaction and reduced traffic and revenues. Actual or perceived health risks or other problems relating to mobile devices
or transmission masts could lead to 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. For
example, a recent study showed that the impact of UMTS radiation on humans is
higher than previously assumed. Actual or perceived health risks of mobile
handsets or base stations and related publicity, regulation or litigation could
have a material adversely affect on Swisscoms mobile communications business
and cause its customer base and average usage per customer to decline.
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
infrastructure, including primarily the mobile and data networks. 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
introduced. As a result, there is a lack of harmonization and flexibility,
which may limit Swisscoms ability to provide flexible and cost-effective
services to its customers and harm its competitive position. In addition,
further adaptation and extension of its IT systems, in particular the billing,
order management and customer relationship management systems, can be complex
and time-consuming and, therefore, hamper Swisscoms business development. Swisscom may not be able to attract and retain highly skilled and qualified
employees Competition for highly qualified personnel is intense in the telecommunications
industry generally, and in Switzerland in particular. This is particularly
true with respect to employees with expertise in the areas Swisscom has
identified as strategic, such as IP expertise. These difficulties are
exacerbated by relatively low levels of unemployment and high wages generally
in Switzerland. Swisscom may not be able to implement necessary restructuring measures and its
relations with the trade unions could 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 labour 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 also could
negatively affect Swisscoms profitability and competitiveness. A deterioration of 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. The determination of the liability and expense for pension benefits in
Swisscoms consolidated financial statements is based on guidelines established
by the International Financial Reporting Standards 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. Under
IFRS, the total underfunding at December 31, 2003 was CHF 2,010 -13-




---



##### Table of Contents



million, of which CHF 1,113 million is recognized in the balance sheet. The
unrecognized loss of CHF 897 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 9 million in 2004. In 2003, Swisscom had an
additional expense of CHF 25 million, after an unrecognized loss of CHF 1,066
million at December 31, 2002. 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. Audits by the
Swiss tax authorities of other Swiss companies in the past have in some cases
resulted in substantial additional payments being required of the affected
companies. If Swisscom were audited by the Swiss tax authorities and any
deficiencies were uncovered, Swisscom may have to make substantial payments for
which it has not made any 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 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 market in which it operates. Although Swisscom
believes that most of these proceedings would individually not have a material
adverse effect on its results of operations and financial condition, in
aggregate these proceedings could have such an effect. Swisscoms strategy of entering into acquisitions, strategic partnerships and
joint ventures entails inherent uncertainty Swisscom actively considers investment opportunities, which may include
significant acquisitions, both in Switzerland and abroad. There can be no
assurance, however, that Swisscom will be able to identify investment
opportunities that meet its investment criteria or that it will be able to
successfully enter into any transactions in respect of opportunities it does
identify. Moreover, acquisitions are inherently risky because of the
difficulties in integrating people, operations, technologies and products that
may arise. For example, the internal controls over financial reporting of
acquired companies may not meet the standards Swisscom applies to its internal
control over financial reporting and may need to be adapted accordingly. If
Swisscom does enter into an acquisition transaction, these difficulties may
result in unanticipated additional costs or failure to achieve anticipated
benefits, including synergies, from the transaction. If Swisscom were to find
in the future that its expectations concerning future cash flows from an
investment are not likely to be met, the carrying value of that investment
would be adversely affected. In particular, Swisscom has made small
acquisitions in the field of public wireless LAN services, an area which may
not grow as fast as Swisscom currently anticipates. Swisscom will also consider entering into strategic partnerships or joint
ventures, particularly at the level of its individual operating subsidiaries,
as it did in 2001, when Vodafone acquired a 25% stake in Swisscom Mobile AG.
Such transactions are also risky because they require ongoing cooperation
between the partners, which may have or may come to have divergent views as to
how the business should be managed and which business development objectives to
pursue. -14-




---



##### Table of Contents



Risks Related to Regulatory Matters Recent amendments to the Telecommunications Ordinance and proposed amendments
to the Telecommunications Act could substantially affect the overall
profitability of Swisscoms business in the future In March 2003, the Federal Council adopted significant amendments to the
Telecommunications Ordinance (Verordnung über Fernmeldedienste), which is the
principal ordinance on telecommunications services. In addition, in November
2003, the Federal Council submitted a bill to the Swiss Parliament with
significant amendments to the Telecommunications Act that would, among other
things, implement the recent amendments to the Telecommunications Ordinance
into law. Swisscom does not expect that any amendments would become effective
in the course of 2004. Important features of the amendments to the
Telecommunications Ordinance and the proposed amendments to the
Telecommunications Act include:  
    
    Unbundling of the Local Loop and Interconnection to Leased Lines.
Under the amended Telecommunications Ordinance, Swisscom is required
to offer unbundled access to its local loop, as well as
interconnection to leased lines, on a cost-oriented basis. However,
because Swisscom believes that such a significant change in the
telecommunications regulations requires an amendment to the
Telecommunications Act, it has not yet implemented these provisions,
pending the adoption of corresponding amendments to the
Telecommunications Act. In addition, TDC Switzerland (Sunrise) filed a
petition with ComCom requesting that Swisscom be required to offer
unbundled access to its local loop and interconnection to leased lines
on a cost-oriented basis. If Swisscom is required to implement these
provisions, competitors will have direct access to Swisscoms
customers and be able to offer them a full range of services without
the need to use Swisscom as an intermediary. In addition, if Swisscom
were required to offer bitstream access, which is one form of
unbundling of the local loop, on a cost-oriented basis, it can not be
excluded that Swisscom would be required to reduce the current
wholesale prices for ADSL services, which would adversely affect the
revenues and profitability of Swisscoms fixed-line business.
    
    Additional Requirements Applicable to Market-Dominant Service
Providers.Under proposed amendments to the Telecommunications Act,
market-dominant service providers will be required to offer access
and not just interconnection to its installations and services on a
cost-oriented basis. The access concept, which is more general than
interconnection, is intended to cover unbundling of the local loop
and interconnection to leased lines, but also to provide the legal
basis for requiring market-dominant service providers to provide
access to any other relevant installation or service on a
cost-oriented basis. Expansion of the concept of interconnection
would make it more likely that Swisscom could be required to provide
services which are currently not subject to the interconnection
regime. If the amendments to the interconnection provisions of the
Telecommunications Act were adopted as currently proposed, it could
have a substantial and adverse effect on Swisscoms revenues and
profitability.
    
    ComComs Authority to Determine Access Services.Under the proposed
amendments to the Telecommunications Act, ComCom would be given the
power to determine the access services that market-dominant providers
are required to provide. Since this decision is not subject to any
review, ComCom could modify the scope of services covered under the
access concept in a relatively fast and unpredictable manner. This
would make it more difficult for Swisscom to anticipate and
effectively respond to any such changes. Regulation of mobile termination and mobile roaming may have a significant
impact on Swisscoms mobile revenues and lead to additional pressure on margins
and reduced profitability Swisscoms mobile termination tariffs and roaming surcharges may become subject
to regulation in the future due to a number of developments, including
regulatory initiatives in the European Union and ongoing proceedings in which
Swisscom is involved. In March 2002, the European Union has published the final part of its new
regulatory framework for the telecommunications industry. Among other things,
these recommendations, which were to be implemented by the member states of the
European Union by July 2003, result in the regulation of mobile call
termination fees. In addition, the European Union is currently investigating
whether operators have been engaged in excessive pricing when entering into
roaming agreements. While Switzerland is not a member state of the EU and
therefore is not subject to EU legislation, the deregulation of the Swiss
telecommunications market has moved in parallel with deregulation in the EU,
and EU directives and implementing legislation in various EU countries have
served as -15-




---



##### Table of Contents



points of reference for the development of the Swiss regulatory regime. In
addition, the awarding of new mobile licenses to two mobile service providers
that require interconnection to the networks of other mobile network operators
in areas where they do not have their own network may increase the pressure on
the Swiss regulatory authorities to regulate mobile termination tariffs. Swisscom was involved in a legal dispute and is currently subject to a
regulatory proceeding, both relating to mobile termination. On November 12,
2002, Tele2 initiated proceedings against Swisscom relating to interconnection
pricing with ComCom, alleging that Swisscoms wholesale prices for termination
of transit traffic on the Swisscom mobile network should be reduced
retroactively, on the grounds that Swisscom has a dominant position in the
mobile termination market. In early 2003, Tele2 withdrew its complaint on
procedural grounds, but reserved the right to refile the previous or an amended
complaint. In October 2002, the Competition Commission initiated proceedings
against Swisscom, Orange and TDC Switzerland (Sunrise) in connection with
mobile termination costs, alleging that each operator has a dominant position
with respect to terminating traffic on its own mobile network. In addition, the
new access concept, described above, may also facilitate the regulators
authority to impose regulation on mobile termination tariffs as it is intended
to provide the legal basis for requiring market-dominant service providers to
provide access to any relevant installation or service on a cost-oriented
basis. Regulation of mobile termination fees or roaming surcharges would have a
significant impact on Swisscoms mobile revenues and lead to additional
pressure on margins and reduced profitability. Regulation of radiation emissions from mobile base stations and antennae may
result in additional capital expenditures in order to maintain current quality
of GSM service and in a delay of the build out of new technologies such as UMTS 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. The NIS Ordinance is implemented by the
cantons, which until recently have used different methods of measuring
radiation emissions to determine compliance with the NIS Ordinance, resulting
in significant regional variations in effective emission standards. In order
to address this issue, the Swiss Agency for the Environment, Forests and
Landscape (BUWAL) issued final recommendations in July 2002 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 current quality of service Swisscom will be
required to put up additional antennae. However, Swisscom does not expect the
associated costs in 2004 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. Recommendations relating to emission standards for UMTS networks
are expected in the course of 2004. 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. Furthermore, recent scientific findings showed that UMTS
radiation has a higher impact on humans than previously assumed, which could
cause regulatory authorities to set higher emission standards than currently
expected. Risks Related to the 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 therefore could be
constrained. In addition, Swisscom is also 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
is an important element of its strategy. -16-




---



##### Table of Contents



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 62.7% stake in Swisscom. 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 December 2003, the Swiss government issued bonds
convertible into Swisscom shares in the aggregate amount of CHF 1.5 billion and
with a maturity of four years. If fully exercised, the bond issuance could
result in a decline of the Confederations stake in Swisscom down to 58.2%. 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. 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. dollar, fluctuation 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. -17-




---



##### 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. At December 31, 2003, Swisscom provided, in Switzerland, 4.0 million
fixed-line telephone access lines, of which 0.9 million were digital or ISDN
lines and 0.5 million were being used for ADSL access. In 2003, Swisscom
billed an aggregate of 18.1 billion minutes of national transit and
interconnection traffic and terminated over 1.6 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 3.8
million subscribers to its mobile service at December 31, 2003. Swisscom also
offers a full range of state-of-the-art data services, from leased lines to
integrated solutions for its corporate customers. Swisscom holds a 95% stake
in debitel, the largest network-independent telecommunications provider in
Europe, which had over 10 million customers at the end of 2003. In 2003,
Swisscom had consolidated net revenue of CHF 14.6 billion, including revenue of
CHF 4.6 billion attributable to debitel. On April 29, 2004, Swisscom entered into an agreement to sell its 95% stake in
debitel AG, including 2% it 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 will be 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, to be assumed by debitel
Konzernfinanzierungs GmbH, an indirect 100% owned subsidiary of the entity to
be acquired by Permira Funds in the transaction. Consideration from the sale
including the vendor loan notes will be recorded at fair value at closing of
the transaction. In determining the expected net selling price for purposes of
calculating the impairment charge at December 31, 2003, management estimated
the fair value of the vendor loan at an amount lower than its nominal value.
After deduction of the deferred portion of the purchase price, Swisscom expects
to receive EUR 430 million in cash at closing. Pending the closing of the
transaction, Swisscoms debitel shares will be held in a blocked account to
prevent Swisscom from selling these shares otherwise than to the Permira Funds
pursuant to the purchase agreement. Swisscoms state-of-the-art telecommunications networks enable quick and
cost-effective introduction of new generation services. Swisscoms fixed-line
network features fully digitalized transmission and local switching and fully
integrated ISDN. Swisscoms digital mobile network also utilizes specific
technologies supporting a variety of value-added services. Swisscoms strategy
focuses on the development of broadband services both in fixed-line and mobile
communications. To this end, Swisscom continues to invest in capacity
enhancement, geographical roll-out and functional upgrades of its fixed-line
broadband platform. Swisscom is currently capable of offering ADSL access
services to over 98% of the population of Switzerland. With respect to its
mobile networks, Swisscom continues to build out its third generation UMTS
network, while also investing in capacity enhancements and functional upgrades
of its existing GSM network, for example to further improve its mobile data
services by using general packet radio service, commonly referred to as GPRS,
technology. See   Networks and Technology. The following table sets forth Swisscoms capital expenditures for the periods
indicated. Year Ended December 31,CHF in millions
    
    2001
    
    2002
    
    2003Fixed-line network
    
    
    470
    
    
    
    479
    
    
    
    497Mobile network
    
    
    258
    
    
    
    295
    
    
    
    381Other
    
    
    506
    
    
    
    448
    
    
    
    335Total
    
    
    1,234
    
    
    
    1,222
    
    
    
    1,213
 -18-




---



##### Table of Contents



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 full 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.
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,
and Swisscom anticipates that recent amendments to EU regulations and future EU
initiatives will influence the development of the Swiss telecommunications
regulatory regime. In March 2003, the Federal Council adopted amendments to
the Telecommunications Ordinance that require Swisscom to offer unbundled
access to its local loop, as well as interconnection to leased lines, on a
cost-oriented basis, with effect of April 1, 2003. Further, in November 2003,
the Federal Council submitted a bill to the Swiss Parliament with significant
amendments to the Telecommunications Act that would, among other things,
implement the recent amendments to the Telecommunications Ordinance into law.
See   Regulation  Unbundling of the Local Loop and Interconnection to Leased
Lines. 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. 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 December 2003, the Swiss
government issued bonds convertible into Swisscom shares in the aggregate
amount of CHF 1.5 billion and with a maturity of four years. If fully
exercised, the bond issuance could result in a decline of the Confederations
stake in Swisscom from currently 62.7% down to 58.2%. In 2002, Swisscom completed the process of spinning off individual businesses
into subsidiaries under a holding company which has responsibility for overall
strategy and financial management of the group. The operating subsidiaries are
managed independently in order to increase competitiveness, transparency and
flexibility in their specific markets. The new organization allows for
separate strategic partnerships with the possibility of equity stakes being
taken by third parties in Swisscoms individual businesses, as occurred in
2001, when Vodafone acquired its 25% stake in Swisscom Mobile AG. Swisscoms objective is to remain a leading and innovative multi-service
provider of telecommunication services in Switzerland. In its home market,
Swisscom believes that the mobile business has growth potential, while the
fixed-line business is, in spite of increasing broadband penetration, likely to
erode over time. Accordingly, Swisscom seeks to optimize its free cash flow
from its existing businesses, while exploring other opportunities to create
value by acquisition. In this regard, Swisscom continues to actively consider
investment opportunities both in Switzerland and abroad. Over the course of
2003, Swisscom has made small acquisitions in the field of public wireless LAN
services and, in December 2003, one acquisition in the field of billing process
outsourcing. Swisscom may also consider other investments, including
potentially large acquisitions, in the future. However, Swisscoms investment
criteria are strict and, therefore, should no suitable investment opportunity
arise, Swisscom will return capital it does not require to its shareholders in
line with its return policy. See Item 8: Financial Information  Dividend
Policy. In the course of 2004, Swisscom intends, in accordance with its return policy,
to return to its shareholders approximately CHF 2 billion in the form of a
share repurchase. See Item 8: Financial Information  Dividend Policy. 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. -19-




---



##### Table of Contents



Overview of Revenue by Business Segment In 2003, Swisscom operated in the following business segments:  
    
    Fixnetprovides fixed-line voice and Internet access services to residential and business
customers and a comprehensive range of fixed-line telecommunication services to residential
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.
    
    debitelis a provider of mobile communications and value-added services in Germany and other
European countries.
    
    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. The following table sets forth external revenue generated by Swisscoms
segments for the periods indicated. Year Ended December 31,CHF in millions
    
    2001
    
    2002
    
    2003Fixnet
    
    
    4,845
    
    
    
    4,762
    
    
    
    4,498Mobile
    
    
    3,220
    
    
    
    3,373
    
    
    
    3,434Enterprise Solutions
    
    
    1,469
    
    
    
    1,373
    
    
    
    1,261debitel
    
    
    3,808
    
    
    
    4,111
    
    
    
    4,555Other
    
    
    742
    
    
    
    833
    
    
    
    761Corporate
    
    
    90
    
    
    
    74
    
    
    
    72Total
    
    
    14,174
    
    
    
    14,526
    
    
    
    14,581
 Effective January 1, 2003, the product ownership of Business Numbers was
transferred from Fixnet to Enterprise Solutions. See   Fixnet  Wholesale
Traffic and   Enterprise Solutions  Business Numbers. In addition, in
February 2003, direct mobile interconnection was introduced 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. As a result, the associated revenues and
costs, 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 2003. See   Fixnet  Wholesale Traffic and   Mobile 
Connectivity Voice. Prior years have been restated to reflect these changes. -20-




---



##### 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 2003, Fixnet generated total revenue of
CHF 5.8 billion, including sales of CHF 1.3 billion to other Swisscom business
segments. With external revenues of CHF 4.5 billion, Fixnet accounted for 31%
of Swisscoms consolidated net revenue in 2003. Services provided by Fixnet include:  
    
    Access.Fixnet provides access services, including
traditional analog, digital and broadband access services, to
residential and business customers. At December 31, 2003, Fixnet
provided 4.0 million fixed-line telephone access lines, including
0.9 million ISDN lines and offered ADSL access over 487,000
subscriber lines.
    
    Retail Traffic.Fixnet provides national and international
fixed-line voice telephony services to residential customers. In
2003, Fixnet carried an aggregate of 12.7 billion minutes of
national telephony and dial-up Internet traffic and 0.8 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 inter-segment revenue) and to other national and
international telecommunications providers. In 2003, Fixnet billed a
total of 18.1 billion minutes of national interconnection and
transit traffic and terminated 1.2 billion minutes of outgoing
international traffic and 1.6 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. Effective January 1, 2003, there were some intra-segment changes in the Fixnet
segment. For example, Fixnets Internet access services, previously included in
Other, are now included in Access. Intra-segment information relating to
prior years has been restated accordingly. The following table sets forth external revenue generated by Fixnet for the
periods indicated. Year Ended December 31,CHF in millions
    
    2001
    
    2002
    
    2003Access
    
    
    1,497
    
    
    
    1,581
    
    
    
    1,715Retail traffic
    
    
    1,279
    
    
    
    1,225
    
    
    
    1,169Wholesale traffic
    
    
    1,033
    
    
    
    1,004
    
    
    
    755Other traffic
    
    
    264
    
    
    
    208
    
    
    
    247Other
    
    
    772
    
    
    
    744
    
    
    
    612Total
    
    
    4,845
    
    
    
    4,762
    
    
    
    4,498
 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. In line with this strategy, 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. In the wholesale market,
Swisscom believes that the increasing demand for broadband connectivity
services will be a future source of growth and an effective means to compete
with cable operators. Swisscom is also actively marketing broadband
connectivity to its Internet subscribers through Bluewin. -21-




---



##### Table of Contents



In connection with Enterprise Solutions increased focus on large business
customers with complex communication needs, effective January 2004,
approximately 46,000 business customers with primarily standard traffic needs
have been transferred to the Fixnet segment. 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 customers as
well as broadband Internet access services to other Internet service providers
on a wholesale basis. In 2003, external revenue from access services amounted
to CHF 1,715 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 2003,
PSTN services comprised 53% 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. Because ISDN penetration in Switzerland is high by
international comparison, ISDN growth has slowed in recent years. Also
contributing to this trend is the increasing use of ADSL services, which are
also offered over an analog line. Swisscom expects this trend to continue. 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)
    
    2001
    
    2002
    
    2003PSTN(2)
    
    
    3,240
    
    
    
    3,163
    
    
    
    3,086ISDN(3)
    
    
    857
    
    
    
    911
    
    
    
    924Total access lines
    
    
    4,097
    
    
    
    4,074
    
    
    
    4,010Total access channels
    
    
    5,300
    
    
    
    5,335
    
    
    
    5,261
   (1)
    
    Based on lines in service, including courtesy lines and service lines.
Restated for the year 2001 to reflect the transfer of access channels from
Enterprise Solutions to Fixnet at the beginning of 2002.(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. 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. -22-




---



##### Table of Contents



The following table sets forth information relating to Swisscoms charges in
effect in 2003 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 March 2003, the Federal Council adopted amendments to the Telecommunications
Ordinance that require Swisscom to offer unbundled access to its local loop on
a cost-oriented basis, with effect from April 1, 2003. Further, in November
2003, the Federal Council submitted a bill to the Swiss Parliament with
significant amendments to the Telecommunications Act that would, among other
things, implement the recent amendments to the Telecommunications Ordinance
into law. See   Regulation  Unbundling of the Local Loop and Interconnection
to Leased Lines. In July 2003, TDC Switzerland (Sunrise) filed a petition with
ComCom requesting that Swisscom be required to offer unbundled access to its
local loop. In February 2004, ComCom issued a decision in favor of TDC, against
which Swisscom lodged an appeal. See Item 8: Financial Information  Legal
Proceedings. Internet Access Swisscoms wholly-owned subsidiary Bluewin 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
    
    2001
    
    2002
    
    2003Bluewin ADSL lines
    
    
    18
    
    
    
    109
    
    
    
    274Wholesale ADSL lines
    
    
    15
    
    
    
    86
    
    
    
    213Total ADSL lines
    
    
    33
    
    
    
    195
    
    
    
    487Bluewin
narrowband subscribers(1)
    
    
    715
    
    
    
    751
    
    
    
    670
   (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. Swisscom believes that future growth in the access area will come from ADSL
technology. 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 further decline in the rate of ISDN growth. 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. -23-




---



##### Table of Contents



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. In order to evaluate the technological
feasibility and market attractiveness of offering television over its broadband
infrastructure, Swisscom will launch a trial offer during summer 2004. For
this purpose, Swisscom has entered into a partnership with Microsoft, an
important provider of mediastreaming technology. 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. See Item 8: Financial Information  Legal
Proceedings  Other Regulatory Proceedings. Retail Traffic Swisscom provides comprehensive national and international calling services to
residential customers. Fixnet considers certain 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 1,169 million in 2003. At the end of March 2002, a new numbering plan was introduced in Switzerland.
Under the new numbering 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. Whereas in the past most local phone calls were
routed automatically over the Swisscom network, under the new numbering plan
subscribers who have pre-selected an alternative carrier have their local calls
routed automatically over that carriers network. As a result, local area
traffic declined in 2002 and continued to decline slightly in 2003. Also
contributing to this trend is the fact that Internet access is increasingly
being offered via so-called ISP numbers and ADSL lines, with the result that
the associated traffic is no longer included in Swisscoms local area traffic
statistics. 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 2003, Swisscom intensified its efforts to win
back customers through direct marketing campaigns. 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. In millions of minutes(1)
    
    Year Ended December 31,2001
    
    2002
    
    2003Local and long distance traffic
    
    
    9,434
    
    
    
    7,864
    
    
    
    6,985Fixed-to-mobile traffic(2)
    
    
    724
    
    
    
    777
    
    
    
    825Internet traffic
    
    
    5,586
    
    
    
    5,766
    
    
    
    4,842Total national retail traffic
    
    
    15,744
    
    
    
    14,407
    
    
    
    12,652International retail traffic(3)
    
    
    778
    
    
    
    808
    
    
    
    842Total retail traffic
    
    
    16,522
    
    
    
    15,215
    
    
    
    13,494
   (1)
    
    Includes traffic on courtesy and service lines. Does not include traffic
generated from Swisscom-operated public payphones.(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
customer billing purposes. Does not include transit traffic originating
outside Switzerland. -24-




---



##### Table of Contents



In 2003, 52% of 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. Effective May 1, 2002, Swisscom combined
the local area and national long distance zones into a single national tariff
zone. Under this plan, all calls in Switzerland, whether local or long
distance, 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 as effect at the end of December 2003 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 of CHF 0.40 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
comprehensive local and national long distance calling service throughout
Switzerland until December 31, 2007. In order to ensure that Universal Service
is affordable, ceilings have been placed on the rates Swisscom can charge for
local and national long distance calls. Since the introduction of the new
numbering plan in March 2002, a single price ceiling has been applicable to all
national traffic. Swisscoms peak national tariffs are well below the
applicable ceiling. See   Regulation  Price Ceilings for Universal
Service. -25-




---



##### 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. In February 2003, Swisscom Mobile contracted with another mobile network
operator to set up direct interconnection between their networks. As a result,
traffic between these networks is now routed directly between their respective
networks and is no longer terminated via the national and international network
of Fixnet Wholesale. 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 2003,
external revenue from national wholesales services amounted to CHF 378 million. The following table sets forth information relating to Fixnets national
interconnection and transit traffic for the periods indicated. In millions of minutes
    
    Year Ended December 31,2001
    
    2002
    
    2003National wholesale traffic(1)
    
    
    16,964
    
    
    
    18,679
    
    
    
    18,103
   (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. Until January 1, 2000, interconnection rates could include a
proportional charge for the providers historical cost base. Since January 1,
2000, interconnection rates have been based on long run incremental costs
(LRIC) of an efficient operator and may no longer include historical costs.
See   Regulation  Interconnection by a Market Dominant Provider. Since the
introduction of LRIC pricing in January 2000, Swisscom has substantially
reduced its standard interconnection rates. The following table sets forth information relating to Fixnets interconnection
prices for the periods indicated. CHF/minute(1)
    
    Year Ended December 31,2001
    
    2002
    
    2003Regional termination
    
    
    0.0160
    
    
    
    0.0143
    
    
    
    0.0130National termination
    
    
    0.0243
    
    
    
    0.0218
    
    
    
    0.0203Regional carrier selection
    
    
    0.0160
    
    
    
    0.0144
    
    
    
    0.0130National carrier selection
    
    
    0.0243
    
    
    
    0.0219
    
    
    
    0.0203
   (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. -26-




---



##### Table of Contents



In 2003, Swisscom reduced its standard interconnection rates by up to 9%. For
2004, Swisscom announced reductions of interconnection rates by up to 13%.
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 obligation. 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. 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 inbound
international traffic. In 2003, external revenue from incoming international
traffic amounted to CHF 208 million. Swisscom has jointly invested in over 57,900 circuits which it shares with
about 100 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. In millions of minutes
    
    Year ended 31 December,2001
    
    2002
    
    2003Incoming international traffic(1)
    
    
    1,805
    
    
    
    1,854
    
    
    
    1,607
   (1)
    
    Minutes of incoming traffic terminated in Switzerland as determined for
international settlement purposes. In 2003, 71% of incoming international traffic originated from five countries:
Germany, United States, France, United Kingdom and Italy. The volume decrease in 2003 reflects enhanced competition as a result of the
build out of alternative international networks and the direct interconnection
between other mobile network operators. 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 practically all global destinations. As an outgrowth of
market liberalization, Swisscom also provides termination of outgoing
international traffic to other national network operators and service
providers. In 2003, external revenue from international termination traffic
amounted to CHF 169 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. -27-




---



##### Table of Contents



The following table sets forth Swisscoms international termination traffic in
minutes for each of the periods indicated. In million of minutes
    
    Year Ended December 31,2001
    
    2002
    
    2003Total international termination traffic(1)
    
    
    1,275
    
    
    
    1,878
    
    
    
    1,188
   (1)
    
    Minutes of outgoing traffic terminated outside of Switzerland. The substantial volume increase in 2002 reflects continued market growth and
the roll-out of international sales offices in Europe in the course of 2001.
However, as this is a low margin business, Swisscom closed the local sales
offices in Europe and sold its international point of presence in the United
States in 2002. As a result, international termination traffic declined
remarkably in 2003. OTHER TRAFFIC As of December 31, 2003, Swisscom operated 8,600 public payphones, of which
4,960 payphones Swisscom is required to maintain as part of its Universal
Service obligation. In the area of private payphones, Swisscom rented or sold
approximately 26,000 private payphones in 2003 to private operators, such as
hotels, restaurants and schools. In recent years, the demand for public
payphone use has declined, primarily due to the fast growth of mobile
telecommunications, and Swisscom expects this trend to continue. In 2003,
Swisscom realized external revenue of CHF 71 million from the operation of
payphones. Swisscom provides around the clock operator services, principally directory
information, operator assistance and a conference call service, directly to its
subscribers. In 2003, external revenue from operator services was CHF 70
million. Swisscom offers prepaid cards, which can be used from any payphone in
Switzerland, any fixed-line phone in Switzerland and in over 100 other
countries and from mobile phones. Swisscoms card products are sold through
retailers such as kiosks, gas stations, post offices, railway stations and
restaurants. In 2003, external revenue from the use of card products was CHF
106 million, of which CHF 72 million related to a release of deferred revenue.
See Note 29 to the consolidated financial statements. 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 2003, sales of customer
equipment generated external revenue of CHF 252 million. The most important distribution channel for Swisscoms customer equipment is
the Swisscom shops. In addition, Swisscom uses third-party distribution
channels. -28-




---



##### Table of Contents



Leased Lines Swisscom offers a full portfolio of leased lines throughout Switzerland. The
customers can choose among a wide range of bandwidths and a selection of
different service levels. Swisscom has contracts with approximately 100
wholesale customers in Switzerland. The primary customer segment for leased
lines is targeted through Enterprise Solutions. See   Enterprise Solutions 
Networking. In March 2003, the Federal Council adopted amendments to the
Telecommunications Ordinance that require Swisscom to offer interconnection to
leased lines on a cost-oriented basis, with effect of April 1, 2003. Further,
in July 2003, TDC Switzerland (Sunrise) filed a petition with ComCom requesting
that Swisscom be required to offer interconnection to leased lines on a
cost-oriented basis. See   Regulation  Unbundling of the Local Loop and
Interconnection to Leased Lines and Item 8: Financial Information  Legal
Proceedings. In 2003, the provision of leased lines generated external
revenue of CHF 143 million. Directories Swisscom Directories operates, maintains and sells Switzerlands most
comprehensive directories database, the Elektronisches Telefonbuch ETV ®
(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 the printed Telephone Books,
as well as for the operation, production and development of electronic
directories and the Yellow Pages Online. Additionally, Swisscom Directories
has primary responsibility for the development and marketing of customized
directories solutions for SOHOs, SMEs and the directories industry. In 2003,
Swisscom Directories had external revenue of CHF 107 million. The directories business is regulated under the Telecommunications Act. In
December 2001, the relevant ordinance was amended to the effect that 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. There is currently an investigation pending at the Competition
Commission to determine whether Swisscom Directories is offering its
directories database to third parties at prices and on conditions that prevent
them from effectively using these data. See Item 8: Financial Information 
Legal Proceedings. Other Other revenue comprises mainly the operation of Telecom FL AG and Internet
narrowband traffic to third-party ISP numbers. In 2003, external revenue from
these services amounted to CHF 110 million. In September 2003, Fixnet sold
Telecom FL to Liechtenstein TeleNet AG. Competition In the area of fixed network telephony and related services, Swisscom faces
intense competition, particularly in the national and international calling
markets. In 2002 and 2003, price competition was less intense due to the
general situation in the telecom market in Switzerland which has undergone some
consolidation with several niche players closing their operations. However,
Swisscom expects price competition to intensify in 2004 due to increased
competition from cable TV operators and Internet service providers. Access. Swisscom does not yet face significant competition in the residential
access market mainly due to the fact that until recently Swisscom was not
required to unbundle its local loop. However, competition has increased since
February 2003, when Cablecom, the largest cable operator in Switzerland,
started offering telephony services over cable on a trial basis und is thereby
directly competing with Swisscoms PSTN and ISDN access services. In March
2003, the Federal Council adopted amendments to the Telecommunications
Ordinance that require Swisscom to offer unbundled access to its local loop on
a cost-oriented basis. See   Regulation  Unbundling of the Local Loop and
Interconnection to Leased Lines. In addition, in February 2004, ComCom issued
a decision requiring Swisscom to offer full unbundled access to its local loop,
against which Swisscom lodged an appeal. See Item 8: Financial Information 
Legal Proceedings  Proceedings Relating to Unbundling of the Local Loop.
Unbundling -29-




---



##### Table of Contents



of the local loop gives 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. In order to compete with other broadband access operators more effectively,
Swisscom reduced its ADSL access tariffs significantly in February 2001 and
March 2002 and is currently increasing the capacity of its ADSL lines
significantly. 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. See Item 8: Financial
Information  Legal Proceedings  Other Regulatory Proceedings. In the wholesale ADSL market, Swisscom faces stiff competition from cable
network operators offering cable modem applications. With the roll out of
broadband mobile services based on UMTS technology, Swisscom also expects to
face competition in the future from providers of broadband mobile services when
they become commercially available. National Retail Traffic. In the past, Swisscom faced limited competition in
the business for local area calls. With the introduction of a new numbering
plan in March 2002, this competition has increased significantly. Under the new numbering 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. Whereas in the past most local phone calls were
routed automatically over the Swisscom network, under the new numbering plan
subscribers who have pre-selected an alternative carrier will have their local
calls routed automatically over that carriers network. As a result, local
area traffic has declined in 2002 and is expected to decline further in the
future. In 2003, local traffic continued to decline as a result of the new
numbering plan as well as decreased Internet dial-up traffic. Swisscom continues to face strong competition in the market for national long
distance calls. Over the last several years, tariffs have come under
significant pressure and margins have declined substantially. In 2001, the
telecommunications market in Switzerland entered a period of consolidation.
Currently, Swisscoms principal competitor in the national long distance market
is TDC Switzerland (Sunrise), which resulted from the merger of diAx and
Sunrise. Swisscom also faces competition from Tele2, EconoPhone and other
low-cost service providers. Despite a test launch of a voice-over-cable
service by Cablecom, pricing pressure remained relatively low. However, margins
are expected to come under renewed pressure in 2004 mainly due to increased
competition from cable operators offering voice-over-cable services 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 originating and terminating 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 -30-




---



##### Table of Contents



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. 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) and Tele2,
which focus their marketing on offering reduced rates for calls directed to
countries of high traffic volume. In October 2002, responding to price
reductions by competitors, Swisscom reduced tariffs for calls to more than 50
countries. In 2003, tariffs overall stabilized. The development of
interconnection pricing will also impact competition in the area of outgoing
international telephony. In the longer 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 2003, 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
an erosion in Swisscoms share in the interconnection market. Competition in the international wholesale market remained fierce in 2003. In
the area of terminating incoming international traffic, Swisscom faces
increasing competition from a number of international operators which have
completed their pan-European networks. As some of these operators have also
installed switches in Switzerland, Swisscoms revenue from terminating incoming
international traffic has declined. In the area of international voice termination, Swisscom competes with low-cost
operators, which gain customers by offering discount prices that are below
cost. In addition, 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 by increased traffic. In
2003, Swisscom completed the upgrade of its international gateways in order to
deploy this technology as well. However, worldwide overcapacity and the
introduction of voice-over-IP technology are likely to keep prices and margins
under pressure. Other Traffic.In the market of public and private payphones, 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 of other operators. In the market for operator services, Swisscom faced only limited competition in
2003 since it is still allowed to use the well-known access number 111. There
are currently discussions with the relevant regulatory agency when Swisscom
will be required to switch to a generic service number. A change of the 111
access number to a generic service number would likely result in a major
reduction in traffic volume for Swisscoms operator services. Customer Equipment.In the area of customer equipment, Swisscom competes
directly with equipment manufacturers, suppliers 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 also active in other sectors of the
telecommunications market, have led to falling prices. Leased Lines.In 2003, Swisscom continued to face intense competition in the
market for national leased lines, in particular from Worldcom. In March 2003,
the Federal Council adopted amendments to the Telecommunications Ordinance that
require Swisscom, with effect from April 1, 2003, to offer interconnection of
leased lines on a cost-oriented basis which is expected to intensify
competition. -31-




---



##### Table of Contents



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 traditional direct marketing
companies expanding into the directories market. -32-




---



##### Table of Contents



MOBILE Overview Swisscom Mobile is the leading provider of mobile telephony services in
Switzerland, with 3.8 million mobile subscribers as of December 31, 2003. In
2003, Swisscoms mobile activities generated total revenue of CHF 4.1 billion,
including sales of CHF 0.7 billion to other Swisscom business segments. With
external revenues of CHF 3.4 billion in 2003, Swisscom Mobile accounted for 24%
of Swisscoms consolidated net revenue. The following table sets forth external revenue generated by Mobile for the
periods indicated. CHF in millions
    
    Year Ended December 31,2001
    
    2002
    
    2003Base fees
    
    
    674
    
    
    
    698
    
    
    
    685Connectivity voice
    
    
    2,016
    
    
    
    2,077
    
    
    
    2,144Connectivity data and value-added services
    
    
    430
    
    
    
    486
    
    
    
    454Other mobile revenue(1)
    
    
    100
    
    
    
    112
    
    
    
    151Total Mobile
    
    
    3,220
    
    
    
    3,373
    
    
    
    3,434
   (1)
    
    Includes revenue from the sale of handsets sold through sales channels
other than Swisscom shops and from SICAP, a prepaid billing platform. Most of Swisscoms mobile telephony revenue is generated from monthly
subscription fees and traffic charges for mobile voice telephony, which
accounted for 82% of its external revenues in the mobile segment in 2003.
Within this segment, however, mobile data and value-added services comprise the
fastest growing business area, driven primarily by a significant increase in
the number of text messages sent using Swisscoms short messaging service
(SMS), despite a decline in revenues in 2003 due to a change in the accounting
method for value-added services numbers. See Item 5: Operating and Financial
Review and Prospectus  Mobile  Connectivity Data and value-added services. With the commercial launch of services enabled by high speed GPRS 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 has
implemented the Vodafone live! portal, enabling mobile information,
entertainment, community and lifestyle premium services, which Swisscom
believes will contribute in the future to the generation of m-commerce revenue
and enhance customers retention. 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 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. -33-




---



##### Table of Contents



In general, all services provided by a party under the service agreement are to
be offered to the other party on terms and conditions equivalent to those
offered to other members of the Swisscom group in respect of Swisscom Mobiles
provision of services, and other members of the Vodafone Group of a similar
size as Swisscom Mobile, in respect of Vodafones provision of services.
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 and services, to know-how of Vodafone and to other relevant
global activities in mobile telecommunications. One recent example of this
cooperation is the launch by Swisscom Mobile of the new Vodafone live! service
in November 2003. 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 2003, Swisscom generated service revenue from the co-operation with Vodafone
in the amount of CHF 66 million and paid an amount of CHF 111 million for
services purchased from Vodafone. These payments primarily related to roaming
charges each of Swisscom Mobile and Vodafone paid the other for the use of the
others network by its customers. GSM and 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 new 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
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 will still
be required to achieve 50% population coverage by the end of 2004. Swisscom
achieved this threshold in May 2003. In addition, each licensee is now
required to report to OfCom every three months on the progress of its network
build-out until it has achieved 20% population coverage. Swisscom continues to build out its broadband networks such as UMTS. Swisscom
has opened its UMTS network to a limited user group in order to test new data
services. Timing of the launch of commercial UMTS services will depend
primarily on the availability of appropriate dual mode (GPRS/UMTS) handsets.
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 intends to activate Enhanced Data Rates for GSM Evolution
(EDGE) technology in selected areas in Spring 2004 and plans to provide EDGE
access throughout its GSM network by the beginning of 2005. Other projects
include building additional base stations and extending the reach of the
networks -34-




---



##### Table of Contents



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 over 400 hotspots in Switzerland. In addition, Swisscom Mobile offers
through roaming agreements access to over 800 additional hotspots throughout
Europe. In November 2003, Swisscom Mobile entered into a cooperation agreement
with Microsoft to offer its business customers easy-to-use, secure PWLAN access
service. In addition, Swisscom intends to introduce a PC card based integrated
service offering access to GPRS, UMTS and PWLAN. 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. These recommendations are generally binding, but deviations are
permitted under certain circumstances. In order to comply with the applicable
emission standards and maintain current quality of service Swisscom will be
required to put up additional antennae. However, Swisscom does not expect the
associated costs in 2004 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. Recommendations relating to emission standards for UMTS
networks are expected in the course of 2004. 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. In thousands(1)
    
    As of December 31,2001
    
    2002
    
    2003Postpaid
    
    
    2,152
    
    
    
    2,298
    
    
    
    2,387Prepaid(2)
    
    
    1,221
    
    
    
    1,307
    
    
    
    1,409Total Subscribers
    
    
    3,373
    
    
    
    3,605
    
    
    
    3,796
   (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. Since 1995, the number of mobile customers in the Swiss marketplace has grown
annually, with overall market penetration reaching almost 82% at the end of
2003. 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. -35-




---



##### Table of Contents



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 entered into roaming agreements with 357 mobile operators
worldwide covering 163 countries and earns revenue from those operators when
their subscribers make mobile phone calls in Switzerland. Swisscom has also
entered into 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. In millions of minutes
    
    Year Ended December 31,2001
    
    2002
    
    2003Connectivity Voice(1)
    
    
    3,296
    
    
    
    3,331
    
    
    
    3,335
   (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. In February 2003, Swisscom Mobile contracted with another mobile network
operator in Switzerland to set up direct interconnection between their
networks. Swisscom Mobile intends to enter into similar agreements with other
network operators in the future. Principal Products.Swisscom currently offers seven principal mobile
products: Natel business, Natel international, Natel swiss, Natel budget, Natel
easy, 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 apply also 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 business 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. The following table sets forth, at the dates indicated, subscriber numbers
relating to each of Swisscoms principal mobile products. In thousands
    
    Year Ended December 31,2001
    
    2002
    
    2003Natel easy
    
    
    1,221
    
    
    
    1,307
    
    
    
    1,409Natel swiss
    
    
    1,503
    
    
    
    1,352
    
    
    
    1,256Natel budget
    
    
    166
    
    
    
    409
    
    
    
    544Natel international
    
    
    328
    
    
    
    264
    
    
    
    224Natel corporate
    
    
    6
    
    
    
    97
    
    
    
    181Natel CMN
    
    
    75
    
    
    
    104
    
    
    
    118Natel business
    
    
    75
    
    
    
    73
    
    
    
    64Natel Total
    
    
    3,373
    
    
    
    3,605
    
    
    
    3,796
 -36-




---



##### Table of Contents



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 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. The following table sets forth information relating to Swisscoms tariffs for
its principal Natel products, as in effect at December 31, 2003. All tariffs
include VAT. SIM
    
    Monthly
    
    
    
    
    
    
    
    
    
    Night AndCard Fee
    
    Base Fees
    
    Peak(1)
    
    Off Peak(2)
    
    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 international
    
    
    40
    
    
    
    45
    
    
    
    0.40
    
    
    
    0.30
    
    
    
    0.20Natel corporate
    
    
    40
    
    
    
    
    (7)
    
    
    
    (8)
    
    
    
    (8)
    
    
    
    (8)Natel CMN
    
    
    40
    
    
    
    45
    
    
    
    
    (6)
    
    
    
    (6)
    
    
    
    (6)Natel business
    
    
    40
    
    
    
    75
    
    
    
    0.25/0.15
    (9)
    
    
    0.25/0.15
    (9)
    
    
    0.25/0.15
    (9)
   (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 minute rates of Natel CMN depend on criteria such as destination.(7)
    
    The monthly charges for Natel corporate are graduated according to the
total amount of subscriptions within a company.(8)
    
    The minute rates of Natel corporate depend on the chosen base product.(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. For calls placed and received outside Switzerland, all Natel customers pay a
roaming surcharge in addition to the tariffs imposed by the local mobile
network operator. Natel easy customers pay a higher surcharge than customers
of other Natel services. 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 June 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 offers MMS also as a
wholesale service to third party content providers. -37-




---



##### Table of Contents



The table below sets forth, for the periods indicated, the numbers of SMS
messages sent. Year Ended December 31,2001
    
    2002
    
    2003Number of SMS messages (in millions)(1)
    
    
    1,317
    
    
    
    1,650
    
    
    
    1,847
   (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
entertainment services. 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 business value chain.
Swisscom is therefore opening standardized interfaces to enabling 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, 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-cards can be
recharged 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 of
Swisscom, Tele2 and In&Phone, which will further intensify competition in the
mobile business. Swisscom expects competition, especially for business customers, to remain
fierce in 2004 due to increased tariff pressure and competing enhanced data
solutions. Competition in the residential segment is expected to be driven also
by handset subsidies. 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 suspended provisionally the requirement to implement equal access in the
mobile network until technical development and international standards allow
its implementation. In the future, Swisscom expects to face competition in the provision of GPRS
and UMTS services from dSpeed, a wholly owned subsidiary of TDC Switzerland
(Sunrise), and Orange, both of which hold Swiss UMTS licenses. -38-




---



##### Table of Contents



ENTERPRISE SOLUTIONS Overview Enterprise Solutions is the leading provider of fixed network telecommunication
services to business customers in Switzerland. In 2003, Enterprise Solutions
generated total revenue of CHF 1.4 billion, including sales of CHF 0.1 billion
to other Swisscom business segments. With external revenues of CHF 1.3 billion
in 2003, Enterprise Solutions accounted for 9% of Swisscoms consolidated net
revenue in 2003. 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 2003, Enterprise Solutions
carried an aggregate of 3.1 billion minutes of national telephony
traffic and 0.5 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, through Infonet Switzerland, international
private network services.
    
    Inhouse and Processes.Inhouse and Processes services
comprise the provision of Business Numbers, which business customers
use to provide their customers access to information services,
various local area network services and a customer relationship
management service.
    
    Other.Enterprise Solutions also offers a variety of other
services, including consulting, business Internet and public data
network services. Effective January 1, 2003, there were some minor intra-segment changes in the
Enterprise Solutions segment. For example, revenue generated from the provision
of business numbers has previously been reported under Value-added Services
and is now included in Inhouse and Processes. Intra-segment information
relating to prior years has been restated accordingly. The following table sets forth external revenue generated by Enterprise
Solutions for the periods indicated. CHF in millions
    
    Year Ended December 31,2001
    
    2002
    
    2003National and international traffic
    
    
    583
    
    
    
    561
    
    
    
    502Networking
    
    
    633
    
    
    
    568
    
    
    
    536Inhouse and processes
    
    
    112
    
    
    
    110
    
    
    
    90Other
    
    
    141
    
    
    
    134
    
    
    
    133Total
    
    
    1,469
    
    
    
    1,373
    
    
    
    1,261
 Depending on a customers size and the complexity of its communication needs,
Enterprise Solutions addresses its business customers through a designated key
account management team, direct and indirect sales channels or via telephone. Since January 2004, Enterprise Solutions has increased its focus on large
business customers with complex communication needs. To this end, approximately
46,000 business customers with primarily standard traffic needs have been
transferred to the Fixnet segment. -39-




---



##### Table of Contents



Due to continued slowdown and overcapacity in the telecommunications market,
Enterprise Solutions has experienced a general decrease in market demand among
all customer segments. Although large business customers have postponed planned
investments in telecommunication solutions in the last two years, the market
seems to have slightly recovered in the fourth quarter of 2003 as inquiries for
Enterprise Solutions services have increased. 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. In August 2002, Enterprise Solutions acquired a 49.9% stake in Unit.Net, a
provider of specialized online communication services based on streaming
technology. Since Unit.Net did not meet its sales targets, it was partly sold
to Virtue Broadcasting Switzerland Ltd. Unit.Net ceased operations in September
2003 and liquidation is expected to be completed in the course of 2004. 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. In millions of minutes(1)
    
    Year Ended December 31,2001
    
    2002
    
    2003Local and long-distance traffic
    
    
    3,715
    
    
    
    3,218
    
    
    
    2,719Fixed-to-mobile traffic(2)
    
    
    444
    
    
    
    457
    
    
    
    428Total national traffic
    
    
    4,159
    
    
    
    3,675
    
    
    
    3,147International traffic(3)
    
    
    621
    
    
    
    586
    
    
    
    499Total traffic
    
    
    4,780
    
    
    
    4,261
    
    
    
    3,646
   (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
customer billing purposes. Does not include 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 for 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. In order to capitalize on the trend toward managed network services, 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 -40-




---



##### Table of Contents



availability. In addition, Enterprise Solutions city services product is an
optimal solution for business customers with high-volume data traffic between
their office locations within a given city. The benefits of city services
include high bandwidth and around the clock end-to-end management. The following table sets forth information relating to Enterprise Solutions
national leased lines. Number of leased lines
    
    Year Ended December 31,2001
    
    2002
    
    2003National leased lines(1)Analog leased lines
    
    
    5,674
    
    
    
    5,408
    
    
    
    5,175Digital leased linesless than 64 kbit/s
    
    
    2,019
    
    
    
    971
    
    
    
    666from 64 kbit/s to less than 2Mbit/s (unmanaged)
    
    
    11,830
    
    
    
    8,244
    
    
    
    6,457from 64 kbit/s to less than 2Mbit/s (managed)
    
    
    5,958
    
    
    
    4,396
    
    
    
    3,7362 Mbit/s and higher (up to 622 Mbit/s)(2)
    
    
    3,078
    
    
    
    3,910
    
    
    
    4,336Total national leased lines
    
    
    28,559
    
    
    
    22,929
    
    
    
    20,370
   (1)
    
    Excluding twisted copper pairs.(2)
    
    Restated for the years 2001 and 2002 to include city services, which has
previously been accounted for under national private networks. In 2003, the number of leased lines with bandwidths of less than 2Mbit/s
continued to decline, as customer applications increasingly require bandwidths
of 2Mbit/s and higher. For the same reason, the overall number of leased lines
decreased, as customers migrated to high capacity services based on IP. 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 in accordance with the length of the line and the
volume of data transmitted from point to point. 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
offering 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. In March 2003, the Federal Council adopted amendments to the Telecommunications
Ordinance that require Swisscom to offer interconnection to leased lines on a
cost-oriented basis, with effect from April 1, 2003. See   Regulation 
Interconnection by a Market-Dominant Provider. 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. -41-




---



##### Table of Contents



The following table sets forth information relating to Enterprise Solutions
international leased lines. Number of leased lines
    
    As of December 31,2001
    
    2002
    
    2003Analog leased lines
    
    
    138
    
    
    
    109
    
    
    
    81Digital leased lines
    
    
    598
    
    
    
    499
    
    
    
    407Total international leased lines
    
    
    736
    
    
    
    608
    
    
    
    488
 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. Through its international participations and partnerships, Swisscom provides
end-to-end managed leased line services for international corporate networks in
a number of European countries. Swisscom also offers such services on a
wholesale basis via its EOSNET network. See   Fixnet  Other and  
Networks and Technology  Fixed-Line Networks. 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, 2003, Enterprise Solutions
managed more than 20,000 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 the
corporate Intranet through all commercially available access technologies, and
encryption services for customers with strict security requirements. In 2003, Enterprise Solutions expanded its Intranet services portfolio through
new features and solutions. For example, it introduced an Internet virtual
private network product, which provides interconnection of local area networks
(LANs) over the public Internet. National Private Networks Enterprise Solutions offers private networks for data transmission based on a
variety of technological platforms. The services comprise frame relay
services, ATM services and color line 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 high bandwidth
networking. It is ideal for data-intensive LAN-to-LAN applications,
particularly for business customers with highly variable data traffic. Instead
of leasing a high capacity leased line to accommodate occasional or
intermittent traffic bursts, customers using frame relay pay for sufficient
throughput capacity to satisfy their day-to-day data requirements, and are
provided additional capacity up to the access rate to accommodate occasional
traffic spikes. Enterprise Solutions offers frame relay at a variety of access
rates, ranging from 64 kbit/s to 34 Mbit/s. Enterprise Solutions frame relay
service is seamlessly integrated with the networks of, and services provided
by, its international partner Infonet. Enterprise Solutions asynchronous transfer mode (ATM) services permit flexible
and tailored data transmission in the broadband range up to 155 Mbit/s.
Applications include native LAN speed interconnections, multicomputer network
links, real-time video and other multimedia applications, electronic
publishing, telemedicine and CAD/CAM. Enterprise Solutions also offers ATM
services featuring variable bit rate transmission. 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 and permits transparent data transfer for all network protocols and
application data types in end-to-end connections. Ring and long-haul
connections are currently in development. This service is primarily aimed at -42-




---



##### Table of Contents



customers who need to transfer large amounts of data in gigabits between two or
more locations in or around business centers. In the past two years, the increased substitution of frame relay and ATM
services by Internet Protocol (IP) services among the large business customers
has resulted in decreased sales of frame relay and ATM services. International Private Networks To allow voice communications and data sharing between their locations in
different countries, large multinational corporations require seamless
international voice, data and networking services. Swisscom has partnered as a
distributor with Infonet Services Corporation (Infonet), in which Swisscom
holds a 17.7% interest, to offer its business customers in Switzerland global
and seamlessly managed telecommunications services. Infonets main focus is
corporate data networks, including providing companies with a managed Intranet,
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. Enterprise Solutions distributes these services in Switzerland
through Infonet Switzerland AG, in which it holds a 90% share. See  
Participations. Inhouse and Processes Inhouse and Processes services comprise the provision of Business Numbers,
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, which Swisscoms business customers use
to provide their customers access to information services. Enterprise Solutions offers toll-free Business Number services for both
national and international use. 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 increasingly 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. Effective January 1, 2003, product ownership of Business Numbers was
transferred from Fixnet to Enterprise Solutions in order to address the needs
of business customers more efficiently and effectively. As a result, the
portfolio was expanded to include new services, including a network-based
menu-prompted information service, which allows Enterprise Solutions to build
simple customer interaction solutions based on Business Numbers. Prior years
have been restated accordingly. The following table sets forth the total traffic generated by Enterprise
Solutions Business Numbers for the periods indicated. In millions of minutes
    
    Year Ended December 31,2001
    
    2002
    
    2003Business Numbers traffic(1)
    
    
    918
    
    
    
    775
    
    
    
    721
   (1)
    
    Does not include calls made by Enterprise Solutions customers to Business
Numbers of other providers. In 2003, traffic volume continued to decrease primarily as a result of
increased substitution of Business Numbers by other information services such
as Internet. However, the decrease in traffic in 2003 was less pronounced than
in 2002, mainly due to the positive effects of customer win-back and retention
programs. -43-




---



##### Table of Contents



LAN Services Enterprise Solutions local area network (LAN) services include LAN network
design, hardware provision, installation, network operation and maintenance
with which it provides the infrastructure for all data and voice requirements
over Internet protocol (IP) within the campus area of business customers.
While sales for LAN services fell overall in 2003, Enterprise Solutions
experienced increased demand for IP-based telephony solutions. Increased market
acceptance of IP telephony is expected to stimulate significant growth in this
area. CRM Enterprise Solutions provides, together with partners such as Kana, Oracle,
Aspect and Cisco, customer relation management (CRM) services and 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 several low speed packet switched data
network services based on the well-established X.25 protocol. Although
relatively slow, X.25 based packet switched services permit highly reliable
data transmission, while offering easy access through a choice of access modes,
including dial-up access across various technologies, such as ISDN, and
extensive interconnection to other X.25 networks around the world. Professional Services In 2003, Enterprise Solutions expanded its consulting and project management
services by offering outsourcing services. These consulting services cover
the entire portfolio of telecommunications services and products Enterprise
Solutions offers. Enterprise Solutions believes that this business will grow
in the future as technologies converge and demand increases for combined IT and
telecommunication solutions. Enterprise Solutions seeks to strengthen its
position in an otherwise commodity marketplace through its role as systems
integrator, offering, 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 also provides a variety of supporting services, including
security services and military communication networks. -44-




---



##### Table of Contents



Competition Enterprise Solutions faces intense competition serving its business customers.
TDC Switzerland (Sunrise) is the overall market challenger in Switzerland, and
is positioning itself as full-service provider. Other competitors include Colt,
which offers telecommunication services to customers in specific locations, and
Cablecom, which aims at positioning itself as a provider of broadband services
via cable and voice-over-IP solutions. Increasing demand for low-cost products
at 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. For further information on competition in the
area of fixed-line telephony generally, see   Fixnet  Competition. Networking.In its national leased line business, Enterprise Solutions has
faced limited but increasing competition from TDC Switzerland (Sunrise), Colt,
Worldcom and T-Systems as well as from Cablecom, the strongest cable TV
provider in Switzerland, which operates its own infrastructure and has invested
heavily to upgrade it. Enterprise Solutions also faces competition from power
plants, which offer telecommunication services to customers via their own
high-capacity dark fiber networks. Competition in the national leased line
market may also increase substantially as a result of the recent amendments to
the Telecommunications Ordinance, which require Swisscom to offer its
competitors interconnection to leased lines on a cost-oriented basis. See  
Regulation  Unbundling of the Local Loop and Interconnection to Leased Lines. In its international leased line business, Enterprise Solutions has been facing
for several years intense competition from international players, such as
Equant/Global One, Worldcom, British Telecom and Deutsche Telecom, 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, T-Systems and TDC Switzerland (Sunrise), as well as system
integrators such as IBM. Prices for private networks in low-speed bandwidths have come under significant
price 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 evolve in the field of LAN services as well as for value-added services
in the Intranet, Extranet and Internet domains based on highly sophisticated IP
technologies, including voice and data integration. Inhouse and processes.Since September 2001, OfCom, the Swiss Federal Office
for Communication, has taken over responsibility for allocating individual
service numbers from 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. Enterprise Solutions major competitors for LAN services are T-Systems and TDC
Switzerland (Sunrise). In the area of CRM solutions, Enterprise Solutions
competes directly with Alcatel and Avaya. Other.Enterprise Solutions major competitors for Business Internet are
T-Systems and TDC Switzerland (Sunrise). In the area of professional services,
Enterprise Solutions primary competitors are consulting firms. In the area of
supporting business, Enterprise Solutions does not face competition and has
ensured its position through long-term contracts. -45-




---



##### Table of Contents



DEBITEL Overview Swisscom owns 95% of the share capital of debitel, a German provider of mobile
communications and value-added services. The remaining 5% of debitels share
capital are publicly traded on the Frankfurt stock exchange. With over 10
million customers at the end of December 2003, debitel is the largest
network-independent mobile communications service provider in Europe. debitel
acts primarily as a reseller of mobile communication products and services,
which it sells under its own brand name to private customers as well as to
small- and medium-sized business customers. In addition to its core mobile
communications services, debitel offers fixed-line services and mobile data and
content services. debitel also has a minority interest in Dangaard Telecom
Holding A/S, one of Europes leading distributors of mobile handsets and
accessories. In 2003, debitel had net revenue of CHF 4.6 billion (EUR 2.9
billion), representing 31% of Swisscoms consolidated net revenue. As a result of the general slow down in the telecommunication market, and
reduced growth prospects for debitel in particular, in 2001 and 2002, Swisscom
wrote down the goodwill associated with the debitel acquisition by CHF 1.1
billion and CHF 702 million, respectively. In connection with the sale of debitel as described below, Swisscom exercised
its option to purchase another 2% in debitel from ElectronicPartner and thereby
increased its stake to 95%. On April 29, 2004, Swisscom entered into an agreement to sell its 95% stake in
debitel AG 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 will be 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, to be assumed by debitel
Konzernfinanzierungs GmbH, an indirect 100% owned subsidiary of the entity to
be acquired by Permira Funds in the transaction. Consideration from the sale
including the vendor loan notes will be recorded at fair value at closing of
the transaction. In determining the expected net selling price for purposes of
calculating the impairment charge at December 31, 2003, management estimated
the fair value of the vendor loan at an amount lower than its nominal value.
After deduction of the deferred portion of the purchase price, Swisscom expects
to receive EUR 430 million in cash at closing. Pending the closing of the
transaction, Swisscoms debitel shares will be held in a blocked account to
prevent Swisscom from selling these shares otherwise than to the Permira Funds
pursuant to the purchase agreement. A portion of the purchase price is also being 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 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 under certain conditions with the right to take control over this
subsidiary in order to minimize its liability under this indemnity. In connection with the discussions concerning the disposal of its shareholding
in debitel, Swisscom recorded a further goodwill impairment charge of CHF 280
million in 2003, reflecting the net amount that was expected from the sale. At December 31, 2003, Swisscom had a cumulative currency translation loss of
CHF 221 million recorded under other reserves in consolidated shareholders
equity. As a result of the sale, the cumulative translation loss through -46-




---



##### Table of Contents



the date of the sale will be removed from equity and recorded under financial
expense in the income statement in 2004. The following table sets forth external revenue generated by debitel for the
periods indicated. CHF in millions
    
    Year Ended December 31,2001
    
    2002
    
    2003Germany
    
    
    2,738
    
    
    
    2,859
    
    
    
    3,192International
    
    
    1,070
    
    
    
    1,252
    
    
    
    1,363Total
    
    
    3,808
    
    
    
    4,111
    
    
    
    4,555
 debitels enhanced service provider strategy stands for network independence
and extension of the value chain. As the point of contact for network
operators, distribution partners and customers, debitel bundles the products of
its partners, develops its own products and is thereby able to offer a broad
range of services, including UMTS services, to its customers. In a more
saturated market environment, debitel has been increasing its emphasis on
customer retention programs, which has resulted in decreased churn. Germany In Germany, debitel offers primarily mobile communication services to its
residential and business customers. As additional services for its mobile
contract customers debitel also offers fixed-line telecommunications and
Internet services and a variety of other services, including mobile data and
content services. debitel also generates revenue from the sale of handsets and
from the acquisition of new subscribers, for which it receives commissions from
network operators. As a mobile communications service provider, debitel does not operate its own
network but instead purchases the telecommunications services of network
operators and uses them to develop its own services which it then sells under
debitels brand names for its own account, at tariffs debitel mostly determines
independently of the network operators. debitels core business in Germany
consists of providing access to the mobile voice and data services of the T-D1,
Vodafone and E-Plus digital telecommunications networks. debitel has entered
into long-term service provider contracts with the operators of those networks
under special license terms and conditions available to service providers.
These agreements also apply to UMTS products and services. debitel offers both contract and prepaid products in the mobile communications
market. Under the contract products, the customer is billed for mobile phone
services used during the prior month, paying both a monthly subscription fee
and per call charges based on the length and type of calls made. In contrast,
for prepaid products the subscriber pays a set price in advance for a SIM card
that allows the subscriber to make calls up to the amount of time purchased. The following table shows the number of debitels contract and prepaid
subscribers in Germany for the periods indicated. In thousands
    
    Year Ended December 31,2001
    
    2002
    
    2003Contract subscribersMobile postpaid subscribers
    
    
    2,268
    
    
    
    2,520
    
    
    
    3,042Other(1)
    
    
    401
    
    
    
    353
    
    
    
    354Mobile prepaid subscribers
    
    
    4,978
    
    
    
    4,856
    
    
    
    4,904Total number of subscribers
    
    
    7,647
    
    
    
    7,729
    
    
    
    8,300
   (1)
    
    Includes subscribers for fixed-line and Internet services. In the field of mobile communications, debitel focuses on products and services
combining networks and technologies such as the integration of the debitel
portal within a network operators portal. -47-




---



##### Table of Contents



debitel also generates revenue from the sale of handsets and merchandise, which
include prepaid packages consisting of handsets, SIM cards and vouchers. In
addition, debitel receives commissions from network operators for new
subscribers acquired. International Through partly- and wholly-owned subsidiaries, debitel offers mobile and other
telecommunications services in the Netherlands, France, Denmark and Slovenia.
Some of these subsidiaries hold significant shares in their respective markets.
In December 2003, debitels foreign subsidiaries together had 2.044 million
customers representing 19.7% of debitels total customer base. In the Netherlands, debitel offers mobile and fixed-line services through its
wholly-owned subsidiary debitel Netherlands B.V., which is the largest
network-independent telecommunications provider in the Netherlands. At the end
of 2003, debitel Netherlands B.V. offered services to 1.403 million customers.
debitel Netherlands cooperates with a number of Dutch network operators,
including KPN and Vodafone (formerly Libertel). The contract with Vodafone
also includes UMTS services. In France, debitel France, as a result of a merger of Videlec S.A. with Telecom
Option S.A., secured its market presence with approximately 100 own shops under
the Videlec brand. In the fourth quarter of 2003, debitel France underwent a
complete reorganization and abandoned the hardware distribution business and
the management of approximately 330,000 Orange customers. At the end of 2003,
debitel France had approximately 102,000 customers. It cooperates as a service
provider with SFR and, on a reseller basis, with Orange and Bouygues Telecom. debitel is also active in Denmark through debitel Danmark A/S in which it holds
a 78.25% interest. Through debitel Danmark AS, debitel had approximately
455,000 customers in Denmark at the end of 2003. In 2003, debitel Danmark
strengthened its market position by acquiring the smaller service providers
Telekompagniet and Link Telecom. Indirect sales activities have been sustained
through the cooperation with several Danish supermarket chains as well as the
Danish Post. In Slovenia, debitel, through a 52% owned subsidiary, provided mobile services
to 85,300 customers in 2003. debitel Slovenia is the sole mobile service
provider in Slovenia and cooperates exclusively with the largest Slovenian
network operator Mobitel. In addition to the introduction of innovative new
products, such as a mobile payment service, debitel Slovenia was the first
debitel company to start offering UMTS services in December 2003. Marketing and Distribution While debitel is continually expanding its direct distribution efforts, it
continues to depend significantly on indirect distribution channels for the
marketing of its products and services. As to its indirect distribution channels, debitel works primarily with the
following distribution partners: the Metro group through its specialty stores
(Media Markt, Saturn) and department stores (Kaufhof); ElectronicPartner, the
largest association of consumer and communication electronics specialty
retailers in Germany; Mercedes Benz and BMW subsidiaries and dealers;
Ringfoto-Group, a German nationwide chain of photo and electronics stores, the
telecommunication specialists Selectric and Chris Keim Com. debitel also
distributes its products and services through a variety of mass and specialty
retailers and seeks cooperation with other retail market leaders to achieve
uniform and comprehensive coverage of all its customer segments. debitels
indirect distribution network has approximately 5,000 active points of sale
throughout Germany. debitel believes that by offering a single point of
contact to its distribution partners, which would otherwise have to deal with
several mobile network service providers, it enjoys a competitive advantage in
addressing the retail market through indirect distribution channels. debitels relationships with its principal indirect distribution partners are
governed by cooperation agreements and distribution partner agreements which
provide that debitels distribution partners will distribute debitel products
and services on an exclusive basis. Currently, approximately 60% of debitels
new customers are acquired through two distribution partners. In 2002, debitel
entered into a new five-year exclusive cooperation agreement with
ElectronicPartner (EP), which received a 2% stake in debitel as consideration
for the exclusive distribution of debitel -48-




---



##### Table of Contents



products. In connection with the sale of its stake in debitel, Swisscom
exercised its option to repurchase this 2% stake from EP in April 2004. At the
end of 2002, debitel entered into a short-term extension of its exclusive
distribution agreement with Media-Saturn-Group. At the beginning of 2004, a
further extension of this exclusive agreement up to the end of 2005 was
reached. Prepaid products and mobile communications equipment are also sold on behalf of
debitel by Dangaard Telecom Holding A/S (Dangaard), in which debitel holds a
21.09% equity interest. Dangaard is one of the Europes leading distributors
of mobile communications equipment in Europe. In 2003, debitel generated
revenue in the amount of CHF 241 million (EUR 158 million) in connection with
the delivery of prepaid products and hardware to Dangaard and had expenses in
the amount of CHF 17 million (EUR 11 million) for Dangaards logistic services
as well as commissions for hardware and advertising cost-refunds. debitel has been building its direct distribution network to supplement its
indirect distribution activities. This distribution network encompasses
debitels shop-in-shop systems and centers as well as direct marketing
activities. Under the shop-in-shop system, debitel sets up uniformly designed
sales areas staffed by debitels own sales staff on the business premises of
selected distribution partners. debitel has also established distribution
points in heavily frequented city center locations that are staffed by
debitels own sales force and offer a wide range of telecommunications services
and hardware. Additionally, debitel has supplemented these efforts with direct
marketing activities conducted via telephone and the Internet. Competition debitel continues to face significant competition from network-independent
providers of fixed, mobile and Internet services, such as Talkline GmbH & Co.
(Talkline), The Phone House (formerly Hutchison) and Mobilcom AG
(Mobilcom). Talkline, a wholly owned subsidiary of TDC Tele Denmark, focuses
on residential customers. The Phone House seeks to provide integrated fixed,
mobile and Internet solutions. While Mobilcom has faced financial difficulties
in 2002, it was able to stabilize its economic situation during 2003 and played
again an active part in the mobile service market. In addition, debitel faces
competition from network operators such as T-Mobile, Vodafone and E-Plus. For
several years, debitel has been trying to negotiate a contract with the fourth
German GSM network operator O2, formerly VIAG Interkom. Legal proceedings have
been instituted to require O2 to permit debitel to act as a reseller of its
services. A judgment issued in favor of debitel was appealed by O2 and the
appeal is still pending. debitel also expects to face competition in the UMTS market from resellers.
Mobilcom, which was one of the original German UMTS licensees, abandoned its
plans to build out a UMTS network due to financial constraints and returned its
UMTS license to the German regulatory authority in December 2003. debitel
expects that Mobilcom will seek to position itself, like debitel, as an
enhanced service provider. -49-




---



##### Table of Contents



OTHER Swisscom is also active in a variety of other businesses, including the sale of
voice communication equipment, the provision of IT, broadcasting and billing
services as well as the operation of a pan-European network for broadband
Internet connectivity. The following table sets forth external revenue for the periods indicated. CHF in millions
    
    Year Ended December 31,2001
    
    2002
    
    2003Swisscom Systems
    
    
    476
    
    
    
    406
    
    
    
    345Swisscom IT Services
    
    
    25
    
    
    
    213
    
    
    
    214Swisscom Broadcast
    
    
    180
    
    
    
    162
    
    
    
    149Billag
    
    
    47
    
    
    
    52
    
    
    
    52Swisscom Eurospot
    
    
    
    
    
    
    
    
    
    
    1Other (1)
    
    
    14
    
    
    
    
    
    
    
    Total Other
    
    
    742
    
    
    
    833
    
    
    
    761
   (1)
    
    Other revenue comprises revenue from All Wireless AG and S.p.A. Milano,
which were sold in the course of 2001. Other revenue for 2001 and 2002 was
restated to reflect the integration of Conextrade AG into Swisscom IT
Services AG effective January 1, 2003. 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, 2003, Swisscom Systems had 1,057 full-time employees. Swisscom Systems sells its products directly 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 for the sale and rental of
equipment in 2003. Since 2002, Swisscom Systems has suffered from declining
demand for network and telephony equipment caused by increased competition, the
continuing poor economic situation, as well as an uncertainty due to current
technological developments, which has led many customers to postpone new
investments in telecommunications equipment. Swisscom Systems has therefore
implemented a major restructuring that included a headcount reduction of 510
employees in 2003 and a rationalization of its product portfolio. Competition.Swisscom Systems competes directly with local and global
companies offering system integration, such as Ascom, NextiraOne and Siemens. Swisscom IT Services In December 2001, Swisscom acquired AGI IT Services AG (AGI IT), one of
Switzerlands leading IT service providers for financial services, and merged
the business of AGI IT and its IT division, together with most of the former
Swisscom ECS (Electronic Commerce Solutions), to form Swisscom IT Services AG.
Swisscom holds 71.1% of the newly formed company with the balance held by AGI
ITs former shareholders, eight cantonal banks. Effective January 1, 2003,
Conextrade AG was integrated into Swisscom IT Services. As of December 31,
2003, Swisscom IT Services had 2,268 employees. Swisscom IT Services offers end-to-end business solutions in the financial
services and telecommunications industry. In addition to business solutions,
Swisscom IT Services focuses on systems integration, outsourcing and IT
infrastructure services, including desktop services and datacenter services.
To strengthen its position as an IT -50-




---



##### Table of Contents



provider, Swisscom IT Services intends to expand its business into new markets
such as public administration and health care. Swisscom IT Services customers are largely the Swisscom group companies and
the eight cantonal banks, AGI ITs former shareholders. Swisscom IT Services
provides outsourcing services to these customers pursuant to long-term
contracts. For other projects, it competes with other IT service providers. In
2003, Swisscom IT Services revenue associated with the eight cantonal banks
totaled CHF 166 million and with third parties CHF 49 million. Swisscom IT
Services intends to increasingly expand its business with third parties,
focusing primarily on the Swiss market. To this end, in late 2003, a
restructuring program was implemented to improve customer orientation, lower
costs and offer prices at market-standards. Over the course of 2004 and 2005,
Swisscom IT Services intends to reduce its staff by approximately 400
employees. According to a recent announcement of AGI-Kooperation, a cooperation formed by
Swisscom IT Services minority shareholder, the eight cantonal banks, the four
smallest of these banks are expected to leave this cooperation and the IT
platform of Swisscom IT Services at the end of 2006 as a result of a
reorganization of this cooperation. Competition.In the professional 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
broadcasting 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. Prior to January 1, 1998, Swisscom Broadcast was required by law to provide
such broadcasting services to SRG. Since January 1, 1998, the market for
broadcasting services has been opened to full competition. In the absence of
any other provider capable of offering nationwide broadcasting services,
Swisscom Broadcast was required to provide such services to SRG until December
31, 2002. Since then, Swisscom Broadcast has provided these services to SRG on
freely negotiated commercial terms under a long-term contract with SRG that was
terminated effective 2006. Negotiations for a new contract are scheduled to
take place in the course of 2004. In 2003, Swisscom Broadcast was paid CHF 121
million to broadcast SRG programming. 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 2005 or 2006. Billag In addition to providing broadcasting services to SRG, Swisscom, through its
wholly-owned subsidiary Billag, collects 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 seeks to establish a new pillar of business and to become a leading
provider of third party billing services and loyalty cards processing. Swisscom Eurospot Swisscom Eurospot is a leading provider of wireless broadband Internet
connectivity for business travelers in Europe. It operates a network of
hotspots across Europe (excluding Switzerland and Scandinavia). Such hotspots
are set up at locations where high volume of traffic is expected, such as
hotels, airports, train stations and conference centers. Swisscom Eurospot
offers a full range of wireless and fixed Internet access services in these
public hotspots in 10 European countries, either through its own infrastructure
that currently consists of approximately 900 hotspots or through roaming
agreements that currently provide access to approximately 1,300 hotspots. In
addition, -51-




---



##### Table of Contents



Swisscom Eurospot has signed approximately 1,400 contracts with venue owners
and intends to roll-out these locations in the future. 
 CORPORATE Corporate includes Swisscoms headquarter functions, Swisscoms programs under
its social plan (WORK_LINK, AMZ), group-company shared services and the
real-estate company Swisscom Immobilien AG (SIMAG). For a description of
WORK_LING and AMZ, 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 Infonet Service Corporation/AUCS Swisscom owns a 17.7% interest in Infonet Services Corporation (Infonet),
which 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. Infonet is listed on the New York Stock Exchange. Other
than Swisscom, its principal shareholders are KPN, Telia, Telefonica SA of
Spain (Telefonica), Telstra Corporation Limited (Telstra) of Australia and
Kokusai Denshin Denwa Co., Ltd. (KDDI) of Japan. Each of Infonets principal shareholders has entered into agreements with
Infonet to distribute its services in their home markets. Swisscom is 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 Enterprise Solutions. Infonet also purchases
certain services from Swisscom, as well as its other principal shareholders, on
a non-exclusive basis. Swisscom also owns a one-third interest in AUCS, a former joint venture between
Unisource and AT&T, from which AT&T withdrew in 1999, and a one-third interest
in WorldPartners Company, a consortium that originally consisted of Unisource
and a group of major national telecommunications companies. Unisource was a
joint venture between Swisscom, KPN Telecom BV (KPN) of the Netherlands and
Telia AB (Telia) of Sweden. Unisource was dissolved in 2000, and its assets,
which comprised the shareholding in AUCS and WorldPartners, were distributed to
its shareholders. The WorldPartners partnership was wound up in 2002. Following the withdrawal of AT&T from AUCS, to ensure that their multinational
customers would continue to have access to high-quality international voice,
data and networking services, 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 for a three-year period until
September 2002. The agreement provided, among other things, that Infonet was
entitled to receive management fees as well as incentive payments if the
accumulated loss incurred by AUCS remained under an agreed limit. As the loss
did not reach this limit, the former Unisource shareholders paid to Infonet
incentive payments in the amount of EUR 72 million, with an additional EUR 5
million being currently held in escrow until the final settlement, which is
expected in 2004. Swisscoms share of these incentive payments amounted to EUR
24 million, with an additional amount of EUR 1.7 million being held in escrow
for the final settlement payment. Swisscom and its partners KPN and Telia are
jointly and severally liable for all remaining costs in winding down the
business of AUCS. These costs will primarily consist of severance payments,
lease terminations and tax liabilities. At December 31, 2003, Swisscom had a
remaining provision in the -52-




---



##### Table of Contents



amount of CHF 17 million which it believes is sufficient to cover all remaining
expenses, including Swisscoms share of any final settlement payments. On September 3, 2002, Swisscom was served with a Consolidated Class Action
Complaint in connection with Infonets initial public offering. The complaint
alleges that defendants made misrepresentations and omissions regarding AUCS in
Infonets Form S-1 registration statement and the accompanying prospectus for
its initial public offering and in other statements during the class period. As
of this date, Swisscom does not believe that this litigation could reasonably
be expected to have a material adverse effect on its consolidated financial
statements. See Item 8: Financial Information  Legal Proceedings. In 2003, Swisscom purchased services from Infonet through Infonet Switzerland
in the aggregate amount of CHF 43.7 million. Other Participations Swisscom has a participation in the satellite operator Intelstat, which it does
not view as a core part of its business. Recently, Swisscom sold its
participations in the satellite operators Inmarsat and Eutelsat. 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 had 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 in 2003 Ceský Telecom (formerly SPT Telecom in the Czech Republic). Until recently,
Swisscom held indirectly, through a 49% interest in TelSource NV (TelSource),
a stake in the Czech telecommunications company Ceský Telecom a.s. (CT). In
December 2003, TelSource, a joint venture of Swisscom and KPN, sold its 27%
stake in CT to international investors for an aggregate amount of EUR 680
million. Swisscom received CHF 510 million from the proceeds of the sale, as
well as CHF 121 million from an extraordinary dividend distribution in 2003. As
a result of the sale, 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 CT. -53-




---



##### Table of Contents



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. Reduction of network complexity and cost optimization are central aspects of
Swisscoms network strategy. In the last two years, Swisscom made significant
progress in optimizing and streamlining its fixed-line network. Making a clear
distinction between platforms that are to be phased out whenever economically
viable, platforms that are still used but not further enhanced, and platforms
that are strategically important for future development, Swisscom follows a
rigorous investment policy. Applying this policy, capital expenditures for
phase-out platforms were reduced to virtually zero, while still-in-use
platforms are subject to tight capacity management and only strategic growth
platforms, such as the broadband platform, are proactively developed and
enhanced. In addition, a number of reengineering measures have been implemented to
increase the efficiency of processes related to the main network, such as
service fulfillment, service assurance and billing. In 2003, Swisscom had
capital expenditures of CHF 497 million relating to its fixed-line network. A
substantial part of this amount was used to increase the capacity for broadband
connections. 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 2003, Swisscom had capital expenditures of CHF 381
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 ATM data services as well as to
an increasing extent IP communication. These networks are supported by
Swisscoms access networks and its extensive national and international
transmission infrastructure. While Swisscom is continuing to use its existing networks for voice and
transport services, upgrading and optimizing them wherever necessary, it is
also developing its broadband and IP capabilities. Swisscom intends to monitor
industry trends and may consider migrating its network toward an alternative
infrastructure in the future. To this end, Swisscom continues its close
cooperation 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 copper, radio and fiber optic cable. As of
December 31, 2003, 84% of all Swisscom subscriber lines, measured by cable
length, were underground. 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
2003, Swisscom has continued to expand its ADSL based broadband network mainly
in capacity and functionality, but also in geographical reach. The service is
now available to more than 98% of the population of Switzerland. -54-




---



##### Table of Contents



Transmission Infrastructure. Swisscoms domestic interexchange transmission
system is 100% digital and, as of December 31, 2003, consisted of approximately
30,210 kilometers of fiber optic cable representing 943,100 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. 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. EOSNET is based on dense wavelength division multiplexing and
synchronous digital hierarchy technology. Through EOSNET, Swisscom has extended
or connected its national transmission infrastructure into these neighboring
countries. Swisscoms international transmission infrastructure consists of terrestrial
and submarine cable transmission systems. Swisscoms national network is
directly linked to approximately 101 other telecommunications service providers
in 82 countries. The majority of European carriers have been connected via
terrestrial networks, with submarine cables being used wherever required.
Intercontinental links from Switzerland have been realized wherever possible
using submarine cables. 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-12/13, TAT-14 and AC-1 in the Atlantic and
SEA-ME-WE3. In 2003, Swisscom started to gradually consolidate its
international network by reducing the number of sea cables (e.g., by early
suspension of TAT-9, TAT-10, TAT-11). Traffic on these routes was moved to
TAT-14 and EOSNET. This consolidation has improved the efficiency of
Swisscoms international operations and increased the usage of Swisscom-owned
infrastructure without reducing quality of service. PSTN/ISDN Network. Swisscoms domestic network connects virtually all Swiss
homes and the vast majority of Swiss businesses, with traffic routed, at
December 31, 2003, through 763 remote subscriber switches, 200 local exchanges
and 2 x 17 transit exchanges. These switches are connected by Swisscoms
transmission infrastructure. Swisscom also operates international gateway switches in Zurich and Geneva. In
line with the ongoing program to optimize the fixed-line network, Swisscom has
reduced the number of international gateways and upgraded the remaining ones to
a higher software version to accelerate the time to set-up international
traffic routing and to enable centralized management. Swisscoms ISDN service, which is fully integrated with the PSTN, is based on
the ETSI (European) 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 still being able to maintain the quality of its PSTN/ISDN
network well beyond 2010. On the 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. -55-




---



##### Table of Contents



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. The platforms used for the provision of leased lines and managed bandwidth
services include a dedicated multiplexing platform which allows transmission
speeds in the range from below 64 kbit/s up to 2 Mbit/s. Swisscoms PDH
platform supports unmanaged leased lines in the range from 2 Mbit/s up to 34
Mbit/s, whereas its SDH platform supports managed and unmanaged services
starting at 2 Mbit/s 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. On top of the frame relay and ATM platforms Swisscom often handles IP
applications, meaning that frame relay and ATM are used as 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. Swisscoms IP network is continuously enhanced to accommodate the
growing capacity demand from ADSL customers. The following table provides selected information at the dates indicated
relating to Swisscoms principal data and IP transmission networks. Number of ports/leased lines(1)
    
    At December 31,2001
    
    2002
    
    2003X.25 ports
    
    
    6,049
    
    
    
    4,317
    
    
    
    2,862Frame relay ports
    
    
    6,051
    
    
    
    5,443
    
    
    
    4,754Leased lines less than 2Mb
    
    
    55,411
    
    
    
    42,640
    
    
    
    26,099Leased lines equal to or higher than 2Mb
    
    
    13,064
    
    
    
    18,300
    
    
    
    20,778ATM ports
    
    
    348
    
    
    
    393
    
    
    
    318IP-servicesTotal ports IP data services(2)
    
    
    10,300
    
    
    
    16,320
    
    
    
    17,442Total ports IP broadband access
    
    
    39,400
    
    
    
    214,787
    
    
    
    543,582
   (1)
    
    Data includes Swisscoms internal usage.(2)
    
    Mainly LAN interconnecting services for business customers, including
16,758 ADSL ports in 2003. -56-




---



##### Table of Contents



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, base station
controllers and mobile switching centers. The base transceiver stations
transmit calls to and from mobile handsets. 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 at the
dates indicated. At December 31,2001
    
    2002
    
    2003Base Transceiver Stations
    
    
    3,969
    
    
    
    4,654
    
    
    
    5,247Base Station Controllers
    
    
    37
    
    
    
    40
    
    
    
    43Mobile Switching Centers
    
    
    30
    
    
    
    31
    
    
    
    31
 In 2003, Swisscom implemented an additional 377 in-house projects, in
particular at airports, hotel and conference centers, installing special GSM
repeaters with dedicated base stations ensuring optimized reception quality.
Furthermore, Swisscom improved coverage in trains throughout Switzerland with
the implementation of additional repeaters in trains and the installation of
cables in tunnels. As a result, over 80% of the main railway routes currently
have GSM and GPRS coverage. In order to reduce its infrastructure costs,
Swisscom co-operates closely with the Swiss national railway company. 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 implemented 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 any
time. In February 2002, Swisscom launched its GPRS service with data
capacities of up to 50 kbit/s. At the end of 2003, Swisscom had nine GPRS
network nodes in place. EDGE.In order to further improve its GPRS services, Swisscom intends to
activate Enhanced Data Rates for GSM Evolution (EDGE) technology in selected
areas in Spring 2004. EDGE is a further development of the GPRS standard that
allows considerably higher transmission speeds of between 150 kbit/s and 200
kbit/s. Swisscom plans to provide EDGE access throughout its GSM network by the
beginning of 2005. 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 2003, Swisscom focused on the installation
of additional UMTS -57-




---



##### Table of Contents



base stations in order to achieve good coverage for the planned launch of UMTS
in 2004. Timing of the launch of commercial UMTS services will depend primarily
on the availability of appropriate dual mode (GPRS/UMTS) handsets. Swisscom is investing in its mobile network to upgrade its existing network to
support UMTS technology in accordance with the terms of its UMTS license.
Other projects include building an additional 500 base stations and extending
the reach of the networks dual-band capability. Swisscom expects to make
significant additional investments over the next several years in connection
with the further 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 is a complementary
wireless broadband Internet access through gateways connected to a fixed-line
network. Swisscom intends to expand its PWLAN network in 2004. 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 SBC. 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 TV
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. -58-




---



##### Table of Contents



PROPERTY, PLANT AND EQUIPMENT As of December 31, 2003, Swisscom carried on its balance sheet real estate
property with an aggregate net book value of CHF 1,050 million. Of this
amount, CHF 691 million relates to property which Swisscom uses under the
leaseback contracts described below and in Note 31 of the consolidated
financial statements. Such property was not subject to any mortgages or other
security interests as at 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 total of 196
buildings, which generated a pre-tax profit of CHF 568 million in 2001. For a
part of the buildings sold Swisscom has entered into leaseback contracts, some
of which have been qualified as finance leases. The gain from the sale of
these buildings, CHF 239 million, will be recognized in income over the
duration of these leasing contracts. The move by Swisscom to dispose of parts
of its real estate portfolio is aimed at allowing the company to focus on its
main business activities. Over the last years, Swisscom has implemented a strategy to steadily reduce its
real estate management costs, which included the outsourcing of certain real
estate management functions, especially cleaning and maintenance. Having
steadily declined from 1,155 in 1998 to approximately 400 at the end of 2000,
the number of full time equivalent employees associated with real estate
management functions remained stable in 2001 and 2002. Restructuring measures
announced in October 2003 included the lay-off of approximately 60 full-time
employees. In addition to reducing personnel costs, Swisscom is optimizing its
use of floor space by reducing the standard office floor area, as well as the
space currently devoted to other business functions, particularly in its
distribution channels. Consolidation of certain business activities and further
workforce reductions will free up office and other space, the majority of which
Swisscom expects to rent out to third parties. In conjunction with the
provision of facility management services to these lessees Swisscom expects to
generate additional income. -59-




---



##### Table of Contents



RESEARCH AND DEVELOPMENT 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 quality of service and customer care; and (3) exploring network
technologies to enable new services as well as to achieve cost efficiencies. 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, the WiFi and WiMax fora and the moving
picture experts group (MPEG). In addition, Swisscom participates in a number of
international organizations. Swisscoms research and development in the area of new communication services
includes programs to develop (1) advanced and media-enriched converged
communication services using packet switched telephony (voice over IP, Instant
Messaging) and advanced voice processing technologies including speech
recognition, synthesis and speaker verification, (2) new software technologies
for business applications as well as programmable mobile devices, (3) security
services for fixed-line network and mobile operators, (4) content based billing
for third parties and broadband services, (5) future wireless services that
allow seamless use of a variety of different access technologies, such as GPRS,
UMTS, Wireless LAN and other radio access technologies, and (6) next generation
information and entertainment services based on multimedia technologies for
broadband fixed and mobile networks including content delivery, user needs and
next generation devices. Swisscom explores strategies and technologies to increase customer satisfaction
and customer use of new services. Factors that Swisscom takes into account
include (1) social and socio-economic trends, (2) diffusion and adoption of
telecommunication services, (3) management of customer expectation, and (4) new
marketing approaches. A significant portion of Swisscoms research and development budget is also
devoted to its network operations. In addition, Swisscom is exploring new
network technologies in the access area of its fixed network, such as open
wireless access technologies, digital subscriber lines (xDSL), fiber access
networks (FTTx), Ethernet technologies, peer-to-peer networking as well as home
networks and related digital applications. 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. -60-




---



##### Table of Contents



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 full 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, the
deregulation of the Swiss telecommunications market has moved in parallel with
deregulation in the EU, and 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. In addition, in November
2003, the Federal Council submitted a bill to the Swiss Parliament with
significant amendments to the Telecommunications Act that would, among other
things, implement the recent amendments to the Telecommunications Ordinance
into law. 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 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 thereby 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 2003, 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. Under the terms of this
license, ISDN access is part of Universal Services and subject to a
price ceiling.
    
    Price Ceilings on Universal Service. 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 within the 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.
    
    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, -61-




---



##### Table of Contents



and contemplate that the market-dominant provider and those providers seeking
interconnection will reach negotiated interconnection agreements, failing which
the regulatory authority is empowered to determine the interconnection
conditions. See Item 8: Financial Information  Legal Proceedings.
    
    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 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 Ordinance and of
the proposed amendments to the Telecommunications Act include:  
    
    Unbundling of the Local Loop and Interconnection to Leased Lines.
Under the amended Telecommunications Ordinance, effective April 1,
2003, Swisscom is required to offer unbundled access to its local
loop, as well as interconnection to leased lines, on a cost-oriented
basis. However, because Swisscom believes that such a significant
change in the telecommunications regulations requires an amendment to
the Telecommunications Act, it has not yet implemented these
provisions, pending the adoption of corresponding amendments to the
Telecommunications Act.
    
    Additional Requirements Applicable to Market-Dominant Service
Providers.Under proposed amendments to the Telecommunications Act,
market-dominant service providers will be required to offer access
and not just interconnection to its installations and services on a
cost-oriented basis. The access concept, which is more general than
interconnection, is intended to cover unbundling of the local loop
and interconnection to leased lines, but also to provide the legal
basis for requiring market-dominant service providers to provide
access to any other relevant installation or service on a
cost-oriented basis.
    
    Elimination of Licensing Requirement to Reduce Barriers to Entry.
Under a proposed amendment to the Telecommunications Act, the existing
requirement that telecommunications service providers obtain a license
to provide most services would be eliminated. The proposed amendments to the Telecommunications Act are currently under
consideration by the Swiss Parliament. In March 2004, the First Chamber of the
Swiss Parliament (National Council) voted to amend the Telecommunications Act
and sent the bill to its committee for a more detailed substantive review. It
is possible that the First Chamber will take a final vote on the bill in the
course of its summer session, in which case the bill would pass to the Second
Chamber (State Council) for consideration during the second half of 2004.
Swisscom does therefore not expect that any amendments would become effective
in the course of 2004. 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. -62-




---



##### Table of Contents



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. This is one of the reasons
why the Federal Council intends to revise the existing regulatory framework.
While amendments to the 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) (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 and CEPT/ECC. 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 the 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 not to 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. -63-




---



##### Table of Contents



Licensing and Notification Requirements The Telecommunications Act requires that anyone who provides telecommunication
services and thereby 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. 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 2003, Swisscom
was required to pay charges of CHF 8 million, such amount including 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. -64-




---



##### Table of Contents



Universal Service One of the principal objectives of the Telecommunications Act is to ensure that
an 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 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 periodically to 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 prices 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. 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. -65-




---



##### Table of Contents



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 23.45Basic 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. Under the proposed amendments to the Telecommunications Act, market-dominant
service providers will be required to offer access and not just
interconnection to its installations and services on a cost-oriented basis.
The access concept, which is more general than interconnection, is intended
to cover unbundling of the local loop and interconnection to leased lines, but
also to provide the legal basis for requiring market-dominant service providers
to provide access to any other relevant installation or service, such as access
reselling, on a cost-oriented basis. 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. -66-




---



##### Table of Contents



Under the proposed amendments to the Telecommunications Act, ComCom would be
given the power to determine the access services that market-dominant providers
are required to provide. In the Telecommunications Ordinance, the Federal Council has specified that a
market-dominant provider must provide access 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, 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. See Item 8: Financial Information  Legal
Proceedings. 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, 2003, Swisscom had concluded interconnection
agreements with 36 operators. Interconnection agreements, except for
confidential portions thereof, can be consulted by the public at the offices of
OfCom. -67-




---



##### Table of Contents



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 Interconnection to Leased Lines Until recently, under the terms of the Telecommunications Act and the
Telecommunications Ordinance, market-dominant services providers have not been
required to offer unbundled access to the local loop or interconnection 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. 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. Unbundling of the local loop would comprise 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, because
Swisscom believes that such a significant change in the telecommunications
regulations requires an amendment to the Telecommunications Act, it has not yet
implemented these provisions, pending the adoption of corresponding amendments
to the Telecommunications Act. The proposed amendments to the
Telecommunications Act are currently under consideration in the Swiss
Parliament. Swisscom does not expect that any amendments would become effective
in the course of 2004. In addition, in July 2003, TDC Switzerland (Sunrise)
filed a petition with ComCom requesting that Swisscom be required to offer all
three types of unbundled access and interconnection to leased lines on a
cost-oriented basis. See Item 8: Financial Information  Legal Proceedings. 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. See   Mobile  Competition. 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 GSM licenses are
effective for a ten-year period. 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. 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 -68-




---



##### Table of Contents



terms of the license to eliminate the requirement that 20% population coverage
be achieved by the end of 2002. Licensees will still be required to achieve 50%
population coverage by the end of 2004. Swisscom achieved this threshold in
May 2003. In addition, each licensee is now required to report to OfCom every
three months on the progress of its network build-out until it has achieved 20%
population coverage. 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 current quality of service
Swisscom will be required to put up additional antennae. However, Swisscom
does not expect the associated costs in 2004 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. Recommendations relating to emission standards for UMTS networks are
expected to be adopted and become effective in the course of 2004. 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. Swisscoms mobile termination tariffs and roaming surcharges may become subject
to regulation in the future due to a number of developments, including
regulatory initiatives in the European Union and ongoing proceedings in which
Swisscom is involved. See Item 3: Key Information  Risk Factors and Item 8:
Financial Information  Legal Proceedings. Regulation of mobile termination
fees or roaming surcharges would have a significant impact on Swisscoms mobile
revenues. 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. -69-




---



##### Table of Contents



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 amended Telecommunications Ordinance that requires
Swisscom to offer interconnection to leased lines on a cost-oriented basis, see
  Unbundling of the Local Loop and Interconnection to Leased Lines. In July
2003, TDC Switzerland (Sunrise) filed a petition with ComCom requesting that
Swisscom be required to offer interconnection to leased lines on a
cost-oriented basis. See 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
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- -70-




---



##### Table of Contents



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. In April 2002, the Office of the United States Trade Representative (USTR)
published the results of an annual survey reviewing the operation and
effectiveness of U.S. telecommunications trade agreements. In this report the
USTR stated that, among other things, excessive prices for leased lines in
Belgium, France, Ireland, Spain and Switzerland make it harder for new entrants
to offer competitive services. Referring to their WTO obligation, the USTR
urged the national regulators of these countries and the EU to identify
benchmarks for leased line prices to ensure that these rates are reasonable. In
a study entitled State of the Swiss Telecommunications Market in International
Comparison, dated April 2002, WIK CONSULT, an international consulting firm,
concluded that the average price level for leased lines in Switzerland is in
fact below the European average. As a result of bilateral governmental
negotiations, the USTR dropped its requirements in 2003. -71-




---



##### Table of Contents



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 31% and 9% of
Swisscoms total revenues in 2003, respectively. Mobile services are provided
through the business segment Mobile and debitel, generating 24% and 31% of
Swisscoms total revenues in 2003, respectively. 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;
    
    Enterprise Solutions:charges for fixed-line voice telephony
services to business customers, fees for providing leased lines,
Intranet services and other networking services;
    
    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 messaging and
information services;
    
    debitel:monthly subscription charges and charges to
customers for making calls, handsets and other merchandise sales and
commissions receivable from the network operators for customers
acquired and retained. On April 29, 2004, Swisscom entered into an agreement to sell its 95% stake in
debitel AG, including 2% it acquired from ElectronicPartner in connection with
this transaction, in a leveraged buy out by funds advised by the private equity
firm Permira, for a purchase price of EUR 640 million (equity value). The principal components of Swisscoms operating expenses include:  
    
    Goods and services purchased, mainly consisting of
interconnection fees for national and international traffic,
including network fees for debitel, 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 business has been affected in recent years by a number of important
developments in its industry, including: -72-




---



##### Table of Contents



Increased competition as a result of the liberalization of the Swiss
telecommunications market.Since the entry into force of the Telecommunications
Act, the Swiss telecommunications market has been open to full competition. The
Telecommunications Act contains numerous provisions designed to facilitate
competition, which primarily affect the traditional telecommunications services
Swisscom offers, such as fixed-line voice and mobile telephony and data
services. As a result of increased competition, margins have come under
pressure in recent years, in particular in the fixed-line business. The most
important challenge Swisscom faces therefore is maintaining its leadership in
the Swiss telecommunications market on profitable terms. The extent to which it
is able to do so largely depends on its ability to reduce its operating costs
and implement further staff reductions. While competition has led to a significant loss in market share of Swisscom, it
has also stimulated overall market demand for telecommunications services such
as broadband access, where Swisscom expects further growth in the future. 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 the
Internet. With the introduction of broadband access and other high-capacity
technologies, customers have been migrating from lower capacity services, such
as narrowband Internet dial-up, to high-capacity services. In addition, the
emergence of new technologies that Swisscom does not offer itself, such as
cable telephony (voice over cable), puts Swisscom in a new competitive
environment. Swisscom believes that its position as a leading provider of
multi-service networks in the Swiss telecommunications market will enable it to
compete effectively in this new environment. Regulatory initiatives.In the past two years, there have been a number of
regulatory initiatives that are likely to further increase competition in the
telecommunications market and put additional pressure on margins. Recent
amendments to the Telecommunications Ordinance require Swisscom to offer
unbundled access to its local loop, as well as interconnection to leased lines,
on a cost-oriented basis. However, because Swisscom believes that such a
significant change in the telecommunications regulations requires an amendment
to the Telecommunications Act, it has not yet implemented these provisions,
pending the adoption of corresponding amendments to the Telecommunications Act.
These amendments are part of proposed amendments to the Telecommunications Act
that were submitted to the Swiss Parliament in November 2003 and that could
become effective as early as mid-2005. Furthermore, Swisscoms mobile termination tariffs and roaming surcharges may
become subject to regulation in the future due to a number of developments,
including regulatory initiatives in the European Union and ongoing proceedings
in which Swisscom is involved in Switzerland. Regulation of mobile termination
fees or roaming surcharges would have a significant impact on Swisscoms mobile
revenues and lead to additional pressure on margins and reduce profitability. SUMMARY OF RESULTS Within a weak economic environment, revenues remained stable overall in 2003. A
decline in revenues from traditional fixed-line telephony was offset by an
increase in revenues from mobile telephony. Swisscom has been facing difficult market conditions in its fixed-line business
primarily due to an increasing substitution by mobile telephony and Internet
use. In addition, strong competition in both the residential as well as the
business segment resulted in a significant decrease in traffic volumes. In the
access market, where Swisscom has been facing increasingly competition from
cable network operators, it was able to defend its competitive position with a
strong increase in the number of ADSL subscribers, reflecting the growing
demand for high bandwidth connectivity. Growth in the mobile telephony market was driven by an increase in the
subscriber base, while prices have come under increased pressure, in particular
in the business segment. Except for messaging services (SMS), usage was
generally lower due to reluctant consumer behavior as a result of the weak
economy. -73-




---



##### Table of Contents



With flat revenues and only limited growth opportunities, Swisscom has focused
on an improvement of its cost management. A significant headcount reduction
mainly in the fixed-line business as part of its ongoing restructuring program,
as well as further efficiency enhancements have led to a significant increase
in operating income. High cash flows from its operating activities and a lack of value-accretive
investment opportunities leaves Swisscom with a balance sheet free of net debt
and sufficient funds to return cash to its shareholders in 2004 according to
its return policy. Swisscom expects the current trend in the fixed-line market to continue.
Growing competition from cable network operators in the residential fixed-line
telephony market as well as regulatory risks such as unbundling of the local
loop and a reduction in interconnection tariffs will further increase pressure
on margins and could lead to further headcount reductions. With penetration
rates having reached very high levels, subscriber growth in the mobile market
will slow down. 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 and may
also be affected by regulatory initiatives, which could include regulation of
mobile termination tariffs as well as access to certain mobile services. SALE OF DEBITEL On April 29, 2004, Swisscom entered into an agreement to sell its 95% stake in
debitel AG, including 2% it acquired from ElectronicPartner in connection with
this transaction, 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 will be 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, to be assumed by debitel
Konzernfinanzierungs GmbH, an indirect 100% owned subsidiary of the entity to
be acquired by Permira Funds in the transaction. Consideration from the sale
including the vendor loan notes will be recorded at fair value at closing of
the transaction. In determining the expected net selling price for purposes of
calculating the impairment charge at December 31, 2003, management estimated
the fair value of the vendor loan at an amount lower than its nominal value.
After deduction of the deferred portion of the purchase price, Swisscom expects
to receive EUR 430 million in cash at closing. Pending the closing of the
transaction, Swisscoms debitel shares will be held in a blocked account to
prevent Swisscom from selling these shares otherwise than to the Permira Funds
pursuant to the purchase agreement. A portion of the purchase price is also being 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 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 under certain conditions with the right to take control over this
subsidiary in order to minimize its liability under this indemnity. In connection with the discussions concerning the disposal of its shareholding
in debitel, Swisscom recorded a further goodwill impairment charge of CHF 280
million in 2003, reflecting the net amount that was expected from a sale. At December 31, 2003, Swisscom had a cumulative currency translation loss of
CHF 221 million recorded under other reserves in consolidated shareholders
equity. As a result of the sale, the cumulative translation loss through the
date of the sale will be removed from equity and recorded under financial
expense in the income statement in 2004. -74-




---



##### Table of Contents



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. 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, 2003 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, 2003, the cumulated actual return on assets has been
significantly lower than the expected return. The average annual actual return
on plan assets in this period was 1.9%, whereas the expected return was 5% in
1999 and 2003 and 5.5% from 2000 to 2002, which resulted in a cumulated
actuarial loss of CHF 728 million at December 31, 2003. As a result of improved
performance of the stock markets in 2003, this actuarial loss was reduced by
CHF 114 million, reflecting the excess of the actual return on assets of CHF
341 million over the expected return of CHF 227 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.
This will result in an additional yearly expense of approximately CHF 25
million beginning in 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 in 2003 was 3.75%. Should the discount rate decrease by
0.5%, the pension liability would increase by approximately CHF 587 million and
the annual pension expense would increase by approximately CHF 12 million. The rate of increase in future compensation levels used in 2003 was 3.1%.
Should this rate increase by 0.5%, the pension liability would increase by
approximately CHF 134 million and the annual pension expense would increase by
approximately CHF 14 million. In connection with the settlement of its obligation to retired employees in
1998, Swisscom retained a liability for pension indexation. Swisscom must pay
PUBLICA (former Pensionskasse des Bundes PKB) the difference between the actual
return on plan assets and the Government prescribed discount rate increased by
an account maintenance fee. At December 31, 2003, included in the present value
of obligations is CHF 338 million for these retired employees. The liability
was determined based on an assumed payment of 1% per year over the life of the
retired employees. The present value obligation that will be paid by PUBLICA is
CHF 3,789 million. While Swisscom believes that the assumption used to
determine this liability is appropriate, should the actual return on plan
assets be lower than the prescribed rate, this would affect Swisscoms pension
liability and future expense. In 2003, under U.S. GAAP, Swisscom recorded a minimum liability of CHF 506
million, of which CHF 292 million reflected the unrecognized prior service cost
and was recorded as an intangible asset. The remaining CHF 214 million, net of
tax of CHF 48 million, was recorded against equity. An increase of the minimum
liability would result in a further reduction of shareholders equity. -75-




---



##### Table of Contents



Impairment of debitel In connection with the discussions concerning the disposal of its shareholding
in debitel, Swisscom recorded a further goodwill impairment charge of CHF 280
million in 2003, reflecting the net amount that was expected from the sale. The revised carrying value of goodwill in debitel at December 31, 2003 under
IFRS is approximately CHF 710 million. In 2001 and 2002, under IFRS, Swisscom recognized an impairment loss for the
difference between the carrying value of its investment in debitel and the
value in use amount. The value in use amount was determined based on
projections of future profitability. The total projected cash flow was
discounted by debitels weighted average cost of capital of 10.26% in 2001 and
10.75% in 2002 that was determined using the Capital Asset Pricing Model. The
main assumptions used in the projections of future profitability were:  
    
    Market penetration rate and debitels market share
    
    Split of subscribers between postpaid and prepaid
    
    Average minutes and revenue per user
    
    Churn rate
    
    Billing margin, which represents total revenue less network
costs payable to the network operators
    
    Margin from earnings before interest, tax and depreciation
    
    Expected level of capital expenditure The accounting model followed for U.S. GAAP was significantly different to
IFRS, as described in IFRS compared with U.S. GAAP below and in Note 42 to the
consolidated financial statements. At December 31, 2002, Swisscom reduced its
goodwill in debitel to zero under U.S. GAAP. Useful lives of technical equipment Technical equipment, with a net book value of CHF 5,053 million at December 31,
2003, 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 28 to the financial statements, management has included a
provision of CHF 314 million at December 31, 2003 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 now expected to
be incurred mainly after 2010. This resulted in a reduction in the present
value of CHF 43 million, which was recorded under financial expense. 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 provided. 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. -76-




---



##### Table of Contents



RESULTS OF GROUP OPERATIONS Year Ended
    
    Year EndedCHF in millions (except percentages)
    
    December 31,
    
    December 31,2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Net revenue
    
    
    14,174
    
    
    
    14,526
    
    
    
    14,581
    
    
    
    2.5
    
    
    
    0.4Other operating income
    
    
    213
    
    
    
    266
    
    
    
    256
    
    
    
    24.9
    
    
    
    (3.8
    )Total
    
    
    14,387
    
    
    
    14,792
    
    
    
    14,837
    
    
    
    2.8
    
    
    
    0.3Goods and services purchased
    
    
    4,513
    
    
    
    4,959
    
    
    
    4,834
    
    
    
    9.9
    
    
    
    (2.5
    )Personnel expenses
    
    
    2,461
    
    
    
    2,593
    
    
    
    2,535
    
    
    
    5.4
    
    
    
    (2.2
    )Other operating expenses
    
    
    3,004
    
    
    
    2,827
    
    
    
    2,827
    
    
    
    (5.9
    )
    
    
    0.0Depreciation
    
    
    1,702
    
    
    
    1,578
    
    
    
    1,564
    
    
    
    (7.3
    )
    
    
    (0.9
    )Amortization
    
    
    472
    
    
    
    427
    
    
    
    361
    
    
    
    (9.5
    )
    
    
    (15.5
    )Total operating expenses
    
    
    12,152
    
    
    
    12,384
    
    
    
    12,121
    
    
    
    1.9
    
    
    
    (2.1
    )Exceptional items(1)
    
    
    3,275
    
    
    
    (702
    )
    
    
    (280
    )
    
    
    n.a.
    
    
    
    (60.1
    )Operating income
    
    
    5,510
    
    
    
    1,706
    
    
    
    2,436
    
    
    
    (69.0
    )
    
    
    42.8Financial result
    
    
    (355
    )
    
    
    (311
    )
    
    
    (14
    )
    
    
    (12.4
    )
    
    
    (95.5
    )Income tax (expense) benefit
    
    
    15
    
    
    
    (361
    )
    
    
    (500
    )
    
    
    n.a.
    
    
    
    38.5Equity in net income of affiliated
companies
    
    
    32
    
    
    
    95
    
    
    
    (7
    )
    
    
    196.9
    
    
    
    n.a.Minority interest
    
    
    (238
    )
    
    
    (305
    )
    
    
    (346
    )
    
    
    28.2
    
    
    
    13.4Net income
    
    
    4,964
    
    
    
    824
    
    
    
    1,569
    
    
    
    (83.4
    )
    
    
    90.4
   (1)
    
    Includes in 2001 gain on partial sale of Swisscom Mobile AG of CHF 3,837
million, gain on sale of real estate of CHF 568 million and impairment of
goodwill in debitel of CHF 1,130 million and in 2002 and 2003 an
additional impairment of goodwill in debitel of CHF 702 million and CHF
280 million, respectively. Net revenue Revenue increased from CHF 14,526 million in 2002 to CHF 14,581 million in
2003, reflecting an increase in revenue from debitel. This increase was
partially offset by a decrease in revenue from Fixnet and Enterprise Solutions.
Revenue from other segments remained relatively stable. Revenue from debitel
increased substantially due primarily to an increase in the number of mobile
postpaid customers. The decrease in revenue in Fixnet and Enterprise Solutions
was mainly due to the reduction in traffic as a result of a loss in market
share resulting primarily from the introduction of 10-digit numbering at the
end of March 2002. The full 10-digit number must now be dialed for all calls.
As a result, subscribers who have pre-selected an alternative carrier will 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. Revenue increased from CHF 14,174 million in 2001 to CHF 14,526 million in 2002
reflecting an increase in revenue from Mobile and debitel. This increase was
partially offset by a decrease in revenue from Fixnet and Enterprise Solutions.
Revenue from other segments remained relatively stable. Revenue from Mobile
increased, primarily from voice telephony and data services, such as SMS
messages, as a result of the continued growth in the number of customers.
debitel revenue increased substantially due primarily to an increase in revenue
from the sale of handsets resulting from an increase in the average price per
device. The decrease in revenue in Fixnet and Enterprise Solutions was mainly
due to the introduction of the 10-digit numbering at the end of March 2002 and
the new tariff in May 1, 2002, as described above. Goods and services purchased Goods and services purchased decreased from CHF 4,959 million in 2002 to CHF
4,834 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 -77-




---



##### Table of Contents



presence in North America in October 2002, the closure of its European points
of presence in November 2002 and a change in Fixnets accounting method for its
third-party ISP numbers. See   Fixnet  External segment expenses. These
effects have been partially offset by an increase in goods and services
purchased by debitel as a result of an increase in the amount incurred for
minutes purchased from the network operators reflecting an increase in the
amount of traffic and cost of mobile equipment purchased for resale. Goods and services purchased increased from CHF 4,513 million in 2001 to CHF
4,959 million in 2002, primarily reflecting an increase in goods and services
purchased by debitel. This increase was accounted for primarily by the higher
cost of mobile equipment purchased for resale, which was due to an increase in
the number of handsets sold, and in the price per handset, and by an increase
in the volume of minutes purchased from the network operators, which was due to
an increase in the amount of traffic. Personnel expenses Personnel expenses decreased from CHF 2,593 million in 2002 to CHF 2,535
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 retirement
benefits of CHF 54 million, as described in Note 9 of the consolidated
financial statements. Personnel expenses increased from CHF 2,461 million in 2001 to CHF 2,593
million in 2002 as a result of (i) an annual salary increase for all employees;
(ii) an increase in the number of employees in growing business areas such as
Mobile and debitel; (iii) an increase in the number of employees at IT services
due to the acquisition of AGI IT Services AG in December 2001; and (iv) an
increase in the average salary of employees at Mobile and debitel due to the
increased skill set of employees. Other operating expenses Other operating expenses remained stable at CHF 2,827 million in 2002 and 2003.
The increase in debitels customer acquisition and retention costs reflecting
an increase in the number of subscribers, was offset by cost reductions in the
other segments. These cost reductions were possible mainly due to a decrease in
IT consultancy costs as a result of fewer projects, a decrease in commissions
at Mobile and the optimization of maintenance costs at Fixnet. Other operating expenses decreased from CHF 3,004 million in 2001 to CHF 2,827
million in 2002 due primarily to a reduction in commissions and marketing
subsidies paid to dealers by debitel. Depreciation Depreciation decreased from CHF 1,578 million in 2002 to CHF 1,564 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 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 will
have to be replaced earlier than expected due to the roll out of UMTS. Depreciation decreased from CHF 1,702 million in 2001 to CHF 1,578 million in
2002 due primarily to a decrease in the Fixnet segment as a result of an
increase in the number of fully depreciated assets that have not been replaced. Amortization Amortization decreased from CHF 472 million in 2001 to CHF 427 million in 2002
and to CHF 361 million in 2003 due primarily to a reduction in the amortization
of goodwill of debitel, reflecting the decrease in the carrying value of
debitel as a result of the impairment charges of CHF 1,130 million recorded in
2001 and CHF 702 million recorded in 2002. -78-




---



##### Table of Contents



Exceptional items Impairment of goodwill of debitel.In connection with the discussions
concerning the disposal of its shareholding in debitel, Swisscom recorded a
further goodwill impairment charge of CHF 280 million in 2003, reflecting the
net amount that was expected from the sale. In 2002 and 2001, Swisscom recorded
impairment charges on the goodwill of debitel of CHF 702 million and CHF 1,130
million, respectively as a result of the decline in future expected growth in
the mobile sector and the delay in the implementation of the third generation
system, UMTS. Tax.In 2002, net income includes a one-time charge of CHF 115 million as a
result of Swisscoms transfer of its operations from Swisscom AG to newly
formed subsidiaries, which are each subject to individual tax rates. This
transfer resulted in a reduction of the weighted average tax rate from 25% to
23%. In 2001, despite recording income before tax of CHF 5,155 million,
Swisscom recorded a tax benefit of CHF 15 million due to the gain on the
partial sale of Mobile and a large portion of the gain on sale of real estate
not being subject to tax and to a tax benefit recorded on the impairment of
debitel. A reconciliation of income tax expense on income before income taxes
to the reported income tax expense is included in Note 16 to the consolidated
financial statements. Sale of real estate.In March 2001, Swisscom entered into two agreements for
the sale of real estate and sold 30 and 166 commercial and office properties
for CHF 1,272 million and CHF 1,313 million, respectively. At the same time,
Swisscom entered into agreements to lease back part of the sold property space.
The total 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. While CHF 239 million have been deferred, the remaining gain of CHF
568 million was recorded in income in 2001. Sale of 25% of Swisscom Mobile. In November 2000, Swisscom entered into an
agreement with Vodafone plc. (Vodafone) for the sale of 25% of the equity of
the Swisscom mobile business for CHF 4.5 billion. The sale was completed on
March 30, 2001, when 25% of the shares of Swisscom Mobile AG were issued to
Vodafone through a capital increase. Swisscom recorded a pre-tax gain on the
sale less transaction costs of CHF 168 million of CHF 3,837 million. Financial result Financial result improved from a net expense of CHF 311 million in 2002 to a
net expense of CHF 14 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 71 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. Financial result remained relatively stable in 2002 compared to 2001. Financial
expense decreased primarily as a result of larger asset write-downs in 2001. In
2001, Swisscom recorded an impairment charge of CHF 219 million on its
investment in Infonet Inc. and wrote down a loan of CHF 199 million given to
UTA. In 2002, Swisscom recorded impairment charges on its investments in
Infonet and Swiss International Airlines Limited as described above. Financial
income also decreased due primarily to a reduction in cash balances on deposit,
a reduction in interest rates and a gain of CHF 72 million on the transaction
with AGI Holding AG in 2001 (see Note 15 of the consolidated financial
statements). Income tax Income tax expense increased from CHF 361 million in 2002 to CHF 500 million in
2003 due primarily to an increase in taxable income. The effective tax rate for
2003 was 20.6%. In 2002, Swisscom transferred its operations from Swisscom AG to newly formed
subsidiaries, which are each subject to individual tax rates. As a result, all
tax assets and liabilities were adjusted, which resulted in a one-time -79-




---



##### Table of Contents



charge of CHF 115 million. The impairment of the goodwill relating to debitel
reduced tax expense by CHF 207 million. Excluding these exceptional items, the
tax rate would have been 21.6%. In 2001, Swisscom recorded an income tax benefit due primarily to the partial
disposal of Swisscom Mobile AG, which was effectively tax-free for the Group,
the sale of real estate, which was partially tax-exempt, and the impairment of
debitel, as previously recorded goodwill amortization effectively became
tax-deductible (see Note 16 to the consolidated financial statements).
Excluding these exceptional items, the tax rate would have been 26.6 %. Equity in net income of affiliated companies Equity in net income of affiliated companies decreased by CHF 102 million in
2003 compared to 2002 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 Communication
Services compared to prior year (see Note 24 to the consolidated financial
statements). Equity in net income of affiliated companies increased in 2002 due primarily to
an impairment charge that was recorded in 2001 relating to Swisscoms
investment in three subsidiaries of tamedia AG. Minority interest Minority interest relates mainly to the 25% shareholding of Vodafone in
Swisscom Mobile AG. The increase in minority interest by CHF 41 million in 2003
compared to 2002 is due to the increase in net income of Swisscom Mobile AG. The increase in minority interest in 2002 is due to the fact that minority
interest in 2001 includes only 9 months results of Swisscom Mobile, as the
acquisition by Vodafone of the 25% shareholding in Swisscom Mobile AG was
effective as of April 1, 2001. -80-




---



##### Table of Contents



RESULTS OF OPERATIONS BY SEGMENT Effective January 1, 2003, the product ownership of Business Numbers was
transferred from Fixnet to Enterprise Solutions. See Item 4: Information on
the Company  Fixnet  Wholesale Trafficand Item 4: Information on the
Company  Enterprise Solutions  Business Numbers.In addition, direct mobile
interconnection was introduced in February 2003 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. As a result, the associated revenues and costs,
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 2003. See Item 4: Information on the Company  Fixnet  Wholesale
Trafficand Item 4: Information on the Company  Mobile  Connectivity
Voice. Prior years have been restated to reflect these changes. The segments for 2003 were defined as follows:  
    
    Fixnetprovides fixed-line voice and Internet access services to residential and business customers and
a comprehensive range of other fixed network telecommunication services to residential 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.
    
    debitelis a provider of mobile communications and value-added services in Germany and other European
countries.
    
    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. The segment results presented below reflect the organization that was in place
in 2003. Segment results Net revenue
    
    Operating incomeCHF in millions
    
    2001
    
    2002
    
    2003
    
    2001(1)
    
    2002
    
    2003Fixnet
    
    
    6,400
    
    
    
    6,262
    
    
    
    5,846
    
    
    
    842
    
    
    
    819
    
    
    
    992Mobile
    
    
    3,983
    
    
    
    4,112
    
    
    
    4,140
    
    
    
    1,585
    
    
    
    1,685
    
    
    
    1,674Enterprise Solutions
    
    
    1,619
    
    
    
    1,522
    
    
    
    1,371
    
    
    
    148
    
    
    
    65
    
    
    
    101debitel
    
    
    3,808
    
    
    
    4,111
    
    
    
    4,555
    
    
    
    (1,381
    )
    
    
    (882
    )
    
    
    (383
    )Other
    
    
    1,403
    
    
    
    1,463
    
    
    
    1,304
    
    
    
    (93
    )
    
    
    (114
    )
    
    
    (42
    )Corporate
    
    
    766
    
    
    
    704
    
    
    
    703
    
    
    
    4
    
    
    
    133
    
    
    
    94Intersegment elimination
    
    
    (3,805
    )
    
    
    (3,648
    )
    
    
    (3,338
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    14,174
    
    
    
    14,526
    
    
    
    14,581
    
    
    
    1,105
    
    
    
    1,706
    
    
    
    2,436
  (1)
    
    Excludes gain on sale of real estate of CHF 568 million and gain on
partial sale of Swisscom Mobile of CHF 3,837 million. -81-




---



##### Table of Contents



Fixnet Revenue from Fixnet comprises primarily fixed-line voice and Internet access
services to residential and business customers, revenue from fixed retail
telephony traffic in respect of residential 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. Effective January 2004, Enterprise Solutions has increased its focus on large
business customers with complex communication needs. To this end, approximately
46,000 business customers with primarily standard traffic needs have been
transferred to the Fixnet segment. External revenues generated with these
customers amounted to approximately CHF 180 million in 2003. This transfer has
not been reflected in the results presented below but will be reported in the
segment results for 2004, with a restatement of prior year numbers. Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Net revenue from external customers
    
    
    4,845
    
    
    
    4,762
    
    
    
    4,498
    
    
    
    (1.7
    )
    
    
    (5.5
    )Intersegment net revenue
    
    
    1,555
    
    
    
    1,500
    
    
    
    1,348
    
    
    
    (3.5
    )
    
    
    (10.1
    )Net revenue
    
    
    6,400
    
    
    
    6,262
    
    
    
    5,846
    
    
    
    (2.2
    )
    
    
    (6.6
    )Segment expenses
    
    
    5,558
    
    
    
    5,437
    
    
    
    4,847
    
    
    
    (2.2
    )
    
    
    (10.9
    )Operating income before
amortization of goodwill
    
    
    842
    
    
    
    825
    
    
    
    999
    
    
    
    (2.0
    )
    
    
    21.1Amortization of goodwill
    
    
    
    
    
    
    6
    
    
    
    7
    
    
    
    n.a.
    
    
    
    16.7Segment operating income
    
    
    842
    
    
    
    819
    
    
    
    992
    
    
    
    (2.7
    )
    
    
    21.1Segment-margin(1)
    
    
    13.2
    %
    
    
    13.2
    %
    
    
    17.1
    %
   (1)
    
    Segment-margin before amortization of goodwill. Net revenue from external customers Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Access
    
    
    1,497
    
    
    
    1,581
    
    
    
    1,715
    
    
    
    5.6
    
    
    
    8.5Retail traffic
    
    
    1,279
    
    
    
    1,225
    
    
    
    1,169
    
    
    
    (4.2
    )
    
    
    (4.6
    )Wholesale traffic
    
    
    1,033
    
    
    
    1,004
    
    
    
    755
    
    
    
    (2.8
    )
    
    
    (24.8
    )Other traffic
    
    
    264
    
    
    
    208
    
    
    
    247
    
    
    
    (21.2
    )
    
    
    18.8Other revenue
    
    
    772
    
    
    
    744
    
    
    
    612
    
    
    
    (3.6
    )
    
    
    (17.7
    )Total Fixnet external revenue
    
    
    4,845
    
    
    
    4,762
    
    
    
    4,498
    
    
    
    (1.7
    )
    
    
    (5.5
    )
 -82-




---



##### Table of Contents



Access.Revenue from access 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, internet broad- and
narrowband 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)PSTN access revenue
    
    
    935
    
    
    
    907
    
    
    
    910
    
    
    
    (3.0
    )
    
    
    0.3ISDN access revenue
    
    
    502
    
    
    
    562
    
    
    
    569
    
    
    
    12.0
    
    
    
    1.2Total PSTN/ISDN access revenue
    
    
    1,437
    
    
    
    1,469
    
    
    
    1,479
    
    
    
    2.2
    
    
    
    0.7ADSL retail revenue
    
    
    8
    
    
    
    39
    
    
    
    112
    
    
    
    387.5
    
    
    
    187.2ADSL wholesale revenue
    
    
    10
    
    
    
    33
    
    
    
    85
    
    
    
    230.0
    
    
    
    157.6Total ADSL revenue
    
    
    18
    
    
    
    72
    
    
    
    197
    
    
    
    300.0
    
    
    
    173.6Other access revenue
    
    
    42
    
    
    
    40
    
    
    
    39
    
    
    
    (4.8
    )
    
    
    (2.5
    )Total access revenue
    
    
    1,497
    
    
    
    1,581
    
    
    
    1,715
    
    
    
    5.6
    
    
    
    8.5Access lines (at period end, in
thousands)(1):PSTN lines(2)
    
    
    3,240
    
    
    
    3,163
    
    
    
    3,086
    
    
    
    (2.4
    )
    
    
    (2.4
    )ISDN lines(3)
    
    
    857
    
    
    
    911
    
    
    
    924
    
    
    
    6.3
    
    
    
    1.4Total access lines
    
    
    4,097
    
    
    
    4,074
    
    
    
    4,010
    
    
    
    (0.6
    )
    
    
    (1.6
    )ADSL subscribers lines (at period
end, in thousands of lines):Retail subscriber lines
    
    
    18
    
    
    
    109
    
    
    
    274
    
    
    
    505.6
    
    
    
    151.4Wholesale subscriber lines
    
    
    15
    
    
    
    86
    
    
    
    213
    
    
    
    473.3
    
    
    
    147.7Total ADSL subscribers lines
    
    
    33
    
    
    
    195
    
    
    
    487
    
    
    
    490.9
    
    
    
    149.7
  (1)
    
    Based on lines in service, including courtesy and service lines. Restated
for 2001 to reflect the transfer of access lines from Enterprise Solutions
to Fixnet at the beginning of 2002.(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. Access revenue increased by 8.5% in 2003 compared to 2002 as a result of a
substantial increase in revenue from asynchronous digital subscriber line
(ADSL). The number of ADSL subscriber lines continued to increase substantially
in 2003, but at a slower rate than in 2002. While customers continued to
migrate from PSTN to more expensive ISDN lines, the growth in the number of
ISDN lines continued to slow in 2003. This is a result of the high penetration
rate in Switzerland and the fact that the fast growing ADSL technology can also
be offered over a traditional PSTN line. Due to a revision of the
Telecommunications Ordinance, Swisscom reduced its ISDN activation fee and
introduced an activation fee for PSTN effective January 1, 2003. Swisscom
believes that future growth in the access area will continue to come from its
broadband product ADSL, which will result in a further slow down in ISDN
growth. Swisscom also expects a decline in the number of access lines due to
increased substitution by mobile telephony. Access revenue increased by 5.6% in 2002 compared to 2001 due to a significant
increase in the number of ADSL lines and to the continued migration of PSTN
customers to the more expensive ISDN lines. -83-




---



##### Table of Contents



Retail traffic.Retail traffic revenue consists of charges to customers for
making local, national long distance and outgoing international calls from a
fixed-network access line, including calls made from the fixed network to
mobile operators networks, particularly Swisscoms mobile network
(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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Local and long distance traffic
    
    
    550
    
    
    
    456
    
    
    
    407
    
    
    
    (17.1
    )
    
    
    (10.7
    )Fixed-to-mobile traffic
    
    
    363
    
    
    
    391
    
    
    
    398
    
    
    
    7.7
    
    
    
    1.8Internet traffic
    
    
    177
    
    
    
    189
    
    
    
    162
    
    
    
    6.8
    
    
    
    (14.3
    )International traffic(2)
    
    
    189
    
    
    
    189
    
    
    
    202
    
    
    
    0.0
    
    
    
    6.9Total retail revenue
    
    
    1,279
    
    
    
    1,225
    
    
    
    1,169
    
    
    
    (4.2
    )
    
    
    (4.6
    )Traffic (in millions of minutes)(1),(3):Local and long distance traffic
    
    
    9,434
    
    
    
    7,864
    
    
    
    6,985
    
    
    
    (16.6
    )
    
    
    (11.2
    )Fixed-to-mobile traffic(4)
    
    
    724
    
    
    
    777
    
    
    
    825
    
    
    
    7.3
    
    
    
    6.2Internet traffic
    
    
    5,586
    
    
    
    5,766
    
    
    
    4,842
    
    
    
    3.2
    
    
    
    (16.0
    )International traffic(5)
    
    
    778
    
    
    
    808
    
    
    
    842
    
    
    
    3.9
    
    
    
    4.2Total retail traffic
    
    
    16,522
    
    
    
    15,215
    
    
    
    13,494
    
    
    
    (7.9
    )
    
    
    (11.3
    )
  (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.(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
customer billing purposes. Does not include transit traffic originating
outside of Switzerland. Revenue from local and long distance traffic decreased by 10.7% in 2003
compared to 2002 primarily as a result of a reduction in traffic due to (i) a
migration of traffic from local Internet dial-up numbers to ISP numbers and
ADSL as a result of an increase in the tariffs for local traffic introduced in
May 2002, (ii) a loss of market share resulting from the introduction of
10-digit numbering at the end of March 2002, and (iii) the substitution effect
from increased use of mobile phones. Swisscom expects revenue to further
decrease in 2004 as a result of the continued substitution effect from
increased use of mobile phones, further migration of traffic from local
Internet dial-up numbers to ISP numbers and ADSL as well as increased
competition. Revenue from fixed-to-mobile traffic slightly increased by 1.8% in 2003
compared to 2002 due to an increase in traffic reflecting the higher
penetration of mobile phones, partially offset by a decrease in average minute
prices as a result of a shift towards off-peak minutes. Revenue is expected to
decrease in 2004 as a result of a decrease in tariffs. Tariffs are expected to
decrease as a result of increased pressure due to regulatory initiatives in the
European Union regarding mobile termination and two proceedings in which
Swisscom is involved. See Item 4: Information on the
Company  Regulation 
Mobile Telecommunicationsand Item 8:
Financial Information  Legal
Proceedings. Revenue from internet traffic decreased by 14.3% in 2003 compared to 2002 due
to a decrease in traffic reflecting primarily an increase in the number of ADSL
customers. ADSL customers pay a fixed monthly fee, irrespective of the amount
of usage, which is recorded under Access Revenue. Tariffs remained stable
compared to 2002. Swisscom expects revenue to further decrease in 2004 due to a
further decline in traffic resulting from a further increase in the number of
ADSL customers. -84-




---



##### Table of Contents



Revenue from international traffic increased by 6.9% in 2003 compared to 2002,
due primarily to an increase in traffic as a result of various promotions that
were offered during 2003 and an increase in the average rate per minute
reflecting a higher proportion of traffic to higher tariff countries. In 2004,
Swisscom expects revenue to decrease primarily reflecting a decrease of the
average tariff due to increased competition. Revenue from local and long distance traffic decreased by 17.1% in 2002
compared to 2001 as a result of a reduction in traffic reflecting a migration
of traffic from local Internet dial-up numbers to ISP numbers as a result of an
increase in the tariffs for local traffic introduced in May 2002 and a loss of
market share due to the introduction of 10-digit numbering at the end of March
2002. Revenue from fixed-to-mobile traffic increased by 7.7% in 2002 compared to 2001
due to an increase in traffic reflecting the higher penetration of mobile
phones and the impact of increased usage of services generating non-volume
related revenues. Revenue from internet traffic slightly increased by 6.8% in 2002 compared to
2001 due to an increase in traffic reflecting the increasing demand for
internet access, partially offset by a decrease in revenue due to the increase
in the number of ADSL customers as ADSL customers pay a fixed monthly fee which
is recorded under Access Revenue. Revenue from international traffic remained stable in 2002 compared to 2001,
despite an increase in traffic, as a result of a reduction of tariffs for calls
to more than 50 countries, partially offset by an increase in the surcharge for
calls from fixed to foreign mobile networks. 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Wholesale national traffic revenue
    
    
    462
    
    
    
    424
    
    
    
    378
    
    
    
    (8.2
    )
    
    
    (10.8
    )International incoming traffic revenue
    
    
    287
    
    
    
    289
    
    
    
    208
    
    
    
    0.7
    
    
    
    (28.0
    )International termination traffic revenue
    
    
    284
    
    
    
    291
    
    
    
    169
    
    
    
    2.5
    
    
    
    (41.9
    )Total wholesale traffic revenue
    
    
    1,033
    
    
    
    1,004
    
    
    
    755
    
    
    
    (2.8
    )
    
    
    (24.8
    )Total wholesale telephony traffic
(millions of minutes):Wholesale national(1)
    
    
    16,964
    
    
    
    18,679
    
    
    
    18,103
    
    
    
    10.1
    
    
    
    (3.1
    )International incoming traffic(2)
    
    
    1,805
    
    
    
    1,854
    
    
    
    1,607
    
    
    
    2.7
    
    
    
    (13.3
    )International termination traffic(3)
    
    
    1,275
    
    
    
    1,878
    
    
    
    1,188
    
    
    
    47.3
    
    
    
    (36.7
    )Total wholesale traffic
    
    
    20,044
    
    
    
    22,411
    
    
    
    20,898
    
    
    
    11.8
    
    
    
    (6.8
    )
  (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. -85-




---



##### Table of Contents



Wholesale national traffic revenue decreased by 10.8% in 2003 compared to 2002
mainly 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, which resulted in a
reduction in revenue in 2003 of CHF 26 million, and a decrease in traffic as a
result of direct mobile interconnection, which enables network operators to
route traffic directly to Mobiles network rather than through Fixnet. This
decrease in traffic was partially offset by an increase in traffic resulting
from the introduction of the 10-digit numbering and an increase in traffic from
other fixed-line operators to mobile operators networks due to increased
mobile penetration. Swisscom expects wholesale national traffic revenue to
decrease due to (i) ongoing efforts by mobile operators to set-up direct
interconnection between each other, (ii) the loss of Internet dial-up traffic
reflecting the growing number of ADSL wholesale subscriber lines and (iii) a
reduction in interconnection rates. International incoming traffic revenue decreased by 28.0% in 2003 compared to
2002 primarily due to a decrease in traffic as a result of a loss in market
share due to increased competition and a decrease in the average international
accounting rates. Swisscom expects International incoming traffic revenue to
continue to decrease reflecting increased competition. International termination traffic revenue decreased by 41.9% in 2003 compared
to 2002, 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. Swisscom expects international
termination traffic revenue to remain relatively stable. Wholesale national traffic revenue decreased by 8.2% in 2002 compared to 2001
as a result of a reduction of interconnection rates in 2002 partially offset by
an increase in traffic due to the introduction of 10-digit numbering at the end
of March 2002, which resulted in a shift from local and long-distance traffic
to wholesale national traffic. International incoming traffic revenue remained relatively stable in 2002
compared to 2001, despite an increase in traffic, due to a decrease in the
average rate per minute as the volume of fixed terminations increased and the
volume of more expensive mobile terminations decreased. International termination traffic revenue grew by 2.5% in 2002 compared to 2001
primarily as a result of an increase in traffic from its international points
of presence, particularly from Swisscom North America, which was sold in
October 2002, partially offset by a decrease in tariffs and revenue from
hubbing reflecting a decrease in mobile traffic. 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Other traffic revenue(1)
    
    
    264
    
    
    
    208
    
    
    
    247
    
    
    
    (21.2
    )
    
    
    18.8
   (1)
    
    Includes revenue from prepaid calling cards, operator services and
payphone services. Other traffic revenue increased 18.8% in 2003 compared to 2002 due primarily to
a release of deferred revenue 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 them to reliably track this
amount. As a result, 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. This increase was
partially offset by (i) a decrease -86-




---



##### Table of Contents



in revenue from cards reflecting the increased usage of mobile phones; (ii) a
decrease in revenue from operator services due to the increased usage of online
services and mobile phones and (iii) a decrease in revenue from payphone
services as a result of the substitution effect of mobile phones and a
reduction in tariffs. Swisscom 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 traffic revenue decreased 21.2% in 2002 compared to 2001 due primarily to
(i) a decrease in revenue from payphone services as a result of the
substitution effect of mobile phones and a reduction in tariffs; (ii) a
decrease in revenue from operator services due to the increased usage of online
services and mobile phones and (iii) a decrease in revenue from cards
reflecting the increased usage of mobile phones. Other revenue.Other revenue comprises primarily revenue from the sale of
customer equipment, the provision of leased lines, the operation of a
directories database, and Telecom FLs operations. The following table sets forth Fixnets other revenue: Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Customer equipment(1)
    
    
    236
    
    
    
    235
    
    
    
    252
    
    
    
    (0.4
    )
    
    
    7.2Leased lines
    
    
    162
    
    
    
    160
    
    
    
    143
    
    
    
    (1.2
    )
    
    
    (10.6
    )Directories
    
    
    79
    
    
    
    93
    
    
    
    107
    
    
    
    17.7
    
    
    
    15.1Other(2)
    
    
    295
    
    
    
    256
    
    
    
    110
    
    
    
    (13.2
    )
    
    
    (57.0
    )Total other products revenue
    
    
    772
    
    
    
    744
    
    
    
    612
    
    
    
    (3.6
    )
    
    
    (17.7
    )
  (1)
    
    Includes customer premises equipment and mobile handsets.(2)
    
    Includes primarily revenue from Telecom FL and Internet narrowband
traffic to third-party ISP numbers. Customer Equipment.Customer equipment revenue comprises revenue from the sale
and rental to customers of PSTN and ISDN telephone handsets, facsimile
terminals, modems and mobile handsets in Swisscom shops. In 2003, customer equipment revenue increased 7.2% in 2003 compared to 2002 due
to an increase in revenue from the sale of ADSL modems reflecting the increase
in the number of ADSL subscribers and an increase in the sale of mobile
handsets, partially offset by a decrease in the sale and rental of PSTN and
ISDN telephone handsets. Swisscom expects revenue from customer equipment to
decline in 2004 due to the reduced number of rental handsets and declining
revenues from ADSL modem sales reflecting promotions of ADSL Access Services. In 2002, customer equipment revenue remained stable. An increase in revenue
from the sale of ADSL modems reflecting the increase in the number of ADSL
subscribers was offset by a decrease in the sale and rental of PSTN and ISDN
telephone handsets. Revenue from the sale of mobile handsets remained
relatively stable as the increase in the number of handsets sold was offset by
a decrease in the price per handset. Leased Lines.Swisscom offers a full portfolio of leased lines throughout
Switzerland with a wide range of bandwidths and different service levels. Revenue decreased by 10.6% in 2003 compared to 2002 primarily due to a
reduction in tariffs. Swisscom expects revenues from leased lines to further
decrease in 2004 reflecting the additional pressure on margins due to the
revised Telecommunications Ordinance that requires Swisscom to offer
competitors interconnection to leased lines on a cost-oriented basis. Revenue remained relatively stable in 2002 compared to 2001. The increase in
the number of leased lines was offset by a decrease in tariffs. -87-




---



##### Table of Contents



Directories. Directories revenue is generated primarily from (i) the
maintenance, sale and advertising of the electronic directories database; and
(ii) the production, advertising and distribution of the printed white pages
telephone books. Revenue increased by 15.1% in 2003 compared to 2002 due primarily to an
increased number of telephone books produced, which gave rise to an increase in
advertising revenue. Swisscom expects revenue from Directories to increase
slightly in 2004. Revenue increased by 17.7% in 2002 compared to 2001 due primarily to the
increased number of telephone books produced, which gave rise to an increase in
advertising revenue. Other.Swisscom generates revenue from subscribers of third-party Internet
service providers who use ISP Numbers to access the Internet and other Internet
services. Until its sale at the end of September 2003, Swisscom has also
generated revenue through its wholly owned subsidiary, Telecom FL AG. Other revenue decreased 57.0% in 2003 compared to 2002 due primarily to 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. Prior years have not been
restated as the effect is not material. Swisscom expects other revenue to
decrease reflecting the sale of Telecom FL AG and a decrease in the narrowband
traffic to third-party ISP numbers reflecting the migration to ADSL access. 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, revenue from the termination of
traffic from Swisscoms fixed-line network on other networks, network fees for
the termination of mobile calls from Swisscom Mobile on other networks, 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Intersegment net revenue
    
    
    1,555
    
    
    
    1,500
    
    
    
    1,348
    
    
    
    (3.5
    )
    
    
    (10.1
    )
   Enterprise
Solutions  National and International Traffic)  Fixnet  Other Revenue 
Other)
   -88-




---



##### Table of Contents



Segment expenses Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Goods and services purchased
    
    
    1,110
    
    
    
    1,140
    
    
    
    769
    
    
    
    2.7
    
    
    
    (32.5
    )Personnel expenses
    
    
    1,001
    
    
    
    1,058
    
    
    
    1,005
    
    
    
    5.7
    
    
    
    (5.0
    )Other operating expenses
    
    
    734
    
    
    
    699
    
    
    
    642
    
    
    
    (4.8
    )
    
    
    (8.2
    )Depreciation and amortization(1)
    
    
    1,080
    
    
    
    1,049
    
    
    
    1,076
    
    
    
    (2.9
    )
    
    
    2.6Other operating income
    
    
    (71
    )
    
    
    (84
    )
    
    
    (108
    )
    
    
    18.3
    
    
    
    28.6Total external segment expenses
    
    
    3,854
    
    
    
    3,862
    
    
    
    3,384
    
    
    
    0.2
    
    
    
    (12.4
    )Intersegment expenses
    
    
    1,704
    
    
    
    1,575
    
    
    
    1,463
    
    
    
    (7.6
    )
    
    
    (7.1
    )Total segment expenses
    
    
    5,558
    
    
    
    5,437
    
    
    
    4,847
    
    
    
    (2.2
    )
    
    
    (10.9
    )
  (1)
    
    Excluding amortization of goodwill. External segment expenses External segment expenses decreased 12.4% in 2003 compared to 2002 due
primarily to the following:  
    
    Goods and services purchased decreased by 32.5% 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 5.0% 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 8.2% 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 2.6% 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. Swisscom expects external segment expenses to slightly decrease as a result of
continued cost optimization and lower depreciation due to an increase in the
number of fully depreciated assets. External segment expenses remained relatively stable in 2002 compared to 2001.
The following effects had an impact on total external segment expenses:  
    
    An increase in personnel expenses by 5.7% was offset by a
decrease in other operating expenses and depreciation and
amortization. The increase in personnel expenses was due to an
increase in the termination benefits from CHF 35 million in 2001 to
CHF 86 million in 2002, as Fixnet reduced its workforce by
terminating approximately 340 full time employees at the end of 2002 -89-




---



##### Table of Contents



and an overall salary increase. These increases were partially
offset by a slight decrease in the average number of employees.
    
    Other operating expenses decreased by 4.8% as a result of a
reduction in (i) rent expenses, (ii) repair and maintenance and
(iii) losses on disposals of fixed assets, partially offset by an
increase in postal charges, as Fixnet insourced this service in
2002, whereas in prior years Swisscom IT Services provided this
service.
    
    The decrease in rent expense was mainly due to the fact that
cleaning services were invoiced directly by the third party service
provider in 2001 and are now billed through SIMAG, giving rise to an
intercompany expense.
    
    The decrease in repairs and maintenance was due primarily to
a reduction in network maintenance costs and the insourcing of the
maintenance and removal of payphone cabins.
    
    Depreciation and amortization expense decreased by 2.9% due
primarily to an increase in the number of fully depreciated assets
that have not been replaced, partially offset by an increase
relating to the next generation network infrastructure that is
needed to support high-speed data transmission and the rollout of
broadband access. Intersegment expenses Intersegment expenses comprise primarily network fees to Mobile for calls
terminated on the mobile network from other networks, 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 decreased by 7.1% in 2003 compared to 2002 due primarily
to (i) an increase in traffic from other mobile network operators terminating
on Swisscom Mobiles network through direct mobile interconnection rather than
using Fixnet as an intermediary and; (ii) a reduction in information technology
expenses reflecting a reduction in the number of projects undertaken by Fixnet
in 2003. Fixnet expects intersegment expenses to remain relatively stable in
2004. Intersegment expenses decreased by 7.6% in 2002 compared to 2001 due primarily
to (i) a decrease in postal charges, as Fixnet insourced this service in 2002,
whereas in prior years Swisscom IT Services provided this service; (ii) a
reduction in management fees payable to group headquarters; and (iii) the fact
that starting in 2002, Fixnet pays insurance fees directly to an insurance
company rather than to group headquarters, with such insurance fees therefore
recorded as third party rather than intersegment expense. The decrease was
partially offset by a change in billing methodology in 2002, as cleaning
services that have been invoiced directly by the third party service provider
in the past are now billed through SIMAG, and a slight increase in network fees
to Mobile reflecting an increase in traffic from other networks to the mobile
network. Segment margin Segment margin before amortization of goodwill increased from 13.2% in 2002 to
17.1% in 2003, despite a 5.5 % 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 2004 due primarily to a reduction in
depreciation expenses reflecting an increase in fully depreciated assets. Segment margin before amortization of goodwill remained relatively stable in
2002 compared to 2001 at 13.2%. The increase in termination benefits; a shift
from retail traffic with higher margins to wholesale traffic with lower
margins; and price reductions for long distance phone calls were partially
offset by a reduction in management fees and depreciation expense. -90-




---



##### Table of Contents



Mobile Revenue from Mobile consists principally of mobile telephony revenue, 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 GSM mobile telephones over Swisscoms
networks. It also consists of fees for using value-added services numbers, data
traffic via GPRS 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Net revenue from external
customers
    
    
    3,220
    
    
    
    3,373
    
    
    
    3,434
    
    
    
    4.8
    
    
    
    1.8Intersegment net revenue
    
    
    763
    
    
    
    739
    
    
    
    706
    
    
    
    (3.1
    )
    
    
    (4.5
    )Net revenue
    
    
    3,983
    
    
    
    4,112
    
    
    
    4,140
    
    
    
    3.2
    
    
    
    0.7Segment expenses
    
    
    2,398
    
    
    
    2,427
    
    
    
    2,466
    
    
    
    1.2
    
    
    
    1.6Segment operating income
    
    
    1,585
    
    
    
    1,685
    
    
    
    1,674
    
    
    
    6.3
    
    
    
    (0.7
    )Segment-margin
    
    
    39.8
    %
    
    
    41.0
    %
    
    
    40.4
    %
 Net revenue from external customers Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Base Fees
    
    
    674
    
    
    
    698
    
    
    
    685
    
    
    
    3.6
    
    
    
    (1.9
    )Connectivity Voice
    
    
    2,016
    
    
    
    2,077
    
    
    
    2,144
    
    
    
    3.0
    
    
    
    3.2Connectivity Data and VAS
    
    
    430
    
    
    
    486
    
    
    
    454
    
    
    
    13.0
    
    
    
    (6.6
    )Other mobile revenue(1)
    
    
    100
    
    
    
    112
    
    
    
    151
    
    
    
    12.0
    
    
    
    34.8Total Mobile external revenue
    
    
    3,220
    
    
    
    3,373
    
    
    
    3,434
    
    
    
    4.8
    
    
    
    1.8
  (1)
    
    Includes revenue from the sale of handsets sold through sales channels
other than Swisscom shops and from SICAP, a prepaid billing platform. -91-




---



##### Table of Contents



The following table sets forth certain data relating to Mobiles subscribers
and traffic: Year Ended
    
    Year EndedDecember 31,
    
    December 31,2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Average number of subscribers
(in thousands)(1):Postpaid
    
    
    2,044
    
    
    
    2,221
    
    
    
    2,333
    
    
    
    8.7
    
    
    
    5.0Prepaid(2)
    
    
    1,137
    
    
    
    1,266
    
    
    
    1,353
    
    
    
    11.3
    
    
    
    6.9Average number of subscribers
    
    
    3,181
    
    
    
    3,487
    
    
    
    3,686
    
    
    
    9.6
    
    
    
    5.7Average monthly minutes of use per
user (AMPU)(1)(3)
    
    
    131
    
    
    
    126
    
    
    
    121
    
    
    
    (3.8
    )
    
    
    (4.0
    )Average monthly revenue per user
(ARPU)(4)
    
    
    89
    
    
    
    85
    
    
    
    81
    
    
    
    (4.5
    )
    
    
    (4.7
    )Traffic (in millions of
minutes)(1):Connectivity voice(5)
    
    
    3,296
    
    
    
    3,331
    
    
    
    3,335
    
    
    
    1.1
    
    
    
    0.1Number of SMS messages (in
millions)(1)(6)
    
    
    1,317
    
    
    
    1,650
    
    
    
    1,847
    
    
    
    25.3
    
    
    
    11.9
   (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 224,166 in
2001, 163,846 in 2002 and 196,172 in 2003.(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. 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.(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. Base Fees revenue decreased 1.9% in 2003 compared to 2002, primarily due to a
continued migration of customers from higher price to lower price tariff
subscriptions and higher business customer discounts, partially offset by an
increase in the subscriber basis. Mobile expects base fees revenue to continue
to decline at a similar rate in 2004. Base Fees revenue increased 3.6% in 2002 compared to 2001 as a result of an
increase in the number of subscribers partially offset by the effect of the
migration of customers from higher price to lower price tariff subscriptions. -92-




---



##### Table of Contents



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
GSM mobile telephones over Mobiles network, revenue from the termination of
traffic on Mobiles network from other Swiss mobile operators and revenue from
the sale of Mobile Prepaid Cards through other service providers under their
own branding, marketing and pricing. Further, fees from the roaming agreement
entered into 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 3.2% in 2003 compared to 2002, primarily
due to an increase in revenue received from traffic terminated on Mobiles
network as a result of direct mobile interconnection, which enables other
mobile network operators to route traffic directly to Mobiles network rather
than through Fixnet as an intermediary, which in the past resulted in the
recognition of intersegment revenue. Revenue from calls made by Mobiles
customers also increased slightly as a result of an increase in Mobiles
subscriber base, partially offset by a decrease in average monthly minutes of
use per user (AMPU) and average monthly revenue per user (ARPU), reflecting the
weak economic environment and the increasing price competition in the business
customers segment. These increases were partially offset by a decrease in
revenue from the national roaming agreement with Orange as a result of its
termination in July 2003. Mobile expects voice revenue to increase slightly in
2004 due to a further increase in the customer base and a stimulation of usage
(AMPU) while prices are expected to remain stable. Connectivity Voice revenue increased 3.0% in 2002 compared to 2001, primarily
due to an increase in traffic by Mobiles customers as a result of the
continued growth in the number of customers, partially offset by a decrease in
the average monthly minutes of use per user (AMPU) and average monthly revenue
per user (ARPU), as newly acquired subscribers represent lower use customers,
and a decrease in revenue from the national roaming agreement with Orange, as a
result of Orange continuing to expand its own network. 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 decreased 6.6% 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 are
reported net of service providers costs, which resulted in a decrease in
revenue of CHF 48 million in 2003. Prior years have not been restated as the
effect is not material. This decrease was partially offset by an increase in
revenue from data messaging and in revenue from data content as Mobiles
customers made use of the increased information services offering. Swisscom
aims to be active throughout the mobile data business value chain and is
therefore opening standardized interfaces to enabling platforms which can be
used by third parties to offer services to Swisscom customers like premium
priced SMS and point of sale payments through mobile handsets. Mobile expects
this area to be its fastest growing business area, driven primarily from a
further stimulation and penetration of SMS, an increased usage of the new
multimedia messaging service (MMS) launched in June 2002 and from the launch of
Vodafone live! in November 2003. The mobile data services enabled by GPRS,
PWLAN and, in the future, UMTS is expected to start showing first real revenue
contributions in 2004. Connectivity data and value-added services revenue increased 13.0% in 2002
compared to 2001 due primarily to a 25.3% increase in the number of SMS
messages sent, resulting from the still increasing popularity of this service
as well as other mobile data services newly introduced in 2002, partially
offset by the decrease in the number of wholesale SMS messages due to the
introduction of fees for international termination of wholesale SMS based on
new interworking agreements. Other Mobile revenue.Net revenue from other consists principally of the sale
of mobile handsets by Mobiles outlets and the sale of the prepaid billing
platform SICAP to other GSM operators. Other mobile revenue increased 34.8% in 2003 compared to 2002 as a result of an
increase in the number of handsets sold to customers directly, reflecting an
increase in higher priced handsets with more sophisticated features and a
reduction in the amount of subsidies offered. Mobile expects revenue in this
area to remain at this level in 2004 due to the high level of sales of higher
priced handsets with more sophisticated features. -93-




---



##### Table of Contents



Other mobile revenue increased 12.0% in 2002 compared to 2001 primarily as a
result of an increase in SICAP revenue originating from projects and an
increase in the number of handsets sold directly to customers as part of
Mobiles retention program, partially offset by an increase in the amount of
subsidies offered to subscribers. Subscriber subsidies depend on the level of
usage, with higher usage users receiving higher subsidies. 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Intersegment net revenue
    
    
    763
    
    
    
    739
    
    
    
    706
    
    
    
    (3.1
    )
    
    
    (4.5
    )
 Intersegment revenue decreased by 4.5% in 2003 compared to 2002 mainly due to a
decrease in network fees from Fixnet as a result of a decrease in traffic due
to direct mobile interconnection, which enables network operators to route
traffic directly to Mobiles network rather than through Fixnet resulting in an
increase in Connectivity Voice revenue and a decrease in intersegment 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 sold. Mobile expects intersegment revenue to remain
relatively stable in 2004. However, tariffs might come under pressure due to
regulatory initiatives in the European Union regarding mobile termination and
two proceedings in which Swisscom is involved. See Item 4: Information on the
Company  Regulation  Mobile Telecommunications and Item 8: Financial
Information  Legal Proceedings. Intersegment revenue decreased 3.1% in 2002 compared to 2001 mainly due to a
decrease in revenue from the sale of handsets as a result of a reduction in the
average selling price per handset. Segment expenses Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Goods and services purchased
    
    
    683
    
    
    
    653
    
    
    
    691
    
    
    
    (4.4
    )
    
    
    5.8Personnel expenses
    
    
    225
    
    
    
    269
    
    
    
    297
    
    
    
    19.6
    
    
    
    10.4Other operating expenses
    
    
    500
    
    
    
    520
    
    
    
    504
    
    
    
    4.0
    
    
    
    (3.1
    )Depreciation and amortization
    
    
    291
    
    
    
    289
    
    
    
    310
    
    
    
    (0.7
    )
    
    
    7.3Other operating income
    
    
    (15
    )
    
    
    (18
    )
    
    
    (14
    )
    
    
    20.0
    
    
    
    (22.2
    )Total external segment expenses
    
    
    1,684
    
    
    
    1,713
    
    
    
    1,788
    
    
    
    1.7
    
    
    
    4.4Intersegment expenses
    
    
    714
    
    
    
    714
    
    
    
    678
    
    
    
    0.0
    
    
    
    (5.0
    )Total segment expenses
    
    
    2,398
    
    
    
    2,427
    
    
    
    2,466
    
    
    
    1.2
    
    
    
    1.6
 External segment expenses External segment expenses increased by 4.4% in 2003 compared to 2002 due
primarily to the following:  
    
    Goods and services purchased increased by 5.8% 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 -94-




---



##### Table of Contents



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 3.1% as a result of a
decrease in IT costs reflecting a decrease in projects and a
decrease in commissions and handset subsidies as a result of a
reduction in the number of new customers and of Mobiles strategy to
reduce commissions and subsidies. 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 remain at this level or slightly
decrease in 2004 as a result of efficiency programs currently underway. External segment expenses increased by 1.7% in 2002 compared to 2001 due
primarily to the following:  
    
    Goods and services purchased decreased by 4.4% primarily as a
result of a reduction in handset purchase prices, as Mobile was able
to benefit from Vodafones global purchasing discounts, partially
offset by increased purchase prices for mobile handsets supporting
new technologies such as MMS and GPRS released in the second half of
2002.
    
    Personnel expenses increased by 19.6% reflecting (i) an
increase in the number of employees required to manage the growth of
the business; and (ii) 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 2002 was driven by the
increased service levels in customer care, the development of new
business areas such as third party business, the mobility portal and
mobile solutions for corporate customers as well as through
internalization of IT contractors to retain skills in-house.
    
    Other operating expenses increased by 4.0% due primarily to
an increase in retention related commissions and handset subsidies.
In 2002, a substantial increase in customer retention costs was
partially offset by a decrease in customer acquisition costs,
reflecting an increase in the number of customers who received a
subsidy. With the Swiss market reaching high penetration levels in
2001, Mobile introduced a retention program, with the aim of
retaining its high value customers. The amount of subsidy offered to
the subscriber is dependent on the level of usage and the length of
the relationship and is also influenced by the competitors
strategy. 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 decreased 5.0% 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 are 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 2004. Intersegment expenses remained stable in 2002 compared to 2001 as a decrease in
international voice termination tariffs was offset by an increase in traffic
generated resulting from the growth in the number of mobile customers. -95-




---



##### Table of Contents



Segment margin 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 relatively stable in 2004. Segment margin increased from 39.8% in 2001 to 41.0% in 2002 due primarily to a
significant increase of data revenue partially offset by higher personnel
expenses and increased expenses for customer retention. -96-




---



##### Table of Contents



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 2004, Enterprise Solutions has increased its focus on large
business customers with complex communication needs. To this end, approximately
46,000 business customers with primarily standard traffic needs have been
transferred to the Fixnet segment. External revenues generated with these
customers amounted to approximately CHF 180 million in 2003. This transfer has
not been reflected in the results presented below but will be reported in the
segment results for 2004, with a restatement of prior year numbers. Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Net revenue from external customers
    
    
    1,469
    
    
    
    1,373
    
    
    
    1,261
    
    
    
    (6.5
    )
    
    
    (8.2
    )Intersegment net revenue
    
    
    150
    
    
    
    149
    
    
    
    110
    
    
    
    (0.7
    )
    
    
    (26.2
    )Net revenue
    
    
    1,619
    
    
    
    1,522
    
    
    
    1,371
    
    
    
    (6.0
    )
    
    
    (9.9
    )Segment expenses
    
    
    1,471
    
    
    
    1,457
    
    
    
    1,270
    
    
    
    (1.0
    )
    
    
    (12.8
    )Operating income
    
    
    148
    
    
    
    65
    
    
    
    101
    
    
    
    (56.1
    )
    
    
    55.4Segment-margin
    
    
    9.1
    %
    
    
    4.3
    %
    
    
    7.4
    %
 Net revenue from external customers Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)National and international traffic
    
    
    583
    
    
    
    561
    
    
    
    502
    
    
    
    (3.8
    )
    
    
    (10.5
    )Networking
    
    
    633
    
    
    
    568
    
    
    
    536
    
    
    
    (10.3
    )
    
    
    (5.6
    )Inhouse and processes
    
    
    112
    
    
    
    110
    
    
    
    90
    
    
    
    (1.8
    )
    
    
    (18.2
    )Other revenue
    
    
    141
    
    
    
    134
    
    
    
    133
    
    
    
    (5.0
    )
    
    
    (0.7
    )Total Enterprise Solutions external
revenue
    
    
    1,469
    
    
    
    1,373
    
    
    
    1,261
    
    
    
    (6.5
    )
    
    
    (8.2
    )
 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. -97-




---



##### Table of Contents



The following table sets forth certain information relating to Enterprise
Solutions national and international fixed-line traffic revenue: Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Local and long-distance traffic revenue.
    
    
    274
    
    
    
    230
    
    
    
    196
    
    
    
    (16.1
    )
    
    
    (14.8
    )Fixed-to-mobile traffic revenue
    
    
    198
    
    
    
    213
    
    
    
    202
    
    
    
    7.6
    
    
    
    (5.2
    )Total national traffic revenue
    
    
    472
    
    
    
    443
    
    
    
    398
    
    
    
    (6.1
    )
    
    
    (10.2
    )Outgoing international traffic revenue
    
    
    111
    
    
    
    118
    
    
    
    104
    
    
    
    6.3
    
    
    
    (11.9
    )Total traffic revenue
    
    
    583
    
    
    
    561
    
    
    
    502
    
    
    
    (3.8
    )
    
    
    (10.5
    )Traffic (in millions of minutes)(1):Local and long-distance traffic
    
    
    3,715
    
    
    
    3,218
    
    
    
    2,719
    
    
    
    (13.4
    )
    
    
    (15.5
    )Fixed-to-mobile traffic
    
    
    444
    
    
    
    457
    
    
    
    428
    
    
    
    2.9
    
    
    
    (6.3
    )Total national traffic
    
    
    4,159
    
    
    
    3,675
    
    
    
    3,147
    
    
    
    (11.6
    )
    
    
    (14.4
    )Outgoing international traffic(2)
    
    
    621
    
    
    
    586
    
    
    
    499
    
    
    
    (5.6
    )
    
    
    (14.8
    )Total traffic
    
    
    4,780
    
    
    
    4,261
    
    
    
    3,646
    
    
    
    (10.9
    )
    
    
    (14.4
    )
  (1)
    
    Includes traffic on courtesy and service lines.(2)
    
    Based on minutes of outgoing international traffic as determined for
customer billing purposes. Does not include traffic originating outside
Switzerland. Local and long-distance traffic revenue decreased by 14.8% in 2003 compared to
2002 due primarily to a decrease in traffic reflecting a loss of market share
as a result of increased competition and the introduction of the 10-digit
numbering at the end of March 2002. Additional effects were a decrease in
tariffs, which was a result of the introduction of a nationwide single tariff
zone at the end of April 2002, the migration of traffic from local Internet
dial-up numbers to ISP numbers and ADSL and the substitution from increased use
of mobile phones. Enterprise Solutions expects a further reduction in local and
long-distance traffic due to increased pressure from competitors. Revenue from fixed-to-mobile traffic decreased by 5.2% in 2003 compared to 2002
due to a decrease in traffic volume as a result of the migration of traffic
from Enterprise Solutions to Mobile, as customers increasingly use new
technologies that enable them to route traffic directly over the mobile instead
of the fixed-line network. Enterprise Solutions expects revenue to further
decrease in 2004 as customers continue to use new technologies and tariffs are
expected to come under increased pressure due to the regulatory initiatives
relating to mobile termination tariffs in the European Union and two legal
proceedings in which Swisscom is involved. See Item 4: Information on the
Company  Regulation  Mobile Telecommunications and Item 8: Financial
Information  Legal Proceedings. Outgoing international traffic revenue in 2003 decreased by 11.9% compared to
2002 mainly due to a decrease in traffic as a result of a decrease in market
share driven by intense competition. The decrease in traffic was partially
offset by an increase in the average rate per minute reflecting a higher
proportion of traffic to higher tariff countries. Enterprise Solutions expects
revenue from outgoing international traffic to further decrease in 2004 as a
result of a decrease in volume and tariffs due to strong competition. Local and long-distance traffic revenue decreased by 16.1% in 2002 compared to
2001 primarily as a result of a decrease in traffic reflecting a loss of market
share due to the introduction of 10-digit numbering at the end of March 2002
and a decrease in tariffs, which was a result of the introduction of a single
national tariff zone. See Item 4: Information on the Company  Fixnet  Retail
Traffic  Tariffs. Revenue from national fixed-to-mobile traffic increased by 7.6% in 2002
compared to 2001 due to an increase in traffic volume and a reduction in
discounts offered. -98-




---



##### Table of Contents



Outgoing international traffic revenue increased in 2002 by 6.3% compared to
2001, despite a decrease in traffic primarily as a result of a reduction in the
discounts offered to customers, partially offset by a reduction in tariffs in
more than 50 countries in October 2002. 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 and
other networking services. See Item 4: Information on the Company  Enterprise
Solutions  Networking. 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Leased lines revenue
    
    
    287
    
    
    
    231
    
    
    
    197
    
    
    
    (19.5
    )
    
    
    (14.7
    )Intranet services revenue
    
    
    150
    
    
    
    164
    
    
    
    184
    
    
    
    9.3
    
    
    
    12.2Private networks revenue(1)
    
    
    136
    
    
    
    122
    
    
    
    107
    
    
    
    (10.3
    )
    
    
    (12.3
    )Other revenue(2)
    
    
    60
    
    
    
    51
    
    
    
    48
    
    
    
    (15.0
    )
    
    
    (5.9
    )Total networking revenue
    
    
    633
    
    
    
    568
    
    
    
    536
    
    
    
    (10.3
    )
    
    
    (5.6
    )Number of leased lines (period end):National leased lines(3)
    
    
    28,559
    
    
    
    22,929
    
    
    
    20,370
    
    
    
    (19.7
    )
    
    
    (11.2
    )International leased lines
    
    
    736
    
    
    
    608
    
    
    
    488
    
    
    
    (17.4
    )
    
    
    (19.7
    )Total leased lines
    
    
    29,295
    
    
    
    23,537
    
    
    
    20,858
    
    
    
    (19.7
    )
    
    
    (11.4
    )
  (1)
    
    Includes revenue from Infonet Switzerland.(2)
    
    Includes mainly facility services.(3)
    
    Excluding twisted copper pairs. Revenue from leased line services decreased by 14.7% in 2003 compared to 2002
as a result of (i) price reductions due to continued competitive pressure, (ii)
the migration to IP based services which are recorded under 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. Enterprise
Solutions expect revenue from leased line services to continue to decrease in
2004 due to a further reduction in tariffs. Revenue from Intranet services increased by 12.2% in 2003 compared to 2002 as a
result of the migration from leased lines, frame relay and ATM services to IP
based platforms. Enterprise Solutions expects revenue from Intranet services to
continue to increase slightly in 2004 as customers continue to migrate from
other platforms to IP based platforms. Revenue from private networks decreased by 12.3% in 2003 compared to 2002
mainly due to the migration to internet protocol (IP) services and a loss in
market share. Enterprise Solutions expects revenue from private network
services to further decrease in 2004 mainly due to the continuing migration to
internet protocol (IP) services. Revenue from leased line services decreased by 19.5% in 2002 compared to 2001,
as a result of price reductions due to continued competitive pressure and a
reduction in the number of leased lines, due to the migration from leased lines
to IP services. This decrease was partially offset by an increased demand for
higher bandwidth with higher tariffs. Revenue from Intranet services increased by 9.3% in 2002 compared to 2001 due
to the launch of new Intranet services, including a low-cost remote access
solution. -99-




---



##### Table of Contents



Revenue from private networks decreased by 10.3% in 2002 compared to 2001
mainly due to price reductions for frame relay and asynchronous transfer mode
(ATM) services and increased substitution of frame relay and ATM services by
Internet Protocol (IP) service. 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, various local area network services
and a customer relationship management service. For a description of Business
Numbers see Item 4: Information on the Company  Enterprise Solutions 
Inhouse and Processes. The following table sets forth, for the periods presented, revenue and traffic
information related to Swisscoms inhouse and processes services: Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Business Numbers revenue
    
    
    78
    
    
    
    72
    
    
    
    66
    
    
    
    (7.7
    )
    
    
    (8.3
    )Other Inhouse and processes revenue(1)
    
    
    34
    
    
    
    38
    
    
    
    24
    
    
    
    11.8
    
    
    
    (36.8
    )Total Inhouse and processes revenue
    
    
    112
    
    
    
    110
    
    
    
    90
    
    
    
    (1.8
    )
    
    
    (18.2
    )Business Numbers traffic
(in millions of minutes)(2)
    
    
    918
    
    
    
    775
    
    
    
    721
    
    
    
    (15.6
    )
    
    
    (7.0
    )
  (1)
    
    Includes primarily LAN services.(2)
    
    Does not include calls made by Enterprise Solutions customers to Business
Numbers of other providers. In 2003, revenue from business numbers decreased by 8.3% compared to 2002,
primarily as a result of loss of market share due to intense competition, a
decrease in the total size of the market, a substitution of speech-enabled
services by SMS and Internet Services and the introduction of a single national
tariff. Revenue from Business Numbers is expected to continue to decrease in
2004 due to intense competition and further substitution by SMS and Internet
Services. In 2002, revenue from business numbers decreased by 7.7% compared to 2001,
primarily as a result of the loss of certain large customers and the
introduction of the single national tariff. Other revenuecomprises primarily business Internet services, public data
network services and professional and supporting services. For a description of
Other 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Business internet revenue
    
    
    44
    
    
    
    50
    
    
    
    54
    
    
    
    13.6
    
    
    
    8.0Other revenue(1)
    
    
    97
    
    
    
    84
    
    
    
    79
    
    
    
    (13.4
    )
    
    
    (6.0
    )Total other revenue
    
    
    141
    
    
    
    134
    
    
    
    133
    
    
    
    (5.0
    )
    
    
    (0.7
    )
  (1)
    
    Includes public data networks, professional and supporting services. -100-




---



##### Table of Contents



Business Internet revenue increased by 8.0% in 2003 compared to 2002 and by
13.6% in 2002 compared to 2001, due to an increased number of customers,
reflecting continued growth in Internet use, and a shift to more expensive,
higher bandwidth products. Enterprise Solutions expects Business Internet
revenue to decrease in 2004 due to further availability of low cost internet
access services. Other revenue decreased by 6.0% in 2003 compared to 2002 and by 13.4% in 2002
compared to 2001 due primarily to customers migrating from the low speed X.25
protocol to high-capacity products. Enterprise Solutions expects a further
revenue reduction in 2004. 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Intersegment net revenue
    
    
    150
    
    
    
    149
    
    
    
    110
    
    
    
    (0.7
    )
    
    
    (26.2
    )
 Intersegment revenue decreased by 26.2% 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.
Enterprise Solutions expects these revenues to slightly decrease in 2004 due to
ongoing optimization efforts in other Swisscom group companies. Intersegment revenue remained relatively stable in 2002 compared to 2001. Segment expenses Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Goods and services purchased
    
    
    109
    
    
    
    93
    
    
    
    77
    
    
    
    (14.7
    )
    
    
    (17.2
    )Personnel expenses
    
    
    221
    
    
    
    207
    
    
    
    215
    
    
    
    (6.3
    )
    
    
    3.9Other operating expenses
    
    
    61
    
    
    
    57
    
    
    
    41
    
    
    
    (6.6
    )
    
    
    (28.1
    )Depreciation and amortization
    
    
    33
    
    
    
    32
    
    
    
    33
    
    
    
    (3.0
    )
    
    
    3.1Total external segment expenses
    
    
    424
    
    
    
    389
    
    
    
    366
    
    
    
    (8.3
    )
    
    
    (5.9
    )Intersegment expenses
    
    
    1,047
    
    
    
    1,068
    
    
    
    904
    
    
    
    2.0
    
    
    
    (15.4
    )Total segment expenses
    
    
    1,471
    
    
    
    1,457
    
    
    
    1,270
    
    
    
    (1.0
    )
    
    
    (12.8
    )
 External segment expenses External segment expenses decreased by 5.9% in 2003 compared to 2002 due
primarily to the following:  
    
    Goods and services purchased decreased by 17.2% mainly as a
result of the fewer projects realized related to LAN-Services. In
contrast, business related to Infonet was relatively stable in 2003.
    
    Personnel expenses increased by 3.9% 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 expense decreased by 28.1% due primarily to a
decrease in advertising expense and lower expenses for business
reengineering projects. -101-




---



##### Table of Contents



Enterprise Solutions expects external segment expense to decrease in 2004 due
primarily to lower termination benefits and lower personnel expenses as a
result of headcount reductions in 2003. External segment expenses decreased by 8.3% in 2002 compared to 2001 due
primarily to the following:  
    
    Goods and services purchased decreased by 14.7% due to the
change in the accounting method for some of its Business Numbers.
Starting in 2002, revenue from these numbers are reported net of
service providers costs, this resulted in a decrease of CHF 16
million of goods and services purchased in 2002 compared to 2001.
    
    Personnel expenses decreased by 6.3% primarily as a result of
a reduction in the number of employees, partially offset by an
overall salary increase. 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 15.4% in 2003 compared to 2002 due to a
reduction in network fees charged by Fixnet resulting from a decrease in the
volume of telephony traffic and leased lines as well as a decrease in tariffs.
Enterprise Solutions expects a further reduction in intersegment expenses in
2004 due to a reduction in volume of traffic. Intersegment expenses remained relatively stable in 2002 compared to 2001. Segment margin Segment margin increased from 4.3% in 2002 to 7.4% in 2003 despite a decrease
in revenue of 9.9%, 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. It is expected
that the margin will slightly increase in 2004 as a result of cost savings
related to the headcount reductions in 2003. Segment margin decreased from 9.1% in 2001 to 4.3% in 2002 due primarily to a
decrease in revenue resulting from the introduction of the 10-digit numbering
at the end of March 2002 and the new single tariff and additional costs
incurred in 2002 relating to the transformation from a service to a solution
provider. -102-




---



##### Table of Contents



DEBITEL Swisscom owns 95% of the share capital of debitel Aktiengesellschaft
(debitel), a German provider of mobile communications and value-added
services. debitel is a network independent telecommunications company that
provides mobile communications, fixed line and Internet services. The primary
operations are in Germany with subsidiaries in the Netherlands, France, Denmark
and Slovenia. Effective October 1, 1999, Swisscom acquired for cash 74.2% of
the outstanding shares of debitel for CHF 3,394 million, of which CHF 3,360
million was allocated to goodwill. Swisscom acquired an additional 20% in 2001
for CHF 928 million, of which CHF 906 million was allocated to goodwill, and a
further 0.8% in 2002. In 2002, Swisscom sold 2% of the outstanding debitel
shares to ElectronicPartner (EP) as consideration for exclusive distribution
rights of debitels products. In connection with the sale of debitel, Swisscom
exercised its option to repurchase these 2% from ElectronicPartner in April
2004. In connection with the discussions concerning the disposal of its shareholding
in debitel, Swisscom recorded a further goodwill impairment charge of CHF 280
million in 2003, reflecting the net amount that was expected from the sale. On April 29, 2004, Swisscom entered into an agreement to sell its 95% stake in
debitel AG in a leveraged buy out by funds advised by the private equity firm
Permira, for a purchase price of EUR 640 million (equity value). debitel focuses primarily on selling standardized products and services for
private customers as well as small- and medium-sized business customers in the
mobile communications market. debitel does not operate its own network but
instead purchases the telecommunications services of network operators and uses
them to develop its own services which it then sells under debitels brand name
for its own account, at tariffs debitel generally determines independently of
the network operators. debitel offers both contract and prepaid products in the
mobile communications market. The results of debitel presented below show the development of the business for
the periods indicated: Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Net revenue from external customers
    
    
    3,808
    
    
    
    4,111
    
    
    
    4,555
    
    
    
    8.0
    
    
    
    10.8Segment expenses
    
    
    3,672
    
    
    
    4,014
    
    
    
    4,486
    
    
    
    9.3
    
    
    
    11.8Operating income before amortization
and impairment of goodwill
    
    
    136
    
    
    
    97
    
    
    
    69
    
    
    
    (28.7
    )
    
    
    (28.9
    )Amortization and impairment of goodwill
    
    
    1,517
    
    
    
    979
    
    
    
    452
    
    
    
    (35.5
    )
    
    
    (53.8
    )Segment operating loss
    
    
    (1,381
    )
    
    
    (882
    )
    
    
    (383
    )
    
    
    (36.1
    )
    
    
    (56.6
    )Segment-margin(1)
    
    
    3.6
    %
    
    
    2.4
    %
    
    
    1.5
    %
   (1)
    
    Segment-margin before amortization and impairment of goodwill. Net revenue from external customers Revenue from external customers consists principally of mobile telephony
revenue, including the sale of SIM cards, monthly subscription charges and
charges to customers for making calls, revenue from handset and other
merchandise sales and commissions receivable from the network operators for new
customers acquired and customers retained. -103-




---



##### Table of Contents



The following table shows debitels revenue in Germany and the rest of Europe
for the periods indicated: Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)RegionGermany
    
    
    2,738
    
    
    
    2,859
    
    
    
    3,192
    
    
    
    4.4
    
    
    
    11.6International
    
    
    1,070
    
    
    
    1,252
    
    
    
    1,363
    
    
    
    17.0
    
    
    
    8.9Total
    
    
    3,808
    
    
    
    4,111
    
    
    
    4,555
    
    
    
    8.0
    
    
    
    10.8
 In 2003, debitel recorded local-currency revenue growth of 6.5% compared to
2002, which represented an increase of 10.8% in Swiss franc terms. Germany The following table sets forth debitels revenue and certain data relating to
subscribers and traffic in Germany: Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Revenue from telephony services(1)
    
    
    2,219
    
    
    
    2,201
    
    
    
    2,472
    
    
    
    (0.8
    )
    
    
    12.3Revenue from sale of handsets and
merchandising
    
    
    187
    
    
    
    404
    
    
    
    391
    
    
    
    116.0
    
    
    
    (3.2
    )Revenue from commissions
    
    
    332
    
    
    
    254
    
    
    
    329
    
    
    
    (23.5
    )
    
    
    29.5Net revenue
    
    
    2,738
    
    
    
    2,859
    
    
    
    3,192
    
    
    
    4.4
    
    
    
    11.6Average number of subscribers
(in thousands):(2)Contract subscribers:Mobile postpaid subscribers
    
    
    2,148
    
    
    
    2,334
    
    
    
    2,801
    
    
    
    8.7
    
    
    
    20.0Other(3)
    
    
    392
    
    
    
    372
    
    
    
    355
    
    
    
    (5.1
    )
    
    
    (4.6
    )Mobile prepaid subscribers
    
    
    4,690
    
    
    
    4,749
    
    
    
    4,793
    
    
    
    1.3
    
    
    
    0.9Total number of subscribers
    
    
    7,230
    
    
    
    7,455
    
    
    
    7,949
    
    
    
    3.1
    
    
    
    6.6Average monthly minutes of use per
mobile postpaid subscriber
    
    
    72
    
    
    
    71
    
    
    
    61
    
    
    
    (1.4
    )
    
    
    (14.1
    )Average monthly revenue per mobile
postpaid subscriber (in CHF)(4)
    
    
    61
    
    
    
    58
    
    
    
    54
    
    
    
    (4.9
    )
    
    
    (6.9
    )
  (1)
    
    Includes revenue from mobile telephony, fixed-line and Internet services.(2)
    
    Averages are based on monthly totals.(3)
    
    Includes subscribers for fixed-line and Internet services.(4)
    
    Includes revenue from all outgoing calls made by debitels subscribers,
excluding inactive customers, including roaming and data and value added
services. 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. Revenue from telephony services increased by 12.3% primarily as a result of an
increase in the number of mobile postpaid customers by 20.0% in 2003 compared
to 2002, partially offset by a decrease in the average monthly minutes of use
per user and in the average monthly revenue per user. The increase in the
number of postpaid customers reflects debitels growth strategy, which focuses
in particular on this segment. -104-




---



##### Table of Contents



The slight decrease of revenue of 3.2% from the sale of handsets and
merchandising reflects primarily a decrease in revenue from the distribution of
prepaid cards and starter packs as a result of the insolvency of one of its
distributors. After this insolvency, management decided to reduce its exposure
in this low margin business and reduced the level of distribution of prepaid
cards. This decrease was partially offset by an increase in the sale of
handsets reflecting an increase in the number of higher priced handsets with
more sophisticated features. Revenue from commissions increased by 29.5% primarily as a result of the
significant increase in the number of mobile postpaid customers and an increase
in retention related commissions, which is aimed at retaining its high value
customers. The amounts that debitel in turn pays its dealers is recorded under
other operating expenses. Revenue from telephony services remained relatively stable in 2002 compared
with 2001 as a result of an increase in the number of subscribers, reflecting
an increase in market penetration, offset by a reduction in the average revenue
per subscriber. The average number of mobile subscribers increased by 0.2
million in 2002 to an average of 7.1 million in 2002, despite the deactivation
of 1.4 million prepaid subscribers. Since 2002, debitel has been deactivating a
prepaid subscriber after he has not reloaded his card for 15 months. Average
monthly minutes of use per user (AMPU) and average monthly revenue per user
(ARPU) decreased by 1.4% and 4.9% respectively, as new subscribers represent
lower usage customers. Revenue from the sale of handsets and merchandising increased significantly in
2002 compared to 2001 due to an increase in the number of handsets sold, which
was influenced by debitels increased market presence resulting from a number
of new shops in Germany, and an increase in the average price per device
resulting from the more complex functionality as a result of the introduction
of new data products. Revenue from commissions decreased by 23.5% in 2002 compared with 2001 due to
the reduction in the amount the network operators paid per new customer, as a
result of saturation in the market. International The following table sets forth debitels international revenue and certain data
relating to subscribers: Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Netherlands
    
    
    587
    
    
    
    765
    
    
    
    817
    
    
    
    30.3
    
    
    
    6.8France
    
    
    285
    
    
    
    313
    
    
    
    326
    
    
    
    9.8
    
    
    
    4.2Denmark
    
    
    150
    
    
    
    147
    
    
    
    190
    
    
    
    (2.0
    )
    
    
    29.3Slovenia
    
    
    25
    
    
    
    27
    
    
    
    30
    
    
    
    8.0
    
    
    
    11.1Belgium
    
    
    23
    
    
    
    0
    
    
    
    0
    
    
    
    n.a.
    
    
    
    n.a.Total
    
    
    1,070
    
    
    
    1,252
    
    
    
    1,363
    
    
    
    17.0
    
    
    
    8.9Average number of customers
(in thousands):(1)Netherlands
    
    
    1,278
    
    
    
    1,369
    
    
    
    1,351
    
    
    
    7.1
    
    
    
    (1.3
    )France(2)
    
    
    444
    
    
    
    498
    
    
    
    396
    
    
    
    12.2
    
    
    
    (20.5
    )Denmark
    
    
    370
    
    
    
    375
    
    
    
    423
    
    
    
    1.4
    
    
    
    12.8Slovenia
    
    
    69
    
    
    
    79
    
    
    
    84
    
    
    
    14.5
    
    
    
    6.3
  (1)
    
    Averages are based on monthly totals.(2)
    
    Includes 307,000, 379,000 and 289,000 customers in 2001, 2002 and 2003,
respectively, for whom debitel performed customer management services on
behalf of Orange. -105-




---



##### Table of Contents



Revenue in the Netherlands increased by 6.8% due primarily to an increase in
the distribution of prepaid cards to non-debitel customers. Revenue in France increased by 4.2% as a result of an increase in telephony
revenue primarily reflecting an increase in the average revenue per user due to
a better customer mix and the acquisition of TelecomOption in February 2003, a
retail chain with 22 shops all over France. This increase was partially offset
by a decrease in revenue from hardware distribution as debitel France sold its
hardware business in October 2003 and the loss of approximately 330,000
customers during 2003, for whom debitel performed customer management services
on behalf of Orange. Revenue in Denmark increased by 29.3% as a result of an increase in the average
customer base by 12.8%, a slight increase of the average revenue per mobile
postpaid subscriber driven by an increase in traffic due to the introduction of
new products and the acquisition and integration of 13 shops of the former
Bluetel retail chain in June 2003. Revenue in Slovenia remained stable in 2003 compared to 2002. In 2002, revenue in Netherlands increased by 30.3% primarily due to the
acquisition of Talkline Netherlands B.V. in November 2001, which has a customer
base of approximately 150,000 postpaid customers. This company was merged with
debitel Netherlands effective September 1, 2002. Revenue from France increased by 9.8% in 2002 primarily as a result of the
acquisition of Videlec S.A. in February 2002, which is a French listed retail
chain with 80 outlets all over France. Revenue from Denmark and Slovenia remained stable in 2002 compared with 2001. Segment expenses Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Goods and services purchased
    
    
    2,457
    
    
    
    2,886
    
    
    
    3,129
    
    
    
    17.5
    
    
    
    8.4Personnel expenses
    
    
    237
    
    
    
    264
    
    
    
    269
    
    
    
    11.4
    
    
    
    1.9Other operating expenses
    
    
    946
    
    
    
    838
    
    
    
    1,050
    
    
    
    (11.4
    )
    
    
    25.3Depreciation and amortization(1)
    
    
    51
    
    
    
    62
    
    
    
    68
    
    
    
    21.6
    
    
    
    9.7Other operating income
    
    
    (19
    )
    
    
    (36
    )
    
    
    (30
    )
    
    
    89.5
    
    
    
    (16.7
    )Total segment expenses
    
    
    3,672
    
    
    
    4,014
    
    
    
    4,486
    
    
    
    9.3
    
    
    
    11.8
  (1)
    
    Excluding amortization of goodwill relating to the purchase of debitel. Segment expenses increased 11.8% in 2003 compared to 2002 due primarily to the
following:  
    
    An increase in goods and services purchased of 8.4% due to an
increase in the amount incurred for airtime purchased as a result of
an increase in the amount of traffic, reflecting the increased
customer base and an increase in hardware expense due to an increase
in the number of handsets sold.
    
    An increase in other operating expenses by 25.3% as a result
of an increase in customer acquisition costs reflecting the
significant increase in the number of postpaid customers in 2003 and
in retention costs, which were increased in order to retain high
value customers. debitel receives commissions from the operators for
the acquisition and retention of subscribers, however the amount
received from the operators is less than the amount debitel pays its
dealers. In addition, marketing expenses also increased
significantly as a result of the overall growth strategy. -106-




---



##### Table of Contents



Segment expenses increased 9.3% in 2002 compared to 2001 due primarily to the
following:  
    
    An increase in goods and services purchased by 17.5 % due
primarily to an increase in mobile equipment purchased for resale
reflecting the increase in the number of handsets sold. Expense
increased disproportionately to revenue as debitel offered higher
handset subsidies in 2002 as part of its customer retention program.
The increase in goods and services purchased also reflected an
increase in the volume of minutes purchased from the network
operators due to the increase in the amount of traffic.
    
    Personnel expenses increased by 11.4% reflecting (i) an
increase in the average number of employees resulting primarily from
the acquisition of Videlec in France in February 2002 and Talkline
Netherlands in November 2001; (ii) an annual salary increase; and
(iii) an increase in the average salary per employee as more higher
skilled employees remained after the downsizing. The average number
of employees increased from 3,352 in 2001 to 3,484 in 2002, but the
number of employees at the year-end decreased from 3,544 in 2001 to
3,299 in 2002 as a result of downsizing.
    
    Other operating expenses decreased by 11.4% due primarily to
a decrease in commissions and marketing subsidies paid to dealers
resulting from debitels cost cutting measures, partially offset by
an increase in rental expenses as debitel moved to larger premises
in 2002 and as a result of an increase in the number of shops in
Germany. Impairment of goodwill In connection with the discussions concerning the disposal of its shareholding
in debitel, Swisscom recorded a further goodwill impairment charge of CHF 280
million in 2003, reflecting the net amount that was expected from the sale. As a result of significant changes in the telecommunications sector, including
the expected delay in the implementation of the third generation system, UMTS,
and a decline in future expected growth in the mobile sector, Swisscom recorded
an impairment charge of its goodwill in debitel in 2001 and 2002. These
impairment charges represent the difference between the carrying value of this
investment and the value in use amount. The value in use amount was determined
based on projections of future profitability. The total projected cash flow was
discounted by debitels weighted average cost of capital of 10.26% in 2001 and
10.75 % in 2002 that was determined using the Capital Asset Pricing Model. This
methodology indicated that the value ascribed to Swisscoms share of debitel
was CHF 2,232 million compared to a carrying value of CHF 3,362 million at
December 31, 2001 and CHF 1,200 million compared to a carrying value of CHF
1,902 million at December 31, 2002. The difference of CHF 1,130 million and CHF
702 million was recorded as an impairment charge in 2001 and 2002,
respectively. Segment margin debitels margin before impairment and amortization of goodwill decreased from
2.4% in 2002 to 1.5% in 2003 due primarily to an increase in customer
acquisition costs reflecting the significant increase in the number of postpaid
customers in 2003 and in retention costs, which were increased in order to
retain high value customers. Segment margin before amortization and impairment of goodwill decreased from
3.6% in 2001 to 2.4% in 2002 primarily as a result of higher handset subsidies
in 2002 as part of debitels customer retention program. In addition, the
reduction of commissions received from network operators was greater than the
reduction in commissions debitel paid its dealers. -107-




---



##### Table of Contents



Other Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Net revenue from external customers
    
    
    742
    
    
    
    833
    
    
    
    761
    
    
    
    12.3
    
    
    
    (8.6
    )Intersegment net revenue
    
    
    661
    
    
    
    630
    
    
    
    543
    
    
    
    (4.7
    )
    
    
    (13.8
    )Net revenue
    
    
    1,403
    
    
    
    1,463
    
    
    
    1,304
    
    
    
    4.3
    
    
    
    (10.9
    )Segment expenses
    
    
    1,496
    
    
    
    1,557
    
    
    
    1,312
    
    
    
    4.1
    
    
    
    (15.7
    )Operating income before
amortization of goodwill
    
    
    (93
    )
    
    
    (94
    )
    
    
    (8
    )
    
    
    1.1
    
    
    
    (91.5
    )Amortization of goodwill
    
    
    
    
    
    
    20
    
    
    
    34
    
    
    
    n.a.
    
    
    
    70.0Segment operating income
    
    
    (93
    )
    
    
    (114
    )
    
    
    (42
    )
    
    
    22.6
    
    
    
    (63.2
    )Segment-margin(1)
    
    
    (6.6
    %)
    
    
    (6.4
    %)
    
    
    (0.6
    %)
  (1)
    
    Segment-margin before amortization of goodwill. Net revenue from external customers Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Swisscom Systems
    
    
    476
    
    
    
    406
    
    
    
    345
    
    
    
    (14.7
    )
    
    
    (15.0
    )Swisscom IT Services
    
    
    25
    
    
    
    213
    
    
    
    214
    
    
    
    n.a.
    
    
    
    0.5Swisscom Broadcast
    
    
    180
    
    
    
    162
    
    
    
    149
    
    
    
    (10.0
    )
    
    
    (8.0
    )Billag
    
    
    47
    
    
    
    52
    
    
    
    52
    
    
    
    10.6
    
    
    
    (0.0
    )Swisscom Eurospot
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    n.a.
    
    
    
    n.a.Other(1)
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    n.a.
    
    
    
    n.a.Total other revenue
    
    
    742
    
    
    
    833
    
    
    
    761
    
    
    
    12.3
    
    
    
    (8.6
    )
  (1)
    
    Other revenue in 2001 comprises revenue from All Wireless and S.p.A.
Milano, which were sold in the course of 2001. Other revenue for 2001 and
2002 was restated to reflect the integration of Conextrade AG into
Swisscom IT Services AG effective January 1, 2003. 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. Systems revenue decreased 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 continuing poor
economic situation. Systems expects revenues to further decrease in 2004 as a
result of the shrinking market. Systems revenue decreased by 14.7% in 2002 compared to 2001 due to a reduction
in prices of equipment and a declining demand for network and telephony
equipment caused by the deteriorating economic situation, which resulted in
many customers postponing planned investments in telecommunications equipment. Swisscom IT Services.Swisscom IT Services offers end-to-end business solutions
primarily in the financial services and telecommunications industry. In
addition to business solutions, Swisscom IT Services focuses on system
integration, outsourcing and IT infrastructure services, including desktop
services and data center services. -108-




---



##### Table of Contents



IT Services revenue remained relatively stable in 2003 compared to 2002, as the
increase in revenue from third party customers was partially offset by a
decrease in revenue from its minority shareholder. Swisscom IT Services expects
revenue in 2004 to slightly decrease due to lower prices granted for contracts
entered into with longer-terms. IT Services revenue increased in 2002 compared to 2001 as a result of the
acquisition of AGI IT Services AG (AGI IT), one of Switzerlands leading IT
service providers for financial services in December 2001. Swisscom merged the
business of AGI IT with its IT division to form Swisscom IT Services AG (SCIS). 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 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 remain
relatively stable in 2004. Broadcasting revenue decreased by 10.0% in 2002 compared to 2001 primarily as a
result of the reduction of terrestrial coverage from three to one language
starting in May 2002. 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 (new: Billag Card Services AG), a
loyalty card processor. Billag revenue remained stable in 2003 compared to 2002. Revenue increased by
10.6% in 2002 compared to 2001 due to the introduction of new services and a
bonus received from SRG for meeting its revenue target. Billag expects revenue
to double in 2004 as a result of the acquisition of T-Systems Card Services AG
in December 2003. Segment expenses Segment expenses decreased by 15.7% in 2003 compared to 2002 due primarily to the following:  
    
    A decrease in termination benefits from CHF 101 million in 2002 to CHF 48 million in 2003
    
    A decrease in personnel expenses for Systems reflecting a
decrease in the average number of employees resulting from the
restructuring accounted for in 2002.
    
    A decrease in operating expenses at Systems reflecting the
decrease in revenue and the cost cutting measures as well as a
decrease in expenses at IT Services reflecting primarily a decrease
in intercompany revenue and cost cutting measures.
    
    A decrease in depreciation due to a decline in the rental of
telecommunications equipment business 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 a pan-European PWLAN network
through Swisscom Eurospot. Segment expenses increased by 4.1% in 2002 compared to 2001due to the following:  
    
    An increase in termination benefits from CHF 77 million in 2001 to CHF 101 million in 2002.
    
    The first time consolidation of AGI IT in 2002.
    
    A decrease in operating expenses at Systems and IT Services
due to the decrease in revenue and to cost cutting measures. -109-




---



##### Table of Contents



Segment margin Segment margin before amortization of goodwill increased from a negative margin
of 6.4% in 2002 to a negative margin of 0.6% in 2003, despite a decrease in
revenue, due primarily to a reduction in termination benefits and to cost
cutting measures. Swisscom expects the margin, before amortization of goodwill,
to increase due to further cost optimization and a decrease in restructuring
costs at IT Services. Segment margin before amortization of goodwill remained relatively stable in
2002 compared to 2001 as the decrease in operating income of Systems, mainly as
a result of the termination benefits, was offset by an increase in operating
income of IT Services. -110-




---



##### Table of Contents



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 (the Employment Market Center AMZ and
WORK_LINK, 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. Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Net revenue from external
customers(1)
    
    
    90
    
    
    
    74
    
    
    
    72
    
    
    
    (17.8
    )
    
    
    (2.7
    )Intersegment net revenue
    
    
    676
    
    
    
    630
    
    
    
    631
    
    
    
    (6.8
    )
    
    
    0.2Net revenue
    
    
    766
    
    
    
    704
    
    
    
    703
    
    
    
    (8.1
    )
    
    
    0.1Segment expenses
    
    
    759
    
    
    
    571
    
    
    
    609
    
    
    
    (24.8
    )
    
    
    6.7Operating income before
amortization of goodwill
    
    
    7
    
    
    
    133
    
    
    
    94
    
    
    
    n.a.
    
    
    
    (29.3
    )Amortization of goodwill
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    n.a.
    
    
    
    n.a.Segment operating income
    
    
    4
    
    
    
    133
    
    
    
    94
    
    
    
    n.a.
    
    
    
    (29.3
    )
  (1)
    
    Net revenue from external customers includes rental income, facility
management services and other revenues. Net revenue remained relatively stable in 2003 compared to 2002 and decreased
by 8.1% in 2002 compared to 2001 mainly reflecting lower management fees from
Swisscoms group companies. Net revenue is expected to remain relatively stable
in 2004. Segment expenses Segment expenses increased by 6.7% in 2003 compared to 2002 primarily 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.
    
    A reduction in the amount of termination benefits eliminated
from the Corporate segment from CHF 119 million in 2002 to CHF 106
million in 2003. 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.
    
    An increase in the expense for employees who are employed by
WORK_LINK from CHF 32 million in 2002 to CHF 53 million in 2003
reflecting an increase in the number of employees that were
transferred into WORK_LINK in 2003. For details of WORK_LINK see Item 6: Directors, Senior Management and Employees  Employees 
Workforce Reduction and Productivity Improvement.
    
    These increases were partially offset by a reduction in
personnel expenses reflecting a reduction in headcount and a
reduction in other operating expenses due to cost reduction measures
that were introduced in 2003. -111-




---



##### Table of Contents



Segment expenses are expected to increase in 2004 mainly as a result of a
further decrease in the amount of termination benefits that will be eliminated
from the Corporate segment due to lower termination benefits recognized in the
other segments as well as an increase in expenses related to the Employment
Market Center and WORK_LINK. Segment expenses decreased by 24.8% in 2002 compared to 2001 primarily due to
the following:  
    
    Termination benefits, which are eliminated from the Corporate
segment as described above, increased from CHF 0 million in 2001 to
CHF 119 million in 2002, as termination benefits that do not meet
the criteria for recognition under IFRS were not recorded in the
segments in 2001.
    
    In 2002, other income, which is included in segment expenses,
includes CHF 70 million resulting from the elimination of a
liability, which was established in 1997. This liability is no
longer legally owed, as the rights to payment expired in 2002. -112-




---



##### Table of Contents



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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Net cash provided by operating activities
    
    
    3,389
    
    
    
    3,785
    
    
    
    4,732
    
    
    
    11.7
    
    
    
    25.0Net cash (used in) provided by investing activities
    
    
    849
    
    
    
    1,572
    
    
    
    (648
    )
    
    
    85.2
    
    
    
    n.a.Net cash used in financing activities
    
    
    (2,709
    )
    
    
    (7,454
    )
    
    
    (2,560
    )
    
    
    175.2
    
    
    
    (65.7
    )
 Cash provided by operating activities The increase of 25.0% 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. The increase of 11.7% in net cash provided by operating activities in 2002
compared to 2001 is primarily due to a decrease in contributions paid to the
pension fund as a result of the one time payment in 2001 and a decrease in
income tax paid. Cash (used in) provided by investing activities Cash flows from investing activities changed from cash provided of CHF 1,572
million in 2002 to cash used of CHF 648 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. Information on Swisscoms capital
expenditure and investments in affiliated companies is shown below. Cash flows provided by investing activities increased by 85.2% in 2002 compared
to 2001 as a result of the disposal of financial assets in 2002 of CHF 2.9
billion and the acquisition of an additional 20% of debitel in 2001. These
effects were partially offset by the proceeds from the disposal of 25% of
Swisscom Mobile and from the sale of real estate in 2001. 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Fixed-line network
    
    
    470
    
    
    
    479
    
    
    
    497
    
    
    
    1.9
    
    
    
    3.8Mobile network
    
    
    258
    
    
    
    295
    
    
    
    381
    
    
    
    14.3
    
    
    
    29.2Other intangible assets
    
    
    163
    
    
    
    137
    
    
    
    135
    
    
    
    (16.0
    )
    
    
    (1.5
    )Buildings
    
    
    28
    
    
    
    2
    
    
    
    6
    
    
    
    (92.9
    )
    
    
    200.0Other
    
    
    315
    
    
    
    309
    
    
    
    194
    
    
    
    (1.9
    )
    
    
    (37.2
    )Total capital expenditure
    
    
    1,234
    
    
    
    1,222
    
    
    
    1,213
    
    
    
    (1.0
    )
    
    
    (0.7
    )
 -113-




---



##### Table of Contents



Capital expenditure in the fixed network increased by 3.8% in 2003 compared to
2002, but remained relatively stable in 2002 compared to 2001. The major areas
of investment in the fixed network relate to (i) the rollout of broadband
access, 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 29.2% in 2003 compared
to 2002 and by 14.3% in 2002 compared to 2001 due to an increase in both the
capacity and coverage of the GSM mobile telephony network. The increase in 2003
was also due to an increase in expenditures for the third generation mobile
system UMTS as well as WLAN in accordance with Mobiles strategy for an
integrated wireless broadband service offering. Investments in affiliated companies.The following table sets forth Swisscoms
investments in affiliated companies for the periods presented: Year Ended
    
    Year EndedDecember 31,
    
    December 31,CHF in millions (except percentages)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Purchases of investments in affiliated companies
    
    
    2
    
    
    
    37
    
    
    
    11
    
    
    
    n.a.
    
    
    
    (70.3
    )Total net carrying value of investments in
affiliated
companies (end of period)
    
    
    603
    
    
    
    691
    
    
    
    53
    
    
    
    14.6
    
    
    
    (92.3
    )
 The total net carrying value of investments in affiliated companies of CHF 53
million at December 31, 2003 comprised primarily Swisscoms investment in
PubliDirect Holding and AUCS. The decrease is mainly due to the sale of the
investment in Cesky Telecom in December 2003. See Note 24 to the consolidated
financial statements. The total net carrying value of investments in affiliated companies of CHF 691
million at December 31, 2002 comprised primarily Swisscoms investment in Cesky
Telecom, PubliDirect Holding and AUCS. The total net carrying value of investments in affiliated companies of CHF 603
million at December 31, 2001 comprised primarily Swisscoms investment in Cesky
Telecom, UTA Telekom and AUCS. Cash used in financing activities Net cash used in financing activities in 2003 resulted primarily from the
repayment of debt of CHF 789 million, the par value reduction of CHF 8 per
share (totaling CHF 530 million), as well as dividend payments to Swisscom
shareholders of 794 million and to minority interests of CHF 393 million. Net cash used in financing activities in 2002 resulted primarily from the share
buy-back of 9.99% of the outstanding shares (totaling CHF 4,264 million), a par
value reduction of CHF 8 per share (totaling CHF 529 million) and the repayment
of debt of CHF 1,656 million, as well as dividend payments to Swisscom
shareholders of CHF 728 million and to minority interests of CHF 304 million. Net cash used in financing activities in 2001 resulted primarily from the
repayment of debt of CHF 1,975 million, a par value reduction of CHF 8 per
share (totaling CHF 589 million) and dividend payments to Swisscom shareholders
of CHF 809 million, partially offset by proceeds of CHF 746 million from the
sale and leaseback transaction related to real estate. Additional 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. -114-




---



##### Table of Contents



Capital requirements Investing activities Capital Expenditure.Swisscom expects capital expenditure to remain relatively
stable in 2004 at approximately CHF 1,300 million reflecting primarily planned
investment in the mobile and fixed-line networks. Swisscom expects investments
in the mobile network to increase in 2004, primarily relating to GPRS and the
roll-out of EDGE and UMTS. Swisscom expects investments in the fixed-line
network to remain at a similar level compared to 2003 as Swisscom continues the
rollout of broadband access, the optimization of the voice switching platform
and the extension of the access network. Financing activities In March 2003, the Board of Directors voted to modify Swisscoms return policy.
The key element of the new 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)
    
    2001
    
    2002
    
    2003
    
    2002/2001
    
    2003/2002(% change)Net cash provided by operating activities
    
    
    3,389
    
    
    
    3,785
    
    
    
    4,732
    
    
    
    11.7
    
    
    
    25.0Capital expenditures
    
    
    (1,234
    )
    
    
    (1,222
    )
    
    
    (1,213
    )
    
    
    (1.0
    )
    
    
    (0.7
    )Net (payments) proceeds from investments
in financial assets(1)
    
    
    (969
    )
    
    
    (141
    )
    
    
    506
    
    
    
    (85.4
    )
    
    
    n.a.Proceeds from sale of real estate
    
    
    1,734
    
    
    
    
    
    
    
    
    
    
    
    (100.0
    )
    
    
    n.a.Proceeds from partial sale of Swisscom
Mobile AG
    
    
    4,282
    
    
    
    
    
    
    
    
    
    
    
    (100.0
    )
    
    
    n.a.Repayment of Swiss Post loan
    
    
    (1,250
    )
    
    
    (1,000
    )
    
    
    (750
    )
    
    
    (20.0
    )
    
    
    (25.0
    )Dividends paid to minority interests
    
    
    (6
    )
    
    
    (304
    )
    
    
    (393
    )
    
    
    n.a.
    
    
    
    29.3Other cash flow from investing and
financing activities, net(2)
    
    
    56
    
    
    
    1
    
    
    
    31
    
    
    
    (98.2
    )
    
    
    n.a.Equity free cash flow
    
    
    6,002
    
    
    
    1,119
    
    
    
    2,913
    
    
    
    (81.4
    )
    
    
    160.3
  (1)
    
    Comprises cash flows from (i) acquisitions and disposals of subsidiaries
and affiliated companies; (ii) the purchase and sale of other financial
assets; and (iii) loans receivable and other non-current assets granted
and repaid.(2)
    
    Comprises cash flows from (i) proceeds from the sale of fixed assets;
(ii) other cash flow from investing activities; and (iii) net purchase of
treasury stock and call options. On the basis of the equity free cash flow generated, Swisscoms Board of
Directors has proposed a dividend of CHF 13 per share (totaling CHF 861
million) to the Annual General Meeting, which took place on April 27, 2004 and
at which Swisscoms shareholders approved the proposal. In the course of 2004,
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. -115-




---



##### Table of Contents



Contractual Obligations and Commercial Commitments.The following tables show
Swisscoms total contractual obligations and commercial commitments as per
December 31, 2003: Contractual Cash Obligations Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    AfterCHF in millions
    
    Total
    
    1 year
    
    1  3 years
    
    4  5 years
    
    5 years1999 and 2000 cross-border leases(1)
    
    
    3,565
    
    
    
    65
    
    
    
    139
    
    
    
    345
    
    
    
    3,016Capital lease obligations
    
    
    2,796
    
    
    
    121
    
    
    
    307
    
    
    
    276
    
    
    
    2,092Operating leases
    
    
    733
    
    
    
    147
    
    
    
    197
    
    
    
    109
    
    
    
    280Unconditional purchase obligations
    
    
    222
    
    
    
    211
    
    
    
    11
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    
    7,316
    
    
    
    544
    
    
    
    654
    
    
    
    730
    
    
    
    5,388
  (1)
    
    Represents total future payment commitments. Under the terms of the
agreements, Swisscom incurred debt and placed the majority on deposit. At
December 31, 2003, the net present value of the lease obligations is CHF
1,339 million and the amount on deposit is CHF 1,011 million. The net
present value of actual cash outflows in the future is therefore only CHF
328 million. Off-balance sheet arrangements As described in Note 27 to the consolidated financial statements, in 1999, 2000
and 2002 Swisscom entered into cross-border tax lease arrangements. Swisscom
concluded that CHF 3,491 million lacked economic substance and should not be
recognized, as the definition of an asset and liability had not been met.
Accordingly, both these assets and liabilities have been removed from the
financial statements. 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, 2001, 2002 and 2003 and shareholders equity
as of December 31, 2001, 2002 and 2003 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
    
    2001
    
    2002
    
    2003Net income (loss):IFRS
    
    
    4,964
    
    
    
    824
    
    
    
    1,569U.S. GAAP
    
    
    5,702
    
    
    
    (863
    )
    
    
    2,096Shareholders equity (at period end):IFRS
    
    
    12,069
    
    
    
    7,299
    
    
    
    7,669U.S. GAAP
    
    
    12,294
    
    
    
    5,587
    
    
    
    6,523
 The key difference between IFRS and U.S. GAAP in 2002 and 2003 relates to the
treatment of goodwill, in particular the amortization and impairment charge
relating to debitel. 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.
Separable intangible assets with definite lives are still amortized over their
useful lives. Upon adoption of SFAS 142, Swisscom recorded an impairment charge
of CHF 1,649 million. 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 and CHF 213 million in 2003 were reversed under U.S.
GAAP. In 2003, Swisscom recorded an additional impairment charge of CHF 280
million under IFRS. As the -116-




---



##### Table of Contents



goodwill balance under U.S. GAAP had a value of zero, the impairment booked
under IFRS was reversed under U.S. GAAP. The key differences between IFRS and U.S. GAAP in 2001 relate to (1) the
impairment charge relating to goodwill at debitel, (2) the treatment of the
gain on the sale and leaseback transactions, and (3) the treatment of the
purchase price allocation in connection with the acquisition of debitel.  (1)
    
    Under IFRS, the analysis of the debitel goodwill impairment
charge was based on projected future cash flows discounted by a
weighted average cost of capital. Under U.S. GAAP, Swisscom applied
the concepts of SFAS 121 Accounting for the Impairment of Long
Lived Assets and for Long Lived assets to be disposed of. As the
undiscounted cash flows exceed the carrying value of the asset,
there is no impairment under U.S. GAAP.(2)
    
    Under IFRS, the gain on the sale of buildings in the sale and
leaseback transactions which were either sold outright or which
qualify as an operating lease was 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. A number
of buildings do not meet the criteria for immediate gain recognition
under U.S. GAAP. The gain on these buildings has been deferred and
will be amortized over the lease term.(3)
    
    Under U.S. GAAP, Swisscom assigned CHF 370 million of the
purchase price in connection with the acquisition of debitel in 1999
to the customer list and reduced goodwill by a corresponding amount.
The customer list is being amortized over 2 years. With respect to
the acquisition in 2001, under U.S. GAAP, Swisscom assigned CHF 238
million of the purchase price to customer list and reduced goodwill
recorded under IFRS by a corresponding amount. The customer list is
being amortized over 3 years. In addition, as a result of recording
an impairment in 2000 relating to the put option under U.S. GAAP,
the amount assigned to goodwill was CHF 329 million lower under U.S.
GAAP compared to IFRS. 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. -117-




---



##### Table of Contents



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 for
such appointment. 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. 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, granting of loans and financing. The
Finance Committee meets on an average 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 Compensation Committee has rotating membership. It
advises the Board on overall compensation policy and meets on an ad
hoc basis. -118-




---



##### Table of Contents




    
    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, 2003, positions and committee memberships were as follows: First
    
    CurrentName
    
    Age
    
    Title
    
    Appointed
    
    Term EndsMarkus Rauh(1)(2)(3)
    
    
    64
    
    
    Chairman
    
    
    1998
    
    
    April 2005André Richoz(3)
    
    
    56
    
    
    Vice-Chairman
    
    
    1998
    
    
    April 2005Jacqueline Françoise Demierre(1)^
    
    
    49
    
    
    Director
    
    
    1998
    
    
    April 2005Michel Gobet(1)^
    
    
    49
    
    
    Director
    
    
    2003
    
    
    April 2005Torsten G. Kreindl(3)
    
    
    40
    
    
    Director
    
    
    2003
    
    
    April 2005Peter Küpfer(2)
    
    
    59
    
    
    Director
    
    
    1998
    
    
    April 2005Felix Rosenberg(1)*
    
    
    62
    
    
    Director
    
    
    1998
    
    
    April 2007Richard Roy(2)
    
    
    48
    
    
    Director
    
    
    2003
    
    
    April 2005Helmut Woelki(3)
    
    
    54
    
    
    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^
    
    Representative of Employees 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,
and of the Supervisory Board of Leica Camera 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 ING Bank 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 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). -119-




---



##### Table of Contents



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 Valora Holding Ltd and Pilatus
Flugzeugwerke AG and a member of the Board of Directors of several large Swiss
companies, including 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. 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 Vice Chairman of the Board of Directors of
Ixos Software AG and Realtech AG and member of the Board of Directors of Lion
Bioscience 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 and, until November 2003, Lufthansa. 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. Messrs. Gobet, Kreindl and Roy replaced three former members of the Board of
Directors, Franco Ambrosetti, Ernst Hofmann and Gerrit Huy, who did not run for
re-election at the last shareholders meeting in May 2003. 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 -120-




---



##### Table of Contents



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 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, 2003: Name
    
    Age
    
    Position
    
    AppointedJens Alder
    
    
    46
    
    
    Chief Executive Officer
    
    December 1999Adrian Bult
    
    
    44
    
    
    CEO of Swisscom Fixnet AG
    
    October 2001Ueli Dietiker
    
    
    50
    
    
    Chief Financial Officer,
Deputy Chief Executive Officer and Head of Group
Human Resources ad interim
    
    April 2002René Fischer
    
    
    38
    
    
    CEO of Swisscom Systems AG
    
    August 2002Stefan Nünlist
    
    
    42
    
    
    Head of Group Communications
    
    July 2001Hans-Peter Quadri
    
    
    50
    
    
    CEO of Enterprise Solutions AG
    
    January 2002Jürg Rötheli
    
    
    40
    
    
    Head of Group Operations &
Related Businesses
    
    July 2001Carsten Schloter
    
    
    40
    
    
    CEO of Swisscom Mobile AG
    
    March 2001Michael Shipton
    
    
    47
    
    
    Chief Strategy Officer
    
    July 2001Urs Stahlberger
    
    
    57
    
    
    CEO of Swisscom IT Services AG
    
    January 2002Peter Wagner
    
    
    50
    
    
    CEO of debitel AG
    
    July 2001
 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 holds a masters degree in business administration from the University
of St. Gallen (1983). 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. Since July 2003, he has also been serving 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
serving as CFO of Swisscom Fixnet 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 -121-




---



##### Table of Contents



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. Hans-Peter Quadriwas appointed CEO of Swisscom Enterprise Solutions AG in July
2002. As Head of Enterprise Solutions he was initially appointed to the Group
Executive Board in January 2002 after serving as Head of Swisscoms Large
Accounts Sales unit and of its Major Accounts Sales unit. Prior to joining
Swisscom in 1999, Mr. Quadri held various positions in IBM Switzerland and IBM
EMEA, including Regional Manager for networking business in charge of
Switzerland, Germany, Austria, Central Europe and Russia. Mr. Quadri is
Chairman of the Board of Directors of Infonet Schweiz AG and a member of the
Board of Directors of Infonet Services Corporation, El Segundo, CA, USA. Until
July 2003, he was also Chairman of the Board of Directors of Unit.net AG (now
in liquidation). Mr. Quadri holds a degree in mathematics and information
technology from the University of Zurich. 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. Peter Wagnerwas appointed to the Group Executive Board in July 2001. Mr.
Wagner has been Chief Executive Officer of debitel AG since June 2000. Prior
to joining debitel he was Chief Executive Officer of Wavetek Wandel Goltermann
Inc. (1998  2000) and COO/CEO of Wandel & Goltermann GmbH (1995  1998). Mr. Wagner is President of the Association of Providers of Telecommunications and
Value Added Services, Germany, member of the Board of Directors of several
companies such as DEKRA e.V., Deutsche Messe AG and the German Association for
Information Technology, Telecommunications and New Media e.V. Mr. Wagner holds
a degree in mathematics and physics from the University of Mainz. Effective March 1, 2003, Mauro Santona, former Head of Group Information
Systems, left Swisscoms Group Executive Board. His area of responsibility was
integrated into Mr. Shiptons area of responsibility. Effective June, 2003,
Esther Häberling, former Head of Group Human Resources, left Swisscoms Group
Executive Board. Her area of responsibility was taken over by Mr. Dietiker on
an interim basis. In January 2004, the Board of Directors appointed Günter
Pfeiffer as the new Head of Group Human Resources effective July 1, 2004. -122-




---



##### Table of Contents



COMPENSATION The aggregate compensation paid by Swisscom to its Board of Directors as a
group in respect of 2003 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 2003
amounted to CHF 9.9 million. Such amount included CHF 4.7 million in bonus
compensation and CHF 0.7 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 Board of Directors compensation and the
Group Executive Boards bonus was paid pursuant to Swisscoms leveraged
executive asset plan. Total compensation paid by Swisscom to the CEO and to
the Chairman of the Board of Directors in respect of 2003 was CHF 1.5 million
and CHF 509,000, respectively. The total amount accrued in pension or similar
benefits for members of Swisscoms Group Executive Board in 2003 was CHF 0.5
million. See Note 39 to the consolidated financial statements. 
 EMPLOYEES Overview With 19,207 employees (full-time equivalent) as of December 31, 2003 (including
3,123 employees associated with debitel), 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 31,2001
    
    2002
    
    2003Fixnet
    
    
    8,639
    
    
    
    8,010
    
    
    
    7,657Mobile
    
    
    2,121
    
    
    
    2,358
    
    
    
    2,418Enterprise Solutions
    
    
    1,558
    
    
    
    1,410
    
    
    
    1,117debitel
    
    
    3,544
    
    
    
    3,299
    
    
    
    3,123Other(1)
    
    
    4,417
    
    
    
    4,374
    
    
    
    3,921Corporate(2)
    
    
    1,049
    
    
    
    1,019
    
    
    
    971Total(3)
    
    
    21,328
    
    
    
    20,470
    
    
    
    19,207
   (1)
    
    Includes 137 employees from the T-Systems Card Services acquisition by
Billag.(2)
    
    Does not include the participants in the WORK_LINK and AMZ
(Arbeitsmarktzentum) 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, signed with the respective 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 expects to have further discussions with
the trade unions to negotiate the renewal of the GAV. 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 as
well as the overall performance of Swisscom. The average work week is 40 hours,
with employees -123-




---



##### Table of Contents



entitled to five weeks holiday. In addition, flexible working time models,
such as annual working time (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 2003, Swisscom (excluding debitel) eliminated, in line with previous
announcements, a total of 1,087 positions resulting in a reduction from 17,171
to 16,084 full-time employees. The year-end figures for 2003 include the small
acquisitions in the field of public wireless LAN services with the build up of
Swisscom Eurospot (90 full-time employees) and the acquisition of T-Systems
Card Services (137 full-time employees). In October 2003, Swisscom announced
that it intends to cut additional 655 jobs over the course of 2004. 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
(Employment Market Center, Arbeitsmarktzentrum, AMZ), an employment program
(WORK_LINK AG) and early retirement schemes. Only employees in Switzerland
covered by the GAV are entitled to benefit from Swisscoms social plan. The outplacement program Employment Market Center provides to employees
affected by workforce reduction measures training and assistance in finding
employment outside of Swisscom. In 2003, Swisscoms Employment Market Center
began to offer its job placement services also to other companies and
organizations and, to this end, its administration was transferred to the newly
founded wholly-owned subsidiary PersPec Personal Perspectives AG. At the end of
2003, the outplacement program counted 723 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. See Note 7 to
the consolidated financial statements. The employment program WORK_LINK AG aims at finding temporary positions for
long-serving Swisscom employees above a certain age who could not find new
employment through the Employment Market Center. WORK_LINK AG 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 2003, WORK_LINK counted
360 participants (in full-time positions). Under IFRS, the costs of WORK_LINK
do not qualify for the creation of provisions, as the employment relationship
with the employees concerned has not been terminated. At December 31, 2003, the obligation relating to WORK_LINK participants and
other social plan measures for which provisions cannot be created under IFRS
amounted to CHF 242 million. Net expenses for the Employment Market Center and
WORK_LINK amounted to CHF 67 million in 2003. This amount consisted of salaries
and wages for WORK_LINK participants, operating expenses to coach the
participants and pension costs according to IFRS for participants of Employment
Market Center and WORK_LINK less any payments Swisscom received for hiring out
employees associated with WORK_LINK on a temporary basis. -124-




---



##### Table of Contents



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
an employees council since January 2002. This council consists of 13
committees (Betriebskommissionen) and fulfills 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 a successful and progressive
industrial relations and particularly on a good relationship with its employees
and their representatives. 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 at December 31, 2003. Due
to the unfavorable development of the capital markets, Swisscom has an
unrecognized loss of CHF 897 million, which is 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. 
 SHARE OWNERSHIP As of April 30, 2004, the members of Swisscoms Board of Directors and
Executive Board owned a total of approximately 12,900 Swisscom shares and
options exercisable for approximately 30,000 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. Leveraged Executive Asset Plans In order to link the interests of Swisscom management with those of
shareholders generally, Swisscom regularly offers shares to management pursuant
to leveraged executive asset plans. Swisscom launched the first such plans in
connection with its IPO in 1998, one of which was also made available to
non-management employees. Similar plans were launched in subsequent years. Under these plans, Swisscom typically offers 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 has a strike price based on the price of the shares at the time of
grant. The options may be sold or exercised at any time during the applicable
exercise period. In the case of broader based plans targeting middle and upper
management, Swisscom may make a contribution on behalf of each participant
based on the amount of his or her personal investment in the plan for the
purpose of acquiring additional shares and options. For a more detailed
description of each of these plans, see Note 8 to the financial statements. Under the first such plans launched at the time of the IPO, participants
received share appreciation rights (SARs), rather than acquiring options, in
connection with their purchase of shares. Each SAR entitled its holder to
receive at the end of a five year holding period, which expired in October
2003, additional shares with a market value equal to the amount by which
Swisscom shares appreciated relative to the base price during the period the
SARs were -125-




---



##### Table of Contents



outstanding. Following the expiration of the holding period, participants in
this plan received 39,300 additional shares. Shares received when the SARs reach maturity or upon exercise of options are
not subject to any contractual restrictions on resale and may be freely sold,
subject to compliance with applicable securities laws. The following table provides summary information relating to Swisscoms
leveraged executive asset plans. Market Value ofNumber of
    
    
    
    
    
    
    
    SARs/ Options as ofTotal Shares
    
    SARs or Options
    
    Base or Strike Price
    
    
    
    April 30, 2004(2)Plans
    
    Purchased(1)
    
    Granted(1)
    
    (CHF)
    
    Settlement Date or Exercise Period
    
    (CHF)2000Board of Directors
    
    
    321
    
    
    
    3,210
    
    
    
    472.50
    
    
    10/11/03  10/10/05
    
    
    8.812001Board of Directors
    
    
    239
    
    
    
    2,390
    
    
    
    503.60
    
    
    10/10/04  10/9/06
    
    
    10.09Group Executive
Board
    
    
    407
    
    
    
    4,070
    
    
    
    475.80
    
    
    5/31/04  5/30/06
    
    
    13.82Middle and upper
management
    
    
    5,269
    
    
    
    5,269,000
    (3)
    
    
    368.21
    
    
    5/1/04  4/25/06
    
    
    61.00
    (3)2002(4)Group Executive
Board
    
    
    529
    
    
    
    5,290
    
    
    
    569.10
    
    
    4/10/05  4/9/07
    
    
    5.28Middle and upper
management
    
    
    5,656
    
    
    
    5,656,000
    (3)
    
    
    467.37
    
    
    4/26/05  4/16/07
    
    
    29.00
    (3)2003Board
of Directors
    
    
    492
    
    
    
    492,000
    (3)
    
    
    417.90
    
    
    5/1/06  4/25/08
    
    
    53.00
    (3)Group Executive Board
    
    
    862
    
    
    
    862,000
    (3)
    
    
    417.90
    
    
    5/1/06  4/25/08
    
    
    53.00
    (3)Middle and upper
management
    
    
    7,166
    
    
    
    7,166,000
    (3)
    
    
    417.90
    
    
    5/1/06  4/25/08
    
    
    53.00
    (3)
   (1)
    
    Includes only the shares, SARs and options of those members of the Board
of Directors and Group Executive Board who were members of the respective
boards at the end of 2003. Some of them were previously part of the
middle and upper management and have received shares, SARs and options
which are still included in the amount of shares, SARs and options
relating to the middle and upper management.(2)
    
    For information purposes only. One option is needed for exercising the
right to purchase one share. Options may only be exercised or sold during
applicable exercise period. 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 April 30, 2004. The closing price of the shares on April 30,
2004 was CHF 402.50 per share. For those options for which there was no
closing price on April 30, 2004, calculated based on the average of bid
and ask price on that day.(3)
    
    100 options are needed for exercising the right to purchase one share. Market value is therefore shown for 100 options.(4)
    
    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. 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 2003,
Swisscom invited its employees (other than management) to purchase a maximum of
ten shares per employee at an offering price of CHF 300 per share.
Approximately 5,000 employees purchased approximately 45,000 shares, which
resulted in an expense of CHF 7 million, reflecting the difference between the
market value of the shares and the consideration received from the employees. -126-




---



##### Table of Contents



ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 
 MAJOR SHAREHOLDERS As of April 30, 2004, Swisscom is aware of the following shareholders that are
the beneficial owners of 5% or more of its shares: Percentage ofNumber of shares held(2)
    
    outstanding sharesSwiss Confederation
    
    
    41,531,200
    
    
    
    62.7
    %The Capital Group Companies, Inc.(1)
    
    
    3,703,716
    
    
    
    5.59
    %
   (1)
    
    Acting 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. The information on the number of shares held by The
Capital Group Companies shareholding is based on a filing with the
Disclosure Office of the SWX Swiss Exchange on February 7, 2002. The
percentage stated in the filing was 5.04% and may no longer be current.
As a result of the share buy back in March 2002, the percentage was
adjusted to 5.59%.(2)
    
    The share register shows Chase Nominees as the record holder of 4,270,709
shares which it holds as an intermediary on behalf of various investors. 
 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 from 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. -127-




---



##### Table of Contents



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 convertible into Swisscom
shares in the aggregate amount of CHF 1.5 billion and with a maturity of four
years. If fully exercised, the bond issuance could result in a decline of the
Confederations stake in Swisscom from currently 62.7% to 58.2%. This 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. To date, the FCCA has not
conducted a review of Swisscom. 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. 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 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 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. -128-




---



##### Table of Contents



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. In March 2003 and
March 2004, 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. 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 338 million in 2003. 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. -129-




---



##### Table of Contents



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 up of the Swiss market to full 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 of both proceedings submitted their disputes to
arbitration, but were unable to reach a settlement. 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. As a result of these decisions, Swisscom has made an
additional provision, which it believes is sufficient to cover any payments it
may be required to make in connection with these proceedings. Due to Swisscoms
obligation to provide its services on a non-discriminatory basis, this decision
may require Swisscom to lower interconnection prices for other interconnection
partners in the future. In December 2003, Swisscom as well as TDC and WorldCom
filed an appeal with the Federal Court, which, if decided against Swisscom,
could result in a further reduction in interconnection prices. The Federal
Court combined the pending proceedings and limited the proceedings to the
question whether ComComs decisions were issued lawfully, since parts of its
decisions were not disclosed to TDC and WorldCom for protection of Swisscoms
business interests. 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 to pre-determined
technical and administrative conditions. A petition to issue 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 -130-




---



##### Table of Contents



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 TDC. 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. Proceedings Relating to Fixed-Mobile Interconnection On November 12, 2002, Tele2 initiated proceedings against Swisscom relating to
interconnection pricing with ComCom, alleging that Swisscoms wholesale prices
for termination of transit traffic on the Swisscom mobile network should be
reduced retroactively to the tariff that Swisscom charged its corporate
customers on May 21, 2001, on the grounds that Swisscom has a dominant position
in the mobile termination market. Swisscom does not believe that it has a
dominant position in this market and is of the view that its prices for mobile
termination of transit traffic are consistent with market practice. Tele2
withdrew its complaint early in 2003 on procedural grounds, but reserved the
right to refile the previous or an amended complaint. Other Legal Proceedings On September 3, 2002, Swisscom was served with a Consolidated Class Action
Complaint on behalf of public investors who purchased securities of Infonet
Services Corporation during the period from December 16, 1999 through August 7,
2001. The complaint was filed against Infonet, several of its current and
former directors (including a former Swisscom employee), the selling
shareholders (including Swisscom) and the underwriters of Infonets initial
public offering. The complaint alleges that defendants made misrepresentations
and omissions regarding AUCS in Infonets Form S-1 registration statement and
the accompanying prospectus for its initial public offering and in other
statements during the class period. The plaintiffs have requested a judgment
determining that the lawsuit is a proper class action, awarding compensatory
damages and/or rescission, costs of the lawsuit and such other relief as the
court may deem just and proper. While the court dismissed the complaint with
regard to the selling shareholders, including Swisscom, and the underwriters,
the proceeding relating to Infonet and the current and former directors is
still pending. These remaining defendants are currently in advanced
negotiations with the plaintiffs, which, if agreed and approved by the court,
would resolve all claims. However, in case the negotiations fail and the court
issues a final decision on this part of the proceeding, the plaintiffs may also
appeal against the courts decision issued with regard to Swisscom. Other Regulatory Proceedings 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 is currently considering this
issue under the Telecommunications Act, which is the law that is intended to
specifically regulate interconnection pricing, in the ongoing Tele2 proceeding
(described above). Accordingly, Swisscom Mobile petitioned the Competition
Commission on December 4, 2002 to cease 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, -131-




---



##### Table of Contents



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 and retail market for broadband services and/or its behavior to be
anti-competitive. 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. On February 2, 2003,
Swisscom lodged an appeal against this decision. On February 27, 2004,
Swisscom requested the Competition Commission to 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. Carrier Preselection Information.On March 25, 2002 OfCom launched a
supervisory proceeding against Swisscom to determine whether Swisscom has
violated its obligation under the Telecommunications Act and the
Telecommunications Ordinance to keep information relating to subscribers
communications confidential. On November 11, 2002, OfCom issued a decision that
Swisscom has violated the law by using data relating to pre-selection customers
to specifically target these customers and also by offering certain services
only to customers who have not pre-selected another carrier. As a result of
this decision, Swisscom Fixnet is prohibited from using data relating to
pre-selection customers for marketing or other related purposes and was
required to pay a CHF 2 million fine. Swisscom lodged an appeal against this
decision at the Appeals Commission of UVEK. On August 20, 2003, the Appeals
Commission issued a decision in which it partly agreed with Swisscom and
reduced the fine to CHF 1.5 million. Access Reselling.On June 24, 2003, TDC Switzerland (Sunrise) filed a petition
with the Competition Commission, alleging 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 are currently not
able to offer its 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. 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 in-depth investigation against Swisscom
Directories to determine whether Swisscom Directories is abusing its
market-dominant position by offering its directories database to third parties
at prices and conditions that prevent third parties to effectively use these
data. Installation of Broadband Equipment.There is currently pending a preliminary
investigation by the Competition Commission the purpose of which is to
determine whether Swisscom Fixnet allowed Enterprise Solutions to install a
technology for its exclusive use, which would enable Enterprise Solutions to
offer its customers products with wider bandwidths, higher service levels and
better end-to-end customer management than would be possible for Swisscoms
competitors. On June 30, 2003, Swisscom requested in a written response to the
Competition Commission to suspend the proceedings on the grounds that Swisscom
is not market dominant in the retail market for broadband services and/or its
behavior is not anti-competitive. -132-




---



##### Table of Contents



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. In March 2003, the Board of Directors voted to modify Swisscoms return policy.
In prior years, it was Swisscoms policy to distribute approximately half of
its net income (after adjusting for exceptional items) as dividend payments to
its shareholders. The key element of the new policy is the annual distribution
of all freely available funds, or the so-called Equity Free Cash Flow. Equity
Free Cash Flow consists of net cash from operating activities less capital
expenditure (on fixed and intangible assets and acquisitions), less dividend
payments to minority shareholders and debt repayments. 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. Applying the new policy, Swisscoms Board of Directors has proposed a dividend
of CHF 12 per share in respect of fiscal year 2002 and a CHF 8 per share par
value reduction, both of which were approved at the Annual General Meeting on
May 6, 2003. 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. 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 the course of 2004,
Swisscom intends, in accordance with its return policy, to return to its
shareholders approximately CHF 2 billion in the form of a share repurchase. 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. -133-




---



##### Table of Contents



ITEM 9: THE OFFER AND LISTING 
 MARKETS Prior to Swisscoms initial public offering in October 1998, there was no
public market for 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 also included in
the Swiss Market Index (SMI). The SWX Swiss Exchange 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 members of the SMI has been taking place on
virt-x, although these stocks remain listed on the SWX Swiss Exchange. 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 Swiss Exchange 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). Trading on the New York Stock Exchange As of December 31, 2003, 9,441,730 ADRs were outstanding, evidencing ADSs
representing 944,173 shares or approximately 1.4% of the Companys outstanding
Share capital, and there were 34 registered holders of such ADRs. -134-




---



##### Table of Contents



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
    
    Low1999
    
    
    656.00
    
    
    
    445.00
    
    
    
    46.125
    
    
    
    29.3752000
    
    
    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
    
    
    
    26.650
 Year Ended December 31,
    
    High
    
    Low
    
    High
    
    Low2001First Quarter
    
    
    472.00
    
    
    
    358.50
    
    
    
    28.750
    
    
    
    20.550Second Quarter
    
    
    457.00
    
    
    
    370.00
    
    
    
    26.500
    
    
    
    21.800Third Quarter
    
    
    492.50
    
    
    
    414.00
    
    
    
    30.750
    
    
    
    23.960Fourth Quarter
    
    
    476.00
    
    
    
    419.50
    
    
    
    29.100
    
    
    
    25.2502002First 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
    
    
    
    31.910
 Month ended
    
    High
    
    Low
    
    High
    
    LowNovember 30, 2003
    
    
    395.00
    
    
    
    378.50
    
    
    
    30.090
    
    
    
    27.850December 31, 2003
    
    
    411.00
    
    
    
    387.50
    
    
    
    32.950
    
    
    
    29.910January 31, 2004
    
    
    430.00
    
    
    
    403.00
    
    
    
    34.340
    
    
    
    32.250February 29, 2004
    
    
    428.00
    
    
    
    416.00
    
    
    
    34.680
    
    
    
    33.100March 31, 2004
    
    
    429.00
    
    
    
    407.50
    
    
    
    33.950
    
    
    
    31.910April 30, 2004
    
    
    425.00
    
    
    
    398.50
    
    
    
    33.210
    
    
    
    30.750
 -135-




---



##### Table of Contents



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. -136-




---



##### Table of Contents



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 more than 5% of Swisscoms 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 1,000,000 have the right to request
that a specific proposal be put on the agenda and voted upon at the next
shareholders meeting. At the Annual General Meeting on May 6, 2003, the
Articles were amended to allow such request to be made by a holder of shares
with a nominal value of CHF 40,000 or more in order to reflect the nominal
value reduction. This amendment became effective in July 2003. 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). -137-




---



##### Table of Contents



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 par value is required for: (1)
changes 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 1 million may request a
written ballot. At the Annual General Meeting on May 6, 2003, the Articles were
amended to require only a holding of shares with a nominal value of CHF 40,000
or more in order to reflect the nominal value reduction. This amendment became
effective in July 2003. 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, except that, if an
annual dividend exceeds 5% of the nominal share capital, then 10% of such
excess must be retained as general reserves. 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. -138-




---



##### Table of Contents



In the course of 2004, Swisscom intends, in accordance with its return policy,
to return to its shareholders approximately CHF 2 billion in form of a share
repurchase. 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. Summary of Significant Differences Between Swiss Corporate Governance Practices
and the NYSEs Corporate Governance Standards Legal Framework 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 the board of directors, procedures and
chairmanship of the board of directors, dealing with -139-




---



##### Table of Contents



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 mean non-executive members of the board of directors 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. -140-




---



##### Table of Contents



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
therefor. 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 request to any 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. -141-




---



##### Table of Contents



EXCHANGE CONTROLS Other than in connection with government sanctions imposed on 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. -142-




---



##### Table of Contents



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 a United States resident or United
States 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%. The Depositary intends to make use of informal procedures under
which it will submit a certificate to the Swiss tax authorities 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 as provided in the Treaty. There can
be no assurance that these informal procedures will remain available. Alternatively, a U.S. holder that qualifies for Treaty benefits (a U.S.
resident) may apply for a refund of the Withholding Tax withheld in excess of
the 15% Treaty rate. 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. Stamp Duties upon Transfer of Securities (Umsatzabgabe). The sale of 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 may be subject to a
stock exchange levy. See Item 9: The Offer and Listing
 Markets  Trading on
the virt-x. 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 after
December 31, 2002 and 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 120-day period beginning 60 days
before the ex- -143-




---



##### Table of Contents



dividend date and meet other holding period requirements. On February 19,
2004, the IRS announced that it will permit taxpayers to apply a proposed
legislative change to the holding period requirement described in the preceding
sentence as if such change were already effective. This legislative technical
correction would change the minimum required holding period, retroactive to
January 1, 2003, to more than 60 days during the 121-day period beginning 60
days before the ex-dividend date. 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 generally will be treated separately,
together with other items of passive income (or, in the case of certain
holders, financial services income). 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
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 on or after May
6, 2003 and 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. 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 -144-




---



##### Table of Contents



such year to which the gain was allocated, together with an interest charge in
respect of the tax attributable to each such year. These amounts of ordinary
income will not be eligible for the favorable tax rates applicable to qualified
dividend income or long-term capital gains. 
 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. -145-




---



##### Table of Contents



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 maximum
length of time hedged is 5 years for the finance lease arrangements entered
into in 1996 and 1997 and 25 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 purchasing contracts are in EUR and USD.
The forecasted transactions are expected to occur in 2004. For further detail
of Swisscoms derivative financial instruments see Note 34 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(except percentages)(1)
    
    Expected Maturity Date
    
    As at December 31, 20032004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Fair valueLong term debt:Fixed rate:Financial liability from
cross-border lease (USD) (1)(2)(3)
    
    
    1
    
    
    
    10
    
    
    
    1
    
    
    
    114
    
    
    
    29
    
    
    
    1,184
    
    
    
    1,339
    
    
    
    1,795Average interest rate (%)
    
    
    6.71
    
    
    
    6.71
    
    
    
    6.71
    
    
    
    6.71
    
    
    
    6.71
    
    
    
    6.71
    
    
    
    6.71Finance lease obligation
(real estate) (CHF)(1)(3)
    
    
    9
    
    
    
    10
    
    
    
    8
    
    
    
    7
    
    
    
    8
    
    
    
    677
    
    
    
    719
    
    
    
    1,130Average interest rate (%)
    
    
    6.3
    
    
    
    6.3
    
    
    
    6.3
    
    
    
    6.3
    
    
    
    6.3
    
    
    
    6.3
    
    
    
    6.3Finance lease obligation
(cross-border lease)
(USD)(1)(3)
    
    
    45
    
    
    
    160
    
    
    
    22
    
    
    
    39
    
    
    
    146
    
    
    
    0
    
    
    
    412
    
    
    
    412Average interest rate (%)
    
    
    3.02
    
    
    
    3.02
    
    
    
    3.02
    
    
    
    3.02
    
    
    
    3.02
    
    
    
    
    
    
    
    3.02Non-current financial assets:Fixed rate:Cross-border lease
(USD) (1)(2)(3)
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    115
    
    
    
    8
    
    
    
    885
    
    
    
    1,011
    
    
    
    1,415Average 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, 2003, the value of the financial
liability from cross-border lease is CHF 1,339 million and the amount on
deposit, recorded under non-current financial assets, is CHF 1,011
million. See Note 27 to the consolidated financial statements.(3)
    
    Under U.S. GAAP, total financial liability from cross-border lease is CHF
4,830 million with an average interest rate of 6.90%, total financial
lease obligation is CHF 676 million and total non-current financial assets
is CHF 4,502 million with an average interest rate of 7.56%. See Note 42
to the consolidated financial statements. -146-




---



##### Table of Contents



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, 2003, foreign exchange contracts were outstanding to purchase
EUR 273 million (CHF 419 million) and USD 85 million (CHF 108 million). The
fair value of these contracts at December 31, 2003 and 2002 was CHF 0 million
and minus CHF 11 million, respectively. Swisscom has entered into foreign exchange contracts as hedges of USD
denominated leases. The total cross-border lease obligation at December 31,
2003, amounted to CHF 740 million (CHF 886 million and CHF 788 million at
December 31, 2002 and 2001, 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
27 and 31 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. -147-




---



##### Table of Contents



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 2003. 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 2003 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) -148-




---



##### Table of Contents



ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table shows, in respect of each of the last two fiscal years,
information concerning the fees billed for professional services rendered by
PricewaterhouseCoopers AG (PwC), Swisscoms principal accountant. CHF in thousands
    
    Year ended December 31,2002
    
    2003Audit Fees
    
    
    6,928
    
    
    
    7,241Audit-Related Fees
    
    
    2,316
    
    
    
    3,185Tax Fees
    
    
    306
    
    
    
    375All Other Fees
    
    
    3,706
    (1)
    
    
    556Total
    
    
    13,256
    
    
    
    11,357
   (1)
    
    Includes fees in the amount of CHF 2.5 million billed by PwC Consulting, which was subsequently sold to IBM. Audit Fees consisted of fees billed by 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 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 PwC for tax compliance and tax planning services, and other
tax services. All Other Fees consisted of fees billed by 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. 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. Effective with the appointment of KPMG as new statutory and group
auditors, Swisscoms Board of Directors decided to appoint PwC as Swisscoms
new internal auditors. 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. -149-




---



##### Table of Contents



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(c) Number of
    
    (or ApproximateShares (or Units)
    
    Dollar Value) ofPurchased as Part
    
    Shares (or Units)(a) Total Number of
    
    (b) Average Price
    
    of Publicly
    
    that May Yet BeShares (or Units)
    
    Paid per Share
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Purchased
    
    (or Units) (CHF)
    
    Programs
    
    Plans or Programs1/1/03  1/31/03
    
    
    5
    (1)
    
    
    420.00
    
    
    
    
    
    
    
    2/1/03  2/28/03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3/1/03  3/31/03
    
    
    20
    (1)
    
    
    411.88
    
    
    
    
    
    
    
    4/1/03  4/30/03
    
    
    53,610
    (1)(2)
    
    
    433.45
    
    
    
    
    
    
    
    5/1/03  5/31/03
    
    
    5
    (1)
    
    
    402.00
    
    
    
    
    
    
    
    6/1/03  6/30/03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7/1/03  7/31/03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8/1/03  8/31/03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9/1/03  9/30/03
    
    
    20
    (1)
    
    
    384.00
    
    
    
    
    
    
    
    10/1/03  10/31/03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11/1/03  11/30/03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12/1/03  12/31/03
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    53,660
    
    
    
    433.42
    
    
    
    
    
    
    
    
   (1)
    
    A total of 60 shares have been purchased by Swisscom Finance Ltd. in Jersey
(Cayman Island) within a passive asset management mandate in the Swiss Market
Index.(2)
    
    53,600 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. PART III 
 ITEM 17: FINANCIAL STATEMENTS Not applicable. -150-




---



##### Table of Contents



ITEM 18: FINANCIAL STATEMENTS Index to Financial Statements PageConsolidated financial statements:Report of Group Auditors
    
    
    F-1Consolidated income statement for each of the three years
ended December 31, 2003, 2002 and 2001
    
    
    F-2Consolidated balance sheet at December 31, 2003, 2002 and 2001
    
    
    F-3Consolidated cash flow statement for each of the three years ended
December 31, 2003, 2002 and 2001
    
    
    F-4Consolidated statement of shareholders equity for each of the three years
ended December 31, 2003, 2002 and 2001
    
    
    F-5Notes to the consolidated financial statements
    
    
    F-6Financial statement schedules:Schedule II  Valuation and Qualifying Accounts
    
    
    S-1
 All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto. -151-




---



##### Table of Contents



Report of Group Auditors 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, 2002 and 2001 and the related
consolidated statements of income, of cash flows and of changes in
shareholders equity for each of the three 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 profession and with International Standards on Auditing issued by
the International Federation of Accountants (IFAC) and auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free 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, 2002 and 2001 and the
results of their operations and their cash flows for each of the three
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 F-1




---



##### Table of Contents



Swisscom Consolidated income statement Year ended December 31CHF in millions, except per share amount
    
    Note
    
    2001
    
    2002
    
    2003Net revenue
    
    
    4
    
    
    
    14,174
    
    
    
    14,526
    
    
    
    14,581Other operating income
    
    
    5
    
    
    
    213
    
    
    
    266
    
    
    
    256Total
    
    
    
    
    
    
    14,387
    
    
    
    14,792
    
    
    
    14,837Goods and services purchased
    
    
    6
    
    
    
    4,513
    
    
    
    4,959
    
    
    
    4,834Personnel expenses
    
    
    7,8,9
    
    
    
    2,461
    
    
    
    2,593
    
    
    
    2,535Other operating expenses
    
    
    10
    
    
    
    3,004
    
    
    
    2,827
    
    
    
    2,827Depreciation
    
    
    23
    
    
    
    1,702
    
    
    
    1,578
    
    
    
    1,564Amortization
    
    
    25
    
    
    
    472
    
    
    
    427
    
    
    
    361Total operating expenses
    
    
    
    
    
    
    12,152
    
    
    
    12,384
    
    
    
    12,121Impairment of goodwill
    
    
    25
    
    
    
    (1,130
    )
    
    
    (702
    )
    
    
    (280
    )Gain on sale of real estate
    
    
    11
    
    
    
    568
    
    
    
    
    
    
    
    Gain on partial sale of Swisscom Mobile AG
    
    
    12
    
    
    
    3,837
    
    
    
    
    
    
    
    Operating income
    
    
    
    
    
    
    5,510
    
    
    
    1,706
    
    
    
    2,436Financial expense
    
    
    13
    
    
    
    (771
    )
    
    
    (517
    )
    
    
    (154
    )Financial income
    
    
    14
    
    
    
    416
    
    
    
    206
    
    
    
    140Income before income taxes, equity in net income of
affiliated companies and minority interests
    
    
    
    
    
    
    5,155
    
    
    
    1,395
    
    
    
    2,422Income tax benefit (expenses)
    
    
    16
    
    
    
    15
    
    
    
    (361
    )
    
    
    (500
    )Income before equity in net income of affiliated
companies and minority interests
    
    
    
    
    
    
    5,170
    
    
    
    1,034
    
    
    
    1,922Equity in net income of affiliated companies
    
    
    24
    
    
    
    32
    
    
    
    95
    
    
    
    (7
    )Minority interest
    
    
    32
    
    
    
    (238
    )
    
    
    (305
    )
    
    
    (346
    )Net income
    
    
    
    
    
    
    4,964
    
    
    
    824
    
    
    
    1,569Basic earnings per share
    
    
    17
    
    
    
    67.50
    
    
    
    12.18
    
    
    
    23.70Diluted earnings per share
    
    
    17
    
    
    
    67.46
    
    
    
    12.17
    
    
    
    23.69
 The accompanying notes form an integral part of these financial statements.  F-2




---



##### Table of Contents



Swisscom Consolidated balance sheet At December 31CHF in millions
    
    Note
    
    2001
    
    2002
    
    2003AssetsCurrent assetsCash and cash equivalents
    
    
    18
    
    
    
    3,788
    
    
    
    1,682
    
    
    
    3,237Current financial assets
    
    
    19
    
    
    
    3,316
    
    
    
    285
    
    
    
    264Trade accounts receivable
    
    
    20
    
    
    
    2,525
    
    
    
    2,418
    
    
    
    2,219Inventories
    
    
    21
    
    
    
    252
    
    
    
    180
    
    
    
    134Other current assets
    
    
    22
    
    
    
    493
    
    
    
    450
    
    
    
    763Current tax assets
    
    
    
    
    
    
    
    
    
    
    178
    
    
    
    18Total current assets
    
    
    
    
    
    
    10,374
    
    
    
    5,193
    
    
    
    6,635Non-current
assetsProperty, plant and equipment
    
    
    23
    
    
    
    8,104
    
    
    
    7,536
    
    
    
    7,009Investments in affiliated companies
    
    
    24
    
    
    
    603
    
    
    
    691
    
    
    
    53Goodwill and other intangible assets
    
    
    25
    
    
    
    2,562
    
    
    
    1,544
    
    
    
    1,210Non-current financial assets
    
    
    26
    
    
    
    1,895
    
    
    
    1,584
    
    
    
    1,383Deferred tax assets
    
    
    16
    
    
    
    811
    
    
    
    410
    
    
    
    250Total non-current assets
    
    
    
    
    
    
    13,975
    
    
    
    11,765
    
    
    
    9,905Total assets
    
    
    
    
    
    
    24,349
    
    
    
    16,958
    
    
    
    16,540Liabilities and shareholders equityCurrent liabilitiesShort-term debt
    
    
    27
    
    
    
    1,757
    
    
    
    1,016
    
    
    
    576Trade accounts payable
    
    
    
    
    
    
    1,237
    
    
    
    1,054
    
    
    
    1,045Current tax liabilities
    
    
    
    
    
    
    359
    
    
    
    121
    
    
    
    138Accrued liabilities
    
    
    28
    
    
    
    128
    
    
    
    246
    
    
    
    326Other current liabilities
    
    
    29
    
    
    
    1,783
    
    
    
    1,526
    
    
    
    1,383Total current liabilities
    
    
    
    
    
    
    5,264
    
    
    
    3,963
    
    
    
    3,468Long-term liabilitiesLong-term debt
    
    
    27
    
    
    
    2,413
    
    
    
    1,505
    
    
    
    1,374Finance lease obligation
    
    
    31
    
    
    
    1,330
    
    
    
    1,192
    
    
    
    1,070Accrued pension cost
    
    
    9
    
    
    
    1,218
    
    
    
    1,101
    
    
    
    1,113Accrued liabilities
    
    
    28
    
    
    
    472
    
    
    
    499
    
    
    
    429Deferred tax liabilities
    
    
    16
    
    
    
    467
    
    
    
    296
    
    
    
    383Other long-term liabilities
    
    
    30
    
    
    
    333
    
    
    
    307
    
    
    
    283Total long-term liabilities
    
    
    
    
    
    
    6,233
    
    
    
    4,900
    
    
    
    4,652Total liabilities
    
    
    
    
    
    
    11,497
    
    
    
    8,863
    
    
    
    8,120Minority interest
    
    
    32
    
    
    
    783
    
    
    
    796
    
    
    
    751Shareholders equityShare capital
    
    
    33
    
    
    
    1,250
    
    
    
    596
    
    
    
    66Additional paid-in capital
    
    
    
    
    
    
    2,395
    
    
    
    572
    
    
    
    572Retained earnings
    
    
    
    
    
    
    8,711
    
    
    
    6,491
    
    
    
    7,296Treasury stock
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    (1
    )Fair value and other reserves
    
    
    35
    
    
    
    (285
    )
    
    
    (359
    )
    
    
    (264
    )Total shareholders equity
    
    
    
    
    
    
    12,069
    
    
    
    7,299
    
    
    
    7,669Total liabilities and shareholders equity
    
    
    
    
    
    
    24,349
    
    
    
    16,958
    
    
    
    16,540
 The accompanying notes form an integral part of these financial statements. F-3




---



##### Table of Contents



Swisscom Consolidated cash flow statement Year ended December 31CHF in millions
    
    Note
    
    2001
    
    2002
    
    2003Cash flows from operating activitiesCash generated from operations
    
    
    36
    
    
    
    4,097
    
    
    
    4,342
    
    
    
    4,727Interest paid
    
    
    
    
    
    
    (284
    )
    
    
    (228
    )
    
    
    (183
    )Income taxes paid
    
    
    
    
    
    
    (678
    )
    
    
    (537
    )
    
    
    (73
    )Interest received
    
    
    
    
    
    
    202
    
    
    
    171
    
    
    
    114Dividends received
    
    
    
    
    
    
    52
    
    
    
    9
    
    
    
    147Gain from cross-border tax lease transactions
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    Net cash provided by operating activities
    
    
    
    
    
    
    3,389
    
    
    
    3,785
    
    
    
    4,732Cash flows from investing activitiesCapital expenditure
    
    
    23,25
    
    
    
    (1,234
    )
    
    
    (1,222
    )
    
    
    (1,213
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    87
    
    
    
    30
    
    
    
    34Proceeds from sale of real estate
    
    
    
    
    
    
    1,734
    
    
    
    
    
    
    
    Proceeds from partial sale of Swisscom Mobile AG
    
    
    12
    
    
    
    4,282
    
    
    
    
    
    
    
    Acquisition of additional shares in debitel
    
    
    
    
    
    
    (928
    )
    
    
    (10
    )
    
    
    Acquisition of other subsidiaries, net of cash acquired
    
    
    15
    
    
    
    (52
    )
    
    
    (45
    )
    
    
    (34
    )Proceeds from sale of subsidiaries
    
    
    
    
    
    
    10
    
    
    
    28
    
    
    
    15Investments in and sale of current financial assets, net
    
    
    19
    
    
    
    (3,059
    )
    
    
    2,896
    
    
    
    16Investments in affiliated companies
    
    
    
    
    
    
    (2
    )
    
    
    (37
    )
    
    
    (11
    )Proceeds from sale of affiliated companies
    
    
    24
    
    
    
    73
    
    
    
    42
    
    
    
    510Sale (purchase) of other financial assets, net
    
    
    
    
    
    
    5
    
    
    
    (70
    )
    
    
    23Loans receivable (granted) repaid and other non-current assets
    
    
    
    
    
    
    (75
    )
    
    
    (49
    )
    
    
    3Other cash flow from investing activities, net
    
    
    
    
    
    
    8
    
    
    
    9
    
    
    
    9Net cash provided by (used in) investing activities
    
    
    
    
    
    
    849
    
    
    
    1,572
    
    
    
    (648
    )Cash flows from financing activitiesRepayment of short-term debt
    
    
    
    
    
    
    (684
    )
    
    
    (620
    )
    
    
    (2
    )Issuance of long-term debt
    
    
    
    
    
    
    6
    
    
    
    94
    
    
    
    16Repayment of long-term debt
    
    
    
    
    
    
    (1,291
    )
    
    
    (1,036
    )
    
    
    (787
    )Proceeds from finance lease obligations
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    Proceeds from sale and leaseback transactions
    
    
    11
    
    
    
    746
    
    
    
    
    
    
    
    Net repayments of cross-border tax lease transactions
    
    
    
    
    
    
    (39
    )
    
    
    (37
    )
    
    
    (58
    )Purchase of treasury stock and call options
    
    
    
    
    
    
    (39
    )
    
    
    (38
    )
    
    
    (12
    )Dividends paid
    
    
    41
    
    
    
    (809
    )
    
    
    (728
    )
    
    
    (794
    )Dividends paid to minority interests
    
    
    32
    
    
    
    (6
    )
    
    
    (304
    )
    
    
    (393
    )Share buy back
    
    
    33
    
    
    
    
    
    
    
    (4,264
    )
    
    
    Capital reduction
    
    
    33
    
    
    
    (589
    )
    
    
    (529
    )
    
    
    (530
    )Other cash flow from financing activities, net
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    
    
    
    
    (2,709
    )
    
    
    (7,454
    )
    
    
    (2,560
    )Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    1,529
    
    
    
    (2,097
    )
    
    
    1,524Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    2,265
    
    
    
    3,788
    
    
    
    1,682Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (6
    )
    
    
    (9
    )
    
    
    31Cash and
cash equivalents at end of year
    
    
    
    
    
    
    3,788
    
    
    
    1,682
    
    
    
    3,237
 Significant non-cash transactions: In 2001, Swisscom entered into an agreement to transfer its IT business to
a separate company, Swisscom IT Services AG, and to merge the latter with
AGI IT Services AG. Swisscom AG and AGI Holding AG have a shareholding of
71.1% and 28.9% respectively in Swisscom IT Services AG. No cash was
transferred. Swisscom recorded a gain of CHF 72 million under financial
income in 2001. See Note 15. The accompanying notes form an integral part of these financial statements.   F-4




---



##### Table of Contents



Swisscom Consolidated statement of shareholders equity CHF in millions
    
    Note
    
    Sharecapital
    
    Additionalpaid-incapital
    
    Retainedearnings
    
    Treasurystock
    
    Fair valueand otherreserves1)
    
    TotalshareholdersequityBalance at January 1, 2001
    
    
    
    
    
    
    1,839
    
    
    
    2,395
    
    
    
    4,556
    
    
    
    (1
    )
    
    
    (121
    )
    
    
    8,668Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64
    )
    
    
    (64
    )Transfers to income statement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Fair value adjustments
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (98
    )
    
    
    (98
    )Losses not recognized in income statement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (164
    )
    
    
    (164
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,964
    
    
    
    
    
    
    
    
    
    
    
    4,964Dividend relating to 2000
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    (809
    )
    
    
    
    
    
    
    
    
    
    
    (809
    )Purchase of treasury stock and options
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    
    
    
    
    (39
    )Sale of treasury stock and options
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    38Capital reduction
    
    
    33
    
    
    
    (589
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (589
    )Balance at December 31, 2001
    
    
    
    
    
    
    1,250
    
    
    
    2,395
    
    
    
    8,711
    
    
    
    (2
    )
    
    
    (285
    )
    
    
    12,069Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (18
    )Transfers to income statement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Fair value adjustments
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    (61
    )Losses not recognized in income statement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    (74
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    824
    
    
    
    
    
    
    
    
    
    
    
    824Dividend relating to 2001
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    (728
    )
    
    
    
    
    
    
    
    
    
    
    (728
    )Share buy back
    
    
    33
    
    
    
    (125
    )
    
    
    (1,823
    )
    
    
    (2,316
    )
    
    
    
    
    
    
    
    
    
    
    (4,264
    )Purchase of treasury stock and options
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71
    )
    
    
    
    
    
    
    (71
    )Sale of treasury stock and options
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    72Capital reduction
    
    
    33
    
    
    
    (529
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (529
    )Balance at December 31, 2002
    
    
    
    
    
    
    596
    
    
    
    572
    
    
    
    6,491
    
    
    
    (1
    )
    
    
    (359
    )
    
    
    7,299Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    120Transfers to income statement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    (26
    )Fair value adjustments
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Gains not recognized in income statement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    95Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,569
    
    
    
    
    
    
    
    
    
    
    
    1,569Dividend relating to 2002
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    (794
    )
    
    
    
    
    
    
    
    
    
    
    (794
    )Purchase of treasury stock and options
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (31
    )Sale of treasury stock and options
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    31Exercise of IPO LEAPs and SuperShares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Capital reduction
    
    
    33
    
    
    
    (530
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (530
    )Balance at December 31, 2003
    
    
    
    
    
    
    66
    
    
    
    572
    
    
    
    7,296
    
    
    
    (1
    )
    
    
    (264
    )
    
    
    7,669
  1)
    
    See Note 35. The accompanying notes form an integral part of these financial statements. F-5




---



##### 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). 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s major lines of business include Fixnet, comprising
the provision of national and international fixed-line voice
telecommunications for residential 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; debitel, which is the largest network-independent mobile service
provider in Germany and sells primarily standardized products and services
for residential customers as well as small and medium-sized business
customers in the mobile communications market. In addition, other
businesses include Swisscom Systems AG, Swisscom IT Services AG, Swisscom
Broadcast AG, Billag AG, Billag Card Services AG and Swisscom Eurospot AG.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 of 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 Swisscom revenues.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 under the historical
cost convention except as disclosed in the accounting policies below. For
example, trading and available-for-sale investments and derivative
financial instruments are shown at fair value.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. Although these estimates are based on
managements best knowledge of current events and actions Swisscom may
undertake in the future, actual results ultimately may differ from those
estimates.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 does not have control are accounted for using the equity
method. Under the equity method, investments are disclosed as investments
in affiliated companies and F-6




---



##### Table of Contents



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 and investments 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.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
Differences between the purchase price of acquisitions and the fair value
of net assets acquired are classified as goodwill from acquisitions.
Goodwill is amortized on a straight-line basis over the estimated useful
life of three to ten years.Research and development
Research and development expenditure is recognized as an expense as
incurred.Software development costs
Generally, costs associated with developing or maintaining computer
software programs are recognized as an expense as incurred. However, costs
that are directly associated with identifiable and unique software products
controlled by Swisscom and have probable future economic benefits are
recognized as intangible assets and 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, are
capitalized at cost and amortized using the straight-line method over the
life of the license, starting when the network becomes operational.Impairment of intangible assets
If there is an indication that the carrying value of an intangible asset,
including goodwill, may be impaired, Swisscom determines the estimated
recoverable amount. 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 (see Note 25).2.4
    
    Foreign currency translationForeign 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 year-end exchange
rates; gains and losses are recognized in the income statement, except when
deferred in equity as qualifying cash flow 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.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 loans and receivables
originated by the entity. All purchases and sales of investments are
recognized on the trade date, which is the date that Swisscom commits to
purchase or sell the asset. 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. F-7




---



##### Table of Contents



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 express intention of
holding the investment for less than 12 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. Fair value is determined by reference to stock exchange quoted bid
prices or other market prices. Realized gains and losses arising from
changes in the fair value of available-for-sale investments are included in
the income statement in the period in which they arise. Unrealized gains
and losses arising from changes in the fair value of available-for-sale
investments are recorded directly to equity as fair value reserve until the
investment is sold or impaired. 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. The cumulative net loss
that had been recognized directly in equity is removed from equity and
recognized in the income statement. When available-for-sale investments are
disposed of, the related accumulated fair value adjustments are included in
the income statement as gains and losses from investments securities.Loans and receivables originated by the enterprise
Loans originated by Swisscom by providing money directly to the borrower or
to a sub-participation agent at draw down are categorized as loans
originated by Swisscom and are carried at amortized cost. Originated loans
and receivables comprise term deposits with maturity dates greater than
three months and less than one year. Loans and receivables without a fixed
maturity are carried at cost.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.Depreciation is computed using the straight-line method based on estimated
useful lives: YearsBuildings
    
    
    15 - 40Cable and ducts
    
    
    14 - 20Transmission equipment
    
    
    4 - 12Switching equipment
    
    
    8 - 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
 F-8




---



##### Table of Contents



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 their estimated
useful lives. 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 reviewed for impairment losses whenever
events or changes in circumstances indicate that the carrying amount may
not be recoverable. Assets whose carrying values exceed their recoverable
amount are written down to an amount determined using discounted net future
cash flows expected to be generated by the asset.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, including 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 subscriber equipment.Revenue from subscription fees is recognized rateably 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 is recorded at the time the call is made. Revenue
from prepaid call cards is deferred and recognized at the time the customer
makes a call. Revenue from leased lines is recognized over the rental
period.Revenue from the sale of equipment is recognized at the point of sale.
Revenue from the maintenance of equipment is recognized rateably 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. F-9




---



##### Table of Contents



2.13
    
    Capitalized costSwisscoms consolidated income statement 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 base data as at December 31,
2003. 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 equity. Deferred tax assets are
recognized if it is probable that benefits will be realized in the future.2.18
    
    Related partiesUnder IFRS, transactions with the Confederation, including with its
departments and agencies, are not subject to the disclosure requirements
for related parties.AGI Holding AG holds 28.9% of Swisscom IT Services AG. The shareholders of
AGI Holding AG comprise eight cantonal banks, which are 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. F-10




---



##### Table of Contents



Through debitel, Swisscom holds 21.1% of DANGAARD Telecom Holding A/S
(Dangaard), a distributor of mobile equipment. debitel delivers prepaid
products and hardware to Dangaard and makes payments for Dangaards
logistics
services as well as commissions for hardware and advertising-cost refunds.
These services are provided 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 with
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 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 riskSwisscom is subject to interest rate risks due to fluctuations in market
rates. Swisscoms cash balances on the money market are exposed to interest
rates risk arising from changes in interest rates, which may have a
negative impact on net income. Substantially all of Swisscoms long-term
debt is in the form of fixed-rate Swiss franc loans with original
maturities of up to five years. Accordingly, movements in interest rates
could lead to fluctuations in the fair-value of such debt instruments.
Swisscom hedges the interest rate risk arising from its long-term leasing
commitments with interest rate derivatives.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.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, F-11




---



##### Table of Contents



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.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.
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
    
    2001
    
    2002
    
    2003Fixnet
    
    
    4,845
    
    
    
    4,762
    
    
    
    4,498Mobile
    
    
    3,220
    
    
    
    3,373
    
    
    
    3,434Enterprise Solutions
    
    
    1,469
    
    
    
    1,373
    
    
    
    1,261debitel
    
    
    3,808
    
    
    
    4,111
    
    
    
    4,555Other
    
    
    742
    
    
    
    833
    
    
    
    761Corporate
    
    
    90
    
    
    
    74
    
    
    
    72Total net revenue
    
    
    14,174
    
    
    
    14,526
    
    
    
    14,581
  Included within Other is CHF 0 million, CHF 174 million and CHF 165 million
in 2001, 2002 and 2003, respectively, of revenue recorded by Swisscom IT
Services AG from eight cantonal banks, which qualifies as related parties. F-12




---



##### Table of Contents



5.
    
    Other operating income CHF in millions
    
    2001
    
    2002
    
    2003Capitalized cost
    
    
    147
    
    
    
    139
    
    
    
    180Gain on sale of property, plant and equipment
    
    
    42
    
    
    
    14
    
    
    
    21Other
    
    
    24
    
    
    
    113
    
    
    
    55Total other operating income
    
    
    213
    
    
    
    266
    
    
    
    256
  Capitalized cost includes labour costs related to the construction of
technical equipment and the development of software, with no interest
allocation included.Other income for 2002 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
    
    2001
    
    2002
    
    2003Raw material, supplies and services purchased
    
    
    137
    
    
    
    140
    
    
    
    128Customer premises equipment
    
    
    973
    
    
    
    1,240
    
    
    
    1,272National traffic fees
    
    
    533
    
    
    
    563
    
    
    
    383International traffic fees
    
    
    793
    
    
    
    780
    
    
    
    716Network fees for debitel and other international subsidiaries
    
    
    2,071
    
    
    
    2,235
    
    
    
    2,314Services purchased from affiliated companies
    
    
    6
    
    
    
    1
    
    
    
    21Total goods and services purchased
    
    
    4,513
    
    
    
    4,959
    
    
    
    4,834
  7.
    
    Personnel expenses CHF in millions
    
    2001
    
    2002
    
    2003Salaries and wages
    
    
    1,796
    
    
    
    1,952
    
    
    
    1,899Termination benefits
    
    
    92
    
    
    
    92
    
    
    
    88Social security expenses
    
    
    176
    
    
    
    203
    
    
    
    183Pension cost. See note 9.
    
    
    252
    
    
    
    203
    
    
    
    257Employee stock ownership program. See Note 8.
    
    
    38
    
    
    
    39
    
    
    
    12Other personnel expenses
    
    
    107
    
    
    
    104
    
    
    
    96Total personnel expenses
    
    
    2,461
    
    
    
    2,593
    
    
    
    2,535
  Employees affected by the headcount reduction who meet certain criteria
relating to age and number of years of service are entitled to transfer to
WORK_LINK AG, an entity that operates external job placement programs,
after these employees have participated in the outplacement program.
Employees who were born in 1950 or earlier and who have worked with
Swisscom since January 1, 1989 or before are guaranteed a salary at
WORK_LINK until the age of 60. Employees who only meet one of these
criteria are guaranteed a salary for a maximum period of 24 months.
WORK_LINK seeks to hire these employees out on a temporary basis. The
employees receive a minimum of 50% of their final salary from Swisscom,
irrespective of whether work can be found for them. The total payment to
these employees of CHF 23 million, CHF 32 million, and CHF 53 million, in
2001, 2002 and 2003, respectively, of which CHF 6 million, CHF 8 million
and CHF 13 million was paid to the employees during their stay in the
outplacement program in 2001, 2002 and 2003, respectively, is recognized as
personnel expenses as incurred. No provision has been recorded for these
employees for their stay in the outplacement program or in WORK_LINK as
these costs do not meet the criteria for recognition under IFRS. The
average number of participants (in full-time positions) in WORK_LINK in
2001, 2002 and 2003 was 153, 218 and 295 employees, respectively. F-13




---



##### Table of Contents



Termination benefits
In 2001, 2002 and 2003, Swisscom took various steps to reduce the number of
employees that resulted in incurring CHF 92 million, CHF 92 million and CHF
88 million in 2001, 2002 and 2003, respectively. The costs of the program
include the following: CHF in millions
    
    2001
    
    2002
    
    2003Severance
    
    
    50
    
    
    
    
    
    
    
    18Outplacement program (EMC)
    
    
    36
    
    
    
    94
    
    
    
    82Revision of prior provision
    
    
    6
    
    
    
    (2
    )
    
    
    (12
    )Total termination benefits
    
    
    92
    
    
    
    92
    
    
    
    88
  Severance
The severance expense relates to a voluntary plan that was established for
certain employees born between 1946 and 1950. Commencing with their 55th
birthday, the employees that entered into an agreement with Swisscom will
work either full-time for a period of 2.5 years or 80% for a period of
three years. At which point they will be terminated and will continue to be
paid for a further 2.5 years and 2 years, respectively. Alternatively,
employees can work 50% for a period of 5 years and will receive
approximately 75% of their previous salary. A total of 275 employees
participated in this program in 2001 and 160 in 2003 and an expense of CHF
50 million and CHF 18 million was recorded in 2001 and 2003, respectively.
This represents the discounted present value, using a rate of 2.5%, of the
amount that will be paid to employees over the period they will not provide
service to Swisscom or the difference between the 75% salary these
employees receive and the 50% they actually work for the 5-year period.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 12 months. In 2001, 2002
and 2003, 396, 985 and 838 full-time equivalent employees participated in
the program, of which 396, 958 and 101, respectively had left the program
by the end of 2003. In connection with this program, Swisscom incurred
expenses of CHF 36 million, CHF 94 million and CHF 82 million in 2001, 2002
and 2003, 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




---



##### Table of Contents



8.
    
    Stock based compensationSwisscom 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 generally offered up to ten shares at
preferential conditions. The shares purchased are subject to a one-year
vesting 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.The number of shares allocated, the exercise price and the expense recorded in 2001, 2002 and 2003 is: NumberExercise price
    
    of allocated
    
    Cost inYear of allocation
    
    in CHF
    
    shares
    
    CHF millions2001
    
    
    
    
    
    
    68,887
    
    
    
    282002
    
    
    240
    
    
    
    119,372
    
    
    
    342003
    
    
    300
    
    
    
    44,946
    
    
    
    7
  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. Starting in 2003, the members of the Board
of Directors and Executive Board participate 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 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 2001, allocated shares and options are the following Number
    
    
    
    
    
    Number
    
    Exercise
    
    Endedof options
    
    Exchange
    
    of allocated
    
    price of
    
    blocking
    
    Maturity ofParticipant
    
    allocated
    
    ratio1)
    
    shares
    
    options
    
    period
    
    optionsBoard of Directors
    
    
    2,710
    
    
    
    1:1
    
    
    
    271
    
    
    
    503.60
    
    
    
    09.10.04
    
    
    
    09.10.06Group Executive Board
    
    
    5,740
    
    
    
    1:1
    
    
    
    574
    
    
    
    475.80
    
    
    
    30.05.04
    
    
    
    30.05.06Management
    
    
    5,269,000
    
    
    
    1:100
    
    
    
    5,269
    
    
    
    368.21
    
    
    
    25.04.04
    
    
    
    25.04.06
  1)
    
    Exchange ratio: number of options required to purchase a share. F-15




---



##### Table of Contents



In 2002, allocated shares and options are the following Number
    
    
    
    
    
    Number
    
    Exercise
    
    Endedof options
    
    Exchange
    
    of allocated
    
    price of
    
    blocking
    
    Maturity ofParticipant
    
    allocated
    
    ratio1)
    
    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
    
    ratio1)
    
    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.  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, 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. This liability
was reversed against equity at the time the options were exercised.Movements in the number of stock options and stock appreciation rights outstanding were as follows: 2001
    
    2002
    
    2003At beginning of year
    
    
    253,664
    
    
    
    312,173
    
    
    
    374,345Granted
    
    
    61,140
    
    
    
    62,180
    
    
    
    86,930Lapsed
    
    
    (2,631
    )
    
    
    (8
    )
    
    
    (9,552
    )Exercised
    
    
    
    
    
    
    
    
    
    
    (240,953
    )Sold by participants
    
    
    
    
    
    
    
    
    
    
    (1,500
    )At end of year
    
    
    312,173
    
    
    
    374,345
    
    
    
    209,270
  Vested options and appreciation rights totaled 302,621 rights at December
31, 2001, 364,793 rights at December 31, 2002 and 209,270 rights at
December 31, 2003. F-16




---



##### Table of Contents



9.
    
    Retirement benefitsEffective 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, which was determined based on an assumed
payment of 1% over the life of the retired employees. 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. At December 31, 2003, included in the present value of obligations is
CHF 338 million for these retired employees. Differences between the actual
and estimated payments are deferred as part of the actuarial gain or loss.
The present value obligation relating to these retired employees at
December 31, 2003 that will be paid by PUBLICA is CHF 3,789 million. 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.Swisscom made several amendments to comPlan in 2001. The most significant
amendment related to how the benefits will be determined for employees born
in 1957 or later. The determination of their benefits changed from a final
salary basis to a cash balance plan that is dependent on employee
contributions. At December 31, 2001, all eligible employees are entitled to
the same benefits under the new plan as the old plan. As this benefit is
not effected by anticipated employee turnover, the present value of the
obligation increased by CHF 55 million of which CHF 45 million was
immediately vested and therefore recognized as an expense. In addition, the
present value of obligations increased by CHF 26 million for other changes
to the plan.Net periodic pension cost of the plan in Switzerland includes the following components: CHF in millions
    
    2001
    
    2002
    
    2003Current service cost
    
    
    154
    
    
    
    178
    
    
    
    182Interest cost
    
    
    258
    
    
    
    261
    
    
    
    255Expected return on plan assets
    
    
    (213
    )
    
    
    (248
    )
    
    
    (227
    )Past service cost
    
    
    53
    
    
    
    12
    
    
    
    22Amortization of actuarial loss
    
    
    
    
    
    
    
    
    
    
    25Net periodic pension cost
    
    
    252
    
    
    
    203
    
    
    
    257
  At December 31, 2002 unrecognized actuarial losses exceeded the present
value of the defined benefit obligation by more than 10%. The excess amount
of CHF 273 million was recognized as an expense over the expected average
remaining working lives of the employees.The status of the pension plan in Switzerland is as follows: CHF in millions
    
    2001
    
    2002
    
    2003Amounts recognized in the balance sheetPresent value of funded obligations
    
    
    6,316
    
    
    
    6,726
    
    
    
    6,903Fair value of plan assets
    
    
    (4,562
    )
    
    
    (4,559
    )
    
    
    (4,893
    )Benefit obligation in excess of plan assets
    
    
    1,754
    
    
    
    2,167
    
    
    
    2,010Unrecognized actuarial losses
    
    
    (404
    )
    
    
    (946
    )
    
    
    (788
    )Unrecognized prior service cost
    
    
    (132
    )
    
    
    (120
    )
    
    
    (109
    )Liability in the balance sheet
    
    
    1,218
    
    
    
    1,101
    
    
    
    1,113
  Pension plan assets include Swisscom shares with a fair value of CHF 9.5
million (2001), CHF 7.0 million (2002) and CHF 6.4 million (2003). CHF in millions
    
    2001
    
    2002
    
    2003Movement in the liability recognized in the balance sheetAt beginning of year
    
    
    1,925
    
    
    
    1,218
    
    
    
    1,101Net periodic pension cost
    
    
    252
    
    
    
    203
    
    
    
    257Contributions paid
    
    
    (962
    )
    
    
    (320
    )
    
    
    (253
    )Acquisition of subsidiaries
    
    
    3
    
    
    
    
    
    
    
    8At end of year
    
    
    1,218
    
    
    
    1,101
    
    
    
    1,113
  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. See Note 15. F-17




---



##### Table of Contents



The following weighted-average assumptions were used in accounting for the defined benefit plan: 2001
    
    2002
    
    2003Discount rate
    
    
    4.25
    %
    
    
    3.90
    %
    
    
    3.75
    %Rate of increase in future compensation levels
    
    
    3.10
    %
    
    
    3.10
    %
    
    
    3.10
    %Expected long-term rate of return on plan assets
    
    
    5.50
    %
    
    
    5.50
    %
    
    
    5.00
    %
  The actual loss on plan assets was CHF 158 million and CHF 195 million in
2001 and 2002, respectively and the actual return amounted to CHF 341
million in 2003.The pension plans outside of Switzerland are insignificant.10.
    
    Other operating expenses CHF in millions
    
    2001
    
    2002
    
    2003Rent
    
    
    239
    
    
    
    250
    
    
    
    274Repairs and maintenance
    
    
    312
    
    
    
    264
    
    
    
    229Loss on disposal of fixed assets
    
    
    119
    
    
    
    67
    
    
    
    39Energy
    
    
    52
    
    
    
    59
    
    
    
    54Information technology costs
    
    
    195
    
    
    
    224
    
    
    
    212Advertising and promotion
    
    
    448
    
    
    
    393
    
    
    
    365Commissions
    
    
    715
    
    
    
    648
    
    
    
    786Contractors and consultancy expenses
    
    
    333
    
    
    
    300
    
    
    
    246General and administration
    
    
    241
    
    
    
    240
    
    
    
    283Miscellaneous operating expenses
    
    
    350
    
    
    
    382
    
    
    
    339Total other operating expenses
    
    
    3,004
    
    
    
    2,827
    
    
    
    2,827
 F-18




---



##### Table of Contents



11.
    
    Gain on sale of real estateIn March 2001 Swisscom entered into two 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 first transaction was completed on April 1, 2001 and the second on June
19, 2001. The total gain on the sale of the properties after transaction
costs of CHF 105 million and including the reversal of environmental
provisions (see Note 28), was CHF 807 million. A number of the leaseback
agreements were finance leases and the gain on the sale of these properties
of CHF 239 million has been deferred and will be released to income over
the individual lease terms. See Note 31. The remaining gain of CHF 568
million represents the gain on the sale of buildings which were either sold
outright or which qualify as operating leases. The present value of the
future payments under the finance lease was CHF 746 million and has been
included both as a fixed asset and as a lease obligation.12.
    
    Gain on partial sale of Swisscom Mobile AGIn November 2000, Swisscom entered into an agreement with Vodafone plc.
(Vodafone) for the sale of 25% of the equity of the Swisscom mobile
business for CHF 4.5 billion. Effective January 1, 2001 Swisscom
transferred the net assets of its mobile business to Swisscom Mobile AG.The sale was completed on March 30, 2001 when 25% of the shares of Swisscom
Mobile AG were issued to Vodafone through a capital increase. In accordance
with the agreement, Vodafone paid the first installment of CHF 2,200
million on closing; CHF 25 million in cash and CHF 2,175 million in shares
of Vodafone. Prior to closing, Swisscom entered into an amendment to the
sales agreement with Vodafone for the subsequent sale of these shares. In
accordance with this amendment the shares were sold on the closing date of
the transaction and Swisscom received cash of CHF 2,067 million, net of a
transaction fee of CHF 108 million. In a further amendment to the sales
agreement, Vodafone gave up their right to issue shares for the second
installment of CHF 2,300 million (plus interest) and agreed to pay Swisscom
CHF 2,250 million (plus interest) in cash. This payment was made on
September 27, 2001. The payment of CHF 50 million of interest in cash was
recorded in interest income.Swisscom recorded a pre-tax gain on the sale, less transaction costs of CHF
168 million, of CHF 3,837 million, calculated as follows: CHF in millions
    
    2001Transaction proceeds, gross
    
    
    4,450Transaction expensesCost of sale of Vodafone shares
    
    
    (108
    )Stamp duty
    
    
    (45
    )Other transaction expenses
    
    
    (15
    )Proceeds of transaction, net
    
    
    4,28225% carrying value of the net assets
    
    
    (445
    )Transaction gain
    
    
    3,837
  For information on the tax impact of the transaction, see Note 16. F-19




---



##### Table of Contents



13.
    
    Financial expense CHF in millions
    
    2001
    
    2002
    
    2003Interest on debt and finance lease obligations
    
    
    288
    
    
    
    246
    
    
    
    172Present value adjustment on accrued liabilities
    
    
    29
    
    
    
    26
    
    
    
    (38
    )Write off of loans receivable from affiliated companies
    
    
    212
    
    
    
    1
    
    
    
    Loss on disposal of debitel shares
    
    
    
    
    
    
    13
    
    
    
    Fair value
losses on financial instruments. See Note 35.Available-for-sale investmentsDerivative financial instruments not qualifying as hedgesForeign exchange losses (gains)
    
    
    (10
    )
    
    
    71
    
    
    
    (48
    )Other financial expense
    
    
    2
    
    
    
    8
    
    
    
    13Total financial expense
    
    
    771
    
    
    
    517
    
    
    
    154
  Swisscom records an accrual for the dismantlement of analog 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 accrual by
CHF 43 million, which was recorded under present value adjustment on
accrued liabilities. See Note 28.Swisscom had an equity method investment in UTA Telekom AG (UTA). The
carrying value of the investment at January 1, 2001 was CHF 51 million.
During 2001, UTA incurred losses and Swisscoms investment was written down
to zero. These losses were recorded under equity in net income of
affiliated companies. See Note 24. Swisscom and UTAs other major
shareholder, Vereinigte Telekom Österreich Beteiligungs GmbH (VTÖB) were
responsible for funding UTAs operations. At December 31, 2001, Swisscom
had a loan outstanding to UTA of CHF 199 million. In December 2001,
Swisscom decided that it would not provide any additional funding and also
concluded that the loan was not collectable. In January 2002, Swisscom
forgave the loan and sold its shares in UTA to VTÖB for EUR 1. In turn,
Swisscom had no further obligations to UTA or any of the other
shareholders.In 2002, Swisscom sold 2% of the outstanding debitel shares to
ElectronicPartner (EP) as consideration for exclusive distribution rights
of debitels products and recorded a CHF 13 million loss on this
transaction. See Note 25.In 2001, the fair value loss on available-for-sale investments includes an
impairment loss on Swisscoms investment in Infonet Services Corp.
(Infonet) of CHF 212 million. In 2002, this includes an impairment loss
of CHF 41 million on its investment in Swiss International Airlines Ltd.
(Swiss) and CHF 111 million in Infonet. In 2003, this includes an
impairment loss of CHF 33 million in Swiss and CHF 22 million on other
available-for-sale investments. See note 19.In 2001, the fair value loss on derivative financial instruments not
qualifying as hedges comprises the decline in value of Swisscoms
investment in Swiss International Airlines Ltd. (Swiss) between
commitment date and issuance date. See Note 26.14.
    
    Financial income CHF in millions
    
    2001
    
    2002
    
    2003Interest
    
    
    336
    
    
    
    168
    
    
    
    114Dividends
    
    
    6
    
    
    
    8
    
    
    
    12Gain on disposal of financial assets
    
    
    
    
    
    
    
    
    
    
    11Gain on transaction with AGI Holding AG. See Note 15.
    
    
    72
    
    
    
    
    
    
    
    Gain on cross-border tax lease transactions. See Note 27.
    
    
    
    
    
    
    28
    
    
    
    Other financial income
    
    
    2
    
    
    
    2
    
    
    
    3Total financial income
    
    
    416
    
    
    
    206
    
    
    
    140
 F-20




---



##### Table of Contents



15.
    
    Acquisitions of subsidiariesIn September 2001, Swisscom concluded an agreement to transfer its IT
business to a separate company, Swisscom IT Services AG and to acquire AGI
IT Services AG. AGI IT Services AG, which was owned by eight cantonal
banks, was one of the leading IT service providers to the financial
services sector in Switzerland. The transaction took the form of an
exchange of shares and closed in December 2001. Swisscom and AGI Holding AG
have a 71.1% and a 28.9% interest respectively in Swisscom IT Services AG.
The acquisition was accounted for using purchase accounting and Swisscom
recorded a dilution gain of CHF 72 million and goodwill of CHF 102 million
arising on the transaction.The fair value of the assets acquired and liabilities of AGI IT Services AG assumed were as follows: CHF in millionsTrade accounts receivable
    
    
    26Other current assets
    
    
    2Property, plant and equipment
    
    
    39Goodwill
    
    
    102Other intangible assets
    
    
    16Trade accounts payable
    
    
    (26
    )Current tax liabilities
    
    
    (2
    )Other current liabilities
    
    
    (9
    )Accrued pension cost
    
    
    (3
    )Total purchase price
    
    
    145
  As of December 19, 2003, Swisscom acquired 100% of T-Systems Card Services
AG from T-Systems Schweiz 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.In February 2003, debitel France S.A. acquired the remaining 50%
shareholding in the retail chain TelecomOption. TelecomOption has since
merged with Videlec Distribution S.A.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.The following table shows the aggregated fair values of the assets acquired, liabilities assumed and cash flows: CHF in millionsCash and cash equivalents
    
    
    38Other receivables
    
    
    373Other current assets
    
    
    6Property, plant and equipment and other intangible assets
    
    
    14Goodwill
    
    
    80Deferred tax assets
    
    
    6Financial liabilities
    
    
    (259
    )Accrued pension cost
    
    
    (8
    )Other short- and long-term liabilities
    
    
    (163
    )Purchase price
    
    
    87Less cash acquired
    
    
    (38
    )Deferred purchase price
    
    
    (15
    )Net cash outflow
    
    
    34
 F-21




---



##### Table of Contents



16.
    
    Income tax expense CHF in millions
    
    2001
    
    2002
    
    2003Current income tax expense
    
    
    499
    
    
    
    123
    
    
    
    241Deferred income tax (benefit) expense
    
    
    (514
    )
    
    
    238
    
    
    
    259Total income tax (benefit) expense
    
    
    (15
    )
    
    
    361
    
    
    
    500
  Current income taxes are calculated based on taxable income of the period
and are accrued in the same period as the revenues and expenses to which
they relate.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
    
    2001
    
    2002
    
    2003Income before income taxes, equity in net income of
affiliated companies and minority interest
    
    
    5,155
    
    
    
    1,395
    
    
    
    2,422Weighted-average statutory tax rate
    
    
    25
    %
    
    
    23
    %
    
    
    23
    %Income tax expense at the weighted average statutory
tax rate
    
    
    1,289
    
    
    
    321
    
    
    
    557Increase (decrease) in income taxes resulting from
Gain on partial sale of Swisscom Mobile not taxable
    
    
    (959
    )
    
    
    
    
    
    
    Gain on partial sale of real estate partly not taxable
    
    
    (126
    )
    
    
    
    
    
    
    Effect of impairment of goodwill of debitel
    
    
    (155
    )
    
    
    (46
    )
    
    
    (16
    )Amortization of goodwill
    
    
    96
    
    
    
    70
    
    
    
    49Effect on deferred taxes due to change in tax rate
    
    
    
    
    
    
    115
    
    
    
    Benefit on investments in affiliated companies
    
    
    (49
    )
    
    
    
    
    
    
    Effect of different tax rates in other countries
    
    
    18
    
    
    
    21
    
    
    
    14Income of subsidiaries not taxable
    
    
    (20
    )
    
    
    (13
    )
    
    
    (30
    )Income not taxable
    
    
    (13
    )
    
    
    (3
    )
    
    
    (8
    )Other
    
    
    (96
    )
    
    
    (104
    )
    
    
    (66
    )Income tax (benefit) expense
    
    
    (15
    )
    
    
    361
    
    
    
    500
  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 connection with establishing a separate legal identity for its mobile
business  Swisscom Mobile AG  the parent company Swisscom AG recognized a
gain for tax purposes on the assessed increase in value of its mobile
business and in 2001 recorded a current tax expense. The increase in value
was however included in the transfer of assets from the parent company to
Swisscom Mobile AG and is recorded for tax purposes as an intangible asset.
The intangible asset recorded by Swisscom Mobile AG is being amortized for
tax purposes over four years. The gain that was recorded on the sale
of shares received by Swisscom Mobile was, in effect, not subject to tax.The increase in the fair value of the real estate between the date it was
either bought or constructed and January 1, 1998  date of
privatization 
is exempt from tax. The increase in the fair value of real estate after
that date is taxable. The amount of tax expense recorded is based on
managements best estimates of the fair value of real estate at January 1,
1998 and is subject to agreement by the tax authorities and therefore the
amount of the tax provision attributable to this gain could change.Prior to impairment charges, Swisscoms tax basis of its investment in
debitel exceeded its carrying basis by CHF 620 million, CHF 197 million and
CHF 68 million in 2001, 2002 and 2003, respectively. Accordingly, the
impairment charges for tax purposes exceeded those recorded in the
consolidated financial statements and Swisscom recorded tax benefits of CHF
155 million, CHF 46 million and CHF 16 million in 2001, 2002 and 2003,
respectively.Deferred income tax assets are recognized for tax loss carry-forwards to
the extent that the realization of the related tax benefit through the
future taxable profits is probable. Certain subsidiaries of Swisscom have
unrecognized tax losses of CHF 266 million, CHF 371 million and CHF 516
million in 2001, 2002 and 2003, respectively, for which no deferred tax
asset is recognized in the balance sheet. These tax losses will expire
mainly after 2009. F-22




---



##### Table of Contents



As at December 31, 2001, 2002 and 2003 the tax effects of temporary
differences that give rise to deferred tax assets and liabilities were as
follows: CHF in millions
    
    2001
    
    2002
    
    2003Assets associated with
Accrued pension cost
    
    
    127
    
    
    
    119
    
    
    
    118Intangible assets
    
    
    747
    
    
    
    346
    
    
    
    164Other current and non-current assets
    
    
    48
    
    
    
    65
    
    
    
    79Tax losses
    
    
    9
    
    
    
    101
    
    
    
    28Total deferred tax assets
    
    
    931
    
    
    
    631
    
    
    
    389Liabilities associated with
Property, plant and equipment
    
    
    (435
    )
    
    
    (400
    )
    
    
    (396
    )Other non-current assets
    
    
    (31
    )
    
    
    (23
    )
    
    
    (21
    )Trade accounts receivable and other current assets
    
    
    (32
    )
    
    
    (6
    )
    
    
    (5
    )Accrued liabilities
    
    
    (14
    )
    
    
    (21
    )
    
    
    (36
    )Other long-term liabilities
    
    
    (75
    )
    
    
    (67
    )
    
    
    (64
    )Total deferred tax liabilities
    
    
    (587
    )
    
    
    (517
    )
    
    
    (522
    )Net deferred tax (liabilities) assets
    
    
    344
    
    
    
    114
    
    
    
    (133
    )
  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
    
    2001
    
    2002
    
    2003Deferred tax assets
    
    
    811
    
    
    
    410
    
    
    
    250Deferred tax liabilities
    
    
    (467
    )
    
    
    (296
    )
    
    
    (383
    )
  The movement in deferred tax assets and liabilities (prior to offsetting) is as follows: Accrued pensionCHF in millions
    
    Intangible assets
    
    cost
    
    Tax loss
    
    Other
    
    TotalDeferred tax assetsBalance at December 31, 2000
    
    
    
    
    
    
    323
    
    
    
    15
    
    
    
    36
    
    
    
    374(Charged) credited to income statement
    
    
    747
    
    
    
    (196
    )
    
    
    (6
    )
    
    
    13
    
    
    
    558Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Balance at December 31, 2001
    
    
    747
    
    
    
    127
    
    
    
    9
    
    
    
    48
    
    
    
    931(Charged) credited to income statement
    
    
    (401
    )
    
    
    (8
    )
    
    
    92
    
    
    
    16
    
    
    
    (301
    )Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Balance at December 31, 2002
    
    
    346
    
    
    
    119
    
    
    
    101
    
    
    
    65
    
    
    
    631(Charged) credited to income statement
    
    
    (182
    )
    
    
    (3
    )
    
    
    (77
    )
    
    
    6
    
    
    
    (256
    )Acquisition of subsidiaries
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    4Credited to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Translation adjustments
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    4
    
    
    
    6Balance at December 31, 2003
    
    
    164
    
    
    
    118
    
    
    
    28
    
    
    
    79
    
    
    
    389
 Property,plant and
    
    Accrued
    
    Other long-CHF in millions
    
    equipment
    
    liabilities
    
    term liabilities
    
    Other
    
    TotalDeferred tax liabilitiesBalance at December 31, 2000
    
    
    362
    
    
    
    45
    
    
    
    79
    
    
    
    53
    
    
    
    539Effect of adopting IAS 39
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    32Charged (credited) to income statement
    
    
    73
    
    
    
    (31
    )
    
    
    (4
    )
    
    
    6
    
    
    
    44Credited to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    (32
    )Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Balance at December 31, 2001
    
    
    435
    
    
    
    14
    
    
    
    75
    
    
    
    63
    
    
    
    587Charged (credited) to income statement
    
    
    (35
    )
    
    
    7
    
    
    
    (8
    )
    
    
    (27
    )
    
    
    (63
    )Credited to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Balance at December 31, 2002
    
    
    400
    
    
    
    21
    
    
    
    67
    
    
    
    29
    
    
    
    517Charged (credited) to income statement
    
    
    (4
    )
    
    
    15
    
    
    
    (3
    )
    
    
    (5
    )
    
    
    3Charged to equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Balance at December 31, 2003
    
    
    396
    
    
    
    36
    
    
    
    64
    
    
    
    26
    
    
    
    522
 F-23




---



##### Table of Contents



17.
    
    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: 2001
    
    2002
    
    2003Net income (CHF in millions)
    
    
    4,964
    
    
    
    824
    
    
    
    1,569Weighted-average number of ordinary shares in issue
    
    
    73,543,972
    
    
    
    67,647,928
    
    
    
    66,199,789Basic earnings per share (CHF)
    
    
    67.50
    
    
    
    12.18
    
    
    
    23.70
  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 is calculated as follows: 2001
    
    2002
    
    2003Net income (CHF in millions)
    
    
    4,964
    
    
    
    824
    
    
    
    1,569Weighted-average number of ordinary shares in issue
    
    
    73,543,972
    
    
    
    67,647,928
    
    
    
    66,199,789Adjustment for stock options and appreciation rights
    
    
    43,747
    
    
    
    70,132
    
    
    
    40,591Weighted-average number of ordinary
shares for diluted earnings per share
    
    
    73,587,719
    
    
    
    67,718,060
    
    
    
    66,240,380Diluted earnings per share (CHF)
    
    
    67.46
    
    
    
    12.17
    
    
    
    23.69
  18.
    
    Cash and cash equivalents CHF in millions
    
    2001
    
    2002
    
    2003Cash deposits
    
    
    918
    
    
    
    988
    
    
    
    1,421Term deposits
    
    
    2,870
    
    
    
    694
    
    
    
    1,816Total cash and cash equivalents
    
    
    3,788
    
    
    
    1,682
    
    
    
    3,237
  The weighted-average effective interest rate on short-term deposits was
2.77% in 2001, 1.67% in 2002 and 0.26% in 2003 and the deposits outstanding
at December 31, 2003 have an average maturity of 9 days. F-24




---



##### Table of Contents



19.
    
    Current financial assets Available-
    
    DerivativeLoans and
    
    for-sale
    
    financialCHF in millions
    
    receivables
    
    investments
    
    instruments
    
    TotalBalance at January 1, 2001
    
    
    50
    
    
    
    67
    
    
    
    121
    
    
    
    238Additions
    
    
    4,556
    
    
    
    196
    
    
    
    
    
    
    
    4,752Disposals
    
    
    (1,656
    )
    
    
    (37
    )
    
    
    
    
    
    
    (1,693
    )Translation adjustments
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Revaluation deficit included in equity. See Note 35.
    
    
    
    
    
    
    (4
    )
    
    
    (7
    )
    
    
    (11
    )Revaluation
(deficit) surplus included in income statement
    
    
    
    
    
    
    (1
    )
    
    
    36
    
    
    
    35Balance at December 31, 2001
    
    
    2,950
    
    
    
    216
    
    
    
    150
    
    
    
    3,316Additions
    
    
    135
    
    
    
    48
    
    
    
    
    
    
    
    183Disposals
    
    
    (3,011
    )
    
    
    (68
    )
    
    
    
    
    
    
    (3,079
    )Interest
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    (16
    )Translation adjustments
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Revaluation deficit included in equity. See Note 35.
    
    
    
    
    
    
    (29
    )
    
    
    (8
    )
    
    
    (37
    )Revaluation deficit included in income statement
    
    
    (3
    )
    
    
    (4
    )
    
    
    (70
    )
    
    
    (77
    )Balance at December 31, 2002
    
    
    55
    
    
    
    158
    
    
    
    72
    
    
    
    285Additions
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Disposals
    
    
    (11
    )
    
    
    (13
    )
    
    
    
    
    
    
    (24
    )Revaluation surplus included in equity. See Note 35.
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    21Revaluation deficit included in income statement
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    (26
    )Balance at December 31, 2003
    
    
    44
    
    
    
    174
    
    
    
    46
    
    
    
    264
  Derivative financial instruments comprise cross-currency interest rate
swaps, interest rate swaps and forward foreign exchange contracts.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. See Note 13.Included within available-for-sale securities at December 31, 2003 are
investments whose cost basis of CHF 53 million exceeded their market value
by CHF 5 million. Swisscom concluded that these investments were not
impaired. The excess, net of unrealized gains, was recorded against equity.  20.
    
    Trade accounts receivable CHF in millions
    
    2001
    
    2002
    
    2003Trade accounts receivable, gross
    
    
    2,841
    
    
    
    2,711
    
    
    
    2,514Allowance for bad debts
    
    
    (316
    )
    
    
    (293
    )
    
    
    (295
    )Total trade accounts receivable, net
    
    
    2,525
    
    
    
    2,418
    
    
    
    2,219
 F-25




---



##### Table of Contents



21.
    
    Inventories CHF in millions
    
    2001
    
    2002
    
    2003Raw material and supplies
    
    
    114
    
    
    
    77
    
    
    
    68Customer premises equipment for resale
    
    
    187
    
    
    
    148
    
    
    
    126Total inventories, gross
    
    
    301
    
    
    
    225
    
    
    
    194Allowance for obsolete and slow-moving items
    
    
    (49
    )
    
    
    (45
    )
    
    
    (60
    )Total inventories, net
    
    
    252
    
    
    
    180
    
    
    
    134
  22.
    
    Other current assets CHF in millions
    
    2001
    
    2002
    
    2003Other receivables and accrued income
    
    
    388
    
    
    
    324
    
    
    
    307Other receivables from collection activities
    
    
    53
    
    
    
    65
    
    
    
    428Receivables from affiliated companies
    
    
    31
    
    
    
    47
    
    
    
    20VAT receivable
    
    
    13
    
    
    
    12
    
    
    
    7Interest receivable
    
    
    8
    
    
    
    2
    
    
    
    1Total other current assets
    
    
    493
    
    
    
    450
    
    
    
    763
  In 2003, other receivables from collection activities contain assets of CHF
336 million that have been pledged against a loan. The outstanding loan
balance at December 31, 2003, was CHF 256 million. F-26




---



##### Table of Contents



23.
    
    Property, plant and equipment Vehicles andLand and
    
    Technical
    
    otherCHF in millions
    
    buildings
    
    equipment
    
    equipment
    
    TotalAt cost:Balance at December 31, 2000
    
    
    6,104
    
    
    
    21,351
    
    
    
    1,934
    
    
    
    29,389Acquisition of subsidiary
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    55Disposals of subsidiaries
    
    
    
    
    
    
    (107
    )
    
    
    (7
    )
    
    
    (114
    )Additions
    
    
    28
    
    
    
    797
    
    
    
    246
    
    
    
    1 071Sale and
leaseback1)
    
    
    239
    
    
    
    
    
    
    
    
    
    
    
    239Disposals
    
    
    (2,999
    )
    
    
    (1,360
    )
    
    
    ( 287
    )
    
    
    (4,646
    )Reclassifications
    
    
    (22
    )
    
    
    99
    
    
    
    (89
    )
    
    
    (12
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Balance at December 31, 2001
    
    
    3,350
    
    
    
    20,780
    
    
    
    1,848
    
    
    
    25,978Acquisition/disposal of subsidiaries, net
    
    
    3
    
    
    
    
    
    
    
    6
    
    
    
    9Additions
    
    
    3
    
    
    
    782
    
    
    
    300
    
    
    
    1,085Disposals
    
    
    (19
    )
    
    
    (644
    )
    
    
    (229
    )
    
    
    (892
    )Reclassifications
    
    
    (120
    )
    
    
    (283
    )
    
    
    406
    
    
    
    3Translation adjustments
    
    
    
    
    
    
    (5
    )
    
    
    (1
    )
    
    
    (6
    )Balance at December 31, 2002
    
    
    3,217
    
    
    
    20,630
    
    
    
    2,330
    
    
    
    26,177Acquisition/disposal of subsidiaries, net
    
    
    
    
    
    
    (2
    )
    
    
    18
    
    
    
    16Additions
    
    
    6
    
    
    
    817
    
    
    
    256
    
    
    
    1,079Disposals
    
    
    (57
    )
    
    
    (777
    )
    
    
    (223
    )
    
    
    (1,057
    )Reclassifications
    
    
    (4
    )
    
    
    (3
    )
    
    
    7
    
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Balance at December 31, 2003
    
    
    3,162
    
    
    
    20,665
    
    
    
    2,399
    
    
    
    26,226Accumulated depreciation:Balance at December 31, 2000
    
    
    3,734
    
    
    
    14,585
    
    
    
    1,124
    
    
    
    19,443Acquisition/disposal of subsidiaries, net
    
    
    
    
    
    
    (107
    )
    
    
    5
    
    
    
    (102
    )Additions
    
    
    76
    
    
    
    1,327
    
    
    
    299
    
    
    
    1,702Disposals
    
    
    (1,651
    )
    
    
    (1,248
    )
    
    
    ( 262
    )
    
    
    (3,161
    )Reclassifications
    
    
    (3
    )
    
    
    30
    
    
    
    (33
    )
    
    
    (6
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Balance at December 31, 2001
    
    
    2,156
    
    
    
    14,587
    
    
    
    1,131
    
    
    
    17,874Acquisition/disposal of subsidiaries, net
    
    
    2
    
    
    
    
    
    
    
    4
    
    
    
    6Additions
    
    
    48
    
    
    
    1,255
    
    
    
    275
    
    
    
    1,578Disposals
    
    
    (13
    )
    
    
    (596
    )
    
    
    (205
    )
    
    
    (814
    )Reclassifications
    
    
    (75
    )
    
    
    (121
    )
    
    
    196
    
    
    
    Translation adjustments
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )
    
    
    (3
    )Balance at December 31, 2002
    
    
    2,118
    
    
    
    15,124
    
    
    
    1,399
    
    
    
    18,641Acquisition/disposal of subsidiaries, net
    
    
    
    
    
    
    (2
    )
    
    
    9
    
    
    
    7Additions
    
    
    44
    
    
    
    1,232
    
    
    
    288
    
    
    
    1,564Disposals
    
    
    (50
    )
    
    
    (752
    )
    
    
    (201
    )
    
    
    (1,003
    )Reclassifications
    
    
    
    
    
    
    10
    
    
    
    (10
    )
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    8Balance at December 31, 2003
    
    
    2,112
    
    
    
    15,612
    
    
    
    1,493
    
    
    
    19,217Net book value:At December 31, 2000
    
    
    2,370
    
    
    
    6,766
    
    
    
    810
    
    
    
    9,946At December 31, 2001
    
    
    1,194
    
    
    
    6,193
    
    
    
    717
    
    
    
    8,104At December 31, 2002
    
    
    1,099
    
    
    
    5,506
    
    
    
    931
    
    
    
    7,536At December 31, 2003
    
    
    1,050
    
    
    
    5,053
    
    
    
    906
    
    
    
    7,009
  1)
    
    In 2001, Swisscom entered into transactions to sell real estate
that was accounted for as a sale-and-leaseback. See Note 11. Upon
entering into these transactions, Swisscom adjusted the carrying
value of the assets to the selling price by CHF 239 million. The gain
is deferred and amortized over the individual lease terms. See Note
31. F-27




---



##### Table of Contents



Included within property, plant and equipment are the following: CHF in millions
    
    2001
    
    2002
    
    2003Assets under construction
    
    
    264
    
    
    
    200
    
    
    
    287Technical equipment acquired under finance leaseAt cost
    
    
    573
    
    
    
    567
    
    
    
    567Accumulated depreciation
    
    
    (284
    )
    
    
    (342
    )
    
    
    (399
    )Net book value
    
    
    289
    
    
    
    225
    
    
    
    168Buildings relating to the sales leasebackAt cost
    
    
    1,185
    
    
    
    1,185
    
    
    
    1,185Accumulated depreciation
    
    
    (454
    )
    
    
    (474
    )
    
    
    (494
    )Net book value
    
    
    731
    
    
    
    711
    
    
    
    691
  24.
    
    Investments in affiliated companies Goodwillfrom
    
    TotalEquity in
    
    investments
    
    investmentsaffiliated
    
    in affiliated
    
    in affiliatedCHF in millions
    
    companies
    
    companies
    
    companiesNet book value:Balance at December 31, 2000
    
    
    400
    
    
    
    112
    
    
    
    512Additions
    
    
    123
    
    
    
    1
    
    
    
    124Dividends received
    
    
    (46
    )
    
    
    
    
    
    
    (46
    )Equity in net result of operations
    
    
    115
    
    
    
    (54
    )
    
    
    61Disposals
    
    
    (76
    )
    
    
    
    
    
    
    (76
    )Impairment
    
    
    
    
    
    
    (30
    )
    
    
    (30
    )Gain on disposal
    
    
    1
    
    
    
    
    
    
    
    1Translation adjustments
    
    
    57
    
    
    
    
    
    
    
    57Balance at December 31, 2001
    
    
    574
    
    
    
    29
    
    
    
    603Additions
    
    
    31
    
    
    
    6
    
    
    
    37Dividends received
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Equity in net result of operations
    
    
    100
    
    
    
    (1
    )
    
    
    99Disposals
    
    
    (8
    )
    
    
    (34
    )
    
    
    (42
    )(Loss) gain on disposal
    
    
    (11
    )
    
    
    7
    
    
    
    (4
    )Translation adjustments
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Balance at December 31, 2002
    
    
    684
    
    
    
    7
    
    
    
    691Additions
    
    
    17
    
    
    
    
    
    
    
    17Dividends received
    
    
    (135
    )
    
    
    
    
    
    
    (135
    )Equity in net result of operations
    
    
    71
    
    
    
    
    
    
    
    71Disposals
    
    
    (510
    )
    
    
    
    
    
    
    (510
    )Loss on disposal
    
    
    (71
    )
    
    
    (7
    )
    
    
    (78
    )Translation adjustments
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Balance at December 31, 2003
    
    
    53
    
    
    
    
    
    
    
    53
  The gross amount of goodwill was CHF 176 million, CHF 8 million and CHF 0
million at December 31, 2001, 2002 and 2003, respectively. F-28




---



##### Table of Contents



Equity in net income of affiliated companies CHF in millions
    
    2001
    
    2002
    
    2003Equity in net result of operations
    
    
    61
    
    
    
    99
    
    
    
    71Gain (loss) on disposal
    
    
    1
    
    
    
    (4
    )
    
    
    (78
    )Impairment of investment in affiliated companies
    
    
    (30
    )
    
    
    
    
    
    
    Total equity in net income of affiliated companies
    
    
    32
    
    
    
    95
    
    
    
    (7
    )
  Year ended December 31, 2001AdditionsIn 2001, total additions to investments in affiliated companies of CHF 124
million comprises primarily a capital increase and the conversion of a loan
into equity at AUCS.Equity in net result of operationsEquity in net result of operations in 2001 comprises primarily the gain on
AUCS (see below) and Swisscoms share of net income from Cesky Telekom
offset by Swisscoms share of losses incurred by UTA. See Note 13.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.ImpairmentIn 2000, Swisscom acquired shares in three subsidiaries of tamedia AG.
These three companies provide platforms for auctioning and classified
personal ads. In connection with this transaction, Swisscom recognized
goodwill of CHF 79 million. At the end of March 2001, two of the internet
platforms ceased operations. As a result Swisscom recognized an impairment
to the goodwill relating to these two companies of CHF 30 million.Year ended December 31, 2002AdditionsAdditions for 2002 of CHF 37 million comprise primarily an additional
investment in AUCS.Equity in net result of operationsEquity in net result of operations comprises primarily Swisscoms share of
net income from Cesky Telecom and the gain on AUCS (see above).Year ended December 31, 2003AdditionsAdditions for 2003 of CHF 17 million primarily comprise a capital increase
at AUCS.Dividends receivedDividends 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 operationsEquity 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 disposalIn December 2003, Swisscom and KPN sold their investment in Cesky Telecom,
which was held by Telsource, to international investors, in an accelerated
bookbuilding process. The sales price was CZK 255 per share, resulting in
Swisscoms share of proceeds of CHF 510 million after transaction costs.
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. F-29




---



##### Table of Contents



Selected aggregated key dataThe following schedule provides selected aggregated key data of Swisscoms
proportionate interest in joint ventures including AUCS, TelSource and UTA
(2001). Other equity investments are insignificant. CHF in millions
    
    2001
    
    2002
    
    2003Income statementNet revenue
    
    
    292
    
    
    
    65
    
    
    
    29Total operating expenses
    
    
    (405
    )
    
    
    (79
    )
    
    
    (101
    )Operating loss
    
    
    (113
    )
    
    
    (14
    )
    
    
    (72
    )Net (loss) income
    
    
    (105
    )
    
    
    93
    
    
    
    (72
    )Balance sheetCurrent assets
    
    
    137
    
    
    
    23
    
    
    
    20Fixed assets
    
    
    760
    
    
    
    676
    
    
    
    1Current liabilities
    
    
    157
    
    
    
    36
    
    
    
    9Long-term liabilities
    
    
    217
    
    
    
    34
    
    
    
    8Shareholders equity
    
    
    523
    
    
    
    629
    
    
    
    4
 F-30




---



##### Table of Contents



25.
    
    Goodwill and other intangible assets Internally
    
    Otherdeveloped
    
    intangibleCHF in millions
    
    Goodwill
    
    software
    
    assets
    
    TotalAt cost:Balance at December 31, 2000
    
    
    3,213
    
    
    
    74
    
    
    
    213
    
    
    
    3,500Additions
    
    
    
    
    
    
    97
    
    
    
    66
    
    
    
    163Disposals
    
    
    
    
    
    
    
    
    
    
    (13
    )
    
    
    (13
    )Acquisitions
    
    
    1,031
    
    
    
    17
    
    
    
    15
    
    
    
    1,063Disposal of subsidiaries
    
    
    
    
    
    
    (7
    )
    
    
    (4
    )
    
    
    (11
    )Reclassifications
    
    
    
    
    
    
    22
    
    
    
    (10
    )
    
    
    12Translation adjustments
    
    
    (121
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (125
    )Balance at December 31, 2001
    
    
    4,123
    
    
    
    202
    
    
    
    264
    
    
    
    4,589Additions
    
    
    
    
    
    
    62
    
    
    
    75
    
    
    
    137Disposals
    
    
    (79
    )
    
    
    (2
    )
    
    
    (4
    )
    
    
    (85
    )Acquisition of subsidiaries
    
    
    54
    
    
    
    
    
    
    
    3
    
    
    
    57Reclassifications
    
    
    
    
    
    
    14
    
    
    
    (17
    )
    
    
    (3
    )Translation adjustments
    
    
    (74
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (78
    )Balance at December 31, 2002
    
    
    4,024
    
    
    
    275
    
    
    
    318
    
    
    
    4,617Additions
    
    
    
    
    
    
    50
    
    
    
    84
    
    
    
    134Disposals
    
    
    
    
    
    
    (6
    )
    
    
    (4
    )
    
    
    (10
    )Acquisition of subsidiaries
    
    
    81
    
    
    
    
    
    
    
    4
    
    
    
    85Translation adjustments
    
    
    296
    
    
    
    6
    
    
    
    13
    
    
    
    315Balance at December 31, 2003
    
    
    4,401
    
    
    
    325
    
    
    
    415
    
    
    
    5,141Accumulated amortization:Balance at December 31, 2000
    
    
    406
    
    
    
    13
    
    
    
    34
    
    
    
    453Amortization
    
    
    390
    
    
    
    44
    
    
    
    38
    
    
    
    472Disposals
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Disposal of subsidiaries
    
    
    
    
    
    
    (5
    )
    
    
    (2
    )
    
    
    (7
    )Impairment
    
    
    1,130
    
    
    
    
    
    
    
    
    
    
    
    1,130Reclassifications
    
    
    
    
    
    
    5
    
    
    
    1
    
    
    
    6Translation adjustments
    
    
    (18
    )
    
    
    
    
    
    
    (3
    )
    
    
    (21
    )Balance at December 31, 2001
    
    
    1,908
    
    
    
    57
    
    
    
    62
    
    
    
    2,027Amortization
    
    
    303
    
    
    
    75
    
    
    
    49
    
    
    
    427Disposals
    
    
    (41
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (45
    )Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Impairment
    
    
    702
    
    
    
    
    
    
    
    
    
    
    
    702Reclassifications
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    Translation adjustments
    
    
    (38
    )
    
    
    
    
    
    
    (1
    )
    
    
    (39
    )Balance at December 31, 2002
    
    
    2,834
    
    
    
    132
    
    
    
    107
    
    
    
    3,073Amortization
    
    
    213
    
    
    
    88
    
    
    
    60
    
    
    
    361Disposals
    
    
    
    
    
    
    (5
    )
    
    
    (3
    )
    
    
    (8
    )Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Impairment
    
    
    280
    
    
    
    
    
    
    
    
    
    
    
    280Translation adjustments
    
    
    217
    
    
    
    2
    
    
    
    5
    
    
    
    224Balance at December 31, 2003
    
    
    3,544
    
    
    
    217
    
    
    
    170
    
    
    
    3,931Net book value:At December 31, 2000
    
    
    2,807
    
    
    
    61
    
    
    
    179
    
    
    
    3,047At December 31, 2001
    
    
    2,215
    
    
    
    145
    
    
    
    202
    
    
    
    2,562At December 31, 2002
    
    
    1,190
    
    
    
    143
    
    
    
    211
    
    
    
    1,544At December 31, 2003
    
    
    857
    
    
    
    108
    
    
    
    245
    
    
    
    1,210
 F-31




---



##### Table of Contents



The vast majority of Swisscoms goodwill relates to its 93.0% ownership of
debitel, a network independent telecommunications company that provides
mobile communications, fixed line and internet services. The acquisition of
this interest has been made in various steps originating with a 74.2%
interest in 1999 and an additional 20.0% in 2001, when Swisscom paid CHF
928 million, of which CHF 906 million was allocated to goodwill. An
additional 0.8% was acquired in 2002. During 2002, Swisscom also sold
1,780,000, or 2.0%, of the outstanding debitel shares to ElectronicPartner
(EP) as consideration for exclusive distribution rights of debitels
products. This resulted in a reduction of goodwill and an increase in
minority interest and other intangible assets and was based on the quoted
market value of debitels share on the day of the transaction. As the
carrying value of Swisscoms investment that was sold exceeded the fair
value of the shares sold, Swisscom recorded a CHF 13 million loss on the
transaction. The goodwill of debitel is amortized on a straight-line basis
over 10 years and at December 31, 2003 has a remaining life of
approximately 6 years.As a result of significant changes in the telecommunications sector,
including the expected delay in the implementation of the third generation
system, UMTS, Swisscom recorded an impairment charge relating to debitel in
2001. As a result of a further decline in future expected growth in the
mobile sector, Swisscom recorded an additional charge in 2002. These
impairment charges represent the difference between the carrying value of
this investment and the value in use amount. The value in use amount was
determined based on projections of future profitability. The total
projected cash flow was discounted by debitels weighted average cost of
capital of 10.26% in 2001 and 10.75 % in 2002 that was determined using the
Capital Asset Pricing Model. The increase in WACC was primarily
attributable to an increase in risk associated with the achievability of
the business plan. This methodology indicated that the value ascribed to
Swisscoms share of debitel was CHF 2,232 million compared to a carrying
value of CHF 3,362 million at December 31, 2001 and CHF 1,200 million
compared to a carrying value of CHF 1,902 million at December 31, 2002. The
difference of CHF 1,130 million and CHF 702 million was recorded as an
impairment charge in 2001 and 2002, respectively.Swisscom concluded that the methodology described above was a better
indicator of value to determine impairment than the quoted stock price
because only 5% of the shares trade. The quoted market price of debitel was
CHF 28.2 (EUR 19.1) a share at December 31, 2001 and CHF 10.7 (EUR 7.4) at
December 31, 2002. The per share value of the revised carrying amount at
December 31, 2001 and 2002 is CHF 26.6 (EUR 18) and CHF 14.5 (EUR 10),
respectively.Swisscom is currently engaged in discussions concerning the potential
disposal of its shareholding in debitel AG. Swisscom therefore believes
that the value in use for debitel approximates the net amount that would be
expected from a sale and recorded an impairment charge of CHF 280 million
at December 31, 2003. At December 31, 2003, Swisscom had a cumulative
currency translation loss of CHF 221 million recorded under other reserves
in shareholders equity. If Swisscom disposes of debitel, the
cumulated currency translation loss through the date of sale would be
removed from equity and recorded under financial expense in the same period
in which the disposal is recorded.In September 2001, Swisscom acquired AGI IT Services AG and recorded
goodwill of CHF 102 million. See Note 15.The addition to goodwill in 2003 relates primarily to the acquisitions of
T-Systems Card Services AG and acquisitions by Swisscom Eurospot in
Germany, the UK and the Netherlands in connection with the set up of a
European WLAN business. F-32




---



##### Table of Contents



26.
    
    Non-current financial assets FinancialAvailable-
    
    Loans and
    
    assets from
    
    Otherfor-sale
    
    receivables
    
    cross-border
    
    financialCHF in millions
    
    investments
    
    originated
    
    tax leases
    
    assets
    
    TotalBalance at January 1, 2001
    
    
    763
    
    
    
    341
    
    
    
    1,194
    
    
    
    46
    
    
    
    2,344Additions
    
    
    84
    
    
    
    135
    
    
    
    77
    
    
    
    8
    
    
    
    304Disposals
    
    
    (35
    )
    
    
    (146
    )
    
    
    (2
    )
    
    
    (27
    )
    
    
    (210
    )Translation adjustments
    
    
    
    
    
    
    (7
    )
    
    
    26
    
    
    
    
    
    
    
    19Write off of loans receivable
    
    
    
    
    
    
    (212
    )
    
    
    
    
    
    
    
    
    
    
    (212
    )Revaluation deficit included in equity
    
    
    (119
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (119
    )Revaluation deficit included in income statement
    
    
    (231
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (231
    )Balance at December 31, 2001
    
    
    462
    
    
    
    111
    
    
    
    1,295
    
    
    
    27
    
    
    
    1,895Additions
    
    
    
    
    
    
    72
    
    
    
    26
    
    
    
    
    
    
    
    98Disposals
    
    
    
    
    
    
    (23
    )
    
    
    (1
    )
    
    
    (10
    )
    
    
    (34
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    (216
    )
    
    
    
    
    
    
    (216
    )Write off of loans receivable
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Revaluation deficit included in equity
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Revaluation deficit included in income statement
    
    
    (152
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (152
    )Balance at December 31, 2002
    
    
    307
    
    
    
    156
    
    
    
    1,104
    
    
    
    17
    
    
    
    1,584Additions
    
    
    
    
    
    
    9
    
    
    
    29
    
    
    
    
    
    
    
    38Disposals
    
    
    (12
    )
    
    
    (38
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    (54
    )Translation adjustments
    
    
    1
    
    
    
    3
    
    
    
    (119
    )
    
    
    
    
    
    
    (115
    )Write off of loans receivable
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Revaluation deficit included in equity. See Note 35.
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )Revaluation deficit included in income statement
    
    
    (33
    )
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (35
    )Balance at December 31, 2003
    
    
    232
    
    
    
    126
    
    
    
    1,011
    
    
    
    14
    
    
    
    1,383
  Available-for-sale investments comprise primarily Swisscoms investments in
Swiss International Airlines Ltd (Swiss) and Infonet Services Corp.
(Infonet).In November 2001 Swisscom subscribed for CHF 100 million of new shares of
Swiss at CHF 56 per share. The shares were issued to Swisscom on December
21, 2001, on which date the market value of these shares amounted to CHF 79
million. The difference between the commitment price and the market price
of CHF 21 million was recorded under financial expense. See Note 13. At
December 31, 2001 Swisscom recorded a fair value adjustment of CHF 3
million, net of taxes of CHF 1 million, being the difference between the
year end price of CHF 82 million and the cost basis of CHF 79 million,
through equity.The market value of 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, the market value exceeded the cost basis by CHF 12
million. This increase was recorded against equity.Swisscoms investment in Infonet consists of both Class A shares and Class
B shares. The difference between Class A and Class B shares is that Class A shares have 10 votes versus 1 vote for Class B shares. Class A shares can
be converted on a one to one basis into Class B shares which are listed on
the New York Stock Exchange. Swisscom used the quoted market price of Class
B shares to determine the fair value of Class A shares. As required by IAS
39, on January 1, 2001, Swisscom made an adjustment to record the
investment at fair value by increasing both investments and equity before
taxes by CHF 119 million. In 2001 and 2002, the shares of Infonet, like
many other companies in the telecommunications sector, declined sharply. At
December 31, 2001 and 2002 Swisscoms cost basis exceeded its market value
by CHF 219 million and CHF 111 million, respectively. 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, 2001 and 2002 Swisscom removed the
CHF 219 million and CHF 111 million, respectively, from equity and recorded
it under financial expense. The amount of the increase in value that was
recorded directly to equity on January 1, 2001 of CHF 119 million was
reversed through equity before the reduction in value was recorded in the
income statement. See Note 13.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. F-33




---



##### Table of Contents



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 119 million in 2003. Financial assets from
cross-border tax lease arrangements represent those assets that were not
offset with corresponding liabilities. See Note 27.27.
    
    DebtShort-term debt CHF in millions
    
    2001
    
    2002
    
    2003Short-term loans
    
    
    73
    
    
    
    67
    
    
    
    56Short-term bank credit
    
    
    
    
    
    
    
    
    
    
    256Current portion of long-term debt
    
    
    1,000
    
    
    
    750
    
    
    
    5Employee savings deposits
    
    
    577
    
    
    
    2
    
    
    
    Short-term loans payable to affiliated companies
    
    
    47
    
    
    
    3
    
    
    
    3Current portion of finance lease obligations. See Note 31.
    
    
    40
    
    
    
    63
    
    
    
    61Derivative financial instruments. See Note 34.
    
    
    20
    
    
    
    131
    
    
    
    195Total short-term debt
    
    
    1,757
    
    
    
    1,016
    
    
    
    576
  Long-term debtLong-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
    
    2001
    
    2002
    
    2003Within one year
    
    
    1,000
    
    
    
    750
    
    
    
    Within 1-2 years
    
    
    750
    
    
    
    
    
    
    
    Total Swiss Post debt
    
    
    1,750
    
    
    
    750
    
    
    
    Financial liability from cross-border tax lease arrangements
    
    
    1,600
    
    
    
    1,463
    
    
    
    1,339Other long-term debt
    
    
    63
    
    
    
    42
    
    
    
    40Total
    
    
    3,413
    
    
    
    2,255
    
    
    
    1,379Less current portion
    
    
    (1,000
    )
    
    
    (750
    )
    
    
    (5
    )Total long-term debt
    
    
    2,413
    
    
    
    1,505
    
    
    
    1,374
  In 1999, 2000 and 2002, Swisscom entered into cross-border tax lease
arrangements with foreign investors relating to parts of its fixed and
mobile networks. Under the terms of the agreements, with durations ranging
from 13 to 30 years, Swisscom received payments and effected investments in
financial assets. At December 31, 2003 liabilities and financial assets
arising from these transactions amounted to USD 3,899 million (CHF 4,830
million) and USD 3,635 million (CHF 4,502 million), respectively. In
accordance with Interpretation SIC-27, Evaluating the substance of
transactions involving the legal form of a lease, Swisscom concluded that
total financial assets of USD 2,819 million (CHF 3,491 million), which were
either irrevocably placed with highly rated securities in trusts or
non-refundable payment undertaking agreements with financial institutions
with minimal credit risk were signed, lacked economic substance and should
not be recognized, as the definition of an asset and liability had not been
met. Accordingly, these financial assets and liabilities have been
eliminated from the consolidated financial statements. Swisscom is not
responsible for any performance under these arrangements, other than that
which would be done in the normal course of business, and therefore
recognized the fees as financial income in the period the transaction was
closed. In 2002, Swisscom recorded a fee of CHF 28 million under financial
income. Debt of CHF 1,339 million and financial assets of CHF 1,011 million
were recorded in Swisscoms balance sheet at December 31, 2003. F-34




---



##### Table of Contents



Future minimum payments resulting from cross-border tax lease arrangements
are due as follows: CHF in millions
    
    2001
    
    2002
    
    2003Within one year
    
    
    80
    
    
    
    66
    
    
    
    65Within 1-2 years
    
    
    79
    
    
    
    72
    
    
    
    75Within 2-3 years
    
    
    83
    
    
    
    87
    
    
    
    64Within 3-4 years
    
    
    86
    
    
    
    73
    
    
    
    237Within 4-5 years
    
    
    83
    
    
    
    77
    
    
    
    108After 5 years
    
    
    4 807
    
    
    
    4,041
    
    
    
    3,016Total future payment commitments
    
    
    5 218
    
    
    
    4,416
    
    
    
    3,565Less future interest charges
    
    
    (3 618
    )
    
    
    (2,963
    )
    
    
    (2,232
    )Total liability from cross-border tax lease arrangements
(net present value)
    
    
    1 600
    
    
    
    1,453
    
    
    
    1,333Fair value adjustments
    
    
    
    
    
    
    10
    
    
    
    6Long-term liability from cross-border tax lease arrangements
    
    
    1 600
    
    
    
    1,463
    
    
    
    1,339
  The weighted-average effective interest rates at the balance sheet date were as follows: CHF in millions
    
    2001
    
    2002
    
    2003Short-term loan
    
    
    5.85
    %
    
    
    5.62
    %
    
    
    3.24
    %Swiss Post loan
    
    
    3.89
    %
    
    
    3.65
    %
    
    
    3.72
    %Employee savings deposits
    
    
    2.54
    %
    
    
    2.45
    %
    
    
    Short-term loans payable to affiliated companies
    
    
    2.00
    %
    
    
    4.64
    %
    
    
    2.13
    %Financial liability from cross-border tax lease arrangements
    
    
    6.99
    %
    
    
    6.78
    %
    
    
    6.71
    %
  28.
    
    Accrued liabilities DismantlementandTermination
    
    restorationCHF in millions
    
    benefits
    
    costs
    
    Environmental
    
    Other
    
    TotalBalance at December 31, 2000
    
    
    28
    
    
    
    338
    
    
    
    211
    
    
    
    167
    
    
    
    744Additional provisions
    
    
    92
    
    
    
    1
    
    
    
    1
    
    
    
    64
    
    
    
    158Present value adjustment
    
    
    
    
    
    
    26
    
    
    
    3
    
    
    
    
    
    
    
    29Reclassifications
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (11
    )
    
    
    (9
    )Reversal of unused provisions
    
    
    
    
    
    
    (18
    )
    
    
    (183
    )
    
    
    (25
    )
    
    
    (226
    )Utilized during year
    
    
    (44
    )
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    (94
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )Balance at December 31, 2001
    
    
    76
    
    
    
    349
    
    
    
    32
    
    
    
    143
    
    
    
    600Additional provisions
    
    
    94
    
    
    
    3
    
    
    
    
    
    
    
    125
    
    
    
    222Present 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
    
    
    
    228
    
    
    
    745Additional provisions
    
    
    100
    
    
    
    4
    
    
    
    5
    
    
    
    167
    
    
    
    276Present value adjustment
    
    
    1
    
    
    
    (39
    )
    
    
    
    
    
    
    
    
    
    
    (38
    )Reversal of unused provisions
    
    
    (12
    )
    
    
    (22
    )
    
    
    
    
    
    
    (77
    )
    
    
    (111
    )Utilized during year
    
    
    (90
    )
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    (128
    )Acquisition of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    9Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Balance at December 31, 2003
    
    
    117
    
    
    
    314
    
    
    
    33
    
    
    
    291
    
    
    
    755Less current portion
    
    
    (66
    )
    
    
    
    
    
    
    
    
    
    
    (260
    )
    
    
    (326
    )Total non-current accrued liabilities
    
    
    51
    
    
    
    314
    
    
    
    33
    
    
    
    31
    
    
    
    429
  For further information concerning termination benefits see Note 7. F-35




---



##### Table of Contents



Provisions for dismantlement and restoration costsProvisions 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 change in requirements of a major customer,
which result in the stations being used 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 3.75% for analog transmitter stations in 2001, 3.0% in
2002 and 2003 and discount rates of 3.5%, 2.5% and 3.1% for mobile stations
in 2001, 2002 and 2003, respectively. The present value adjustment includes
amounts arising from the changes in the discount rate in 2001, 2002 and
2003 of CHF 11 million, CHF 11 million and CHF 4 million, respectively. The
provision was reduced in 2003 by CHF 22 million due to the elimination of
the liability resulting from the sale of stations.EnvironmentalIn 2001, the reserve for environmental liabilities was reduced because
under the terms of the sale and leaseback agreements Swisscom is no longer
liable for such costs. Furthermore as a result of certain technology
changes and other factors it was concluded that the provision should be
reduced.Provisions for interconnection lawsuitsSwisscom supplies interconnection services to other telecom companies in
Switzerland. Two of these companies filed lawsuits against Swisscom in 2000
on the grounds that the interconnection prices levied by Swisscom for the
years 2000 to 2003 were too high. On November 6, 2003, the Federal
Communications Commission (ComCom) decreed that Swisscom had to reduce the
interconnection prices for these two competitors by 25% to 35%,
retroactively for the years 2000 to 2003, which corresponds to the sum of
CHF 208 million. Swisscom has lodged an appeal with the Federal Court. The
two competitors which filed the lawsuits have also lodged appeals with the
Federal Court demanding a further reduction in interconnection prices than
decreed by ComCom without specifying an amount. Swisscom has recorded a
provision representing managements best estimate, since the lawsuits were
filed. Following the ComCom decree, the management of Swisscom revised its
estimate and increased the provision. The provision is reported under other
accrued liabilities.29.
    
    Other current liabilities CHF in millions
    
    2001
    
    2002
    
    2003Interest payable
    
    
    6
    
    
    
    2
    
    
    
    1VAT payable
    
    
    109
    
    
    
    120
    
    
    
    111Social security payable
    
    
    41
    
    
    
    13
    
    
    
    12Accrual for overtime and unused vacation
    
    
    61
    
    
    
    72
    
    
    
    58Accrued expenses
    
    
    1,121
    
    
    
    881
    
    
    
    862Revenue received in advance
    
    
    445
    
    
    
    438
    
    
    
    339Total other current liabilities
    
    
    1,783
    
    
    
    1,526
    
    
    
    1,383
  Revenue from the sale of telephone cards for the fixed network, 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 them to reliably track this amount. As a result, 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.30.
    
    Other long-term liabilities CHF in millions
    
    2001
    
    2002
    
    2003Revenue received in advance
    
    
    30
    
    
    
    23
    
    
    
    15Deposits received from customers
    
    
    54
    
    
    
    44
    
    
    
    36Deferred gain on sale and leaseback of real estate
    
    
    236
    
    
    
    232
    
    
    
    228Other long-term liabilities
    
    
    13
    
    
    
    8
    
    
    
    4Total other long-term liabilities
    
    
    333
    
    
    
    307
    
    
    
    283
 F-36




---



##### Table of Contents



31.
    
    Lease obligationIn 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.Swisscom entered into several cross-currency interest rate swaps and
forward foreign exchange contracts as hedges of USD denominated leases in
1996 and 1997. On adopting IAS 39 effective January 1, 2001, the derivative
financial instruments were separated from the finance lease obligation
being hedged.The future minimum lease payments relating to these transactions are
included in the following table: CHF in millions
    
    2001
    
    2002
    
    2003Within one year
    
    
    114
    
    
    
    133
    
    
    
    121Within 1-2 years
    
    
    145
    
    
    
    129
    
    
    
    223Within 2-3 years
    
    
    141
    
    
    
    243
    
    
    
    84Within 3-4 years
    
    
    277
    
    
    
    87
    
    
    
    99Within 4-5 years
    
    
    92
    
    
    
    104
    
    
    
    177After 5 years
    
    
    2,306
    
    
    
    2,276
    
    
    
    2,092Total future payment commitments
    
    
    3,075
    
    
    
    2,972
    
    
    
    2,796Less future interest charges
    
    
    (1,755
    )
    
    
    (1,787
    )
    
    
    (1,712
    )Total finance lease obligations (net present value)
    
    
    1,320
    
    
    
    1,185
    
    
    
    1,084Fair value adjustments
    
    
    9
    
    
    
    32
    
    
    
    18Accrued interest
    
    
    41
    
    
    
    38
    
    
    
    29Total finance lease obligations
    
    
    1,370
    
    
    
    1,255
    
    
    
    1,131Less current portion. See Note 27.
    
    
    (40
    )
    
    
    (63
    )
    
    
    (61
    )Long-term finance lease obligation
    
    
    1,330
    
    
    
    1,192
    
    
    
    1,070
  The lease obligations are hedged with cross-currency interest rate swaps
and forward foreign exchange contracts. See Note 34.The present value of finance lease liabilities is as follows: CHF in millions
    
    2001
    
    2002
    
    2003Within one year
    
    
    40
    
    
    
    63
    
    
    
    61Within 1-2 years
    
    
    66
    
    
    
    60
    
    
    
    148Within 2-3 years
    
    
    69
    
    
    
    164
    
    
    
    30Within 3-4 years
    
    
    194
    
    
    
    32
    
    
    
    46Within 4-5 years
    
    
    38
    
    
    
    50
    
    
    
    129After 5 years
    
    
    913
    
    
    
    816
    
    
    
    670Total finance lease obligations (net present value)
    
    
    1,320
    
    
    
    1,185
    
    
    
    1,084
  The weighted-average effective interest rates for obligations from finance
lease amounted to 4.39%, 4.93% and 5.16% for 2001, 2002 and 2003,
respectively.Payments for operating leases amounted to CHF 85 million, CHF 123 million
and CHF 127 million in 2001, 2002 and 2003, respectively. Future minimum
lease payments resulting from operating lease contracts are due as follows: CHF in millions
    
    2001
    
    2002
    
    2003Within one year
    
    
    119
    
    
    
    113
    
    
    
    147Within 1-5 years
    
    
    351
    
    
    
    340
    
    
    
    306After 5 years
    
    
    375
    
    
    
    342
    
    
    
    280Total future payment commitments
    
    
    845
    
    
    
    795
    
    
    
    733
 F-37




---



##### Table of Contents



32.
    
    Minority interests CHF in millions
    
    2001
    
    2002
    
    2003Balance at beginning of year
    
    
    61
    
    
    
    783
    
    
    
    796Share of net profit of subsidiaries
    
    
    238
    
    
    
    305
    
    
    
    346Issuance of share capital to minority interest
    
    
    520
    
    
    
    
    
    
    
    Effect of acquisitions and divestitures
    
    
    (30
    )
    
    
    12
    
    
    
    Dividends paid to minority interests
    
    
    (6
    )
    
    
    (304
    )
    
    
    (393
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    2Balance at end of year
    
    
    783
    
    
    
    796
    
    
    
    751
  33.
    
    Shareholders equityShares outstanding at December 31, 2001, December 31, 2002 and December 31,
2003 totaled 73,550,000, 66,203,261 and 66,203,261 with a par value of CHF
17, CHF 9 and CHF 1, respectively. All issued shares are fully paid. Each
share entitles the holder to one vote. In accordance with the resolution
passed at the General Shareholders meeting of May 29, 2001, a par value
reduction of CHF 8 per share, amounting to CHF 589 million was approved. A
further reduction in par value of CHF 8 per share, amounting to CHF 529
million, was approved at the General Meeting of Shareholders on April 30,
2002. In the first half of 2002, Swisscom bought back 7,346,739 of its own
registered shares for CHF 4,264 million. As a result, share capital was
reduced by 9.99%. At the General Shareholders meeting on May 6, 2003, a
further reduction in par value of CHF 8 per share, amounting to CHF 530
million, was approved. The number of treasury shares outstanding at
December 31, 2001, December 31, 2002 and December 31, 2003 totaled 3,431,
1,605 and 2,272 respectively.In 2001, 2002 and 2003, Swisscom acquired 69,804, 125,442 and 53,660 of its
own shares, respectively, through purchases on the market. The total amount
paid to acquire the shares was CHF 31 million, CHF 63 million and CHF 23
million in 2001, 2002 and 2003, respectively. The total amount paid was
deducted from shareholders equity.In 2001, 68,887 shares were issued to employees, members of the Executive
Board and the Board of Directors for no consideration. See Note 8.In 2002, 119,372 shares were sold to employees at a price of CHF 240 per
share. In addition, 5,896 shares were issued to members of management and
members of the Executive Board. The market value of these shares on the
date of issuance in 2002 was CHF 63 million. The difference between the
market value and the consideration received from employees has been
recognized under personnel expenses. Swisscom also purchased CHF 8 million
worth of stock options on the market for its Management Incentive Plan. See
Note 8.In 2003, 44,946 shares were sold to employees at a price of CHF 300 per
share. In addition, 8,693 shares were issued to employees and members of
the Executive Board and the Board of Directors. The market value of these shares on the date of issuance in 2002 was CHF 23 million. The difference
between the market value and the consideration received from employees has
been recognized under personnel expenses. Swisscom also purchased CHF 8
million worth of stock options on the market for its Management Incentive
Plan. See Note 8. F-38




---



##### Table of Contents



34.
    
    Financial instrumentsHedging reserveIn the year ended December 31, 2000, Swisscom did not recognize the change
in fair values of its derivative financial instruments. On the adoption of
IAS 39 at January 1, 2001, certain derivatives were designated as cash flow
hedges and remeasured to fair value. The fair values at that date were
recorded in fair value and other reserves within shareholders equity. See
Note 35. CHF in millionsBalance at January 1, 2001
    
    
    11Revaluation
    
    
    (11
    )Tax on revaluation
    
    
    2Balance at December 31, 2001
    
    
    2Transfers to income statement
    
    
    4Tax effect on transfers to income statement
    
    
    1Revaluation
    
    
    (37
    )Tax on revaluation
    
    
    7Balance at December 31, 2002
    
    
    (23
    )Revaluation
    
    
    9Balance at December 31, 2003
    
    
    (14
    )
  There was no transfer to income statement resulting from hedge
ineffectiveness in 2001, 2002 and 2003.Net fair values of derivative financial instruments CHF in millions
    
    2001
    
    2002
    
    2003Contracts with positive fair valuesFair value
hedges
    
    
    9
    
    
    
    33
    
    
    
    18Cash flow hedges
    
    
    7
    
    
    
    
    
    
    
    (1
    )Non qualifying derivative financial instruments
    
    
    134
    
    
    
    39
    
    
    
    29Total. See Note 19.
    
    
    150
    
    
    
    72
    
    
    
    46Contracts with negative fair valuesFair value
hedges
    
    
    
    
    
    
    
    
    
    
    (6
    )Cash flow hedges
    
    
    4
    
    
    
    29
    
    
    
    20Non qualifying derivative financial instruments
    
    
    16
    
    
    
    102
    
    
    
    181Total. See Note 27.
    
    
    20
    
    
    
    131
    
    
    
    195
  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 5
years for cross-border lease arrangements entered into in 1996 and 1997, 25
years for arrangements entered into in 2000 and 10 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. In 2001, these hedging transactions
were designated as cash flow hedges. In 2002, they were reclassified as non
qualifying derivative financial instruments as they do not qualify as cash
flow hedges. F-39




---



##### 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, 2001, 2002 and
2003. 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 2001
    
    value 2001
    
    amount 2002
    
    value 2002
    
    amount 2003
    
    value 2003Financial assetsCash and cash equivalents
    
    
    3,788
    
    
    
    3,788
    
    
    
    1,682
    
    
    
    1,682
    
    
    
    3,237
    
    
    
    3,237Current financial assets
    
    
    3,316
    
    
    
    3,316
    
    
    
    285
    
    
    
    285
    
    
    
    264
    
    
    
    264Trade accounts receivable
    
    
    2,525
    
    
    
    2,525
    
    
    
    2,418
    
    
    
    2,418
    
    
    
    2,219
    
    
    
    2,219Other current assets
    
    
    493
    
    
    
    493
    
    
    
    450
    
    
    
    450
    
    
    
    763
    
    
    
    763Non-current financial assets*
    
    
    1,895
    
    
    
    2,230
    
    
    
    1,584
    
    
    
    2,126
    
    
    
    1,383
    
    
    
    1,787Financial liabilitiesShort-term debt*
    
    
    1,757
    
    
    
    1,757
    
    
    
    1,016
    
    
    
    1,026
    
    
    
    576
    
    
    
    576Trade accounts payable
    
    
    1,237
    
    
    
    1,237
    
    
    
    1,054
    
    
    
    1,054
    
    
    
    1,045
    
    
    
    1,045Other current liabilities
    
    
    1,783
    
    
    
    1,783
    
    
    
    1,526
    
    
    
    1,526
    
    
    
    1,383
    
    
    
    1,383Long-term debt*
    
    
    2,413
    
    
    
    2,835
    
    
    
    1,505
    
    
    
    2,110
    
    
    
    1,374
    
    
    
    1,830Finance lease obligation*
    
    
    1,330
    
    
    
    1,585
    
    
    
    1,192
    
    
    
    1,670
    
    
    
    1,070
    
    
    
    1,480Accrued liabilities
    
    
    600
    
    
    
    600
    
    
    
    745
    
    
    
    745
    
    
    
    755
    
    
    
    755Other long-term liabilities
    
    
    333
    
    
    
    333
    
    
    
    307
    
    
    
    307
    
    
    
    283
    
    
    
    283
   *
    
    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, other current assets and
other current liabilitiesThe 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 assetsThe 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, accrued liabilities and other long-term
liabilitiesThe fair value of finance lease obligations is estimated using the expected
future payments discounted at market rates. The carrying amounts of accrued
liabilities and other long-term liabilities correspond to fair value.DebtThe fair value of fixed rate debt is estimated using the expected future
payments discounted at market interest rates. F-40




---



##### Table of Contents



35.
    
    Fair value and other reserves Hedging
    
    Fair value
    
    TranslationCHF in millions
    
    reserve
    
    reserve
    
    reserve
    
    TotalBalance at December 31, 2000
    
    
    
    
    
    
    2
    
    
    
    (224
    )
    
    
    (222
    )Adoption of IAS 39.
    
    
    11
    
    
    
    90
    
    
    
    
    
    
    
    101Translation adjustments
    
    
    
    
    
    
    
    
    
    
    (64
    )
    
    
    (64
    )Transfers to income statement
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Revaluation
    
    
    (11
    )
    
    
    (119
    )
    
    
    
    
    
    
    (130
    )Tax on revaluation
    
    
    2
    
    
    
    30
    
    
    
    
    
    
    
    32Balance at December 31, 2001
    
    
    2
    
    
    
    1
    
    
    
    (288
    )
    
    
    (285
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (18
    )Transfers to income statement
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Tax effect on transfers to income statement
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Revaluation
    
    
    (37
    )
    
    
    (32
    )
    
    
    
    
    
    
    (69
    )Tax on revaluation
    
    
    7
    
    
    
    1
    
    
    
    
    
    
    
    8Balance at December 31, 2002
    
    
    (23
    )
    
    
    (30
    )
    
    
    (306
    )
    
    
    (359
    )Translation adjustments
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    120Transfers in equity
    
    
    
    
    
    
    (7
    )
    
    
    7
    
    
    
    Transfers to income statement
    
    
    
    
    
    
    20
    
    
    
    (46
    )
    
    
    (26
    )Revaluation
    
    
    9
    
    
    
    (10
    )
    
    
    
    
    
    
    (1
    )Tax on revaluation
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Balance at December 31, 2003
    
    
    (14
    )
    
    
    (25
    )
    
    
    (225
    )
    
    
    (264
    )
  In 2003, transfers to income statement comprise primarily an impairment
charge of CHF 22 million relating to certain of Swisscoms
available-for-sale investments (see Note 19) and the realization of
cumulated translation gains of CHF 41 million on the sale of Cesky Telecom.
See Note 24.Revaluation comprises 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 19 and
26.36.
    
    Cash generated from operations Year ended December 31CHF in millions
    
    Note
    
    2001
    
    2002
    
    2003Net Income
    
    
    
    
    
    
    4,964
    
    
    
    824
    
    
    
    1,569Adjustments for
Minority interest
    
    
    32
    
    
    
    238
    
    
    
    305
    
    
    
    346Equity in net income of affiliated companies
    
    
    24
    
    
    
    (32
    )
    
    
    (95
    )
    
    
    7Income tax (benefit) expense
    
    
    16
    
    
    
    (15
    )
    
    
    361
    
    
    
    500Depreciation
    
    
    23, 25
    
    
    
    1,702
    
    
    
    1,578
    
    
    
    1,564Amortization
    
    
    25
    
    
    
    472
    
    
    
    427
    
    
    
    361Impairment of goodwill
    
    
    25
    
    
    
    1,130
    
    
    
    702
    
    
    
    280Issuance of shares and options to management and employees
    
    
    7
    
    
    
    38
    
    
    
    39
    
    
    
    12Net loss on disposal of fixed assets
    
    
    5,10
    
    
    
    77
    
    
    
    53
    
    
    
    18Gain on sale of real estate
    
    
    11
    
    
    
    (568
    )
    
    
    
    
    
    
    Gain on sale of other subsidiaries
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    Gain on partial sale of Swisscom Mobile AG
    
    
    12
    
    
    
    (3,837
    )
    
    
    
    
    
    
    Financial expense
    
    
    13
    
    
    
    771
    
    
    
    517
    
    
    
    154Financial income
    
    
    14
    
    
    
    (416
    )
    
    
    (206
    )
    
    
    (140
    )4,517
    
    
    
    4,505
    
    
    
    4,671Changes in operating assets and liabilities, net of effects
of acquisitions and disposals of subsidiaries
Decrease in trade accounts receivable
    
    
    
    
    
    
    112
    
    
    
    101
    
    
    
    200Decrease in inventories
    
    
    
    
    
    
    2
    
    
    
    77
    
    
    
    47Decrease in other current assets
    
    
    
    
    
    
    512
    
    
    
    42
    
    
    
    54Decrease in trade accounts payable
    
    
    
    
    
    
    (333
    )
    
    
    (176
    )
    
    
    (145
    )Increase (decrease) in other current and accrued liabilities
    
    
    
    
    
    
    74
    
    
    
    (63
    )
    
    
    (80
    )Decrease in other long-term liabilities
    
    
    
    
    
    
    (77
    )
    
    
    (27
    )
    
    
    (25
    )(Decrease) increase in accrued pension cost
    
    
    
    
    
    
    (710
    )
    
    
    (117
    )
    
    
    5Cash generated from operations
    
    
    
    
    
    
    4,097
    
    
    
    4,342
    
    
    
    4,727
 F-41




---



##### Table of Contents



37.
    
    Commitments and contingenciesContractual commitments for future capital expenditures at December 31,
2003 amounted to CHF 222 million, of which CHF 211 million will be due in
2004.At December 31, 2001, Swisscom had guaranteed certain liabilities of
affiliated companies and third parties totalling CHF 225 million.38.
    
    Segment reportingEffective January 1, 2003, the product ownership of Business Numbers
was transferred from Fixnet to Enterprise Solutions. In addition, direct
mobile interconnection was introduced in February 2003 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. The associated revenues and costs, which
in the past were recorded as external revenues and costs in the Fixnet
segment, were recorded as external revenues and costs in the Mobile segment
in 2003. Prior years have been restated to reflect these changes.The Fixnet segment comprises primarily access services to residential and
business customers, fixed retail telephony traffic in respect of
residential 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 comprises 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 debitel segment reflects the business activities of the debitel
Group.The segment Other mainly comprises Swisscom Systems AG, Swisscom IT
Services AG, Swisscom Broadcast AG, Billag AG, Billag Card Services AG and
Swisscom Eurospot AG.Corporate covers the costs of headquarters, the real-estate company,
the employment company WORK_LINK and costs not directly allocable to a
segment.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, and consequently CHF 119 million and CHF 106
million was eliminated in 2002 and 2003, respectively in the Corporate
segment in the consolidated financial statements.Segment assets include all operating assets used by a segment and comprise
receivables, inventories, other current assets, property, plant and
equipment and intangibles. While most of these assets can be directly
attributed to individual segments, the carrying amount of certain assets
used jointly by two or more segments is allocated to the segments on a
reasonable basis. Segment liabilities include all operating liabilities and
comprise primarily accounts payable, accrued pension costs, accrued
liabilities and other liabilities.Although Swisscoms segments are managed on a worldwide basis, they operate
primarily in two geographical regions. In Switzerland, its home country,
Swisscom provides a full range of telecommunication services. In Germany,
debitel primarily sells standardized mobile communications products and
services to residential customers and small and medium-sized businesses. F-42




---



##### Table of Contents



2001
    
    
    
    
    
    
    
    
    
    EnterpriseCHF in millions
    
    Fixnet
    
    Moblie
    
    Solutions
    
    debitel
    
    Other
    
    Corporate
    
    Elimination
    TotalNet revenue from external customers
    
    
    4,845
    
    
    
    3,220
    
    
    
    1,469
    
    
    
    3,808
    
    
    
    742
    
    
    
    90
    
    
    
    
    
    
    
    14,174Intersegment net revenue
    
    
    1,555
    
    
    
    763
    
    
    
    150
    
    
    
    
    
    
    
    661
    
    
    
    676
    
    
    
    (3,805
    )
    
    
    Net revenue
    
    
    6,400
    
    
    
    3,983
    
    
    
    1,619
    
    
    
    3,808
    
    
    
    1,403
    
    
    
    766
    
    
    
    (3,805
    )
    
    
    14,174Segment expenses
    
    
    (4,478
    )
    
    
    (2,107
    )
    
    
    (1,438
    )
    
    
    (3,621
    )
    
    
    (1,267
    )
    
    
    (659
    )
    
    
    3,805
    
    
    
    (9,765
    )Operating income before
depreciation (EBITDA)
    
    
    1,922
    
    
    
    1,876
    
    
    
    181
    
    
    
    187
    
    
    
    136
    
    
    
    107
    
    
    
    
    
    
    
    4,409Margin in %
    
    
    30.0
    
    
    
    47.1
    
    
    
    11.2
    
    
    
    4.9
    
    
    
    9.7
    
    
    
    14.0
    
    
    
    
    
    
    
    31.1Depreciation and amortization
    
    
    (1,080
    )
    
    
    (291
    )
    
    
    (33
    )
    
    
    (51
    )
    
    
    (229
    )
    
    
    (100
    )
    
    
    
    
    
    
    (1,784
    )Operating income before
goodwill amortization
    
    
    842
    
    
    
    1,585
    
    
    
    148
    
    
    
    136
    
    
    
    (93
    )
    
    
    7
    
    
    
    
    
    
    
    2,625Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (387
    )
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (390
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,130
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,130
    )Segment operating income
    
    
    842
    
    
    
    1,585
    
    
    
    148
    
    
    
    (1,381
    )
    
    
    (93
    )
    
    
    4
    
    
    
    
    
    
    
    1,105Gain on sale of real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    568Gain on partial sale of Swisscom
Mobile AG
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,837Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,510Segment assets
    
    
    8,567
    
    
    
    4,268
    
    
    
    460
    
    
    
    3,272
    
    
    
    1,370
    
    
    
    12,110
    
    
    
    (6,301
    )
    
    
    23,746Affiliated companies
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    526
    
    
    
    
    
    
    
    603Total assets
    
    
    8,630
    
    
    
    4,268
    
    
    
    460
    
    
    
    3,286
    
    
    
    1,370
    
    
    
    12,636
    
    
    
    (6,301
    )
    
    
    24,349Segment liabilities
    
    
    7,874
    
    
    
    1,609
    
    
    
    429
    
    
    
    1,041
    
    
    
    988
    
    
    
    5,857
    
    
    
    (6,301
    )
    
    
    11,497Total liabilities
    
    
    7,874
    
    
    
    1,609
    
    
    
    429
    
    
    
    1,041
    
    
    
    988
    
    
    
    5,857
    
    
    
    (6,301
    )
    
    
    11,497Capital expenditure
    
    
    597
    
    
    
    315
    
    
    
    29
    
    
    
    66
    
    
    
    173
    
    
    
    54
    
    
    
    
    
    
    
    1,234Depreciation, amortization
and impairment
    
    
    1,080
    
    
    
    291
    
    
    
    33
    
    
    
    1,568
    
    
    
    229
    
    
    
    103
    
    
    
    
    
    
    
    3,304Gain (loss) on disposal of assets, net
    
    
    (80
    )
    
    
    (14
    )
    
    
    (1
    )
    
    
    13
    
    
    
    (13
    )
    
    
    18
    
    
    
    
    
    
    
    (77
    )
  Geographical Segments Additions toproperty, plant andCarrying amount
    
    equipment andCHF in millions
    
    Net revenue
    
    of assets
    
    intangible assetsSwitzerland
    
    
    10,181
    
    
    
    20,339
    
    
    
    1,150Germany
    
    
    2,730
    
    
    
    2,825
    
    
    
    43Other international activities
    
    
    1,263
    
    
    
    1,185
    
    
    
    41Total
    
    
    14,174
    
    
    
    24,349
    
    
    
    1,234
 F-43




---



##### Table of Contents



2002
    
    
    
    
    
    
    
    
    
    EnterpriseCHF in millions
    
    Fixnet
    
    Moblie
    
    Solutions
    
    debitel
    
    Other
    
    Corporate
    
    Elimination
    
    TotalNet revenue from external customers
    
    
    4,762
    
    
    
    3,373
    
    
    
    1,373
    
    
    
    4,111
    
    
    
    833
    
    
    
    74
    
    
    
    
    
    
    
    14,526Intersegment net revenue
    
    
    1,500
    
    
    
    739
    
    
    
    149
    
    
    
    
    
    
    
    630
    
    
    
    630
    
    
    
    (3,648
    )
    
    
    Net revenue
    
    
    6,262
    
    
    
    4,112
    
    
    
    1,522
    
    
    
    4,111
    
    
    
    1,463
    
    
    
    704
    
    
    
    (3,648
    )
    
    
    14,526Segment expenses
    
    
    (4,388
    )
    
    
    (2,138
    )
    
    
    (1,425
    )
    
    
    (3,952
    )
    
    
    (1,352
    )
    
    
    (506
    )
    
    
    3,648
    
    
    
    (10,113
    )Operating income
before depreciation and
amortization (EBITDA)
    
    
    1,874
    
    
    
    1,974
    
    
    
    97
    
    
    
    159
    
    
    
    111
    
    
    
    198
    
    
    
    
    
    
    
    4,413Margin in %
    
    
    29.9
    
    
    
    48.0
    
    
    
    6.4
    
    
    
    3.9
    
    
    
    7.6
    
    
    
    28.1
    
    
    
    
    
    
    
    30.4Depreciation and amortization
    
    
    (1,049
    )
    
    
    (289
    )
    
    
    (32
    )
    
    
    (62
    )
    
    
    (205
    )
    
    
    (65
    )
    
    
    
    
    
    
    (1,702
    )Operating income before
goodwill amortization
    
    
    825
    
    
    
    1,685
    
    
    
    65
    
    
    
    97
    
    
    
    (94
    )
    
    
    133
    
    
    
    
    
    
    
    2,711Amortization of goodwill
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (277
    )
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (303
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (702
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (702
    )Segment operating income
    
    
    819
    
    
    
    1,685
    
    
    
    65
    
    
    
    (882
    )
    
    
    (114
    )
    
    
    133
    
    
    
    
    
    
    
    1,706Segment assets
    
    
    8,813
    
    
    
    3,760
    
    
    
    497
    
    
    
    2,068
    
    
    
    1,165
    
    
    
    5,144
    
    
    
    (5,180
    )
    
    
    16,267Affiliated companies
    
    
    43
    
    
    
    
    
    
    
    9
    
    
    
    10
    
    
    
    
    
    
    
    629
    
    
    
    
    
    
    
    691Total assets
    
    
    8,856
    
    
    
    3,760
    
    
    
    506
    
    
    
    2,078
    
    
    
    1,165
    
    
    
    5,773
    
    
    
    (5,180
    )
    
    
    16,958Segment liabilities
    
    
    7,388
    
    
    
    1,104
    
    
    
    451
    
    
    
    861
    
    
    
    847
    
    
    
    3,392
    
    
    
    (5,180
    )
    
    
    8,863Total liabilities
    
    
    7,388
    
    
    
    1,104
    
    
    
    451
    
    
    
    861
    
    
    
    847
    
    
    
    3,392
    
    
    
    (5,180
    )
    
    
    8,863Capital expenditures
    
    
    585
    
    
    
    392
    
    
    
    23
    
    
    
    68
    
    
    
    103
    
    
    
    51
    
    
    
    
    
    
    
    1,222Depreciation, amortization
and impairment
    
    
    1,055
    
    
    
    289
    
    
    
    32
    
    
    
    1,041
    
    
    
    225
    
    
    
    65
    
    
    
    
    
    
    
    2,707Gain (loss) on disposal of assets, net
    
    
    (50
    )
    
    
    (3
    )
    
    
    (1
    )
    
    
    
    
    
    
    (7
    )
    
    
    8
    
    
    
    
    
    
    
    (53
    )
  Geographical Segments Additions toproperty, plantCarrying amount
    
    and equipment andCHF in millions
    
    Net revenue
    
    of assets
    
    intangible assetsSwitzerland
    
    
    10,180
    
    
    
    14,436
    
    
    
    1,125Germany
    
    
    2,888
    
    
    
    1,707
    
    
    
    76Other international activities
    
    
    1,458
    
    
    
    815
    
    
    
    21Total
    
    
    14,526
    
    
    
    16,958
    
    
    
    1,222
 F-44




---



##### Table of Contents



2003
    
    
    
    
    
    
    
    
    
    EnterpriseCHF in millions
    
    Fixnet
    
    Moblie
    
    Solutions
    
    debitel
    
    Other
    
    Corporate
    
    Elimination
    
    TotalNet revenue from external customers
    
    
    4,498
    
    
    
    3,434
    
    
    
    1,261
    
    
    
    4,555
    
    
    
    761
    
    
    
    72
    
    
    
    
    
    
    
    14,581Intersegment net revenue
    
    
    1,348
    
    
    
    706
    
    
    
    110
    
    
    
    
    
    
    
    543
    
    
    
    631
    
    
    
    (3,338
    )
    
    
    Net revenue
    
    
    5,846
    
    
    
    4,140
    
    
    
    1,371
    
    
    
    4,555
    
    
    
    1,304
    
    
    
    703
    
    
    
    (3,338
    )
    
    
    14,581Segment expenses
    
    
    (3,771
    )
    
    
    (2,156
    )
    
    
    (1,237
    )
    
    
    (4,418
    )
    
    
    (1,148
    )
    
    
    (548
    )
    
    
    3,338
    
    
    
    (9,940
    )Operating income
before depreciation and
amortization (EBITDA)
    
    
    2,075
    
    
    
    1,984
    
    
    
    134
    
    
    
    137
    
    
    
    156
    
    
    
    155
    
    
    
    
    
    
    
    4,641Margin in %
    
    
    35.5
    
    
    
    47.9
    
    
    
    9.8
    
    
    
    3.0
    
    
    
    12.0
    
    
    
    22.0
    
    
    
    
    
    
    
    31.8Depreciation and amortization
    
    
    (1,076
    )
    
    
    (310
    )
    
    
    (33
    )
    
    
    (68
    )
    
    
    (164
    )
    
    
    (61
    )
    
    
    
    
    
    
    (1,712
    )Operating income before
goodwill amortization
    
    
    999
    
    
    
    1,674
    
    
    
    101
    
    
    
    69
    
    
    
    (8
    )
    
    
    94
    
    
    
    
    
    
    
    2,929Amortization of goodwill
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (172
    )
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    ( 213
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (280
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (280
    )Segment operating income
    
    
    992
    
    
    
    1,674
    
    
    
    101
    
    
    
    ( 383
    )
    
    
    ( 42
    )
    
    
    94
    
    
    
    
    
    
    
    2,436Segment assets
    
    
    9,398
    
    
    
    3,707
    
    
    
    502
    
    
    
    1,666
    
    
    
    1,518
    
    
    
    4,895
    
    
    
    (5,199
    )
    
    
    16,487Affiliated companies
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    53Total assets
    
    
    9,437
    
    
    
    3,707
    
    
    
    502
    
    
    
    1,679
    
    
    
    1,518
    
    
    
    4,896
    
    
    
    (5,199
    )
    
    
    16,540Segment liabilities
    
    
    7,243
    
    
    
    1,146
    
    
    
    379
    
    
    
    810
    
    
    
    1,215
    
    
    
    2,526
    
    
    
    (5,199
    )
    
    
    8,120Total liabilities
    
    
    7,243
    
    
    
    1,146
    
    
    
    379
    
    
    
    810
    
    
    
    1,215
    
    
    
    2,526
    
    
    
    (5,199
    )
    
    
    8,120Capital expenditures
    
    
    583
    
    
    
    431
    
    
    
    13
    
    
    
    48
    
    
    
    119
    
    
    
    19
    
    
    
    
    
    
    
    1,213Depreciation, amortization
and impairment
    
    
    1,083
    
    
    
    310
    
    
    
    33
    
    
    
    520
    
    
    
    198
    
    
    
    61
    
    
    
    
    
    
    
    2,205Gain (loss) on disposal of assets, net
    
    
    (14
    )
    
    
    (10
    )
    
    
    (4
    )
    
    
    
    
    
    
    (5
    )
    
    
    15
    
    
    
    
    
    
    
    (18
    )
  Geographical Segments Additions toproperty, plantCarrying amount
    
    and equipment andCHF in millions
    
    Net revenue
    
    of assets
    
    intangible assetsSwitzerland
    
    
    9,993
    
    
    
    14,268
    
    
    
    1,149Germany
    
    
    3,192
    
    
    
    1,286
    
    
    
    36Other international activities
    
    
    1,396
    
    
    
    986
    
    
    
    28Total
    
    
    14,581
    
    
    
    16,540
    
    
    
    1,213
 F-45




---



##### Table of Contents



39.
    
    Executive Board and Board of DirectorsTotal compensation paid by Swisscom to the Board of Directors in 2001, 2002
and 2003 amounted to CHF 1.4 million, 1.7 million and CHF 1.9 million,
respectively. Total compensation paid by Swisscom to Executive Board
members in 2001, 2002 and 2003 amounted to CHF 8.0 million, CHF 9.2 million
and CHF 9.9 million, respectively, including CHF 0.4 million, CHF 0.5
million and CHF 0.7 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 in 2001, CHF 0.2 million in 2002
and CHF 0.3 million in 2003. For the benefit of its Executive Board members
Swisscom made social security and ordinary pension fund contributions and
insurance payments of CHF 0.7 million in 2001, CHF 1.1 million in 2002 and
CHF 1.4 million in 2003. In 2001, 2002 and 2003 the Executive Board
consisted of 10, 13 and 12 members, respectively. 25% of the Executive
Boards bonus was paid in stock and stock options. In 2001 and 2003, 25% of
the Board of Directors compensation was also paid in stock and stock
options. No stock or stock options were paid to the Board of Directors in
2002. See Note 8. F-46




---



##### Table of Contents



40.
    
    Significant subsidiaries and affiliated companies Interest in
    
    Consolidation
    
    
    
    
    
    Share CapitalCompany name
    
    Location, country
    
    percent
    
    method
    
    
    
    
    
    in thousands
    
    SegmentSwitzerlandBillag AG
    
    Fribourg, Switzerland
    
    
    100
    
    
    Full
    
    
    
    
    
    CHF
    100
    
    
    OtherBillag Card
Services AG1)
    
    Brüttisellen, Switzerland
    
    
    100
    
    
    Full
    
    
    
    
    
    CHF
    350
    
    
    OtherBluewin AG2)
    
    Zurich, Switzerland
    
    
    100
    
    
    Full
    
    
    
    
    
    CHF
    20,000
    
    
    Fixnetcablex AG
    
    Berne, Switzerland
    
    
    100
    
    
    Full
    
    
    
    
    
    CHF
    5,000
    
    
    FixnetInfonet (Schweiz) AG
    
    Berne, Switzerland
    
    
    90
    
    
    Full
    
    
    
    
    
    CHF
    1,500
    
    
    Enterprise Sol.PersPec Personal Perspectiv AG
    
    Berne, Switzerland
    
    
    100
    
    
    Full
    
    
    
    
    
    CHF
    500
    
    
    CorporatePubliDirect Holding AG
    
    Zurich, Switzerland
    
    
    49
    
    
    Equity
    
    
    
    
    
    CHF
    10,000
    
    
    FixnetSICAP AG3)
    
    Köniz, Switzerland
    
    
    75
    
    
    Equity
    
    
    
    
    
    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 Sol.Swisscom
Eurospot S.A.4)
    
    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
    
    
    71.1
    
    
    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
    
    
    OtherWORK_LINK AG
    
    Berne, Switzerland
    
    
    40
    
    
    Full
    
    
    
    
    
    CHF
    100
    
    
    CorporateOther countriesAUCS Communications Services v.o.f.5)
    
    Hoofddorp, Netherlands
    
    
    33,33
    
    
    Equity
    
    
    
    
    
    EUR
    
    
    
    Corporatedebitel-Gruppe
    
    Stuttgart, Germany
    
    
    93
    
    
    Full
    
    
    
    
    
    EUR
    89,000
    
    
    debitelDANGAARD Telecom Holding A/S
    
    Padborg, Denmark
    
    
    21,09
    
    
    Equity
    
    
    
    
    
    DKK
    100,000
    
    
    debiteldebitel Danmark A/S, Denmark
    
    Albertslund, Denmark
    
    
    78,28
    
    
    Full
    
    
    
    
    
    DKK
    149,200
    
    
    debiteldebitel France S.A., France
    
    Chaville, France
    
    
    100
    
    
    Full
    
    
    
    
    
    EUR
    500
    
    
    debiteldebitel Nederland B.V. , Netherlands
    
    Hoofddorp, Netherlands
    
    
    100
    
    
    Full
    
    
    
    
    
    EUR
    68
    
    
    debiteldebitel Shop B.V, Netherlands
    
    Amersfoort, Netherlands
    
    
    100
    
    
    Full
    
    
    
    
    
    EUR
    20
    
    
    debiteldebitel telekomunikacije Slovenia d.d.
    
    Ljubljiana, Slovenia
    
    
    52
    
    
    Full
    
    
    
    
    
    SIT
    463,423
    
    
    debiteldebitel Vertriebs GmbH, Germany
    
    Stuttgart, Germany
    
    
    100
    
    
    Full
    
    
    
    
    
    EUR
    26
    
    
    debiteldebitel Mobile Services Holding GmbH
    
    Stuttgart, Germany
    
    
    100
    
    
    Full
    
    
    
    
    
    EUR
    25
    
    
    debitelDGS (Dansk GSM Service A/S)
    
    Padborg, Denmark
    
    
    100
    
    
    Full
    
    
    
    
    
    EUR
    500
    
    
    debitelMIDRAY GmbH, Germany
    
    Cologne, Germany
    
    
    100
    
    
    Full
    
    
    
    
    
    EUR
    511
    
    
    debitelVidelec Distribution S.A.
    
    Paris, France
    
    
    100
    
    
    Full
    
    
    
    
    
    EUR
    1,000
    
    
    debitelSwisscom (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 Deutschland Holding GmbH
    
    Frankfurt, Germany
    
    
    100
    
    
    Full
    
    
    
    
    
    EUR
    26
    
    
    CorporateSwisscom (France) SA
    
    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
    45,000
    
    
    FixnetSwisscom North America, Inc.
    
    Washington D.C., USA
    
    
    100
    
    
    Full
    
    
    
    
    
    USD
    
    
    
    FixnetSwisscom Re AG
    
    Vaduz, Lichtenstein
    
    
    100
    
    
    Full
    
    
    
    
    
    CHF
    1,000
    
    
    CorporateSwisscom (UK) Ltd.
    
    London, Great Britain
    
    
    100
    
    
    Full
    
    
    
    
    
    GBP
    
    
    
    FixnetTelSource
N.V.5)
    
    The Hague, Netherlands
    
    
    49
    
    
    Equity
    
    
    
    
    
    EUR
    91
    
    
    Corporate
   1)
    
    Acquisition by Billag AG as of December 19, 2003.2)
    
    Incorporation in 2003.3)
    
    Fully owned subsidiary of Swisscom Mobile AG.4)
    
    Formerly European PWLAN AG. Swisscom Eurospot S.A. represents
companies purchased or incorporated in Germany, France, the
Netherlands, Belgium, Luxembourg, the UK, Spain and Italy.5)
    
    Joint venture.  In 2003, the fully consolidated Telecom FL AG, Liechtenstein, and the
shareholding in Cesky Telecom, Czech Republic, were sold; the business
activities of conextrade AG were transferred to Swisscom IT Services AG;
Unit.net AG discontinued its operations and went into liquidation; and
debitel DANGAARD France SAS and debitel France S.A. as well as Videlec
Distribution S.A. and Videlec S.A. merged their operations. F-47




---



##### Table of Contents



41.
    
    Post Balance sheet eventsDividendAt the General Meeting of Shareholders on April 27, 2004, a dividend of CHF
13 per share, amounting to a total income distribution of CHF 861 million,
is to be proposed for 2003. These financial statements do not reflect this
dividend payable, which will be accounted for in shareholders equity as an
appropriation of retained earnings in the year ending December 31, 2004.
The dividends declared in respect of 2000, 2001 and 2002 were CHF 809
million, CHF 728 million and CHF 794 million, respectively. F-48




---



##### 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, 2001, 2002 and 2003 and net income for each of
the years in the three-year period ended December 31, 2003 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 belowReconciliation of net income from IFRS to U.S.
GAAPThe 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
    
    2001
    
    2002
    
    2003Net income according to IFRS
    
    
    4,964
    
    
    
    824
    
    
    
    1,569U.S. GAAP adjustments:a) Capitalization of interest cost
    
    
    (31
    )
    
    
    (1
    )
    
    
    (1
    )b) Retirement benefits
    
    
    32
    
    
    
    (17
    )
    
    
    (12
    )c) Stock based compensation
    
    
    (8
    )
    
    
    9
    
    
    
    6d) Termination benefits
    
    
    50
    
    
    
    (20
    )
    
    
    11e) Write-down of long-lived assets
    
    
    (30
    )
    
    
    
    
    
    
    f) Capitalization of software
    
    
    (124
    )
    
    
    
    
    
    
    g) Impairment of investments
    
    
    24
    
    
    
    
    
    
    
    h) Cross-border tax leases
    
    
    14
    
    
    
    (13
    )
    
    
    15i) debitel purchase accounting
    
    
    (142
    )
    
    
    (82
    )
    
    
    (86
    )j) Application of SAB 101
    
    
    18
    
    
    
    9
    
    
    
    31k) Site restoration
    
    
    18
    
    
    
    14
    
    
    
    (13
    )l) Telephone poles
    
    
    10
    
    
    
    4
    
    
    
    m) Goodwill amortization
    
    
    
    
    
    
    304
    
    
    
    213m) Goodwill impairment
    
    
    1,130
    
    
    
    (283
    )
    
    
    280n) Dilution gains
    
    
    (72
    )
    
    
    
    
    
    
    o) Derivative accounting
    
    
    21
    
    
    
    (21
    )
    
    
    p) Sale and leaseback transaction
    
    
    (286
    )
    
    
    30
    
    
    
    24q) Income taxes
    
    
    114
    
    
    
    29
    
    
    
    21Net income before cumulative effect of accounting
change according to U.S. GAAP
    
    
    5,702
    
    
    
    786
    
    
    
    2,058k) l) m) Cumulative effect of accounting change, net of tax
    
    
    
    
    
    
    (1,649
    )
    
    
    38Net income (loss) according to U.S. GAAP
    
    
    5,702
    
    
    
    (863
    )
    
    
    2,096
  The impact on U.S. GAAP basic and diluted earnings (loss) per share is as
follows: CHF
    
    2001
    
    2002
    
    2003Basic earnings per share before accounting change
    
    
    77.53
    
    
    
    11.62
    
    
    
    31.09Cumulative effect of accounting change
    
    
    
    
    
    
    (24.38
    )
    
    
    0.57Basic earnings (loss) per share
    
    
    77.53
    
    
    
    (12.76
    )
    
    
    31.66Diluted earnings per share before accounting change
    
    
    77.49
    
    
    
    11.61
    
    
    
    31.07Cumulative effect of accounting change
    
    
    
    
    
    
    (24.35
    )
    
    
    0.57Diluted earnings (loss) per share
    
    
    77.49
    
    
    
    (12.74
    )
    
    
    31.64
  The shares outstanding used to calculate basic and diluted earnings per
share under U.S. GAAP are the same as that used under IFRS. F-49




---



##### Table of Contents



Reconciliation of shareholders equity from IFRS to U.S. GAAPThe 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, 2001, 2002 and 2003. CHF in millions
    
    2001
    
    2002
    
    2003Shareholders equity according to IFRS
    
    
    12,069
    
    
    
    7,299
    
    
    
    7,669U.S. GAAP adjustments:a)
    
    Capitalization of interest cost
    
    
    50
    
    
    
    49
    
    
    
    48b)
    
    Retirement benefits
    
    
    254
    
    
    
    (136
    )
    
    
    11c)
    
    Stock based compensation
    
    
    (5
    )
    
    
    4
    
    
    
    d)
    
    Termination benefits
    
    
    50
    
    
    
    30
    
    
    
    41e)
    
    Write-down of long-lived assets
    
    
    
    
    
    
    
    
    
    
    f)
    
    Capitalization of software
    
    
    
    
    
    
    
    
    
    
    g)
    
    Impairment of investments
    
    
    (9
    )
    
    
    (9
    )
    
    
    (9
    )h)
    
    Cross-border tax leases
    
    
    (300
    )
    
    
    (313
    )
    
    
    (298
    )i)
    
    debitel purchase accounting
    
    
    (381
    )
    
    
    107
    
    
    
    28j)
    
    Application of SAB 101
    
    
    (232
    )
    
    
    (223
    )
    
    
    (192
    )k)
    
    Site restoration
    
    
    (39
    )
    
    
    (25
    )
    
    
    (7
    )l)
    
    Telephone poles
    
    
    (11
    )
    
    
    (7
    )
    
    
    m)
    
    Goodwill
    
    
    1,130
    
    
    
    (1,050
    )
    
    
    (633
    )p)
    
    Sale and leaseback transaction
    
    
    (286
    )
    
    
    (256
    )
    
    
    (232
    )q)
    
    Income taxes
    
    
    4
    
    
    
    117
    
    
    
    97Shareholders equity according to U.S. GAAP
    
    
    12,294
    
    
    
    5,587
    
    
    
    6,523
  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 on capitalization of interest cost, 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
    
    2001
    
    2002
    
    2003Interest capitalized during year
    
    
    12
    
    
    
    8
    
    
    
    8Depreciation expense
    
    
    (8
    )
    
    
    (9
    )
    
    
    (9
    )Disposal of property during year
    
    
    (35
    )
    
    
    
    
    
    
    Net income statement effect
    
    
    (31
    )
    
    
    (1
    )
    
    
    (1
    )CHF in millions
    
    2001
    
    2002
    
    2003Gross amount capitalized
    
    
    88
    
    
    
    96
    
    
    
    104Accumulated depreciation
    
    
    (38
    )
    
    
    (47
    )
    
    
    (56
    )Net amount capitalized
    
    
    50
    
    
    
    49
    
    
    
    48
 F-50




---



##### Table of Contents



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
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 and 2003 under U.S. GAAP.The following weighted average assumptions were used in accounting for the
defined benefit plan under U.S. GAAP: 2001
    
    2002
    
    2003Weighted average discount rate
    
    
    4.25
    %
    
    
    3.90
    %
    
    
    3.75
    %Rate of increase in future compensation levels
    
    
    3.10
    %
    
    
    3.10
    %
    
    
    3.10
    %Expected long-term rate of return on plan assets
    
    
    5.50
    %
    
    
    5.50
    %
    
    
    5.00
    %
  Net periodic pension cost includes the following components: CHF in millions
    
    2001
    
    2002
    
    2003Service cost on benefits earned
    
    
    154
    
    
    
    178
    
    
    
    182Interest cost on projected benefit obligation
    
    
    258
    
    
    
    261
    
    
    
    255Expected return on plan assets
    
    
    (213
    )
    
    
    (248
    )
    
    
    (227
    )Amortization of prior service cost
    
    
    21
    
    
    
    29
    
    
    
    29Amortization of actuarial loss
    
    
    
    
    
    
    
    
    
    
    30Net periodic pension cost under U.S. GAAP
    
    
    220
    
    
    
    220
    
    
    
    269Net periodic pension cost under IFRS. See Note 9.
    
    
    252
    
    
    
    203
    
    
    
    257Difference between U.S. GAAP and IFRS
    
    
    32
    
    
    
    (17
    )
    
    
    (12
    )
 F-51




---



##### Table of Contents



The status of the pension plan is as follows: CHF in millions
    
    2001
    
    2002
    
    2003Benefit obligation:At beginning of year
    
    
    6,259
    
    
    
    6,316
    
    
    
    6,726Service cost on benefits earned
    
    
    154
    
    
    
    178
    
    
    
    182Interest cost on projected benefit obligation
    
    
    258
    
    
    
    261
    
    
    
    255Contributions of plan participants
    
    
    106
    
    
    
    88
    
    
    
    97Net transfers
    
    
    (117
    )
    
    
    (3
    )
    
    
    (160
    )Benefits paid
    
    
    (258
    )
    
    
    (214
    )
    
    
    (211
    )Actuarial loss (gain)
    
    
    (258
    )
    
    
    100
    
    
    
    (19
    )Plan amendments
    
    
    81
    
    
    
    
    
    
    
    10Acquisition
    
    
    91
    
    
    
    
    
    
    
    23Benefit obligation at end of year
    
    
    6,316
    
    
    
    6,726
    
    
    
    6,903Plan assets at fair value:At beginning of year
    
    
    3,941
    
    
    
    4,562
    
    
    
    4,559Actual return on plan assets
    
    
    (158
    )
    
    
    (195
    )
    
    
    341Employer contributions
    
    
    962
    
    
    
    321
    
    
    
    253Contributions of plan participants
    
    
    106
    
    
    
    88
    
    
    
    97Net transfers
    
    
    (117
    )
    
    
    (3
    )
    
    
    (160
    )Benefits paid
    
    
    (258
    )
    
    
    (214
    )
    
    
    (211
    )Acquisition
    
    
    86
    
    
    
    
    
    
    
    14Plan assets at fair value at end of year
    
    
    4,562
    
    
    
    4,559
    
    
    
    4,893Benefit obligation in excess of plan assets
    
    
    1,754
    
    
    
    2,167
    
    
    
    2,010Minimum liability adjustment
    
    
    
    
    
    
    683
    
    
    
    506Unrecognized actuarial loss
    
    
    (451
    )
    
    
    (993
    )
    
    
    (830
    )Unrecognized prior service cost
    
    
    (339
    )
    
    
    (310
    )
    
    
    (292
    )Accrued pension cost under U.S. GAAP
    
    
    964
    
    
    
    1,547
    
    
    
    1,394Accrued pension cost under IFRS. See Note 9.
    
    
    1,218
    
    
    
    1,101
    
    
    
    1,113Difference between U.S. GAAP and IFRS
    
    
    254
    
    
    
    (446
    )
    
    
    (281
    )
  The difference between U.S. GAAP and IFRS is allocated in 2002 to
intangible assets of CHF 310 million and a reduction of equity of CHF 136
million. In 2003 the adjustment is allocated to intangible assets of CHF
292 million and an increase in equity of CHF 11 million.In contrast to the projected benefit obligation, the accumulated benefit
obligation, which amounted to CHF 6,106 million in 2002 and CHF 6,287
million in 2003, 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. If an additional
minimum liability is recognized, an intangible asset up to the amount of
the unrecognized prior service cost 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).Other comprehensive income before tax relating to the minimum liability
increased by CHF 159 million in 2003.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-52




---



##### 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, 2001, 2002 and 2003 and target
allocations were as follows: Target
    
    2001
    
    2002
    
    2003Debt Securities
    
    
    62.5
    %
    
    
    56.5
    %
    
    
    65.3
    %
    
    
    60.6
    %Equity securities
    
    
    30.0
    %
    
    
    28.5
    %
    
    
    24.0
    %
    
    
    30.9
    %Real estate and other
    
    
    7.5
    %
    
    
    15.0
    %
    
    
    10.7
    %
    
    
    8.5
    %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 is based on historical investment
performance and the target investment return criteria for the future
determined by the trustees.In 2004, the Company expects to make normal employer pension contributions
of CHF 192 million to comPlan. F-53




---



##### Table of Contents



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 now valued at market value on the grant date
and recorded over the full vesting period under personnel expenses. Under
IFRS, Swisscom restated all periods presented.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 continue 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
2001 appreciation of CHF 8 million has been recorded as personnel expenses
and 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 have now been exercised there is no longer a difference between
IFRS and U.S. GAAP.A summary of Swisscoms stock based compensation transactions is shown
below: Weighted
    
    
    
    
    
    WeightedWeighted
    
    
    
    
    
    average
    
    
    
    
    
    averageaverage
    
    
    
    
    
    exercise
    
    
    
    
    
    exercise2001
    
    exercise price
    
    2002
    
    price
    
    2003
    
    priceOutstanding at January 1
    
    
    253,664
    
    
    
    321
    
    
    
    312,173
    
    
    
    336
    
    
    
    374,345
    
    
    
    362Options granted
    
    
    61,140
    
    
    
    395
    
    
    
    62,180
    
    
    
    492
    
    
    
    86,930
    
    
    
    418Options lapsed
    
    
    (2,631
    )
    
    
    316
    
    
    
    (8
    )
    
    
    316
    
    
    
    (9,552
    )
    
    
    400Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (240,953
    )
    
    
    318Options sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,500
    )
    
    
    485Outstanding at December 31
    
    
    312,173
    
    
    
    336
    
    
    
    374,345
    
    
    
    362
    
    
    
    209,270
    
    
    
    425
  The following table summarizes information about Swisscoms stock based
compensation outstanding at December 31, 2003: Number
    
    Weighted
    
    Weightedoutstanding at
    
    average
    
    averageDecember 31,
    
    remaining
    
    exerciseRange of exercise prices
    
    2003
    
    contractual life
    
    priceCHF 350 - CHF 400
    
    
    52,710
    
    
    
    2.3
    
    
    CHF 368CHF 401 - CHF 450
    
    
    86,930
    
    
    
    4.3
    
    
    CHF 418CHF 451 - CHF 500
    
    
    61,190
    
    
    
    3.1
    
    
    CHF 468CHF 501 - CHF 550
    
    
    2,710
    
    
    
    2.8
    
    
    CHF 504CHF 551 - CHF 600
    
    
    5,730
    
    
    
    3.3
    
    
    CHF 569209,270
    
    
    
    3.4
    
    
    CHF 425
  At December 31, 2003, options exercisable had a weighted average exercise
price of CHF 473. F-54




---



##### Table of Contents



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 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
    
    2001
    
    2002
    
    2003Net income (loss)As reported
    
    
    5,702
    
    
    
    (863
    )
    
    
    2,096Pro forma
    
    
    5,710
    
    
    
    (872
    )
    
    
    2,090CHFBasic earnings (loss) per shareAs reported
    
    
    77.53
    
    
    
    (12.76
    )
    
    
    31.66Pro forma
    
    
    77.64
    
    
    
    (12.89
    )
    
    
    31.57Diluted earnings (loss) per shareAs reported
    
    
    77.49
    
    
    
    (12.74
    )
    
    
    31.64Pro forma
    
    
    77.59
    
    
    
    (12.88
    )
    
    
    31.55
  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.The difference between equity under IFRS and U.S. GAAP can be summarized as
follows: CHF in millionsDifference at beginning of year
    
    
    4Reclassification of put options from temporary equity to equity
    
    
    8Reduction in expense from 2003
    
    
    6Liability under U.S. GAAP reversed into equity when SARs were exercised
    
    
    12Liability under IFRS reversed into equity when SARs were exercised. See Note 8.
    
    
    (30
    )Difference at end of year
    
    
    
 F-55




---



##### Table of Contents



d)
    
    Termination benefitsIn 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.Effective January 1, 2003, Swisscom adopted SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. Under the guidance of
SFAS No. 146, termination benefits are not allowed to be immediately
accrued if employees are required to render service until they are
terminated and will not be terminated within the minimum retention period,
which is three months. If employees are required to continue working beyond
the minimum retention period, the liability is to be recognized ratably
over the future service period.During 2003, under IFRS, Swisscom accrued termination benefits relating to
its outplacement program. Under U.S. GAAP at December 31, 2003, Swisscom
has reversed termination benefit accruals of CHF 12 million relating to
employees who will not be terminated within the minimum retention period.
Under U.S. GAAP, these expenses will be recognized over the future service
period of these employees.The U.S. GAAP adjustments that impact the balance sheet consist of the
following: CHF in millions
    
    2001
    
    2002
    
    2003Accrued liabilities under IFRS
    
    
    76
    
    
    
    118
    
    
    
    117Accrued liabilities under U.S. GAAP
    
    
    26
    
    
    
    88
    
    
    
    76Difference
    
    
    50
    
    
    
    30
    
    
    
    41
  The U.S. GAAP adjustments that impact the income statement consist of the
following: CHF in millions
    
    2001
    
    2002
    
    2003Operating expense
    
    
    92
    
    
    
    90
    
    
    
    87Interest expense
    
    
    
    
    
    
    2
    
    
    
    1Total IFRS expense
    
    
    92
    
    
    
    92
    
    
    
    88Total U.S. GAAP expense
    
    
    42
    
    
    
    112
    
    
    
    77Difference
    
    
    50
    
    
    
    (20
    )
    
    
    11
 F-56




---



##### Table of Contents



e)
    
    Write-down of long-lived assetsIn 1997 Swisscom recorded an impairment charge of CHF 107 million relating
to the write down of certain property, plant and equipment to their
realizable value. In determining the realizable amount, Swisscom discounted
future cash flows expected to result from the use and eventual disposition
of these assets. Under U.S. GAAP, the assets recoverable amount is
determined using undiscounted cash flows. The recoverable amount based on
undiscounted cash flow exceeded the carrying value and therefore the
impairment charge under IFRS was reversed.As the assets were not written down under U.S. GAAP, additional
depreciation expense of CHF 30 million has been recognized in the year
ended December 31, 2001. At December 31, 2001 these assets were fully
depreciated.f)
    
    Capitalization of softwarePrior to the adoption of IAS 38 Intangible Assets on January 1, 2000,
Swisscom expensed software costs as incurred. Under U.S. GAAP, external
consultant costs incurred in the development of software for internal use
have been capitalized from January 1, 1995. These costs are amortized over
a three-year period.There is no material difference between the policy for capitalizing
software under IFRS as compared to U.S. GAAP as of January 1, 2000.
Accordingly, under U.S. GAAP, Swisscom recognized additional amortization
expense relating to the software that was capitalized at December 31, 1999.
At December 31, 2001 capitalized software was fully amortized. CHF in millions
    
    2001
    
    2002
    
    2003Software capitalized during year
    
    
    
    
    
    
    
    
    
    
    Amortization expense
    
    
    (124
    )
    
    
    
    
    
    
    Net income statement effect
    
    
    (124
    )
    
    
    
    
    
    
    
  g)
    
    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 security is written
down the new value becomes its carrying value and it is not subsequently
reversed.In 2001, Swisscom reduced the carrying value of its shares in Infonet to
its fair value and recorded a charge for the other than temporary decline
in value. As the carrying value of the shares was CHF 24 million greater
under IFRS compared to U.S. GAAP, the amount of the charge under IFRS was
CHF 24 million greater and was reversed in the reconciliation to U.S. GAAP. F-57




---



##### Table of Contents



h)
    
    Cross-border tax leasesAs described in Note 27, in 1999, 2000 and 2002, Swisscom entered into a
series of transactions in which it placed a total of CHF 3,491 million 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 met. Under
U.S. GAAP both the asset and liability of CHF 3,491 million would be
recorded on the balance sheet. In addition under U.S. GAAP, Swisscom would
recognize rental income, depreciation expense and interest expense
associated with these leases. The terms of the asset deposited in the trust
are exactly the same as the debt obligation and therefore the only income
statement effect is the profit on the transaction. The effect of such
accounting would be to recognize the profit from each of the transactions
CHF 108 million, CHF 214 million and CHF 28 million respectively, over the
life of the leases, which range from 13 to 30 years. Accordingly, in 2001,
2002 and 2003 Swisscom has recognized income of CHF 14 million, CHF 15
million and CHF 15 million, respectively relating to the leases. There will
be no expected cash receipts or payments in the future as both the assets
and liabilities will decline equally over the term of the lease.i)
    
    debitel purchase accountingPro forma information
As described in Note 25, during 2001, Swisscom acquired an additional 20%
interest in debitel for CHF 928 million. The pro forma effect of the
acquisition on the results for 2001 is insignificant.Difference in basis
With respect to the acquisition in 2001, under U.S. GAAP, Swisscom assigned
CHF 238 million of the purchase price to customer list and reduced goodwill
recorded under IFRS by a corresponding amount. The customer list will be
amortized over a three-year period. As a result of this adjustment a
deferred tax liability of CHF 95 million would be recorded and goodwill
would be increased by a corresponding amount. In addition, as a result of
recording an impairment in 2000 relating to the put option described below,
the amount assigned to goodwill was CHF 329 million lower under U.S. GAAP
compared to IFRS.debitel put options
Swisscom acquired its additional 20% interest in debitel pursuant to the
exercise by two shareholders of options that allowed them to put 17,862,761 shares of debitel to Swisscom. As at December 31, 2000, the market price of
debitel was EUR 21.9 (CHF 33.3) and the put price was EUR 34 (CHF 51.7).
The difference between the put price and the fair value is accounted for as
a preferential dividend to the minority interest, and the amount of the
charge was determined by multiplying the difference between the put price
and the fair value by the number of shares that can be put back to
Swisscom. Under IFRS, there is no separate accounting for these types of
financial instruments. Under U.S. GAAP an expense of CHF 329 million would
have been recognized in the income statement. As this transaction closed in
October 1999, the guidance in EITF 00-4 Majority Owners Accounting for a
Transaction in the Shares of a Consolidated Subsidiary and a Derivative
Indexed to the Minority Interest in that Subsidiary was not followed.One shareholder exercised its option in January 2001 for CHF 468 million
and the other shareholders exercised its option in July 2001 for CHF 460
million. CHF 906 million has been recorded as goodwill under IFRS and is
being amortized over ten years. Under U.S. GAAP, the CHF 329 million that
was recorded as a liability at December 31, 2000 would have reduced the
amount of the purchase price assigned to goodwill in 2001.The (increase) decrease in amortization expense under U.S. GAAP compared to
IFRS is summarized as follows: CHF in millions
    
    2001Goodwill
    
    
    48Customer List
    
    
    (190
    )Total
    
    
    (142
    )
  During the years ended December 31, 2002 and 2003, amortization expense
relating to the customer list would have been CHF 82 million and CHF 86
million and the unamortized balance would have been CHF 107 million and CHF
28 million, respectively. As described in m) 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.j)
    
    Application of SAB 101The staff of the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin 101 that addresses Revenue Recognition. Under this
guidance, revenue earned from access and similar charges should be
recognized over the estimated life of the customer relationship. Swisscom
previously recognized revenue immediately upon connection or similar
activity. In 2001, 2002 and 2003, the effect of the deferred and released
revenue from prior periods amounted to F-58




---



##### Table of Contents



CHF 18 million, CHF 9 million and CHF 31 million, respectively, which has
been recorded as an addition to net revenue.
SAB 101 allows companies to defer costs directly associated with revenue
that has been deferred. Swisscom has elected not to defer any such costs.k)
    
    Site restorationAs described in Note 28, 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 28, 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.The difference between asset retirement obligation and net asset
capitalized between IFRS and U.S. GAAP consist of the following: CHF in millions
    
    2001
    
    2002
    
    2003Net asset capitalized under IFRS
    
    
    34
    
    
    
    32
    
    
    
    28Retirement obligation under IFRS
    
    
    (349
    )
    
    
    (371
    )
    
    
    (314
    )Net liability under IFRS
    
    
    (315
    )
    
    
    (339
    )
    
    
    (286
    )Net asset capitalized under U.S. GAAP
    
    
    
    
    
    
    
    
    
    
    21Retirement obligation under U.S. GAAP
    
    
    (354
    )
    
    
    (364
    )
    
    
    (314
    )Net liability under U.S. GAAP
    
    
    (354
    )
    
    
    (364
    )
    
    
    (293
    )Difference
    
    
    (39
    )
    
    
    (25
    )
    
    
    (7
    )
  The difference between the components for site restoration expense between
IFRS and U.S. GAAP consist of the following: CHF in millions
    
    2001
    
    2002
    
    2003Operating expenses
    
    
    8
    
    
    
    (3
    )
    
    
    Depreciation expense
    
    
    7
    
    
    
    5
    
    
    
    9Financial expense (income)
    
    
    26
    
    
    
    22
    
    
    
    (39
    )Total IFRS expense (income)
    
    
    41
    
    
    
    24
    
    
    
    (30
    )Depreciation expense
    
    
    
    
    
    
    
    
    
    
    10Financial expense (income)
    
    
    23
    
    
    
    10
    
    
    
    (27
    )Cumulative effect of first time adoption
    
    
    
    
    
    
    
    
    
    
    (31
    )Total U.S. GAAP expense (income)
    
    
    23
    
    
    
    10
    
    
    
    (48
    )Difference1)
    
    
    18
    
    
    
    14
    
    
    
    18
 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-59




---



##### Table of Contents



l)
    
    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 is reversed, as the liability is not discounted. For the years
ended December 31, 2001 and 2002 the interest expense recorded as an
addition to the liability in the amount of CHF 1 million for 2001 and 2002
under IFRS is reversed. Due to a change in law the accrual for
dismantlement was reassessed in 2001 and a decrease was recorded. Due to
the fact that under U.S. GAAP the liability is not discounted the decrease
is higher and additional income is recorded in the amount of CHF 9 million.
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. F-60




---



##### Table of Contents



m)
    
    Goodwill amortization and impairmentAs described in Note 25, Swisscom recorded an impairment charge of CHF
1,130 million in 2001 relating to goodwill of debitel. Under IFRS, this
analysis was based on the projected future cash flow discounted by a
weighted average cost of capital. Under U.S. GAAP, Swisscom applied the
concepts of SFAS 121 Accounting for the Impairment of Long Lived Assets
and for Long Lived Assets to be disposed of. As the undiscounted cash
flows exceeded the carrying value of the asset, there was no impairment
under U.S. GAAP in 2001. In June 2001, the FASB issued SFAS 142, Goodwill
and Other Intangible Assets which supersedes SFAS 121. Under SFAS 142,
goodwill and indefinite-lived intangible assets are no longer amortized,
but rather must be tested for impairment upon adoption and at least
annually thereafter. Separable intangible assets with definite lives
continue to be amortized over their useful lives. On January 1, 2002,
Swisscom adopted the provisions of SFAS 142.The goodwill balance as of December 31, 2001, under U.S. GAAP was CHF 2,778
million, relating primarily 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
25 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, and Swisscom recorded an impairment charge of CHF 1,649 million
on adoption of SFAS 142 on January 1, 2002.Under IFRS, CHF 304 million and CHF 213 million of amortization expense
relating to goodwill was recognized in 2002 and 2003, respectively. These
amounts were eliminated under U.S. GAAP.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
in the proceeding paragraph. 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.As described in note 25, in 2003 Swisscom recorded an additional impairment
charge of CHF 280 million. As the goodwill balance under U.S. GAAP had a
value of zero, the impairment booked under IFRS was reversed under U.S.
GAAP.The difference between the impairment charge under IFRS and U.S. GAAP is
summarized below: CHF in millions
    
    2001
    
    2002
    
    2003IFRS Impairment charge
    
    
    1,130
    
    
    
    702
    
    
    
    280U.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)
    
    
    1,130
    
    
    
    (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, 2003, the U.S. GAAP adjustments that impact the balance consist of the following: CHF in millions
    
    2001
    
    2002
    
    2003Increase (decrease) debitel goodwill
    
    
    1,130
    
    
    
    (1,077
    )
    
    
    (701
    )Reversal of other goodwill amortization
    
    
    
    
    
    
    27
    
    
    
    68Effect on shareholders equity
    
    
    1,130
    
    
    
    (1,050
    )
    
    
    (633
    )
  The changes in the carrying amount of goodwill for the year ended December 31, 2003 are as follows: CHF in millions
    
    TotalJanuary 1, 2003
    
    
    140Additions
    
    
    81Translation effects
    
    
    3December 31, 2003
    
    
    224
 F-61




---



##### Table of Contents



Adjusted net income (loss): CHF in millions
    
    December 31, 2001
    
    December 31, 2002
    
    December 31, 2003Reported net income (loss)
    
    
    5,702
    
    
    
    (863
    )
    
    
    2,096Add back: Goodwill amortization
    
    
    342
    
    
    
    
    
    
    
    Adjusted net income
    
    
    6,044
    
    
    
    (863
    )
    
    
    2,096
  The following tables present Swisscoms 2001 results on a basis comparable to the 2002 and 2003 results, adjusted to
exclude amortization expense related to goodwill.Basic earnings (loss) per share: in CHF
    
    December 31, 2001
    
    December 31, 2002
    
    December 31, 2003Reported basic EPS
    
    
    77.53
    
    
    
    (12.76
    )
    
    
    31.66Goodwill amortization
    
    
    4.65
    
    
    
    
    
    
    
    Adjusted basic EPS
    
    
    82.18
    
    
    
    (12.76
    )
    
    
    31.66
  Diluted earnings (loss) per share: in CHF
    
    December 31, 2001
    
    December 31, 2002
    
    December 31, 2003Reported basic EPS
    
    
    77.49
    
    
    
    (12.74
    )
    
    
    31.64Goodwill amortization
    
    
    4.65
    
    
    
    
    
    
    
    Adjusted diluted EPS
    
    
    82.14
    
    
    
    (12.74
    )
    
    
    31.64
  In the fourth quarter of 2003, Swisscom initiated proceedings for the sale
of its investment in debitel and management committed itself to a plan to
sell this investment after year-end. The carrying amount of assets and
liabilities of debitel are presented in the table below. CHF in millions
    
    At December 31. 2003Current assets
    
    
    708Long-term assets
    
    
    298Total assets
    
    
    1,006Current liabilities
    
    
    (770
    )Long-term liabilities
    
    
    (52
    )Total liabilities
    
    
    (822
    )
  Swisscoms intangible assets that are subject to amortization, the amortization expense in 2003 and the expected
amortization expense for the 5 years ended December 31, 2008 are summarized below: Gross carrying
    
    AccumulatedCHF in millions
    
    among
    
    AmortizationAmortized intangible assets:At December 31, 2003Customer lists
    
    
    624
    
    
    
    (596
    )Internally developed software
    
    
    325
    
    
    
    (217
    )Other
    
    
    415
    
    
    
    (170
    )Total
    
    
    1,364
    
    
    
    (983
    )Aggregate amortization expense:For year ended December 31, 2003
    
    
    
    
    
    
    234Estimated amortization expense:For year ended December 31, 2004
    
    
    
    
    
    
    (148
    )For year ended December 31, 2005
    
    
    
    
    
    
    (101
    )For year ended December 31, 2006
    
    
    
    
    
    
    (68
    )For year ended December 31, 2007
    
    
    
    
    
    
    (20
    )For year ended December 31, 2008
    
    
    
    
    
    
    (10
    )
 F-62




---



##### Table of Contents



n)
    
    Dilution gainsSwisscoms assets increased when a subsidiary sold common stock to other
parties for an amount greater than Swisscoms carrying value. Under IFRS, a
dilution gain of CHF 72 million relating to AGI IT Services AG was recorded
in the income statement in 2001. As a result of the recurring losses based
on guidance issued by the Staff of the U.S. Securities and Exchange
Commission, Swisscom has removed the gain from the income statement and
recorded this increase directly to equity under U.S. GAAP.o)
    
    Derivative accountingAs described in Note 26, Swisscom subscribed for CHF 100 million of new
shares in Swiss for CHF 56 per share effective November 2, 2001. The shares
were issued to Swisscom on December 21, on which date the market value of
these shares amounted to CHF 79 million. The difference between the
commitment price and the market price of CHF 21 million was recorded under
financial expense for IFRS purposes. At December 31, 2001, Swisscom
recorded a fair value adjustment of CHF 3 million, net of taxes of CHF 1
million, being the difference between the year-end price of CHF 46 and the
issue price of CHF 44, through equity. There are restrictions on Swisscoms
ability to sell the shares. Accordingly, under U.S. GAAP, the agreement to
buy the shares would not be considered a derivative instrument based on the
guidance contained in SFAS 133 Implementation Issue No. A14. Therefore, the
CHF 21 million difference in commitment price and market price at the date
of the issue would be recorded in equity as a fair value adjustment 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-63




---



##### Table of Contents



p)
    
    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 (see Note 28), 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. See
Note 28. 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, 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. These
transactions are accounted for under the finance method and the sales
proceeds would be reported as a financing obligation and the properties
would remain on the balance sheet and would be depreciated as in the past.
The lease payments would be split into an interest part and an amortization
of the obligation.The differences are the following: CHF in millions
    
    2001
    
    2002
    
    2003Fixed assets
    
    
    (292
    )
    
    
    (288
    )
    
    
    (284
    )Deferred gain
    
    
    (40
    )
    
    
    (13
    )
    
    
    9Finance obligation/Lease liability
    
    
    46
    
    
    
    45
    
    
    
    43Total difference on balance sheet items
    
    
    (286
    )
    
    
    (256
    )
    
    
    (232
    )Gain (deferred) released under U.S. GAAP
    
    
    (242
    )
    
    
    27
    
    
    
    22Depreciation expense/Impairment loss
    
    
    (43
    )
    
    
    4
    
    
    
    4Interest expense
    
    
    
    
    
    
    1
    
    
    
    Lease cost
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )Total difference in income statement
    
    
    (286
    )
    
    
    30
    
    
    
    24
  Under IFRS, for the buildings qualifying as finance leases, Swisscom
adjusted the carrying value of the fixed assets, when the transaction was
first recorded in March 2001, by the gain of CHF 239 million, to the
selling price. The increase in the value of the asset is deferred and is
included within other long-term liabilities. Under U.S. GAAP, Swisscom
reversed this amount and also recorded additional losses on certain
properties, reflecting the different accounting treatment described above,
when the transaction was first recorded in 2001. As a result, fixed assets
were reduced by CHF 292 million, CHF 288 million and CHF 284 million in
2001, 2002 and 2003, respectively.Swisscom deferred an additional CHF 260 million under U.S. GAAP, of which
CHF 18 million was released in 2001, CHF 27 million in 2002, and CHF 22
million in 2003. F-64




---



##### Table of Contents



q)
    
    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 119 million.Income before income taxes, equity in net (loss) income of affiliated
companies, minority interest and change in accounting principle consists of
the following: CHF in millions
    
    2001
    
    2002
    
    2003Switzerland
    
    
    5,935
    
    
    
    2,147
    
    
    
    2,802Foreign
    
    
    (156
    )
    
    
    (2,468
    )
    
    
    88Total
    
    
    5,779
    
    
    
    (321
    )
    
    
    2,890
  Income tax expenses would be allocated as follows: CHF in millions
    
    2001
    
    2002
    
    2003CurrentSwitzerland
    
    
    469
    
    
    
    74
    
    
    
    191Foreign
    
    
    30
    
    
    
    49
    
    
    
    50Total current
    
    
    499
    
    
    
    123
    
    
    
    241DeferredSwitzerland
    
    
    (554
    )
    
    
    235
    
    
    
    191Foreign
    
    
    (74
    )
    
    
    (26
    )
    
    
    47Total deferred
    
    
    (628
    )
    
    
    209
    
    
    
    238Total income taxes
    
    
    (129
    )
    
    
    332
    
    
    
    479
  The components of deferred taxes under U.S. GAAP at December 31, 2001, 2002 and 2003 are presented below: CHF in millions
    
    2001
    
    2002
    
    2003Deferred tax asset:Current liabilities
    
    
    58
    
    
    
    51
    
    
    
    44Accrued pension cost
    
    
    63
    
    
    
    152
    
    
    
    117Intangible assets
    
    
    747
    
    
    
    346
    
    
    
    164Other current and non current assets
    
    
    75
    
    
    
    88
    
    
    
    98Tax losses
    
    
    80
    
    
    
    190
    
    
    
    137Less: allowance for tax losses
    
    
    (71
    )
    
    
    (89
    )
    
    
    (109
    )Total deferred tax asset
    
    
    952
    
    
    
    738
    
    
    
    451Deferred tax liabilities:Property, plant and equipment
    
    
    (449
    )
    
    
    (406
    )
    
    
    (403
    )Trade receivables and other current assets
    
    
    (32
    )
    
    
    (6
    )
    
    
    (5
    )Other non-current assets
    
    
    (100
    )
    
    
    (67
    )
    
    
    (33
    )Accrued liabilities
    
    
    (23
    )
    
    
    (28
    )
    
    
    (46
    )Total deferred tax liabilities
    
    
    (604
    )
    
    
    (507
    )
    
    
    (487
    )Net deferred tax (liability) asset under U.S. GAAP
    
    
    348
    
    
    
    231
    
    
    
    (36
    )Net deferred tax asset (liability) under IFRS
    
    
    344
    
    
    
    114
    
    
    
    (133
    )Difference
    
    
    4
    
    
    
    117
    
    
    
    97The components of income tax expense are:Current tax expense
    
    
    499
    
    
    
    123
    
    
    
    241Deferred tax expense (benefit)
    
    
    (628
    )
    
    
    209
    
    
    
    238Income tax expense (benefit) under U.S. GAAP
    
    
    (129
    )
    
    
    332
    
    
    
    479Total income tax expense (benefit) under IFRS
    
    
    (15
    )
    
    
    361
    
    
    
    500Difference
    
    
    114
    
    
    
    29
    
    
    
    21
 F-65




---



##### Table of Contents



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, 2003: CHF in millions
    
    2003Deferred tax assets (short term)
    
    
    162Deferred tax assets (long term)
    
    
    221Deferred tax liabilities (short term)
    
    
    (6
    )Deferred tax liabilities (long term)
    
    
    (413
    )Net deferred tax liability under U.S. GAAP
    
    
    (36
    )
  Other DisclosuresSFAS 133  Accounting for Derivative
Instruments and Hedging ActivitiesEffective January 1, 2001, Swisscom adopted SFAS 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
35. 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, 2001, 2002 and 2003. As the effect of
recording these financial instruments was only CHF 3 million, Swisscom has
not presented this as a reconciling item.Swisscom Mobile AG  Minority InterestAs described above, Swisscom sold 25% of its interest in Swisscom Mobile AG
during 2001. While there are differences between U.S. GAAP and IFRS as it
relates to this entity, both the carrying value at the time of the sale as
well as subsequent activity, the effect on minority interest was
insignificant to present 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
    
    2001
    
    2002
    
    2003Statement of operations:Net revenues
    
    
    723
    
    
    
    278
    
    
    
    313Total operating expenses
    
    
    (1,037
    )
    
    
    (318
    )
    
    
    (422
    )Operating loss
    
    
    (314
    )
    
    
    (40
    )
    
    
    (109
    )Net income (loss)
    
    
    283
    
    
    
    266
    
    
    
    (115
    )Balance sheet:Current assets
    
    
    363
    
    
    
    139
    
    
    
    119Non-current assets
    
    
    1,572
    
    
    
    1,464
    
    
    
    56Current liabilities
    
    
    384
    
    
    
    148
    
    
    
    45Long-term liabilities
    
    
    621
    
    
    
    106
    
    
    
    36Shareholders equity
    
    
    930
    
    
    
    1,349
    
    
    
    94
  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 24, TelSource N.V. sold its investment in Cesky Telecom
in December 2003. F-66




---



##### 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 27.Significant amounts attributable to transactions with the Confederation,
its departments and agencies: ExpenseCHF in millions
    
    2001
    
    2002
    
    2003Swiss Post
    
    
    86
    
    
    
    52
    
    
    
    11
  Significant amounts payable to the Confederation, its departments and agencies: PayableCHF in millions
    
    2001
    
    2002
    
    2003Swiss Post
    
    
    1,750
    
    
    
    750
    
    
    
    
  Transactions with VodafoneOn March 30, 2001, Swisscom sold a 25% stake in Swisscom Mobile AG.
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 22
million in 2001 (from April 1, 2001), CHF 36 million in 2002 and CHF 66
million in 2003. Services purchased from Vodafone during the same periods
total CHF 43 million, CHF 57 million and CHF 111 million, respectively.Transactions with DangaardThe following are the related party income statement transactions between
Dangaard and Swisscoms subsidiary debitel: CHF in millions
    
    2001
    
    2002
    
    2003Revenue
    
    
    327
    
    
    
    375
    
    
    
    241Expenses
    
    
    16
    
    
    
    16
    
    
    
    17Interest income
    
    
    
    
    
    
    1
    
    
    
    1
  The following are the related party balance sheet transactions between Dangaard and Swisscoms subsidiary debitel: CHF in millions
    
    2001
    
    2002
    
    2003Accounts receivable
    
    
    28
    
    
    
    35
    
    
    
    19Loan receivable
    
    
    
    
    
    
    39
    
    
    
    39
  Restrictions on the payment of dividendsUnder Swiss company law, the maximum amount of shareholders equity that
may be distributed is CHF 4,967 million. F-67




---



##### Table of Contents



Effect of new accounting pronouncements:International Financial Reporting StandardsIn 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 17, Leases; 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.U.S. GAAPIn 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 will apply to
revenue arrangements entered into by Swisscom after January 1, 2004.
Swisscom is currently assessing the impact of EITF Issue No. 00-21 on its
consolidated financial statements. Based on a preliminary analysis,
Swisscom has concluded that the impact on the consolidated financial
statements is not expected to be material.In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003) (FIN 46), Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51. FIN 46 addresses the consolidation of
business enterprises to which the usual condition (ownership of a majority
voting interest) of consolidation does not apply. This interpretation
focuses on controlling financial interests that may be achieved through
arrangements that do not involve voting interest. It concludes that in the
absence of clear control through voting interests, a companys exposure
(variable interest) to the economic risks and potential rewards from the
variable interest entitys assets and activities are the best evidence of
control. If an enterprise holds a majority of the variable interests of an
entity, it would be considered the primary beneficiary. The primary
beneficiary is required to include assets, liabilities and the results of
operations of the variable interest entity in its financial statements.
The provisions of FIN 46 is effective for Swisscom January 1, 2004 for all
new variable interest entities created or acquired after February 1, 2003.
Swisscom does not believe it will be necessary to consolidate or disclose
information about variable interest entities upon adoption of this
standard. F-68




---



##### Table of Contents



Schedule IIValuation and Qualifying Accounts Allowance for bad
    
    Early leave andCHF in millions
    
    Restructuring
    
    and doubtful debts
    
    outplacementLiability at December 31, 2000
    
    
    29
    
    
    
    279
    
    
    
    28Amounts written off
    
    
    
    
    
    
    (85
    )
    
    
    Increase in provision
    
    
    
    
    
    
    125
    
    
    
    82Translation adjustments
    
    
    
    
    
    
    (3
    )
    
    
    Cash payments
    
    
    (11
    )
    
    
    
    
    
    
    (34
    )Liability at December 31, 2001
    
    
    18
    
    
    
    316
    
    
    
    76Amounts written off
    
    
    
    
    
    
    (50
    )
    
    
    Increase in provision
    
    
    
    
    
    
    32
    
    
    
    92Reclassification
    
    
    
    
    
    
    (3
    )
    
    
    Translation adjustments
    
    
    
    
    
    
    (2
    )
    
    
    Cash payments
    
    
    (7
    )
    
    
    
    
    
    
    (50
    )Liability at December 31, 2002
    
    
    11
    
    
    
    293
    
    
    
    118Amounts written off
    
    
    
    
    
    
    (62
    )
    
    
    Increase in provision
    
    
    
    
    
    
    56
    
    
    
    88Translation adjustments
    
    
    
    
    
    
    8
    
    
    
    Cash payments
    
    
    (4
    )
    
    
    
    
    
    
    (89
    )Liability at December 31, 2003
    
    
    7
    
    
    
    295
    
    
    
    117
 S-1




---



##### Table of Contents



ITEM 19: EXHIBITS Index to Exhibits Exhibit 1
    
    Amended Articles of Incorporation (Statuten) in English translationExhibit 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
 -152-




---



##### Table of Contents



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 Dietiker
Chief Financial Officer
 Date: May 3, 2004 -153-