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  **SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549** **FORM 20-F**   o **REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR12(g) OF THE SECURITIES EXCHANGE ACT OF 1934****or**   þ **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934****For the fiscal year ended December 31, 2005****or**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934****For the transition period from           to****or**   o **SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934****Date of event requiring this shell company report                                         **     **Commission file number:**  **1-14860****Swisscom AG**(Exact name of Registrant as specified in its charter)**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 exchange****Title of each class** **on which registered**American Depositary Shares, each representing one-tenth ofone Registered Share, Nominal Value CHF 1 per share New York Stock Exchange          Registered Shares, Nominal Value CHF 1 per share* New York Stock Exchange * Listed, not for trading or quotation purposes, but only in connection with the registrationof American Depositary Shares pursuant to the requirements of the Securities and ExchangeCommission 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 asof December 31, 2005: 61,482,761 Registered Shares, Nominal Value CHF 1 per share.     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule405 of the Securities Act.         Yes þ No o       If this report is an annual or transition report, indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934.         Yes o No þ       Indicate by check mark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.         Yes þ No o       Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):     Large accelerated filer þ Accelerated filer o Non-accelerated filer o     Indicate by check mark which financial statement item the registrant has elected to follow.         Item 17 o Item 18 þ       If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).         Yes o No þ    
 

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**TABLE OF CONTENTS**       **Page** INTRODUCTION  1 ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS  3 ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE  3 ITEM 3: KEY INFORMATION  4 Selected Financial Data  4 Risk Factors  10 ITEM 4: INFORMATION ON THE COMPANY  21 Overview  21 Fixnet  25 Mobile  37 Solutions  43 Other  48 Corporate  51 Other Participations  51 Divestments/Discontinued Operations  52 Networks and Technology  53 Property, Plant and Equipment  57 Research and Development  58 Regulation  59 ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS  70 Introduction  70 Summary of Results  72 Critical Accounting Policies  72 Results of Group Operations  75 Fixnet  80 Mobile  87 Solutions  92 Other  98 Corporate  102 Liquidity and Capital Resources  104 ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES  111 Directors and Senior Management  111 Compensation  116 Employees  116 Share Ownership  119 ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS  121 Major Shareholders  121 Relationship and Transactions with the Swiss Confederation  121 ITEM 8: FINANCIAL INFORMATION  125 Financial Statements  125 Legal Proceedings  125 Dividend Policy  130 ITEM 9: THE OFFER AND LISTING  131 Markets  131 Price History  132 ITEM 10: ADDITIONAL INFORMATION  133 Memorandum and Articles of Association  133 Corporate Governance  136 Exchange Controls  138 Taxation  139 Documents on Display  142 ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  143 ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES  144 ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES  145 ITEM 14: MATERIAL MODIFICATIONS  145 ITEM 15: CONTROLS AND PROCEDURES  145 ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT  145 ITEM 16B: CODE OF ETHICS  145 ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES  146 
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       **Page** ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES  147 ITEM 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS  147 ITEM 17: FINANCIAL STATEMENTS  148 ITEM 18: FINANCIAL STATEMENTS  148 ITEM 19: EXHIBITS  149 SIGNATURE  150  EX-1 EX-12 EX-13
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**INTRODUCTION****Presentation of financial and other information**Swisscom publishes its financial statements in Swiss francs (“CHF”). Unless otherwise indicated,all amounts in this annual report are expressed in Swiss francs. Solely for the convenience of thereader, certain amounts denominated in foreign currencies appearing primarily under the headings“*Item 4: Information on the Company — Divestments/Discontinued Operations*” and “*Item 5: Operatingand Financial Review and Prospects*” have been translated into Swiss francs. These translationsshould not be construed as representations that the amounts referred to actually represent suchtranslated amounts or could be converted into the translated currency at the rate indicated.Swisscom’s annual audited consolidated financial statements for the years ended December 31, 2005,December 31, 2004 and December 31, 2003, included in this annual report, are prepared in accordancewith International Financial Reporting Standards (“IFRS”), which differ in certain respects fromU.S. generally accepted accounting principles (US GAAP). For a reconciliation of the materialdifferences between IFRS and U.S. GAAP as they relate to Swisscom, see Note 44 to the consolidatedfinancial statements.As used in this annual report, the term “Swisscom”, unless the context otherwise requires, refersto Swisscom AG and its consolidated subsidiaries. The term “Confederation” refers to the SwissConfederation.**Cautionary statement regarding forward-looking statements**This annual report contains statements that constitute “forward-looking statements” within themeaning 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, whichconstitute forward-looking statements have been made and may in the future be made by or on behalfof 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 economicperformance.The words “anticipate”, “believe”, “expect”, “estimate”, “intend”, “plan” and similar expressionsidentify certain of these forward-looking statements. Readers are cautioned not to put unduereliance on forward-looking statements because actual events and results may differ materially fromthe expected results described by such forward-looking statements.Many factors may influence Swisscom’s actual results and cause them to differ materially fromexpected 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 telecommunicationregulations in Switzerland and the possibility that additional regulations may beimposed in the future;  **•** developments in technology, particularly the timely rollout of equipment;  **•** the evolution of Swisscom’s strategic partnerships and acquisitions, including costsassociated with possible future acquisitions and dispositions;
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 **•** the effects of tariff reductions and other marketing initiatives;  **•** the outcome of litigation in which Swisscom is involved; and  **•** macroeconomic trends, governmental decisions and regulatory policies affectingbusinesses in Switzerland generally, including changes in the level of interest or taxrates.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.
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**PART I****ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**Not Applicable.**ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE**Not Applicable.
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**ITEM 3: KEY INFORMATION****Selected Financial Data****Selected Consolidated Financial and Statistical Data**The selected consolidated financial data below have been extracted or derived from, and arequalified by reference to, the audited consolidated financial statements of Swisscom. Theconsolidated financial statements were prepared in accordance with IFRS, which differ in certainsignificant respects from U.S. GAAP. For a reconciliation of the significant differences betweenIFRS and U.S. GAAP as they relate to Swisscom, see Note 44 to the consolidated financialstatements.                     CHF in millions **Year Ended December 31,**  **2001**  **2002**  **2003**  **2004**  **2005**    **Consolidated Income Statement Data:**                    *Amounts in accordance with IFRS:*                    **Net revenue**  **10,366**   **10,415**   **10,026**   **10,057**   **9,732** Other income  193   228   231   195   260    **Total**  **10,559**   **10,643**   **10,257**   **10,252**   **9,992**                      Goods and services purchased  2,056   2,073   1,706   1,847   1,831 Personnel expenses  2,224   2,329   2,266   2,194   2,173 Other operating expenses  2,070   2,004   1,798   1,823   1,817 Depreciation  1,669   1,546   1,537   1,542   1,286 Amortization  62   114   142   151   108    **Total operating expenses**  **8,081**   **8,066**   **7,449**   **7,557**   **7,215**                      Gain on sale of real estate  675(1)  —   —   —   — Gain on partial sale of Swisscom Mobile AG  3,837(2)  —   —   —   —     **Operating income**  **6,990**   **2,577**   **2,808**   **2,695**   **2,777** Financial expense  (760)  (495)  (226)  (272)  (160)Financial income  416   197   213   138   242 Equity in net income (loss) of affiliatedcompanies  32   94   (9)  22   13    **Income before income taxes, equity in netincome of affiliated companies and minorityinterest**  **6,678**   **2,373**   **2,786**   **2,583**   **2,872**                      Income tax (expense) benefit(3)  48   (313)  (467)  (392)  (535)   **Net income from continuingoperations**  **6,726**   **2,060**   **2,319**   **2,191**   **2,337** Discontinued operations(4) (5)  (1,433)  (933)  (408)  (243)  9    **Net income**  **5,293**   **1,127**   **1,911**   **1,948**   **2,346**    Net income attributable to equity holdersof Swisscom AG  5,067   826   1,571   1,596   2,022    Net income attributable to minority interest  226   301   340   352   324    
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                     CHF in millions except per Share and   ADS amounts **Year Ended December 31,**  **2001**  **2002**  **2003**  **2004**  **2005**    **Basic earnings per share****(6)**                    -from continuing operations  88.38   26.00   29.89   28.42   33.64 -from discontinued operations(5)  (19.48)  (13.79)  (6.16)  (3.76)  0.15 -net income  68.90   12.21   23.73   24.66   33.79 **Diluted earnings per share****(6)**                    -from continuing operations  88.33   25.98   29.88   28.42   33.64 -from discontinued operations(5)  (19.47)  (13.78)  (6.16)  (3.76)  0.15 -net income  68.86   12.20   23.72   24.66   33.79 Basic and diluted earnings per ADS(6)  6.89   1.22   2.37   2.47   3.38                      *Amounts in accordance with U.S. GAAP:*                    **Net revenue**  **10,384**   **10,424**   **10,057**   **10,113**   **9,767** Net income from continuing operations  6,070   1,780   2,066   1,968   2,066 Net income (loss) from discontinuedoperations(5)  (368)  (994)  (8)  145   263 Cumulative effect of a change in accountingpolicy  —   (1,649)  38   —   —    **Net income (loss)**  **5,702**   **(863****)**  **2,096**   **2,113**   **2,329**    **Basic earnings (loss) per share**                    -from continuing operations  82.53   26.31   31.21   30.41   34.52 -from discontinued operations(5)  (5.00)  (14.69)  (0.12)  2.24   4.40 Cumulative effect of a change in accountingpolicy  —   (24.38)  0.57   —   — -net income  77.53   (12.76)  31.66   32.65   38.92 **Diluted earnings (loss) per share**                    -from continuing operations  82.49   26.29   31.19   30.41   34.52 -from discontinued operations(5)  (5.00)  (14.68)  (0.12)  2.24   4.40 Cumulative effect of a change in accountingpolicy  —   (24.35)  0.57   —   — -net income  77.49   (12.74)  31.64   32.65   38.92 Basic earnings per ADS(6)  7.75   (1.28)  3.17   3.27   3.89 Diluted earnings per ADS(6)  7.75   (1.27)  3.16   3.27   3.89 
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                     CHF in millions **Year Ended December 31,**  **2001** **2002** **2003** **2004** **2005**   **Consolidated Balance Sheet Data:**                    *(end of period)*                    *Amounts in accordance with IFRS:*                    Cash and cash equivalents  3,565   1,512   3,104   2,387   1,023 Other current assets  5,807   2,871   2,815   3,818   4,226 Property, plant and equipment  7,837   7,274   6,760   6,190   6,000 Investments in affiliated companies  589   682   41   58   191 Other non-current assets  3,017   2,256   1,913   1,779   1,969 Assets from discontinued operations(5)  3,300   2,135   1,685   —   —    **Total assets**  **24,115**   **16,730**   **16,318**   **14,232**   **13,409**   ** **Short-term debt  1,694   958(7)  514(7)  373   173 Trade accounts payable and other current liabilities  2,569   2,170   2,219   2,314   2,562 Long-term debt and finance lease obligations  3,490   2,451(7)  2,187   1,941   2,130 Accrued pension cost  1,218   1,101   1,113   1,118   805 Accrued liabilities and other long-term liabilities  1,148   979   984   1,033   1,115 Liabilities from discontinued operations(5)  1,055   886   794   **—**   —    **Total liabilities**  **11,174**   **8,545**   **7,811**   **6,779**   **6,785** Minority interest  769   781   731   663   623 Shareholders’equity  12,172   7,404   7’776   6,790   6,001    **Total equity**  **12,941**   **8,185**   **8,507**   **7,453**   **6,624**   ** **                     *Amounts in accordance with U.S. GAAP:*                    Assets continuing operations  24,049   18,654   18,360   17,734   17,549 Assets discontinued operations(5)  4,049   1,165   1,012   —   —    **Total assets**  **28,098**   **19,819**   **19,372**   **17,734**   **17,549**   ** **Long-term debt and finance lease obligationscontinuing operations  7,255   6,415   5,856   5,394   6,090 Long-term debt and finance lease obligationsdiscontinued operations(5)  28   23   36   —   — Total long-term debt and finance lease obligations  7,283   6,438   5,892   5,394   6,090 Shareholders’ equity  12,294   5,587   6,523   5,863   5,191                      **Consolidated Cash Flow Data:**                    *Amounts in accordance with IFRS:*                    Net cash provided by operating activities  3,208   3,698   4,708   4,066   3,432                      Capital expenditures:                    Fixed-line networks  470   479   497   360   353 Mobile networks  258   295   381   434   238 Other intangibles  125   70   98   103   189 Buildings  28   2   6   13   104 Other  287   281   183   226   203    **Total capital expenditures**  **1,168**   **1,127**   **1,165**   **1,136**   **1,087**   ** **                     Investments in affiliated companies  2   37   11   —   101 
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                       **Year Ended December 31,**  **2001** **2002** **2003** **2004** **2005**   **Statistical Data:**                    Fixed-line access lines(8)                    (*end of period, in thousands*)                    PSTN lines  3,240   3,163   3,086   3,007   2,922 ISDN lines  857   911   924   924   900    **Total fixed-line access lines**  **4,097**   **4,074**   **4,010**   **3,931**   **3,822**                         Traffic (*in millions of minutes*):                    National fixed-line telephony(9)  14,317   12,316   10,957   10,211   9,483 Outgoing international fixed-linetelephony(10)  1,399   1,394   1,341   1,316   1,282 Mobile telephony(11)  3,296   3,331   3,335   3,404   3,688                      Retail Internet subscribers (*end of period, inthousands*)(12)  734   860   944   1,013   1,118 Swisscom Mobile subscribers(13)                    (*end of period, in thousands*)  3,373   3,605   3,796   3,908   4,281 Number of full-time equivalent employees                     (*end ofperiod*)  17,784   17,171   16,079   15,477   16,088 **Notes to Selected Consolidated Financial and Statistical Data** (1) In 2001, Swisscom entered into two agreements for the sale of real estate and recorded again of CHF 675 million. (2) In 2001, Swisscom sold 25% of the shares of Swisscom Mobile AG to Vodafone and recorded again of CHF 3,837 million on disposal. (3) Prior to 2002, Swisscom was subject to a weighted average statutory income tax rate of 25%.Swisscom’s effective tax rate for the year ended December 31, 2001 was reduced by threeone-time effects: (1) the gain on the sale of Swisscom Mobile was, in effect, not subject totax; (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 consolidatedfinancial statements. In 2002, Swisscom transferred its operations from Swisscom AG to newlyformed subsidiaries, which are each subject to individual tax rates. This resulted in adecrease in the weighted average statutory tax rate from 25% to 23%. For 2004 and 2005, theweighted average statutory tax rate was further reduced to 22.3%. See Note 14 to theconsolidated financial statements. (4) Swisscom sold debitel in June 2004 and granted the purchaser vendor loan notes amounting toEUR 210 million in connection therewith. The vendor loan notes were initially recognized atfair value and in the following period using the effective interest rate method. See Note 37to the consolidated financial statements. The purchaser prematurely repaid the entire loan inthe first six months of 2005 and made a payment of CHF 351 million, representing the nominalvalue of the loan and the contractually agreed interest. The difference of CHF 59 millionbetween the recoverable value of the loan and the payment was recorded under discontinuedoperations (debitel). (5) As a result of the sale of debitel in June 2004, Swisscom treats debitel in its consolidatedfinancial statements as a discontinued operation. Prior years have been restated accordingly. (6) Earnings per ADS are based on the ratio of one-tenth of one share to one ADS. Basicweighted-average number of shares outstanding in 2001, 2002, 2003, 2004 and 2005 was73,543,972, 67,647,928, 66,199,789, 64,715,609 and 59,835,529, respectively. (7) Total debt at December 31, 2001 and 2002 includes debt outstanding to the Swiss Post and theFederal Treasury in the aggregate principal amount of CHF 1.8 billion and CHF 0.8 billion,respectively. In the course of 2003, Swisscom repaid the remaining outstanding loans of CHF0.8 billion to the Swiss Post. (8) Based on lines in service, including courtesy and service lines. (9) Represents total traffic generated by customers of Fixnet and Solutions. Includes traffic oncourtesy and service lines. Includes traffic from Swisscom’s fixed-line network to mobilenetworks and to private user networks. Does not include Internet traffic and traffic generatedfrom Swisscom-operated public payphones, Swisscom’s toll-free, cost shared and premium ratetelephone number services for business customers or by Swisscom’s information services. (10) Represents total traffic generated by customers of Fixnet and Solutions. Based on minutes asdetermined for customer billing purposes. (11) Includes minutes from all outgoing calls made by subscribers of Swisscom Mobile. Figuresinclude voice minutes only. (12) “Active” access subscribers include all paid-access subscribers and those subscribers toSwisscom’s free access services who have accessed their accounts at least once in the past 40days. (13) Swisscom does not include accounts of any prepaid customer with inactivity of more thantwelve months in its subscriber figures. This resulted in the deactivation of 207,000 inactiveprepaid customers in December 2001. As of
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      December 31, 2004, approximately 124,000 customers,which had not registered with Swisscom on a timely basis, as required by law since July 2004,were deactivated.**Dividend Information**The following table shows, in respect of each of the years indicated, information concerning thedividends per share paid in Swiss francs and in U.S. dollars. Dividends were declared in Swissfrancs and converted into U.S. dollars using the noon buying rate for Swiss francs per U.S. dollaron the date of the shareholders’ meeting at which the relevant dividend was approved. As used inthis annual report, the term “noon buying rate” refers to the exchange rate for Swiss francs perU.S. dollar, as announced by the Federal Reserve Bank of New York for customs purposes as the ratein The City of New York for cable transfers in foreign currencies.           **Dividend per Share****Year Ended December 31,** **(CHF)** **(USD)**2001(1)  11   6.78 2002(1)  12   9.15 2003(1)  13   10.01 2004  14   11.77 2005(2)  16   n/a  (1) In each of 2001, 2002 and 2003, shareholders received an additional distribution of CHF 8 pershare (equivalent to USD 4.48 per share, USD 4.93 per share and USD 6.00 per share, in eachcase on the date of the shareholders’ meeting at which the relevant distribution was approved)following par value reductions. (2) The Board of Directors has proposed a dividend of CHF 16 per share in respect of fiscal year2005, which is subject to approval by the Annual General Meeting to be held on April 25, 2006.In December 2005, Swisscom completed a share repurchase program, in which it repurchasedshares in an aggregate amount of CHF 2 billion. See “*Item 8: Financial Information – DividendPolicy*”.
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**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 onApril 21, 2006 was CHF1.2776.       **Average****Year Ended December 31,** **Rate****(1)**2001  1.6944 2002  1.5497 2003  1.3374 2004  1.2393 2005  1.2507  (1) The average of the noon buying rates on the last business day of each full month during therelevant period.The following table shows, for the periods indicated, information concerning the high and lownoon buying rates for the Swiss franc, expressed in Swiss francs per U.S. dollar.         **Month** **High** **Low**October 2005  1.3022   1.2731 November 2005  1.3255   1.2780 December 2005  1.3210   1.2788 January 2006  1.2938   1.2595 February 2006  1.3201   1.2841 March 2006  1.3201   1.2893 
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**Risk Factors****Risks Related to Swisscom’s Business*****Amendments to the Telecommunications Act will require Swisscom to offer unbundled access to itslocal loop and other related services, which could negatively affect its fixed-line business andoverall operating results***Since the entry into force of the Swiss Telecommunications Act on January 1, 1998 (Fernmeldegesetz)(the “Telecommunications Act”), the Swiss telecommunications market has been open to competition.While the Telecommunications Act contains provisions designed to facilitate competition in thefixed-line telephony market, Swisscom has not yet been required to unbundle its local loop, whichmeans that Swisscom provides access services to the vast majority of customers who use fixed-linetelephony services in Switzerland, many of whom continue to use Swisscom as their default providerof national and international calling services. Nonetheless, competition has resulted in loss ofmarket share and margin pressure for such calling services.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act which are notexpected to enter into force prior to January 1, 2007. Swisscom will be required to offer, amongother things, unbundled access to its local loop in the form of full access on a cost-orientedbasis as well as access rebilling. Unbundling of the local loop in the form of full access willallow competitors to offer access services to customers in Switzerland without having to buildlocal loops of their own, although they will still have to make significant investments in theirown network infrastructure in order to connect to the local loop. Moreover, with access rebilling,competitors will be able to bill customers directly for the access services provided by Swisscom.As a result, Swisscom’s competitors will be able to offer their customers a full range offixed-line services, including access, and their customers would receive a single bill covering allthese services. Accordingly, the amendments will increase competition in the access market andcould cause Swisscom to lose additional market share in the national and international callingmarkets.In the form passed by the Swiss Parliament, unbundling of the local loop will also requiremarket-dominant providers to offer bitstream access to other providers on demand for four years ona cost-oriented basis. Currently, Swisscom’s competitors provide ADSL services to its customersbased on a wholesale contract with Swisscom on commercial terms. Regulated bitstream access maytherefore enable Swisscom’s competitors to offer ADSL services at lower rates than currentlyoffered. Market-dominant providers will have to make bitstream access available at the maindistributor frame and over their copper net in the local loop. This will require Swisscom’scompetitors to make significant upfront investments in their own network infrastructure in order toreach Swisscom’s main distributor frame for bitstream data traffic and to build their own accesslines within four years or switch to full access. In addition, competitors will not be entitled touse Swisscom’s investments in fiber optic lines. With increased competition, Swisscom’s share ofthe ADSL market is likely to decline and Swisscom could be required to lower its ADSL tariffs toremain competitive. While a loss in retail access revenue would be partially compensated for byadditional wholesale revenue for access services provided to Swisscom’s competitors, those serviceswill have to be provided on a cost-oriented basis. Accordingly, introduction of bitstream accesscould have a significant and adverse effect on the growth and profitability of Swisscom’s accessbusiness.The impact of the amendments to the Telecommunications Act on Swisscom will depend on certaindetails, including the type of products to be unbundled, the manner in which unbundling will occurand the method used to determine applicable prices, which remain to be determined.Overall, the amendments to the Telecommunications Act could negatively affect Swisscom’s fixed-linebusiness by reducing revenues and causing margins to decline. Because fixed-line services continueto account for a significant part of Swisscom’s overall revenues, the amendments could adverselyaffect Swisscom’s consolidated results as well.***Regulation of mobile access or call origination, mobile termination or mobile roaming maynegatively affect Swisscom’s mobile revenues and overall profitability***While the Telecommunications Act opened the Swiss mobile telephony market to competition, mobiletelephony in Switzerland has not yet been the subject of extensive regulation. However,developments in the EU and Switzerland could result in additional regulation in the future,especially with regard to mobile access and call origination, mobile termination and mobileroaming.
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In March 2006, the European Commission and the European Regulators Group (ERG) held a pressconference regarding the Commission’s initiative to regulate international mobile roaming chargesto prevent mobile service providers from charging higher roaming fees for using the networks ofcompetitors in the European Union than the actual underlying costs. In order to ensure that thebenefits of this wholesale regulation are actually passed on to the end-users, the Commissionanticipates a need for regulation at the retail level. In particular, the regulation would abolishall roaming charges for receiving a call when traveling abroad and introduce a “home pricingprinciple” for calls made abroad. Such a regulation would not be expected to enter into forcebefore summer 2007.While Switzerland is not a member state of the EU and therefore is not subject to EU legislation,EU directives and implementing legislation in various EU countries have served as points ofreference for the development of the Swiss regulatory regime. With respect to roaming charges,which have been the subject of numerous Swiss media reports, EU legislation could lead tointervention by the Swiss Competition Authority or the Swiss Pricing Monitoring Authority(*Preisüberwacher*). EU-wide regulation would likely increase market pressure on mobile networkoperators in Switzerland, including Swisscom Mobile, even if no additional regulation or regulatoryintervention is undertaken in Switzerland.Swisscom’s GSM telephony license expires on May 31, 2008. To renew its GSM license, SwisscomMobile was required to submit its renewal application at least two years in advance of the licenseexpiration date. Swisscom Mobile submitted its renewal request to ComCom on December 21, 2005.ComCom has yet to issue a decision on Swisscom Mobile’s application, and may impose certainconditions on the renewal, such as requiring Swisscom Mobile to pay higher fees or give access toits network to mobile virtual network operators or to sell to its competitors mobile telephonyminutes on a cost-oriented basis for resale.With regard to mobile termination tariffs, the Competition Commission has initiated proceedingsagainst Swisscom alleging that it has a dominant position with respect to terminating traffic onits own mobile network. If Swisscom is found to have a dominant position in this market, it couldbe required to reduce its mobile termination fees and/or pay large fines.Regulation of mobile access or call origination, mobile termination fees or roaming charges wouldhave a material and adverse effect on Swisscom’s mobile revenues and lead to additional pressure onmargins and reduced profitability. Since the mobile business has been a major source of Swisscom’sprofitability in recent years, these regulatory changes would adversely affect Swisscom’s businessas a whole.***The Swiss Competition Commission may require Swisscom Mobile to pay large fines and reduce itsprices***In October 2002, the Competition Commission initiated proceedings against Swisscom Mobile inconnection with mobile termination fees. These are the fees mobile network operators charge eachother for connecting incoming calls to their network. On April 7, 2006, the Secretariat of theCompetition Commission provided Swisscom Mobile with its draft decision, according to which itbelieves that Swisscom Mobile has a market-dominant position which it has supposedly abused bydemanding disproportionately high termination fees. The Secretariat has indicated that it intendsto propose to the Competition Commission that it impose a fine of at least CHF 489 million and hasasked Swisscom Mobile to comment on the draft decision by May 22, 2006. The proposed fines relateto the period from April 1, 2004 (when a new amendment to the Swiss Antitrust Law entered intoeffect) to May 31, 2005 (when Swisscom Mobile lowered its mobile termination fee from CHF 0.335 toCHF 0.20). Investigations into the mobile termination fees charged by Swisscom Mobile after May 31,2005 will continue. For more information, see “*Item 8: Financial Information — Legal Proceedings —Other Regulatory Proceedings*”.The proposed minimum fine is based on the maximum legal fine amount (equal to 10% of the revenuerealized in Switzerland during the previous three years) and the Secretariat’s opinion of: theseverity of Swisscom Mobile’s alleged anti-trust violations, the relevant timeframe, the amount ofSwisscom Mobile’s supposedly excess profits and the lack of mitigating factors. The minimum fine isbased on the assumption that prior to June 1, 2005, Swisscom Mobile’s mobile termination fees ofCHF 0.335 were CHF 0.135 too high. The Secretariat of the Competition Commission has indicated thatthe fine amount may increase if it determines that Swisscom Mobile’s new mobile termination fee ofCHF 0.20 is also excessive. The Secretariat’s draft decision includes indications that theCompetition Commission may consider CHF 0.10 appropriate as a cost-oriented, non-discriminatoryprice.
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The Secretariat’s draft decision may be an indication that the competition authorities are willingto strictly enforce the Antitrust Law and to impose large fines and that they may considercost-oriented pricing as a reference under circumstances where it is difficult to determine anappropriate non-discriminatory price. In addition, the approach indicated by the Secretariat’sactions may impact other competition proceedings against Swisscom and require Swisscom to reduceprices for various services. Reducing prices, particularly to cost-oriented levels, may have asignificant negative impact on Swisscom’s profitability.Should the Competition Commission issue its decision in the form proposed by its Secretariat,Swisscom Mobile would appeal to the Appeals Commission for Competition Matters and, if necessary,in the final event to the Federal Court. Swisscom is currently in the process of evaluating theimpact that this draft decision and the proposed fines will have on the consolidated financialstatements, which may result in the recognition of a provision in 2006 and a cash outflow in alater period.***Service providers are increasingly able to offer Swisscom’s core telecommunications services usingalternative technologies***The availability of alternative technologies capable of supporting telecommunications services isincreasingly enabling competitors to provide services which fully substitute for Swisscom’s coreservices (fixed-line voice and data services and mobile telephony).With market penetration rates for mobile having reached almost 92% in Switzerland by the end of2005 (based on data published by mobile network operators), mobile telephony is increasingly usedas a substitute for fixed-line telephony, resulting in a decline in access lines and fixed-linetraffic revenues. To the extent a Swisscom Fixnet customer opts to use Swisscom’s mobile services,Swisscom Mobile benefits from this trend. Where a customer switches to another mobile serviceprovider, however, Swisscom may no longer earn any revenue from this customer. Some of this losscan be compensated by wholesale revenue which Swisscom Fixnet and Swisscom Mobile derive fromcollecting fees for terminating calls on their networks and for routing calls between the mobilenetworks of other mobile network operators. However, with direct mobile interconnection mobilenetwork operators are able to terminate their traffic directly on each other’s networks instead ofrouting traffic through Swisscom Fixnet, bypassing Swisscom entirely.While the continuing substitution of mobile for fixed-line telephony has negatively affectedSwisscom’s fixed-line business, Swisscom faces an even greater threat from cable network operators,in particular Cablecom, the largest cable network operator in Switzerland. Having made significantinvestments in their cable networks to allow for bidirectional data transfer, Cablecom and othercable network operators have been able to leverage their existing networks into platforms forcompeting directly with Swisscom in its core competencies by offering basic voice and dataservices, as well as high speed Internet access services, to customers throughout Switzerland. Insuch cases, Swisscom not only loses revenue derived from such customers, it may also cease to havea direct relationship with such customers. Since mid-2004, Cablecom and other cable networkoperators have been adding subscribers to their voice telephony services at a rapid rate andSwisscom expects this trend to continue.There are also numerous service providers with minimum network infrastructure who take advantage ofinterconnection rates and leverage the public Internet to provide low cost national andinternational calling services using Voice over Internet Protocol (VoIP). The increasingpopularity of peer-to-peer communication also means that international calls may be placed betweenpersonal computers at minimal cost. As the quality and convenience of using these IP-basedservices has improved in recent years, they have become a viable alternative to traditionalfixed-line services for many users, a trend Swisscom expects to continue and accelerate in thefuture. As in the fixed-line business, the popularity of IP-based peer to peer communication ishaving an increasingly disruptive effect on Swisscom’s mobile business due to substitution ofinstant messaging for SMS and of VoIP-services for mobile voice telephony services. While Swisscomcontinues to derive revenue from providing its infrastructure for some of these services, and hasitself introduced a mobile instant messaging service, revenue is likely to decline overall as aresult of the increased use of these services.***Increased competition may have a significant impact on the revenues and profitability of Swisscom’sfixed-line broadband business, which may not allow Swisscom to recoup its investment in fixed-linebroadband infrastructure and multimedia services***The provision of broadband access based on ADSL technology has been a fast-growing business forSwisscom over the last several years, partially offsetting declines in its traditional fixed-linebusiness. In order to continue
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to grow this business, Swisscom is making significant capital expenditures to increase downloadcapacity by upgrading its network. However, there is a risk that increased competition maynegatively impact this growth and prevent Swisscom from realizing a return on its investment.Swisscom faces strong competition particularly from cable network operators, including Cablecom,who are able to offer high-speed Internet access via cable. Cable currently offers higherbandwidth than ADSL and has certain other advantages over ADSL. Moreover, as a cable networkoperator, Cablecom is particularly well positioned to combine voice, data and Internet accessservices with a multimedia content offering. In response to this increased competition, Swisscomis making capital expenditures to upgrade its network to be able to combine its core activities invoice and Internet services with multimedia services such as TV and video on demand. However,Cablecom has already been offering these multimedia services for some time, and Swisscom may not besuccessful in entering this market. Swisscom has experienced delays in introducing its televisionservices, and once Swisscom has introduced these services, they may not be competitive withservices offered by cable network operators.If Swisscom is unable to introduce a competitive television and/or video service in a timelyfashion, it may lose customers to cable network operators and experience higher customer churn. IfSwisscom were forced to significantly reduce its retail prices as a result of increased competitionand price pressure, this would have a significant impact on the revenues and profitability ofSwisscom’s fixed-line broadband business.***Demand for broadband mobile services, which Swisscom has identified as a source of future growth inits mobile business, may be lower than expected and Swisscom may not be able to recoup thesubstantial investment required to build out its networks***The future success of Swisscom’s mobile business, which in recent years has been Swisscom’s mostprofitable operating segment, depends on, among other things, the capabilities and widespreadmarket acceptance of broadband mobile technologies such as universal mobile telecommunicationsystem (UMTS), Enhanced Data Rates for GSM Evolution (EDGE) technology and high-speed downlinkpacket access (HSDPA). UMTS is a third generation mobile radio system that creates additionalmobile radio capacity and enables broadband media applications while also providing high speedInternet access. EDGE is a further development of the general packet radio service (GPRS) standardthat allows considerably higher transmission speeds. Swisscom launched its commercial UMTS servicesin November 2004 and activated EDGE technology in early 2005. HSDPA is an UMTS enhancement thatallows transmission speeds of up to 1.8 Mbit/s, the same speed as customers experience at WLANhotspots. Swisscom plans to launch HSDPA in 2006.In connection with the build-out of its UMTS, EDGE and HSDPA networks and the development ofrelated products and services, Swisscom has incurred, and expects to incur in the future,substantial capital expenditures. It is still unclear whether certain of these new services willmeet with market acceptance. Market acceptance depends on a number of factors, including theavailability of applications which exploit the potential of the technology, as well as on thebreadth and quality of available content. Furthermore, the level of demand for mobile broadbandservices could be lower than expected as a result of increased use of alternative mobile broadbandtechnologies, such as public wireless LAN. If mobile broadband services fail to achieve theexpected advantages over other technologies, Swisscom’s mobile business will suffer and Swisscommay be unable to recoup a portion of its investment in UMTS, EDGE and HSDPA technology and could berequired to write down the value of some of the related assets.***High penetration and increasing competition in the mobile telecommunications market have caused perminute prices to decline and could cause customer retention costs to increase substantially suchthat Swisscom may not be able to maintain its current market share***With mobile penetration having reached almost 92% in Switzerland at the end of 2005 (based on datapublished by mobile network operators), prices have declined, it has become more difficult toacquire new customers and Swisscom has been driven to increase its focus on customer retention.Swisscom already faces substantial competition from the other two mobile licensees in Switzerland,Orange and TDC (Sunrise). Competition for business customers is particularly intense, as Orangeand TDC (Sunrise) have been increasing their efforts to win market share in this segment. InDecember 2003, ComCom awarded GSM licenses to Tele2 and In&Phone, which further intensifiedcompetition in the mobile business market. In response to competition, Swisscom has introducedbudget service plans and service plans where calls are billed on a per-call, rather thanper-minute, basis. As a result, the average price per minute of mobile traffic has declined.Furthermore, given the high rate of mobile penetration and increasing competition, customerretention costs could increase substantially. If
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Swisscom is unable to attract new or retain existing customers in the mobile market, its mobilerevenues would suffer and it would lose market share. At the same time, further declines in averageminute prices and an increase in the cost of customer retention would put additional pressure onmargins and could lead to a substantial decline in profitability.***Actual or perceived health risks and other problems relating to mobile devices or transmissionmasts could lead to stricter regulation of radiation emissions from mobile base stations andantennae, additional compliance expenditures and decreased mobile communications usage***Concern has been expressed that the electromagnetic signals from mobile devices and base stationsmay pose health risks or interfere with the operation of electronic equipment, including automobilebraking and steering systems.In December 1999, the Federal Council adopted an ordinance, known as the NIS Ordinance, whichestablishes emission standards to protect the population of Switzerland from non-ionizing radiationemitted by various sources, including mobile antennae and base stations. In July 2002, the SwissAgency for the Environment, Forests and Landscape (“BUWAL”) issued final guidelines for enforcementauthorities on the appropriate methods by which to measure electromagnetic emissions from basestations and masts in the GSM network, but which did not address emission standards for UMTSnetworks. Final guidelines relating to emission standards for UMTS networks were adopted in 2005.In order to comply with the applicable emission standards and to maintain its current level ofservice, Swisscom could be required to install additional antennae. However, Swisscom does notexpect the associated costs to be materially different in 2006 from those incurred in previousyears. See “*Item 4: Information on the Company – Regulation – Mobile Telecommunications*”.A study has indicated that UMTS radiation has an impact on the well-being of humans. While theimpact of UMTS radiation on the well-being of humans is supposedly small, the results of the studyare statistically significant. Additional studies, which attempt to replicate this study whilecorrecting certain of its scientific shortcomings, are currently being conducted. If these furtherstudies confirm that UMTS radiation may have adverse health effects, regulatory authorities may setstricter emission standards for the UMTS network than currently apply. Any of these regulatorymeasures would have a severe and adverse effect on Swisscom’s mobile business and Swisscom may beunable to recoup its investment in the UMTS network and required to take significant write downs.Even if stricter regulatory measures are not adopted, perceived health risks of mobile handsets orbase stations and related publicity could cause Swisscom’s customer base and average usage percustomer to decline, which would have a material adverse effect on Swisscom’s mobile communicationsbusiness. Environmental and health concerns are also making it more difficult, and more costly, tofind acceptable sites for base stations and could thereby impair the build-out of Swisscom’swireless infrastructure, primarily the mobile network.***If Swisscom is not able to benefit from a potential increase in market demand for integratedcommunication solutions and IT services, its business customers and solutions business would suffer***As the provision of basic telecommunication services to business customers has become a commoditybusiness characterized by low margins, Swisscom believes that future growth in this market will liein the provision of enhanced business solutions. Accordingly, it has invested in upgrading its datanetworks, thereby enabling the provision of integrated data and voice services with greaterflexibility, scalability and performance. However, demand for such integrated communicationssolutions has not developed as Swisscom anticipated. The slowdown of the global economy that beganin 2001 led to a decline in corporate spending which was particularly pronounced in the IT area.Despite modest improvements in the economy since the beginning of 2004, demand for integratedcommunication solutions and IT services may decline if the economy slows down again. Moreover,Swisscom faces intense competition from other players in the market for integrated communicationsolutions and IT services, some of which have more experience than Swisscom and who are able tooffer services on a global basis. As a result of these factors, and due to Swisscom’s primarilydomestic focus, there can be no assurance that Swisscom will benefit proportionately from anyupturn in market demand.***The expansion of its outsourcing business exposes Swisscom to the risk that it may not be able toachieve expected cost savings and could be required to perform long term contracts at a loss***In recent years, Swisscom has expanded its business in the outsourcing market. Outsourcingcontracts are typically multi-year engagements under which Swisscom takes over management of aclient’s technology
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operations, business processes, network and/or IT infrastructure. Generally, Swisscom also takesover the clients’ employees associated with the outsourced operations and may become responsiblefor the related employee obligations, such as pension and severance commitments. The successfulimplementation of outsourcing projects depends, among other things, on Swisscom’s ability torapidly optimize the outsourced operations by reducing costs and on Swisscom’s ability toaccurately forecast the rate at which it will be able to reduce such costs. If Swisscom is notable to realize anticipated efficiencies, or if it fails to implement such efficiencies on theschedule predicted, it may not be able to perform these contracts on a profitable basis. Inaddition, some of these contracts may permit termination fees or impose other penalties if Swisscomdoes not meet performance levels specified in the contracts. Because these contracts extend overmultiple years, it may be years until Swisscom recognizes that its forecasts are inaccurate andthat it is unable to implement anticipated cost reductions. In the mean time, Swisscom may enterinto additional contracts based on the same or similar assumptions and forecasts, compounding itslosses.***Swisscom may consider making investments and acquisitions, including potentially large acquisitionsoutside its home market, which would entail a variety of important risks***Swisscom continues to actively consider investment opportunities, which could potentially includelarge acquisitions outside its home market. In the last two years, Swisscom has been involved inadvanced acquisition discussions and proceedings relating to Telekom Austria, Cesky Telecom a.s.and Eircom Group plc. Although these discussions and proceedings ultimately did not result in anacquisition, and although the strategic goals for 2006 to 2009 announced by the Swiss FederalCouncil, as Swisscom’s majority shareholder, have limited Swisscom’s flexibility in this regard,acquisitions that fulfill specified criteria may still be undertaken and Swisscom expects tocontinue to consider international investment opportunities in the future.Entry into a significant acquisition would entail a variety of important risks. There can be noassurance that Swisscom would be able to successfully execute the business plan it pursued with aspecific acquisition, such as leveraging the target’s expertise in certain areas, or to realizeother anticipated benefits, including synergies, from the transaction. This risk may be compoundedin the case of a cross-border transaction, as political and cultural factors may make it moredifficult to implement management and other changes. Although Swisscom would seek to conduct duediligence on any potential target, the opportunity to do so may be limited and it is possible thatthe transaction would entail higher than anticipated costs, that the target would have additionalliabilities for which Swisscom would not be entitled to indemnification or that write downs wouldbe required, including of any goodwill arising out of the transaction. Moreover, should Swisscomenter into a large acquisition, Swisscom could incur substantial debt, which could negativelyaffect earnings and lead to an increase in leverage ratios, thereby reducing Swisscom’s futurefinancial flexibility.Additional risks are associated with smaller Swisscom investments at home or abroad. Swisscom mayrealize a loss on investments it makes in start-up companies, in uncertain technologies or incompanies targeted for growth with potentially risky business plans if such companies are unable toimplement their business plans or pursue an unsuccessful strategy. For example, a risk exists thatSwisscom Eurospot will be unable to repay loans received from Swisscom, or that Swisscom will haveto record an impairment charge in connection with its investment in Antenna Hungária.***Swisscom depends upon a limited number of suppliers, particularly for the supply of next generationfixed and mobile network components***Swisscom’s ability to provide and roll out reliable, high quality and secure products and services,depends upon, among other things, the adequate and timely supply of transmission, switching,routing and data collection systems, related software and other network equipment. If Swisscomwere unable to obtain adequate supplies of equipment in a timely manner, or if there weresignificant increases in the costs of such supplies, Swisscom’s operations would be adverselyaffected. This is particularly true with respect to network equipment and services that Swisscomrequires to upgrade its existing fixed and mobile networks to enable new broadband and multimediaservices based on new technologies, such as ADSL, very high bit-rate digital subscriber line(VDSL), symmetric digital subscriber line (SDSL), EDGE, UMTS and HSDPA. While Swisscom seeks todiversify its suppliers, it currently has only one supplier of ADSL equipment, who is also thesupplier of VDSL and SDSL equipment, and one supplier of UMTS and EDGE equipment, who will also bethe supplier of HSDPA equipment. Swisscom also depends on the timely supply of mobile handsetswhich can be used in the UMTS, EDGE and HSDPA networks.
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***Network failures may result in the loss of traffic, reduced revenue and harm to Swisscom’sreputation***Modern telecommunication networks are vulnerable to damage or interruption caused by systemfailures, hardware or software failures, computer viruses or external events such as storms,floods, avalanches, fires, power loss or intentional wrongdoing. Swisscom has experienced networkfailures in the past. In June 2004, Swisscom’s IP network for business customers was disrupted forseveral hours due to a software failure. If the disruption had continued for a longer period, itwould have had significantly adverse consequences, in particular for the banking sector. In 2005,flooding disrupted both Swisscom’s mobile and fixed-line networks. While mobile coverage wasquickly restored, thousands of customers remained without ADSL and fixed-line services for weeks.The flooding caused Swisscom to incur additional repair costs and reduced revenue from affectedcustomers. The risk of network failures can never be entirely eliminated. Any such failure may harmSwisscom’s reputation and could result in customer dissatisfaction and reduced traffic andrevenues.***Complex IT systems may fail to operate properly, hampering Swisscom’s business development***Swisscom relies for many of its most important data processing functions on complex IT systemswhich have been developed over a long period of time. Older systems have been upgraded and adaptedon an ongoing basis and new systems have been introduced. As a result, there is a lack ofharmonization in Swisscom’s IT systems which may affect Swisscom’s ability to compete with newerservice providers and therefore require that Swisscom make further investments to facilitate theprovision of flexible and cost-effective services to its customers and may harm its competitiveposition. In addition, further adaptation and extension of Swisscom’s IT systems, in particularits billing, order management and customer relationship management systems, would be complex andtime-consuming and could therefore hamper Swisscom’s business development.Swisscom’s triple-play strategy for future growth and the continuing convergence amongtelecommunications technologies and devices will require it to integrate a variety of media andtechnologies. Swisscom may experience difficulties integrating existing systems and new equipmentdesigned to facilitate the delivery of multimedia services as such equipment may not operateproperly in connection with Swisscom’s existing equipment and networks. Technical difficulties maydelay the implementation of Swisscom’s growth strategy and may lead to customer dissatisfaction,both of which could harm Swisscom’s reputation and result in reduced revenues and profitability.***Swisscom’s relations with the trade unions******could deteriorate***In 2005, Swisscom entered into a new collective bargain agreement with the trade unions. Theagreement, which entered into effect in January 2006, is of unlimited duration unless terminated byeither party on six months’ notice to the end of a calendar year. The agreement will first becometerminable in 2007. Termination of the collective bargaining agreement, the initiation of newnegotiations and staff reductions could damage labor relations or even lead to work disruptions,which in turn could also negatively affect Swisscom’s profitability and competitiveness. Laborrelations could also be negatively impacted in the event of a sale of the Swiss Confederation’scontrolling interest in Swisscom as part of the Federal Council’s current efforts to privatizeSwisscom.***Swisscom may be audited by the Swiss tax authorities and, if any deficiencies are uncovered, may berequired to make substantial payments***Since Swisscom’s incorporation as a Swiss stock corporation, only some of Swisscom’s groupcompanies have been subject to a detailed review by the Swiss tax authorities. Based on theexperience of other Swiss companies, Swisscom believes that a review of the direct and indirecttaxes of other Swisscom group companies or of the whole group may occur in the near future. Pastaudits by the Swiss tax authorities of other Swiss companies have in some cases resulted insubstantial additional payments being required of the affected companies. While Swisscom was notrequired to pay any substantial additional payments as a result of past tax reviews of its groupcompanies, it cannot be excluded that, if Swisscom is audited by the Swiss tax authorities in thefuture and any deficiencies are uncovered, Swisscom may have to make substantial payments for whichit has not made provisions.
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***Swisscom is involved in a number of legal proceedings which, if decided against Swisscom, could inthe 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 telecommunicationsprovider in Switzerland has attracted the attention of its competitors in Switzerland and of theSwiss regulatory authorities. In addition, Swisscom is regularly involved in legal disputes withcompetitors as a result of its leading position in the fixed-line and mobile communications marketsin which it operates. For example, Swisscom is currently involved in a legal proceeding withrespect to fixed-fixed interconnection fees, in which it may be required to lower interconnectionprices by approximately 30%. Swisscom has recorded a provision relating to these proceedings basedon management’s best estimate of the outcome. When these proceedings conclude in the second half of2006 or in 2007, Swisscom will be required to settle the disputed amounts, which could result in asignificant cash outflow. If the Federal Court’s decision differs from Swisscom’s estimate, *e.g.,*by requiring Swisscom to retroactively offer discounted prices to all of its customers rather thanjust to the parties to the proceedings, such settlement may exceed the amount provided for in thefinancial statements as of December 31, 2005, thereby affecting Swisscom’s income.Although Swisscom believes that most of these proceedings would not individually have a materialadverse effect on its results of operations and financial condition, in the aggregate theseproceedings could have such an effect. This risk has been heightened by the latest approachindicated by the Swiss Competition Commission in its investigation of Swisscom Mobile’s mobiletermination fees. While the results of those proceedings are not directly applicable to othercases, they may signal greater scrutiny by the Competition Commission in enforcing the AntitrustLaw coupled with higher potential fines.***The inclusion of new services in the Universal Service Obligation could require Swisscom to makeinvestments that are disproportionate to anticipated revenues.***In fall 2006, the Federal Communications Commission (“ComCom”) will open a tender for the newUniversal Service license, which will apply after Swisscom’s current Universal Service licenseexpires at the end of 2007. The Federal Council recently published a proposal to amend theTelecommunications Ordinance to extend the Universal Service Obligation in line with technologicaldevelopments and current social and economic requirements.If Swisscom is the winning bidder in the tender and the Universal Service Obligation is expanded toinclude the provision of broadband services (as currently proposed by the Federal Council),Swisscom could be required to make investments that it will not be able to recoup due to priceceilings for products included in the Universal Service Obligation.***If Swisscom fails to maintain an effective system of internal controls, it may not be able toaccurately report its financial results or prevent fraud. As a result, current and potentialshareholders could lose confidence in Swisscom’s financial reporting, which would harm its businessand the trading price of its shares and ADSs.***Effective internal controls are necessary for Swisscom to provide reliable financial reports andeffectively prevent fraud. If Swisscom cannot provide reliable financial reports or prevent fraud,its financial results could be harmed.Swisscom devotes significant attention to establishing and maintaining effective internal controls.Swisscom is in the process of documenting, reviewing and, if appropriate, improving its internalcontrols and procedures in connection with Section 404 of the Sarbanes Oxley Act of 2002, whichrequires annual management assessments of the effectiveness of Swisscom’s internal controls overfinancial reporting and a report by Swisscom’s independent auditors addressing these assessments.Both Swisscom and its independent auditors are in the process of testing Swisscom’s internalcontrols in connection with the Section 404 requirements. As part of this documentation and testingprocess, Swisscom and its independent auditors have identified problematic areas for furtherattention or remediation. Implementing appropriate changes to Swisscom’s internal controls mayrequire specific compliance training of Swisscom’s directors, officers and employees, entailsubstantial costs in order to modify the deficient elements of Swisscom’s existing accountingsystems, and take a significant period of time to complete.Swisscom cannot be certain that these measures will ensure that it implements and maintainsadequate controls over its financial reporting processes and related Section 404 reportingrequirements. Any failure to implement
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required new or improved controls, or difficulties encountered in their implementation, could harmSwisscom’s financial results or cause it to fail to meet its reporting obligations. Any suchfailure could also adversely affect Swisscom’s assessment of the effectiveness of its ‘internalcontrol over financial reporting’ that will be required when the Section 404 requirements becomeapplicable to it. Inferior internal controls could also cause investors to lose confidence inSwisscom’s reported financial information, which could have a negative effect on the market priceof Swisscom’s shares and ADSs.**Risks Related to Ownership by the Swiss Confederation*****The interests of the Swiss Confederation, which owns a majority stake in Swisscom, may differ fromthose of Swisscom and could hamper Swisscom’s development***The Swiss Confederation holds a majority of Swisscom shares. Any reduction of the Confederation’sholding below a majority would require a change in law. Swisscom may not undertake a capitalincrease that would otherwise have the effect of decreasing the Confederation’s shareholding toless than a majority, unless the Confederation agrees to participate in the capital increase.Swisscom’s ability to raise additional equity capital could therefore be constrained.In addition, for as long as the Swiss Confederation maintains a controlling interest in Swisscom,it will continue to be able to influence Swisscom’s strategy. For example, in 2005 Swisscom wasinvolved in advanced negotiations to acquire Eircom Group plc of Ireland. At the end of November,after the Swiss Federal Council instructed its representative on the Swisscom Board of Directors tovote against such an acquisition and, instead, to support the distribution of free capital toshareholders, talks on a takeover of Eircom were broken off. In December 2005, the Swiss FederalCouncil, as Swisscom’s majority shareholder, announced its new strategic goals for 2006 to 2009which limit Swisscom’s flexibility for corporate acquisitions. The strategic goals permit holdingsabroad only if they support Swisscom’s core business within Switzerland or can be shown to furtherother strategic-industrial logic. The Federal Council expects that Swisscom will not enter intoany investments in foreign telecommunications companies with a universal service obligationmandate. Finally, the Federal Council has indicated that net debt should be restricted to no morethan one and a half times earnings before interest, taxes, depreciation and amortization (EBITDA).As a result of the Federal Council’s position, Swisscom could be limited in its ability toundertake major corporate actions, such as acquisitions or entry into strategic partnerships,either at the parent company level or through subsidiaries, which are important elements of itsstrategy. Swisscom may also be limited in its ability to incur debt to finance such an acquisitionand may be prevented from optimizing its balance sheet structure.***The sale of a substantial stake in Swisscom by the Swiss Confederation could negatively affectSwisscom’s share price and reputation***As of December 31, 2005, the Swiss Confederation held a 62.45% stake in Swisscom. The stake willincrease after the planned share capital reduction following the share buyback completed inDecember 2005. On April 5, 2006, the Swiss Federal Council adopted a dispatch on theConfederation’s holdings in Swisscom for submission to the Federal Assembly. The subject of theproposal is an amendment to the Telecommunications Enterprise Act of 1997 (the “TUG”), which wouldtransfer power to the Federal Council to sell the government’s controlling interest in Swisscom.Future sales by the Swiss Confederation may occur, whether as a result of this initative or as partof a reduction to the current legal minimum shareholding of 50%-plus-one-share. Swisscom will haveonly a very limited ability to influence the structure or details of such sales. The sale ordistribution of a significant number of Swisscom’s shares by the Swiss Confederation may cause themarket price of Swisscom’s shares and ADSs to decline.In addition, part of Swisscom’s reputation for reliability and trustworthiness among its customersis due to Swisscom’s ownership by the Swiss Confederation. If the Swiss Confederation sells asignificant portion of its stake in Swisscom, Swisscom’s reputation may be impaired, it may losecustomers to competitors, and the market price of Swisscom’s shares and ADSs may decline.
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***If another party acquires control of Swisscom as a result of the Swiss Confederation reducing itsstake in Swisscom below 50%, Vodafone plc may exercise its conditional pre-emption rights to sellits 25% stake in Swisscom Mobile to Swisscom, and Swisscom’s counterparties in significantcontracts may be able to terminate such contracts or demand additional security.***Swisscom is a party to several significant contracts, including a Shareholder’s Agreement withVodafone plc and various cross-border lease agreements, which contain provisions related to apotential change of control of Swisscom.Vodafone plc holds conditional pre-emption rights which would permit it to sell its 25% stake inSwisscom Mobile to Swisscom at fair market value if a party other than the Swiss Confederation isable to exert a controlling influence over Swisscom. Under current law, the Swiss Confederationmay not sell its controlling interest in Swisscom, and therefore Vodafone’s right to sell itsshares in Swisscom Mobile cannot be exercised. In accordance with International FinancialReporting Standards (IFRS), Swisscom therefore has not recorded a liability related to such rights.On January 25, 2006, however, the Swiss Federal Council published a consultation documentcontaining a proposal for a change in law that would permit the Swiss Confederation to sell itscontrolling interest. If the law is changed, it would be possible for the government to dispose ofits shares in Swisscom and a new shareholder could potentially obtain control of Swisscom. If sucha change in the law occurs, Vodafone’s conditional sale right would have to be recorded at fairvalue as a financial liability.If Vodafone’s conditional sale right becomes exercisable, the existence of such rights may reduceSwisscom’s attractiveness to potential acquirors. In addition, if a change of law occurred, a newshareholder obtained control of Swisscom and Vodafone were to exercise its conditional pre-emptionrights, Swisscom would have to use a significant amount of cash, or incur a significant amount ofdebt, to pay the purchase price, which is defined as the fair market value of Vodafone’s 25%interest in Swisscom Mobile. This could negatively affect Swisscom’s liquidity, credit rating andfinancial flexibility.In addition, Swisscom Mobile is a party to a related Service Agreement with Vodafone plc. Underthis agreement, each of Swisscom Mobile and Vodafone has agreed to provide the other with access toits products and services, global best practice guidelines, as well as to provide certainconsultancy and supporting services. In addition, the parties have agreed upon reciprocal roamingarrangements. The Service Agreement is terminable if an entity other than Swisscom AG acquires morethan half of the voting rights and equity capital of Swisscom Mobile or the above-mentionedShareholders’ Agreement is terminated. If the Service Agreement were to be terminated, SwisscomMobile could face higher costs for certain products and services, lose access to services andcontent that Vodafone makes available to Swisscom customers, lose access to the newest mobilehandset models and/or be required to pay higher prices for mobile handsets in general.Between 1996 and 2002, Swisscom entered into cross-border tax lease arrangements under the terms ofwhich parts of its fixed and mobile networks were sold or leased long-term to US American Trustsand leased back with terms of up to 30 years. In the transaction concluded in 2002, Swisscom wasrequired to provide a letter-of-credit to secure a part of its obligations to the equity investors.Swisscom is obliged to issue further letters-of-credit if the Swiss Confederation gives up itsmajority shareholding in Swisscom. Issuing additional letters-of-credit may limit Swisscom’sfinancial flexibility.In addition, a change of control of Swisscom may induce certain of Swisscom’s contractualcounterparties to attempt to renegotiate contracts, even where they do not directly benefit from acontract termination right.**Risks Related to Swisscom’s Shares*****Currency fluctuations may adversely affect the trading prices of Swisscom’s ADSs and the value ofany distributions Swisscom makes***Because Swisscom’s stock is traded in Swiss francs and the ADSs are traded in U.S. dollars,fluctuations in the exchange rate between the two currencies may affect the relative value ofSwisscom’s ADSs. In addition, should Swisscom make any distribution on its common stock in Swissfrancs, the depositary will convert such distributions to U.S. dollars. If exchange rates fluctuatebefore the depositary converts the currencies, U.S. shareholders may lose some of the value of thedistribution.
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***Shareholders’ rights are governed by Swiss law and differ in some respects from the rights ofshareholders under U.S. law***Swisscom is a stock corporation organized under the laws of Switzerland. The rights of holders ofSwisscom’s shares, and therefore, many of the rights of its ADS holders, are governed by Swisscom’sarticles of incorporation and by Swiss law. These rights differ in some respects from the rights ofshareholders in typical U.S. corporations. In particular, Swiss law significantly limits thecircumstances 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 ofSwisscom’s Board of Directors or Group Executive Board***Swisscom is a Swiss stock corporation. The members of its Board of Directors and Group ExecutiveBoard are non-residents of the United States. In addition, Swisscom’s assets and the assets ofmembers of its Board of Directors and Group Executive Board are located in whole or in substantialpart outside the United States. As a result, it may not be possible for shareholders to enforceagainst Swisscom or members of its Board of Directors and Group Executive Board judgments obtainedin the United States courts based on the civil liability provisions of the securities laws of theUnited States. In addition, awards of punitive damages and judgments rendered in the United Statesor elsewhere may be unenforceable in Switzerland.
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**ITEM 4: INFORMATION ON THE COMPANY****Overview**Swisscom is the principal telecommunications provider in Switzerland, offering a comprehensiverange of products and services to residential and business customers. As the leading provider offixed-line services, Swisscom offers analog and digital access services. In addition, Swisscomoffers broadband services over existing subscriber lines using a technology commonly referred to asADSL. As of December 31, 2005, Swisscom provided 3.8 million fixed-line telephone access lines inSwitzerland, of which 0.9 million were digital or ISDN lines and 1.1 million were being used forADSL access. In 2005, Swisscom billed an aggregate of 15.9 billion minutes of national transit andinterconnection traffic and terminated over 1.6 billion minutes of incoming international trafficon behalf of other telecommunication service providers. Through Swisscom Mobile AG, in whichVodafone holds a 25% stake, Swisscom is the leading mobile telecommunications service provider inSwitzerland, with over 4.3 million subscribers to its mobile service as of December 31, 2005.Swisscom also offers a full range of state-of-the-art data services, from leased lines tointegrated solutions for its business customers. In 2005, Swisscom’s net revenue amounted to CHF9.7 billion.On June 8, 2004, Swisscom sold its 95% stake in debitel AG, the largest network independenttelecommunications provider in Europe, in a leveraged buyout by funds advised by the private equityfirm Permira (Permira Funds), for a purchase price of EUR 640 million (equity value). As a resultof the sale, debitel is treated in the consolidated financial statements as a discontinuedoperation. Prior years have been restated accordingly. See “*— Divestments/Discontinued Operations— debitel*”.Swisscom operates a variety of state-of-the-art telecommunications networks which enable the quickand cost-effective introduction of innovative services. Swisscom’s PSTN/ISDN network featuresfully digitalized transmission and local switching and fully integrated ISDN. Swisscom has upgradedits access networks to provide broadband connectivity services via ADSL technology in the localloop. ADSL technologies operate, like ISDN, over existing copper lines, but offer higher speed andvolume for data transmission. Swisscom’s ADSL service is available to approximately 98% of thepopulation of Switzerland, and its fastest offering provides download speeds of up to 6 Mbit/s.Swisscom also operates several data networks used for the provision of packet switched, frame relayand asynchronous transfer mode (ATM) data services and, to an increasing extent, IP and Ethernetcommunication. Swisscom’s mobile telephony network is a digital mobile dual band network based onthe international GSM standard. In order to respond to increasing demand for mobile data services,Swisscom introduced nationwide Enhanced Data Rates for GSM Evolution (EDGE) coverage. EDGEtechnology permits faster transmission of data via existing GSM installations. Swisscom has alsobuilt out a separate “third generation” UMTS network. UMTS is a mobile radio system that createsadditional mobile radio capacity and enables broadband media applications while also providing highspeed Internet access. Swisscom is currently capable of providing UMTS service to approximately90% of the Swiss population. As described in more detail below, Swisscom is currently makingtargeted investments in both its fixed-line and mobile networks to increase coverage where neededas well as to enhance capacity and upgrade functionality. See “*— Networks and Technology*”.The following table sets forth Swisscom’s capital expenditures for the periods indicated.             CHF in millions **Year Ended December 31,**  **2005** **2004** **2003**   Fixed-line network  353   360   497 Mobile network  238   434   381 Other  496   342   287    **Total**  **1,087**   **1,136**   **1,165**    Prior to January 1, 1998, Swisscom was the state monopoly service provider and was subject only tolimited competition. On January 1, 1998, the Swiss telecommunications market was opened tocompetition with the implementation of the Telecommunications Act. Since then, a large number ofcompetitors have entered the Swiss market, with intense competition in both fixed-line and mobiletelephony and in services provided to business customers.Although Switzerland is not a member of the EU, the Swiss market has been liberalized on theschedule and in the manner set forth in the EU directives mandating the liberalization oftelecommunications services in member
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states. In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act whichare not expected to enter into force prior to January 1, 2007. Swisscom will be required to offer,among other things, unbundled access to its local loop on a cost-oriented basis in the form of fullaccess as well as bitstream access for a limited period of four years. See *“ — Regulation —Unbundling of the Local Loop and Other Access Regulation”.*Under the Telecommunications Act, Swisscom was required to continue to provide certain basictelecommunications services comprising Universal Service throughout Switzerland until December 31,2002, with a number of such services subject to price ceilings. Swisscom’s Universal Servicelicense was later renewed for another five-year term and ISDN access became part of UniversalService subject to a price ceiling.On December 19, 2005, Swisscom completed a share repurchase program in which it repurchased sharesin an aggregate amount of CHF 2 billion, representing 7.75% of its share capital. The AnnualGeneral Meeting to be held on April 25, 2006 will vote on a resolution to reduce Swisscom’s sharecapital accordingly. See “*Item 8: Financial Information — Dividend Policy*”.Historically, Swisscom’s operations were a part of the Swiss PTT, a dependent agency of the SwissGovernment. The TUG established Swisscom as a special statutory stock corporation. The TUGprovides that the Swiss Confederation must hold a majority of the capital and voting rights ofSwisscom. As of December 31, 2005, the Swiss Confederation held a 62.45% stake in Swisscom. Thisstake will increase following effectiveness of the planned share capital reduction mentioned above.On January 25, 2006, the Swiss Federal Council published a consultation document containing aproposal to change the law that prohibits the Swiss Confederation from selling its controllinginterest in Swisscom. As long as the Swiss Confederation maintains a controlling interest inSwisscom, it will continue to be able to influence Swisscom’s business and strategy. For example,in 2005 Swisscom was involved in advanced negotiations to acquire Eircom Group plc of Ireland. Atthe end of November, after the Swiss Federal Council instructed its representative on the SwisscomBoard of Directors to vote against such an acquisition and, instead, to support the distribution offree capital to shareholders, talks on a takeover of Eircom were broken off. Swisscom views theSwiss Federal Council’s proposal to implement a change of law and sell the government’s controllinginterest in Swisscom as positive overall. The sale of the government’s controlling interest willincrease Swisscom’s corporate strategic flexibility in a rapidly evolving internationalenvironment.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 39 to theconsolidated financial statements.**Strategy**The key challenge Swisscom faces is finding profitable new sources of revenue to offset the declinein traditional activities. Swisscom’s new strategy is based on three pillars:**•** ***Strengthening its core business with convergent offerings and maximizing efficiency byexploiting functional overlaps in technology.***The most important pillar of the strategy is thestrengthening of Swisscom’s core business by offering a comprehensive portfolio of multimediaservices and first-class customer service. Swisscom aims to provide customers with highlyattractive offerings from a comprehensive range of products, services and network accessoptions. Individual products are increasingly expected to be bundled into all-round packages.Swisscom expects to win customers’ trust with improved, rapid and competent customer care withsimplified access to customer contact points. Swisscom is looking to position itself as aSwiss role model in the field of customer service.   By exploiting functional overlaps in technology, Swisscom also intends tosimplify its technological infrastructure and to combine functions wheresensible. Introducing a common architecture and design across platforms willreduce operating costs and improve performance. Moreover, Swisscom will seek toimplement new organizational structures to establish shared services forsupport functions and eliminate what is not necessary to support its corebusiness. **•** ***Promoting growth in business customers solutions.***Thesecond pillar of the strategy consists of extendingSwisscom’s activities in the business customer marketby offering a wider range of IT and communicationssolutions. Swisscom plans to offer internationalcompanies with a decision-making center located inSwitzerland a one-stop shop for internationalservices, *e.g.,*with the help of cross-borderalliances.
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  Swisscom’s existing competence in providing solutions for the banking andhealthcare industries is to be further expanded. In addition, Swisscom islooking to achieve substantial growth in the outsourcing market. **•** ***Expanding through targeted projects.***The third pillarcovers expansion projects in areas where Swisscom hasproven core competences. Firstly, Swisscom hasidentified opportunities to add value byincorporating its specialized know-how into projectstargeting specific customer segments in othercountries. Swisscom expects additional opportunitiesto emerge in countries with pent-up demand for thetechnologies Swisscom can provide, *e.g.,*broadbandtelecommunications and digital television. WithinSwitzerland there may also be expansion potential inareas where Swisscom is active, but not the marketleader. Secondly, Swisscom plans to enter marketsrelated to its current core business that areundergoing major changes under the influence ofdigitalization and broadband penetration (*e.g.,*telemedicine).Implementing this strategy may also involve the acquisition of companies, where appropriate.However, Swisscom will apply rigorous investment criteria and synergies or business logic mustjustify the price of any acquisition.The strategic goals of the Federal Council limit Swisscom’s ability to enter into acquisitions.The Federal Council expects Swisscom not to enter into any investments in any foreigntelecommuncations company with a universal service obligation (USO) mandate and to limit net debtto a maximum of one-and-a-half times EBITDA as reported on a consolidated basis. Nonetheless, theBoard of Directors has analyzed the Federal Coucil’s strategic goals for 2006 to 2009 and believesthey provide sufficient leeway for the company’s further value-adding development. For moreinformation, see “*Item 7: Major Shareholders and Related Party Transactions — Relationship andTransactions with the Swiss Confederation — The Confederation as Shareholder — Strategic Goals*”.Should no suitable investment opportunities arise, Swisscom intends, in accordance with itsdividend policy, to return capital it does not require to its shareholders. See “*Item 8: FinancialInformation — Dividend Policy*”.
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**Overview of Revenue by Business Segment**In 2005, Swisscom operated in the following business segments: **•** **Fixnet**provides access, fixed-line voice, Internet and a comprehensive range ofother fixed network telecommunication services to residential and business customers.In addition, Fixnet provides wholesale services and also offers a variety of otherservices, including the sale of customer equipment, the provision of leased lines andthe operation of a directories database.  **•** **Mobile**provides mobile telephony, data and value-added services in Switzerland andsells mobile handsets.  **•** **Solutions**provides national and international fixed-line voice telephony services tobusiness customers and offers leased lines, Intranet services and integratedcommunication technology solutions, including outsourcing services, to businesscustomers.    The Solutions business segment was formed on January 1, 2005, when SwisscomEnterprise Solutions was merged with Swisscom Systems, formerly accounted for in thesegment “Other”, to form a new business segment named Swisscom Solutions.  **•** **Other**covers mainly the provision of IT services through Swisscom IT Services, thebroadcasting businesses of Swisscom Broadcast and Antenna Hungária in Switzerland andHungary, the billing services and customer cards business of Accarda and the operationof a pan-European network for broadband Internet connectivity through SwisscomEurospot.  **•** **Corporate**includes Swisscom’s headquarter functions, group-company shared services,property rentals through the real estate company Swisscom Immobilien and Swisscom’sprograms under its social plan.The following table sets forth external revenue generated by Swisscom’s segments for the periodsindicated.             CHF in millions **Year Ended December 31,**  **2005** **2004** **2003**   Fixnet  4,319   4,555   4,601 Mobile  3,651   3,679   3,511 Solutions(1)  1,123   1,279   1,426 Other(1)  571   476   416 Corporate  68   68   72    **Total**  **9,732**   **10,057**   **10,026**     (1) Effective January 1, 2005, Swisscom Enterprise Solutions was merged with Swisscom Systems,formerly accounted for in the segment “Other”, into a new business segment named Solutions.Prior years’ numbers for the segments “Other” and Solutions were restated accordingly.
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**Fixnet****Overview**Through Fixnet, Swisscom is the leading provider of fixed network telecommunication services inSwitzerland, which it provides to residential, business and wholesale customers. In 2005, Fixnetgenerated total revenue of CHF 5.3 billion, including sales of CHF 1.0 billion to other Swisscombusiness segments. With external revenues of CHF 4.3 billion, Fixnet accounted for 44% ofSwisscom’s consolidated net revenue in 2005.Services provided by Fixnet include:• **Access.**Fixnet provides access services, including traditional analog, digital andbroadband access services, to residential and business customers. As of December 31,2005, Fixnet provided 3.8 million fixed-line telephone access lines, including 0.9million ISDN lines, and offered ADSL access to approximately 1.1 million subscriberlines.• **Retail Traffic.**Fixnet provides national and international fixed-line voicetelephony services to residential and business customers. In 2005, Fixnet carried anaggregate of 9.8 billion minutes of national telephony and dial-up Internet traffic and0.9 billion minutes of outgoing international traffic generated by residentialcustomers.• **Wholesale Traffic.**Fixnet provides a wide range of wholesale services to Swisscom’sother segments (which results in the recognition of intersegment revenue) and to othertelecommunications providers. In 2005, Fixnet billed a total of 15.9 billion minutes ofnational interconnection and transit traffic, carried 0.8 billion minutes of outgoinginternational traffic and terminated 1.6 billion minutes of incoming internationaltraffic.• **Other Traffic.**Fixnet operates public payphones, provides operator services andoffers prepaid calling cards.• **Other.**Fixnet also offers a variety of other services, including the sale ofcustomer equipment, the provision of leased lines and the operation of a directoriesdatabase.The following table sets forth external revenue generated by Fixnet for the periods indicated.             CHF in millions **Year Ended December 31,**  **2005** **2004** **2003**   Access  1,992   1,876   1,715 Retail traffic  1,082   1,240   1,329 Wholesale traffic  483(1)  691   677 Other traffic  130   158   247 Other  632   590   633    **Total**  **4,319**   **4,555**   **4,601**     (1) In 2005, Swisscom contributed its international wholesale business to a joint venture withBelgacom. As Fixnet only has a minority stake in this new company, certain associated revenues(and costs) are no longer recorded by Fixnet.In order to strengthen its competitive position in the retail fixed-line market, Swisscom aimsto increase usage of its broadband access services and to strengthen customer loyalty. Swisscombelieves that demand for broadband connectivity services will continue to increase and is activelymarketing broadband connectivity in the retail market. Swisscom believes that combining its coreactivities voice and Internet with multimedia services such as TV and video on demand, a so-calledtriple-play strategy, will be an effective means of competing with cable network operators.Swisscom carried out a 3-month field trial ending February 2005 of providing television to 600 ofits users and installed the technology for employees of the Swisscom Group and Microsoft at the endof 2005 as a second test launch. Swisscom plans to introduce the new multimedia services on acommercial basis during 2006. In addition, Swisscom seeks to optimize product distribution and topromote customer care through direct and indirect sales channels, such as Swisscom shops andspecialized outlets. Swisscom also operates a direct marketing center.
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**Access**Fixnet provides homes and businesses in Switzerland with analog and digital telephone access linesas well as a variety of supplementary services. In addition, Swisscom offers Internet accessservices to residential and business customers as well as broadband Internet access services toother Internet service providers on a wholesale basis. In 2005, external revenue from accessservices amounted to CHF 1,992 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 telecommunicationschannel. Swisscom offers its PSTN customers a wide range of supplementary services includingcaller identification, call forwarding, call waiting, engaged line callback, three-party conferencecalling and caller identification suppression services. In 2005, PSTN services comprised 41% oftotal 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 qualityconnections with faster transmission of signals, and increases the bandwidth capacity of the accessnetwork. ISDN also supports a full range of supplementary services. Swisscom offers both basicISDN access lines with two channels and primary ISDN access lines with thirty channels.The following table sets forth, for the periods indicated, selected data relating to access linesprovided by Fixnet to residential and business customers.             In thousands of lines(1) **As of December 31,**  **2005** **2004** **2003**   PSTN(2)  2,922   3,007   3,086 ISDN(3)  900   924   924    **Total access lines**  **3,822**   **3,931**   **4,010**                 Total access channels  5,043   5,175   5,261  (1) Based on lines in service, including courtesy lines and service lines. (2) Each PSTN line provides one access channel. (3) ISDN lines consist of basic ISDN lines and primary ISDN lines. A basic ISDN line provides twoaccess channels and a primary ISDN line provides 30 access channels.ISDN growth has stagnated in recent years and even declined in 2005 because of the increasinguse of ADSL services, which are also offered over PSTN lines, and because of the introduction ofcaller identification on PSTN by mid-2005, which up to then had only been offered over ISDN. Inaddition, the total number of access lines declined primarily due to the increase in market shareof Cablecom, Switzerland’s major cable network operator, which offers voice and Internet accessover its own infrastructure. Swisscom expects this trend to continue.Swisscom does not receive revenue in connection with the initial in-house installation of accesslines, which is generally performed by independent contractors. Most of the supplementary servicesavailable are included in the monthly subscription.
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The following table sets forth information relating to Swisscom’s charges in effect in 2005 for theprovision of voice access services.         CHF (including VAT) **Activation Fee** **Monthly Fee**   PSTN  43.00   25.25 ISDN basic with up to 3 access numbers  43.00   43.00 ISDN basic with up to 7 access numbers  43.00   53.80 ISDN basic with up to 10 access numbers  43.00   63.90 ISDN primary  914.60   538.00 Under the terms of the Universal Service license, the provision of ISDN access is included withinSwisscom’s Universal Service obligation and is subject to a price ceiling of CHF 40.00 (excludingVAT). PSTN access is subject to a price ceiling of CHF 23.45 (excluding VAT). Additional chargesmay be levied for the provision of supplementary services. See “— *Regulation — Universal Service*”and “*— Regulation — Price Ceilings for Universal Service*”.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act which are notexpected to enter into force prior to January 1, 2007. Swisscom will be required to offer, amongother things, unbundled access to its local loop on a cost-oriented basis in the form of fullaccess as well as bitstream access for a limited period of four years. See “*— Regulation —Unbundling of the Local Loop and Other Access Regulation*” and “*Item 8: Financial Information —Legal Proceedings*”.**Internet Access**Swisscom is the leading Internet service provider for retail customers in Switzerland, offeringbroadband Internet access over asynchronous digital subscriber lines (ADSL) and narrowband Internetaccess as a dial-up service over ISDN and PSTN lines. In addition, Swisscom Fixnet providesbroadband Internet access to other Internet service providers on a wholesale basis.The following table provides information about the number of access subscribers for the periodsindicated:             In thousands of lines/subscribers **Year Ended December 31,**  **2005** **2004** **2003**   Retail ADSL lines  708   490   274 Wholesale ADSL lines  390   312   213    **Total ADSL lines**  **1,098**   **802**   **487**                 Retail narrowband subscribers(1)  410   523   670  (1) Includes active access subscribers only, defined as all paid-access subscribers and thosesubscribers to Swisscom’s free-access services who had accessed their accounts at least oncein the last 40 days.In recent years, growth in the access area has come from ADSL technology, which offerssignificantly higher transmission speeds compared to ISDN. Because ADSL may be offered over atraditional PSTN line, ADSL growth has contributed to a decline in the number of ISDN lines.Swisscom offers residential Internet users and small businesses Internet access service packagesfacilitating high-quality Internet access using both narrowband and broadband access technologies,IP-based communication services, personal information management services and shared hostingservices. Internet access over ADSL is offered on a flat-fee basis for high bandwidth users, andon a minutes-of-use basis for 150kbit/s low bandwidth users. In 2005, Swisscom strengthened itsposition in this market by acquiring Cybernet (Schweiz) AG from the Viatel Group. Cybernet focusesits activities on the small and medium-sized business market, where its core businesses includeconnectivity, data centers and e-business.Swisscom seeks to increase the number of subscribers to ADSL access services by offering new ADSLservices and significantly increasing the capacity of its ADSL lines and adding very high bit-ratedigital subscriber lines (VDSL) that will allow downstream speeds well above 10 Mbit/s.
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The following table sets forth information relating to Swisscom’s charges in effect in 2005 for theprovision of ADSL services.               **Downstream / upstream**    CHF (including VAT) **bandwidth (kbit/s)****(2)** **Monthly Fee** **Hourly rate**   ADSL 150 PAYG(1)  150/50   9.00   2.40 ADSL 600  600/100   49.00   — ADSL 1200  1200/200   69.00   — ADSL 2400  2400/200   99.00   —  (1) Pay-as-you-go service introduced in the third quarter of 2005. (2) Effective mid-March 2006, the downstream/upstream bandwidth offering for new ADSL 600customers was increased to 2000 / 100, for ADSL 1200 to 3500 / 300, and for ADSL 2400 to 5000/ 300. The monthly fees remained unchanged. The downstream/upstream bandwidth provided toexisting customers will be upgraded until the end of the second quarter of 2006.In a letter dated October 20, 2005, the Competition Commission announced that it was openingan investigation of Swisscom and Swisscom Fixnet, based primarily on allegations made by one ofSwisscom’s competitors, TDC (Sunrise). The Competition Commission believes facts exist whichindicate Swisscom may be abusing its dominant position. In addition, the Competition Commissionintends to investigate whether prices for certain of Swisscom’s ADSL services are excessive andunreasonable. See “*Item 8: Financial Information — Legal Proceedings — Other RegulatoryProceedings”*.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act which are notexpected to enter into force prior to January 1, 2007. Market-dominant providers will be requiredto offer bitstream access to other providers on demand for four years on a cost oriented basis.See “*— Regulation — Unbundling of the Local Loop and Other Access Regulation*”.**Television and Multimedia Entertainment**As Swisscom continues to upgrade the capacity of its networks, the increased bandwidth will allowSwisscom to pursue its so-called triple play strategy of combining its core activities withmultimedia services. Swisscom plans to offer television and video on demand services during 2006.Rather than sending television and video signals by broadcasting or transmitting them via cableconnections, consumers will be able to use their high-speed Internet connections to seamlesslystream video to their computers and televisions. In order to evaluate the technologicalfeasibility and market appeal of offering television over its broadband infrastructure, Swisscomstarted a trial at the end of 2005 in which it installed the technology for employees of SwisscomFixnet and Microsoft. In addition, to further this “triple play” strategy, Swisscom has acquired a49% strategic stake in CT Cinetrade AG, a Swiss media company whose activities include a pay-TVchannel, video and DVD film rights, as well as movie theaters. In preparing the market forSwisscom’s entry into the TV business, in March 2005 Swisscom launched an interactive televisionproduct which can be used with cable, satellite and terrestrial broadcast systems in order tocompete with cable network operators, which are particularly well positioned to combine voice, dataand Internet access services with multimedia content. For more information, see “*Item 3: KeyInformation — Risk Factors — Risks Related to Swisscom’s Business — Increased competition may havea significant impact on the revenues and profitability of Swisscom’s fixed-line broadband business,which may not allow Swisscom to recoup its investment in fixed-line broadband infrastructure andmultimedia services*”.**Retail Traffic**Swisscom provides comprehensive national and international calling services to residential andbusiness customers. Fixnet’s business customers are small and medium sized enterprises that do notrequire customized telecommunications solutions. External revenue attributable to national trafficand outgoing international traffic originating on the fixed-line network generated by Fixnetcustomers amounted to CHF 1,082 million in 2005.Retail traffic has declined in recent years, mainly due to a significant decline in local areatraffic and Internet traffic. In 2004, the decline in local area traffic was a result of the factthat Internet is increasingly accessed via Internet dial-up numbers, offered by Internet serviceproviders, and ADSL lines, with the result that the associated traffic is no longer included inSwisscom’s local area traffic statistics. In 2005, the continued
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migration to ADSL lines contributed to the decline in Internet traffic, while increased competitionreduced voice traffic. Swisscom expects retail traffic to continue to decline.Swisscom believes it is well-positioned to remain the leading provider of national traffic andoutgoing international calling services in the Swiss market. To this end, Swisscom continues toimplement new measures designed to maintain its market share in national and internationaltelephony traffic and to increase customer loyalty. In 2005, Swisscom intensified its efforts toretain and win back customers through direct marketing campaigns and new pricing models.***Traffic*****.**The following table sets forth, for the periods indicated, selected information relatingto Fixnet’s national and outgoing international fixed voice telephony traffic.             In millions of minutes(1)(2) **Year Ended December 31,**  **2005** **2004** **2003**   Local and long distance traffic  6,628   7,205   7,732 Fixed-to-mobile traffic  925   949   950 Internet traffic  2,252   3,323   4,842    **Total national retail traffic**  **9,805**   **11,477**   **13,524** International retail traffic(3)  926   955   968    **Total retail traffic**  **10,731**   **12,432**   **14,492**     (1) Figures do not include traffic generated from Swisscom-operated public payphones or fromcalling cards. (2) Includes traffic on courtesy and service lines. (3) Based on minutes of outgoing international traffic as determined for retail customer billingpurposes. Does not include international wholesale traffic originating outside Switzerland.In 2005, 55.2% of the outgoing international traffic generated by Fixnet customers (excludingoutgoing international mobile traffic) was directed toward three countries: Germany, France andItaly.***Tariffs.***Swisscom offers a variety of tariff packages targeting different customer segments. Undersome tariff packages, Swisscom’s national traffic charges are calculated on the basis of callduration, time of day, day of the week, and whether the call is fixed-to-fixed or fixed-to-mobile.Swisscom has also implemented pricing models under which customers pay a monthly subscription fee,allowing them to make both national and international calls at reduced rates or even for free atcertain off-peak times. These new pricing models have effectively resulted in an overall tariffreduction.Local and long-distance fixed-fixed calls within Switzerland that are billed on a per-minute basisare billed as follows:         CHF/minute(1) **Peak**(2) **Off-Peak**(3)   National fixed-fixed 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.National fixed-to-mobile calls are billed as follows:         CHF/minute(1) **Peak**(2) **Off-Peak**(3)   Generally applicable tariff  0.55   0.45 New tariffs applicable to callsterminating on:        Swisscom Mobile (as of July 1, 2005)  0.41   0.31 TDC (Sunrise) Mobile        (as of October 1, 2005)  0.49   0.39  (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.
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Swisscom’s international calling charges are generally based on duration, destination and dayof 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 fromMonday to Friday and a weekend rate for Saturday and Sunday and five tariff groups.The following table sets forth information relating to Swisscom’s international tariffs in effectat the end of December 2005 for calls to the countries generating the most outgoing internationaltraffic.         In CHF/minute, including VAT(1) **Weekday** **Weekend**   Germany, Austria, France, Italy, United Kingdom, United States, Canada  0.12   0.10 Portugal, Spain, Netherlands  0.25   0.20 Serbia, Montenegro  0.65   0.50  (1) Calls are charged in incremental steps of CHF 0.10 without a set-up charge. A surcharge isapplied for calls to foreign mobile networks.Swisscom offers a variety of promotions, such as discounts for evening and weekend calls,temporary discounts and new pricing models designed to improve price perception and reduce churn.Under its Universal Service obligation, Swisscom is required to provide, subject to price ceilings,comprehensive local and national long distance calling services throughout Switzerland untilDecember 31, 2007. Swisscom’s current tariffs are well below the applicable ceiling. See “ *—Regulation — Price Ceilings for Universal Service”.*
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**Wholesale Traffic**Swisscom provides various national wholesale services to other telecommunications providers,including network operators, service providers and resellers. Swisscom’s portfolio of nationalwholesale services includes basic interconnection services, which Swisscom offers to all licensedoperators, registered service providers and others entitled to interconnection under theTelecommunications Act. See “ *— Regulation — Interconnection by a Market-Dominant Provider*”.The international wholesale business is characterized by low margins due to overcapacity and strongcompetition.Effective July 1, 2005, Swisscom and Belgacom, the leading telecommunications company in Belgium,formed a new joint venture company, named Belgacom International Carrier Services (BICS), combiningtheir international wholesale activities. As part of the transaction (the Belgacom transaction),Swisscom received a 28% interest in the joint venture in exchange for its international wholesalebusiness and international network, valued at CHF 36 million. Fixnet’s wholesale business nowconsists only of its wholesale national business. In 2004 and 2005, Fixnet’s internationalwholesale operations contributed CHF 445 million and CHF 256 million to Swisscom’s wholesaletraffic revenues, respectively. The full-year effect of the transaction will be a significantdecrease in revenues and expenses in 2006.As of July 1, 2005, a large portion of Swisscom’s wholesale international traffic ceased to berouted through Fixnet, and is now routed directly through BICS. As Fixnet only has a minoritystake in the joint venture, associated costs and revenues normally would no longer be recorded byFixnet. For technical reasons, however, international incoming traffic to be routed through BICSin Switzerland to either domestic third party networks or to Swisscom’s Mobile network willcontinue to be routed through Fixnet’s network until 2007. Accordingly, associated revenues andcosts are still being recognized by Fixnet. These revenues and costs, which were recorded underinternational incoming traffic until December 31, 2005, are now recorded under wholesale nationaltraffic. After 2007, BICS traffic will no longer be routed through Fixnet under this arrangement.Since February 2003, direct mobile interconnection has been available, and mobile network operatorshave been able to terminate their traffic directly on each other’s networks. Traffic betweennetworks, which had previously been routed via Fixnet Wholesale’s networks, is now routed directly.Since the introduction of direct mobile interconnection, Swisscom’s competitors have been able tooffer their customers direct mobile interconnection, which resulted in a decrease in traffic overSwisscom’s network.**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 TelecommunicationsAct, and it complements this standard offer with a portfolio of extended interconnection servicesand wholesale products. In 2005, external revenue from national wholesale services amounted to CHF227 million.The following table sets forth information relating to Fixnet’s national interconnection andtransit traffic for the periods indicated.             In millions of minutes **Year Ended December 31,**  **2005** **2004** **2003**   Wholesale national traffic(1)  15,947   17,055   17,871  (1) Based on minutes as determined for customer billing purposes. Includes traffic related tothird party revenues for access, termination and transit services.Until 2007, international incoming traffic routed through BICS in Switzerland will continue tobe terminated by Fixnet for technical reasons. Until December 31, 2005, Fixnet recognized thistraffic as incoming international traffic. Since January 1, 2006, Fixnet has been recognizing thistraffic as wholesale national traffic.Swisscom’s standard interconnection offer encompasses a set of basic interconnection services whichSwisscom is required to offer under the Telecommunications Act. The standard offer comprisesinterconnection between access points on the Swisscom network and competitors’ access points,originating, terminating and transit
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services, access to Swisscom’s emergency, national and international directory enquiryservices, as well as access to the Business Numbers of Swisscom and other service providers.Under the Telecommunication Act, the interconnection rates charged by a market dominant providermust be cost-oriented, but may include an appropriate return on capital. Interconnection rates arebased on the long run incremental costs (“LRIC”) of an efficient operator and may not includehistorical costs. See “ — *Regulation — Interconnection by a Market-Dominant Provider*”.The following table sets forth information relating to Fixnet’s interconnection prices for theperiods indicated.             CHF/minute(1) **As of December 31,**  **2005**  **2004**  **2003**    Regional termination  0.0112   0.0114   0.0130 National termination  0.0175   0.0186   0.0203 Regional carrier selection  0.0113   0.0115   0.0130 National carrier selection  0.0176   0.0187   0.0203  (1) Includes set-up charge. Calculated based on the weighted average price of a call of fourminutes duration, whereby the traffic split in peak, off-peak and night calls was taken intoconsideration.In 2005, Swisscom reduced its standard interconnection rates by up to 7%. For 2006, Swisscomhas announced further interconnection rate reductions averaging 5%. Swisscom believes that itsinterconnection rates are in line with the European average and represent a fair, transparent andconsistent implementation of the applicable regulatory requirements. Swisscom expects to continueto adapt its interconnection charges from time to time as it realizes further cost savings throughnetwork optimization or improvements in efficiency.Swisscom has regularly been involved in legal proceedings relating to its interconnectionobligations. In November 2003, ComCom issued decisions requiring Swisscom to lower interconnectionprices with retroactive effect for the years 2000 to 2003 by 25-35%. Swisscom lodged an appealagainst this decision with the Federal Court. Swisscom’s competitors, TDC (Sunrise) and WorldComalso filed an appeal demanding further reductions than decided by ComCom. In October 2004, theFederal Court overturned the ComCom decision on procedural grounds and remanded the petitions forre-hearing before ComCom. On June 10, 2005, ComCom confirmed its November 2003 decision, requiringSwisscom and Fixnet to retroactively reduce the interconnection rates charged TDC (Sunrise) andWorldCom between 2000 and 2003 by approximately 30%. ComCom required TDC (Sunrise) and WorldCom toreduce their own prices on a reciprocal basis. On July 13, 2005, Fixnet and TDC (Sunrise) bothlodged an appeal against this decision with the Federal Court. For further information on legalproceedings relating to interconnection, see “*Item 8: Financial Information — Legal Proceedings*”.
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**Incoming International Traffic**Swisscom’s agreement with Belgacom to combine their international wholesale activities by forming anew joint venture company included the transfer of Fixnet’s wholesale international incomingtraffic business. Until 2007, however, international incoming traffic will continue to be routedthrough Fixnet for technical reasons. As a result, corresponding revenues and expenses are stillbeing recorded by Fixnet. Until December 31, 2005, Fixnet recognized this traffic as incominginternational traffic. Since January 1, 2006, Fixnet has been recognizing this traffic aswholesale national traffic. In 2005, external revenue from incoming international traffic amountedto CHF 146 million.The following table sets forth information relating to Fixnet’s incoming international traffic inminutes for the periods indicated.             In millions of minutes **Year Ended December 31,**  **2005**  **2004**  **2003**    Incoming international traffic  1,577   1,521   1,607 **International Termination Traffic**Swisscom’s agreement with Belgacom to combine their international wholesale activities by forming anew joint venture company included the transfer of Fixnet’s wholesale international terminationtraffic business. External revenue from international termination traffic amounted to CHF 245million in 2004, and CHF 110 million in 2005 (prior to the July 2005 transfer to Belgacom).The following table sets forth Swisscom’s international termination traffic in minutes for each ofthe periods indicated.             In million of minutes **Year Ended December 31,**  **2005**  **2004**  **2003**    International termination traffic(1)  755(2)  1,508   1,188  (1) Minutes of outgoing traffic terminated outside of Switzerland. (2) Prior to the July 2005 transfer to Belgacom.**Other Traffic**Swisscom generates other traffic revenue from the operation of private and public payphones (whichSwisscom is required to maintain as part of its Universal Service obligation), operator servicesand from the sale of pre-paid cards. In 2005, Swisscom realized external revenue of CHF 130 millionfrom these services.**Other**Other services comprise the sale of customer equipment, the provision of leased lines, theoperation 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 Swisstelecommunications market. Swisscom purchases from third-party suppliers all of thetelecommunications equipment that it sells or rents under the Swisscom brand name. In addition,Swisscom sells telecommunications equipment under third-party brand names. Swisscom offersresidential customers primarily PSTN and ISDN corded and cordless telephone handsets and facsimilemachines. Swisscom also offers mobile handsets and a variety of other products through its Swisscomshops, including ADSL modems. In 2005, sales of customer equipment generated external revenue ofCHF 253 million.The most important distribution channel for Swisscom’s customer equipment is its Swisscom shops. Inaddition, Swisscom uses third-party distribution channels.
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**Leased Lines**Swisscom offers a full portfolio of leased lines throughout Switzerland. Customers can chooseamong a wide range of bandwidths and a selection of different service levels. Swisscom hascontracts with approximately 80 wholesale customers in Switzerland. Business customers, the primarycustomer segment for leased lines, are targeted through Solutions. See “ *— Solutions — LeasedLines National*”. In March 2006, the Swiss Parliament adopted amendments to the TelecommunicationsAct which are not expected to enter into force prior to January 1, 2007. Swisscom will be requiredto offer, among other things, access to leased lines on a cost-oriented basis. See “*— Regulation —Unbundling of the Local Loop and Other Access Regulation*” and “*Item 8: Financial Information —Legal Proceedings*”. In 2005, the provision of leased lines generated external revenue of CHF 158million.**Directories**Swisscom Directories operates, maintains and sells Switzerland’s most comprehensive directoriesdatabase, the electronic phonebook (*Elektronisches Telefonbuch ETV ®*or “ETV”). ETV includes over6 million residential and business entries and is updated daily with subscriber information fromSwitzerland’s major telecommunications service providers. Swisscom Directories is also responsiblefor the production, marketing and distribution of printed telephone books, as well as theoperation, production and development of electronic directories and the online yellow pages. In2005, Swisscom Directories generated external revenue of CHF 120 million.The directories’ business is regulated under the Telecommunications Act. Since 2001, everytelecommunication service provider is required to provide its regulated data, including daily dataupdates, not only to directories publishers, as was the case in the past, but to any interestedparty and for any use. In 2002, Swisscom Directories was appointed by all major telecommunicationproviders as their data agent and is now responsible for centrally handling the provision ofregulated data. In connection with an investigation to determine whether Swisscom Directoriesoffered its directories database to third parties at prices and on conditions that prevent themfrom effectively using the data, the Competition Commission determined that Swisscom Directorieshas a market-dominant position, but decided not to pursue the matter. Swisscom appealed the findingthat it has a market-dominant position. The appeal is still pending. See “*Item 8: FinancialInformation — Legal Proceedings*”.**Other**Other revenue comprises mainly Internet narrowband traffic to third-party ISP numbers. Inaddition, it provides a range of value added services and data services to residential customers.In 2005, external revenue from these services amounted to CHF 101 million.**Competition**In the area of fixed network telephony and related services, Swisscom faces intense competition,particularly in the national and international calling markets. In 2005, price competitionintensified due to increased competition from cable network operators, especially Cablecom, thelargest cable network operator in Switzerland, and from Internet service providers. Swisscomexpects price competition to intensify in 2006.***Access***. As recently as two years ago, Swisscom did not face significant competition in theresidential access market, mainly due to the fact that Swisscom has not yet been required tounbundle its local loop. However, competition has increased since mid-2004, when Cablecom startedoffering telephony services over cable on a commercial basis and is thereby directly competing withSwisscom’s PSTN and ISDN access services. In March 2006, the Swiss Parliament adopted amendmentsto the Telecommunications Act which are not expected to enter into force prior to January 1, 2007.Swisscom will be required to offer, among other things, unbundled access to its local loop on acost-oriented basis in the form of full access as well as bistream access for a limited period offour years. See “ *— Regulation — Unbundling of the Local Loop and Other Access Regulation*” and“*Item 8: Financial Information — Legal Proceedings — Proceedings Relating to Unbundling of theLocal Loop*”. Unbundling of the local loop will give competitors direct access to Swisscom’scustomers and the ability to offer them a full range of services without the need to use Swisscomas an intermediary. In addition to loss of access revenues, unbundling the local loop is likely tolead to increased competition for national and international traffic as for the first time,customers will be able to choose among competing full-service providers of fixed-line telephony.
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Swisscom’s principal competitors in the Internet access market are Cablecom and TDC (Sunrise). TDC(Sunrise) offers narrowband dial-up access through its own network as well as ADSL broadband accessthrough a reselling agreement with Swisscom Fixnet.In the market for broadband access, Swisscom faces stiff competition from cable network operators,including Cablecom, who are able to offer high-speed Internet access via cable. Cable currentlyoffers higher bandwidth than ADSL and has certain other advantages over ADSL. Cable networkoperators are particularly well positioned to combine voice, data and Internet access services withmultimedia content. In response to this increased competition, Swisscom is making capitalexpenditures to upgrade its network to combine its core activities in voice and Internet serviceswith multimedia services such as TV and video on demand. However, cable network operators have beenoffering these multimedia services for some time and Swisscom may not be successful in enteringthis market. With the rollout of broadband mobile services based on UMTS and other wirelessbroadband access technologies, Swisscom may face additional competition from broadband mobileservice providers.In order to compete with other broadband access operators more effectively, Swisscom has increasedthe capacity of its ADSL services by more than 400% since 2003. The most recent upgrade started inMarch 2006 and will double ADSL bandwidth for most service plans by mid-2006.After revoking, on October 17, 2005, a provisional order from May 6, 2002 relating to a petitionfiled by two of Swisscom’s competitors, the Competition Commission announced, in a letter datedOctober 20, 2005, that it was opening a new investigation of Swisscom and Swisscom Fixnet, basedprimarily on allegations made by one of Swisscom’s competitors, TDC (Sunrise). The CompetitionCommission believes facts exist which indicate Swisscom may be abusing its dominant position. Inaddition, the Competition Commission intends to investigate whether prices for certain ofSwisscom’s ADSL services are excessive and unreasonable. See “*Item 8: Financial Information — LegalProceedings — Other Regulatory Proceedings”*.***National Retail Traffic***. Swisscom faces increasing competition in the national retail trafficmarket, especially from Cablecom. Currently, Swisscom’s principal competitors in the nationalretail traffic market are TDC (Sunrise), Cablecom and Tele2. In 2006, prices are expected toremain under pressure, mainly due to increased competition from cable network operators, mobilenetwork operators and Internet service providers offering Internet telephony (known as Voice overIP) services.Tariffs for fixed to mobile calls, which are accounted for in national traffic, are expected tocome under particular pressure due to regulatory initiatives in the European Union regarding mobiletermination and two proceedings in which Swisscom is involved. See “ *— Regulation — MobileTelecommunications”*. Effective June 1, 2005 Swisscom reduced its mobile termination rates by morethan 40% from CHF 0.335 to CHF 0.200 per minute in order to compete more effectively with othermobile network operators. In response, TDC (Sunrise) reduced its mobile termination rates from CHF0.3685 to CHF 0.2995, effective August 1, 2005, and Orange reduced its rates from CHF 0.3695 to CHF0.3295, effective January 1, 2006. The reductions in mobile termination rates by TDC (Sunrise) andOrange were less than Swisscom had expected, based on ComCom’s decision to require reciprocalreductions from the two operators, and based on conditions prevailing in the European market and inthe sector, *i.e.,*CHF 0.200/minute.Swisscom’s competitors for national long distance service depend on Swisscom for the provision ofwholesale origination and termination access and transit services. As a result, the pricing ofthese services has had an important impact on the development of retail competition. Since January1, 2000, Swisscom has been required to calculate its interconnection costs in any market in whichit is market-dominant on the basis of the long-run incremental cost of an efficient operator andmay no longer include historical costs. As a result, interconnection prices have steadilydeclined. Because interconnection rates calculated on the basis of long-run incremental costs onlycover the additional cost to Swisscom of giving other providers access to its network and do notinclude the historical costs incurred by Swisscom in building out its network, Swisscom’scompetitors may be able to offer retail services at lower prices than Swisscom while still coveringtheir costs. See “— *Regulation — Interconnection by a Market-Dominant Provider*”. In November 2003,based on complaints by TDC (Sunrise) and WorldCom, ComCom issued decisions requiring Swisscom tolower interconnection prices with retroactive effect for the years 2000 to 2003 by 25-35%.Swisscom lodged an appeal against this decision with the Federal Court. In October 2004, theFederal Court issued a decision overturning the ComCom decisions on procedural grounds andremanding the petitions for re-hearing before ComCom. On June 10, 2005, the ComCom confirmed itsNovember 2003 decision, requiring Swisscom and Fixnet to retroactively reduce the interconnectioncharges charged TDC (Sunrise) and WorldCom between 2000 and 2003 by approximately 30%. ComComrequired TDC
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(Sunrise) and WorldCom to reduce their own prices on a reciprocal basis. On July 13, 2005, Fixnetand TDC (Sunrise) both lodged an appeal against this decision with the Federal Court, which has yetto issue a decision. See “*Item 8: Financial Information — Legal Proceedings*”.***International Retail Traffic.***Swisscom also faces strong competition in the outgoing internationalcalling market. Swisscom’s principal competitors in the outgoing international traffic market areTDC (Sunrise), Tele2, Cablecom and Solaris, which focus their marketing on offering reduced ratesfor calls directed to countries of high traffic volume. The development of interconnection pricingwill also impact competition in the area of outgoing international telephony.Over the long term, Swisscom expects that additional market share will be lost in the area ofinternational fixed voice telephony due to the increasing use of Voice-over-IP technologies andincreased low-price competition. The international rates are therefore expected to come underadditional pressure.***Wholesale Traffic.***In 2005, Swisscom continued to face increasing competition in the nationalwholesale market from various network providers such as Colt and TDC (Sunrise), currently offeringservices between major Swiss cities and international outgoing services to resellers.***Other Traffic.***In the public and private payphones market, Swisscom does not face significantcompetition. However, the overall market for public and private payphone use is expected todecline further due to increasing use of mobile phones and phone cards issued by other operators.In the market for operator services, Swisscom faced only limited competition in 2005. Swisscom isallowed to use the well-known access number 111 until the end of 2006. Thereafter, Swisscom willhave to switch to the new service number 1811, which is expected to result in a significantreduction in traffic volume for its operator services.***Customer Equipment*****.**In the area of customer equipment, Swisscom competes directly with equipmentmanufacturers and third-party vendors. A number of Swisscom’s principal suppliers of telephonesand other customer equipment, including mobile handsets, also compete with Swisscom. Vigorouscompetition and rapid technological change in the sector, as well as increasing competition fromcompanies that are also active in other sectors of the telecommunications market, have led tofalling prices.***Leased Lines.***In 2005, Swisscom continued to face intense competition in the market for nationalleased lines, in particular in areas with high data volume. Swisscom’s main competitors in thismarket are Cablecom, TDC (Sunrise) and Colt. In March 2006, the Swiss Parliament adoptedamendments to the Telecommunications Act which are not expected to enter into force prior toJanuary 1, 2007. Swisscom will be required to offer, among other things, access to leased lines ona cost-oriented basis, which is expected to intensify competition. See “ *— Regulation — Unbundlingof the Local Loop and Other Access Regulation*”.***Directories.***Swisscom faces significant competition in the directories market from onlinedirectory operators, internet search engines and traditional direct marketing companies enteringthe market. Barriers to entry remain low, particularly in the online directory market, andSwisscom Directories expects competition to increase further.
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**Mobile****Overview**Swisscom Mobile is the leading provider of mobile telephony services in Switzerland, with 4.3million mobile subscribers as of December 31, 2005. In 2005, Swisscom’s mobile activitiesgenerated total revenue of CHF 4.2 billion, including sales of CHF 0.5 billion to other Swisscombusiness segments. With external revenues of CHF 3.7 billion in 2005, Swisscom Mobile accountedfor 38% of Swisscom’s consolidated net revenue.The following table sets forth the external revenue generated by Mobile for the periods indicated.             CHF in millions **Year Ended December 31,**  **2005**  **2004**  **2003**    Base fees  677   691   685 Connectivity voice  2,203   2,286   2,221 Connectivity data and value-added services  604   521   454 Other mobile revenue(1)  167   181   151    **Total Mobile**  **3,651**   **3,679**   **3,511**     (1) Includes revenue from the sale of handsets sold through sales channels other than Swisscomshops and from SICAP, a prepaid billing platform.Most of Swisscom’s mobile telephony revenue is generated from monthly subscription fees andtraffic charges for mobile voice telephony, which accounted for 79% of its external revenues in themobile segment in 2005.With the successful implementation of services enabled by high speed GPRS, PWLAN, EDGE and UMTStechnologies, Swisscom believes that an increasingly significant portion of its mobile revenue willbe generated by mobile data services, value-added services, Internet access and e-commerceservices. In November 2003, Swisscom implemented the Vodafone live! portal, providing mobileinformation, entertainment, community and lifestyle premium services, and Swisscom has addedsignificant new features (such as live television and music downloads) to these services sincethen. Swisscom believes that these services will contribute in the future to the generation ofm-commerce revenue and enhance customer retention. In July 2005, Swisscom upgraded its MobileUnlimited service, which enables seamless data download/synchronization via a PC card, by addingEDGE to the existing list of supported mobile broadband technologies (GPRS, PWLAN, UMTS) whichSwisscom believes will contribute in the future to the generation of data revenues.Since February 2003, direct mobile interconnection has been available, and Swisscom Mobile andother mobile network operators are able to terminate their traffic directly on each other’snetworks rather than through Swisscom Fixnet, which had been the intermediary for such traffic.During 2005, Swisscom Mobile capitalized on efficiency efforts initiated in recent years and wasable to show a modest reduction in the average number of employees (full time equivalents) from2,491 at year-end 2004 to 2,412 at year-end 2005, in part by transferring employees to Swisscom’ssocial plan programs. By reducing its workforce, Swisscom Mobile reversed the trend of the lastseven years while still showing strong subscriber growth.On April 7, 2006, the Secretariat of the Competition Commission issued a draft decision in itsproceedings against Swisscom Mobile in connection with mobile termination fees. The Secretariatbelieves that Swisscom Mobile has abused its market-dominant position and has indicated that itintends to impose a fine of at least CHF 489 million. For more information, see “*Item 3: KeyInformation — Risk Factors — Risks Related to Swisscom’s Business — The Swiss CompetitionCommission may require Swisscom Mobile to pay large fines and reduce its prices*” and “*Item 8:Financial Information — Legal Proceedings — Other Regulatory Proceedings*”.**Alliance with Vodafone**In connection with the acquisition of a 25% shareholding in Swisscom Mobile AG by Vodafone GroupPlc (“Vodafone”) effective April 1, 2001, Swisscom Mobile and Vodafone entered into a shareholders’agreement and a service agreement, which set out the terms on which Swisscom Mobile and Vodafonewould cooperate in certain areas.
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Under the terms of the shareholders’ agreement, the Board of Directors of Swisscom Mobile consistsof up to seven members, of which up to two may be Vodafone appointees, one may be an independentdirector, and up to four may be Swisscom appointees. Currently, the Swisscom Mobile Board ofDirectors consists of two Vodafone appointees and three Swisscom appointees. Resolutions of theBoard, including approval of the annual budget, require the affirmative vote of the majority of thedirectors. Certain significant transactions are subject to unanimous Board approval, includingdecisions regarding specific investments, purchases or disposals of assets in excess of certainthresholds and material modification or termination of such agreements. The listing of SwisscomMobile shares on any exchange is also subject to unanimous Board approval. Any change in sharecapital of Swisscom Mobile is subject to approval by both Swisscom and Vodafone.Subject to certain exceptions, Swisscom and Vodafone have also agreed in the shareholders’agreement that Vodafone is not to engage in the mobile business in Switzerland, or to have anycontrolling stake in a mobile business operating in Switzerland, other than pursuant to the termsof the shareholders’ agreement and the related service agreement. The shareholders’ agreement maybe terminated without notice if Swisscom holds less than 41% or if Vodafone holds less than 10% ofSwisscom Mobile. In addition, Vodafone holds a conditional pre-emption right that would permit itto sell its 25% stake in Swisscom Mobile to Swisscom at fair market value if a party other than theSwiss Confederation is able to exert a controlling influence over Swisscom. For more information,see “*Item 3: Key Information — Risk Factors — Risks Related to Ownership by the Swiss Confederation— If another party acquires control of Swisscom as a result of the Swiss Confederation reducing itsstake in Swisscom below 50%, Vodafone plc may exercise its conditional pre-emption rights to sellits 25% stake in Swisscom Mobile to Swisscom, and Swisscom’s counterparties in significantcontracts may be able to terminate such contracts or demand additional security*”.In November 2003, the original service agreement entered into as part of the cooperation withVodafone was replaced by a new service agreement between Swisscom Mobile, Vodafone and VodafoneMarketing Sarl, to reflect the continued and deepening co-operation between Swisscom Mobile andVodafone and the development of new technologies in recent years.Under the service agreement, each of Swisscom Mobile and Vodafone agreed to provide the other withaccess to its products and services, and to provide certain consultancy and supporting services inagreed circumstances. The service agreement also provides for a framework for co-managinginternational corporate accounts and co-operation in the area of product development, and givesSwisscom Mobile the right to use future upgrades of certain services and enabling platformsdeveloped by the Vodafone group on normal commercial terms even if the service agreement isterminated. Swisscom Mobile pays an overall fee for all services and products provided by theVodafone group companies.In general, all services provided by Swisscom Mobile under the service agreement are to be offeredto Vodafone on terms and conditions equivalent to those offered to other members of the Swisscomgroup, while Vodafone is required to offer its services to Swisscom Mobile on terms and conditionsequivalent to those offered to other members of the Vodafone Group of a size similar to SwisscomMobile. Furthermore, each of Swisscom Mobile and Vodafone has agreed, subject to certainexceptions, not to offer the services provided under the service agreement to any other mobiletelecommunications business in any of the Vodafone territories, in respect of Swisscom Mobile, andany of Switzerland and Liechtenstein, in the case of Vodafone.Swisscom Mobile and Vodafone have also entered into a branding agreement, which sets forth theterms for mutual use of their trade names and marks.Swisscom believes this strategic alliance enhances its competitive position in the mobile market.Through this alliance, Swisscom Mobile has access to Vodafone products, services and know-how andto other relevant global activities in mobile telecommunications. Swisscom Mobile may alsoparticipate in Vodafone’s worldwide arrangements for the procurement and/or supply chain managementof infrastructure, handsets and other products, which enables Swisscom Mobile to realize costsavings.In 2005, Swisscom generated service revenue from the co-operation with Vodafone in the amount ofCHF 88 million and paid an amount of CHF 103 million for services purchased from Vodafone. Thesepayments primarily related to roaming charges that each of Swisscom Mobile and Vodafone paid theother for the use of the other’s network by its customers.
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**GSM and the Introduction of Next Generation Mobile Services**Swisscom’s mobile services are provided using the global system for mobile communications (GSM)standard as well as the Universal Mobile Telecommunication System (UMTS), the dominant digitalstandards in Europe and much of the rest of the world.In 2001, Swisscom completed the implementation of general packet radio service (GPRS) technology inthe network. GPRS is a standard for data transfer on GSM mobile phone networks and utilizes “packetswitching” technology. In February 2002, Swisscom launched its first commercial GPRS service with atransmission rate of up to 50 kbit/s.In December 2000, Swisscom was awarded one of four UMTS licenses auctioned in Switzerland, forwhich it paid CHF 50 million. Universal mobile telecommunication system (UMTS) is a thirdgeneration mobile radio system that creates additional mobile radio capacity and enables broadbandmedia applications while also providing high speed Internet access. Swisscom has achieved allmilestones stipulated in the UMTS licence and successfully launched its commercial UMTS services inSeptember 2004.In December 2002, Swisscom introduced a public wireless LAN (PWLAN) service. Swisscom Mobile is theleading PWLAN network operator in Switzerland, currently operating approximately 900 hotspots inSwitzerland. In addition, Swisscom Mobile offers access to additional hotspots through roamingagreements mainly with Swisscom Eurospot. For more information on these networks and Swisscom’sPWLAN services, see “*—Networks and Technology — Mobile Telecommunications Network”*and *“— Other —Swisscom Eurospot”*.Swisscom continues to build out its broadband networks, such as UMTS. At the same time, Swisscomalso invests in capacity enhancements and functional upgrades of its existing GSM network. Forexample, in order to further improve its GPRS services, Swisscom has activated Enhanced Data Ratesfor GSM Evolution (EDGE) technology in all active GSM locations in early 2005. Other projectsinclude building additional base stations in tunnels and along train routes and extending the reachof the network’s dual-band capability. To further enhance the customer experience, Swisscom willenable high-speed downlink packet access (HSDPA) in selected dense urban areas in the course of2006. Swisscom believes that it can provide its customers with a true broadband experience byproviding seamless connectivity through a variety of technologies, e.g. HSDPA, UMTS, EDGE and WLAN.For further information on Swisscom’s mobile network, see “ *— Networks and Technology — MobileTelecommunications Network*”.In December 1999, the Federal Council adopted an ordinance, known as the NIS Ordinance, whichestablishes emission standards to protect the population of Switzerland from non-ionizing radiationemitted by various sources, including mobile antennae and base stations.In July 2002, the Swiss Agency for the Environment, Forests and Landscape (“BUWAL”) issued finalguidelines for enforcement authorities on the appropriate methods by which to measureelectromagnetic emissions from base stations and masts in the GSM network, but which did notaddress emission standards for UMTS networks. Final guidelines relating to emission standards forUMTS networks were adopted in 2005. In order to comply with the applicable emission standards andto maintain its current level of service, Swisscom could be required to, install additionalantennae. However, Swisscom does not expect the associated costs in 2006 to be materiallydifferent from those incurred in previous years. See “*— Regulation — Mobile Telecommunications*”.**Base Fees**Swisscom’s base fees are generated from monthly subscription fees paid by Swisscom’s postpaidmobile subscribers and include revenue generated from the sale of SIM cards. For more informationon Swisscom’s mobile subscribers, monthly base fees and SIM card fees, please see “*— ConnectivityVoice*”, below.
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**Connectivity Voice**As the leading provider of mobile telephony services in Switzerland, Swisscom offers its customersmobile telephony service in Switzerland as well as abroad. Swisscom has roaming agreements with425 mobile network operators worldwide covering 179 countries and earns revenue from thoseoperators when their subscribers make mobile phone calls in Switzerland.***Traffic.***The table below sets forth, for the periods indicated, the volume of traffic relating toSwisscom’s mobile telephony business.             In millions of minutes **Year Ended December 31,**  **2005**  **2004**  **2003**    Connectivity Voice (1)  3,688   3,404   3,335  (1) Includes minutes from all outgoing calls made by Mobile subscribers as well as serviceaccounts and traffic generated by service accounts.For information on average monthly minutes of use and average monthly revenue per mobilecustomer, see “*Item 5: Operating and Financial Review and Prospects — Results of Operations bySegment — Mobile*”.***Principal Products.***Swisscom currently offers a wide variety of mobile products, including pre- andpost-paid products and products where calls are charged on either a per minute or per call basis.All of Swisscom’s mobile products except its data-only and prepaid, low-cost products provideSwisscom customers with the full range of mobile services, allowing them to make and receive callswithin Switzerland or internationally, using the same telephone number over GSM and/or UMTS systemsin countries where Swisscom has roaming agreements. In June 2005, Swisscom launched a new range ofproducts designated as “liberty” products. Subscribers to these products are charged on a per callbasis, rather than on a per-minute basis, when calling numbers in the national fixed-line networkor when calling other subscribers within Swisscom’s mobile network. All other calls are charged perminute. Swisscom also introduced its M-Budget mobile product in September 2005, which addresses theno frills, low cost segment. The offer only includes voice, roaming and SMS services, with allother services (e.g. MMS, GPRS, etc.) disabled.***Subscribers.***The following table shows the total number of subscribers to Swisscom’s mobileservices as of the dates indicated.             In thousands(1) **As of December 31,**  **2005**  **2004**  **2003**    Postpaid  2,640   2,518   2,387 *Of which subscribers to liberty products*  *570*   *—*   *—* Prepaid(2)   1,641   1,390   1,409 *Of which subscribers to liberty products*  *65*   *—*   *—*    **Total Subscribers**  **4,281**   **3,908**   **3,796**     (1) Includes service accounts. (2) Swisscom does not include accounts of any prepaid customer with inactivity of more thantwelve months in its subscriber figures. A customer is deemed inactive after a period oftwelve months without making a call or sending a SMS message. As of December 31, 2004,approximately 124,000 prepaid customers, which had not registered with Swisscom on a timelybasis as required by law since July 2004, were deactivated.Since 1995, the number of mobile customers in the Swiss marketplace has grown annually, withoverall market penetration reaching almost 92% at the end of 2005, based on data published bymobile network operators. Swisscom expects growth in the mobile market to continue, although at aslower rate in light of high market penetration. With growing market penetration, Swisscomincreasingly focuses on customer retention.In order to promote customer retention, Swisscom has implemented customer loyalty and win-backprograms, including incentives for twelve and twenty-four month contract commitments, handsetsubsidies and handset renewal possibilities, which resulted in a further decline of customer churn.While Swisscom’s mobile businessrelies primarily on Swisscom shops for sales and marketing, it is also expanding its use ofindirect and alternative sales channels.
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***Tariffs.***The following table provides an overview of the range of tariffs applicable as ofDecember 31, 2005, in Swisscom’s principal product categories. All tariffs include VAT.                       **SIM**  **Monthly**          **Night and** (CHF) **Card Fee**  **Base Fees**  **Peak**(1)  **Off-Peak**(2)  **Weekend**(3) **Charge per Min**                    Postpaid products  40   15-75   0.18-0.70   0.15-0.70   0.15-0.70 Prepaid products  40   —(4)  0.37-0.99   0.37-0.90   0.37-0.80                      **Charge per Call (liberty products)**                Postpaid products  40   12/25   0.50 / 0.70   0.50 / 0.70   0.50 / 0.70 Prepaid products  40   —(4)  0.80   0.80   0.80  (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) Customers who use prepaid mobile products are charged an initial fee for the SIM card only;there is no fee for recharging the card.Swisscom offers a variety of tariff and service packages targeting different customersegments. Swisscom has introduced lower-cost products for residential and business customers,which have effectively resulted in an overall tariff reduction. Because Swisscom’s mobilecustomers can switch from one tariff to another, which Swisscom believes helps to prevent customerchurn, the introduction of these new tariffs has led to a decline in the number of subscribers toSwisscom’s higher priced services. Swisscom expects that pressure on tariffs in both theresidential and business segments will remain fierce in the future. Additional price reductionsoccurred as a result of Swisscom Mobile’s reduction of its termination rate from CHF 0.335 to CHF0.20 in June 2005. Regulation of mobile access could still result in Swisscom being required tosell its competitors mobile telephony minutes on a cost-oriented basis for resale, which would putadditional pressure on turnover.For calls placed and received outside Switzerland, customers are generally billed using a fixedtariff model under which tariffs vary depending on the user’s geographic “zone”. This modelprovides the customer high cost transparency and good cost control. Certain customers also have theoption of being billed using a surcharge model under which a roaming surcharge is added to thetariffs imposed by the local mobile network operator.**Connectivity Data and Value-Added Services**Connectivity data and value-added services comprise mainly short messaging services (SMS), datatraffic and services.Short messaging services (SMS), one of the most popular mobile data services, allows messages withup to 160 letters to be sent via a digital mobile phone. In 2002, Swisscom launched a multimediamessaging service (MMS), which is a further development of its SMS service.
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The table below sets forth, for the periods indicated, the numbers of SMS messages sent.               **Year Ended December 31,**  **2005**  **2004**  **2003**    Number of SMS messages (in millions)(1)  1,991   1,986   1,847  (1) Includes service accounts and traffic generated by service accounts. Does not includewholesale SMS messages.The mobile data service Vodafone live! allows customers to take and send picture messages,download games and polyphonic ringtones and to access information and entertainment services, suchas live television, which now includes 22 television channels. These mobile entertainment andmobile data services are continually upgraded either globally through Vodafone or locally throughSwisscom. E-mail synchronization services have been the primary growth driver for data services,and are expected to continue growing.In addition to Vodafone live!, Swisscom Mobile opened standardized interfaces to enable platformswhich are used by third parties to offer mobile data and other services to Swisscom mobilesubscribers. Examples of such services include premium priced SMS and MMS, which allow point ofsale payment through mobile handsets.**Other*****Customer Equipment Sales.***Revenue from sales of mobile handsets through Swisscom shops isaccounted for in Swisscom’s Fixnet segment. All other revenue from the sale of mobile handsets isallocated to Mobile.***SICAP.***SICAP, a wholly owned subsidiary of Swisscom Mobile AG provides prepaid billing services tomobile network operators worldwide, including so-called over-the-air solutions, through whichprepaid GSM SIM-card settings can be modified.**Competition**In its mobile business, Swisscom faces competition primarily from the two other original mobilelicensees in Switzerland, Orange and TDC (Sunrise). In December 2003, ComCom awarded GSM licensesto two other competitors, Tele2 and In&Phone. Tele2 launched a city network in Zurich in June 2005and plans to expand its services to other cities either by building out its own network or byentering into national roaming agreements with the other mobile network operators. In&Phone haslaunched campus networks throughout Switzerland and is expected to enter into a national roamingagreement with TDC (Sunrise) in early 2006.Swisscom expects competition, especially for business customers, to remain strong in 2006 due toincreased tariff pressure and competing enhanced data solutions. Competition in the residentialsegment is expected to be driven by handset subsidies as well as by new competitive price plans.In the future, Swisscom expects to face competition in the provision of GPRS, EDGE and UMTSservices from TDC (Sunrise) and Orange, both of which hold Swiss UMTS licenses.As in the case of fixed-line voice telephony, competition in the mobile market has been facilitatedby provisions of the Telecommunication Act and related ordinances requiring that Swisscom offereasy access and number portability. Although equal access is also mandated under the applicableregulations, ComCom has provisionally suspended the implementation of equal access in the mobilenetwork until technical developments and international standards allow its implementation.
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**Solutions****Overview**Effective January 1, 2005, Enterprise Solutions merged with Swisscom Systems, formerly accountedfor under the segment “Other”, to form a new business segment named Swisscom Solutions.Solutions is the leading provider of telecommunication services to business customers inSwitzerland with complex needs. In 2005, Solutions generated total revenue of CHF 1.3 billion. Withexternal revenues of CHF 1.1 billion in 2005, Solutions accounted for 11 % of Swisscom’sconsolidated net revenue in 2005. **•** **National and International Traffic**. Solutions offers national and internationalfixed-line voice telephony services to business customers. In 2005, Solutions carriedan aggregate of 1.9 billion minutes of national telephony traffic and 0.4 billionminutes of outgoing international traffic generated by business customers.  **•** **Leased Lines National**. Solutions offers national leased lines services to businesscustomers.  **•** **Intranet Services**. Solutions offers Intranet services, consisting primarily ofmanaged VPN (Virtual Private Networks) services to business customers.  **•** **Other Service Business**. Solutions offers private network services, businessinternet access and business numbers, which business customers use to provide theircustomers with access to information services. In addition, Solutions offersinternational VPN and leased line services to its customers through partnerships.  **•** **Solution Business.**Solutions offers business customers custom-made modular solutionsto plan, build and run customers’ business communication needs.**System Integration**. Solutions provides a comprehensive portfolio of productsand services related to data and telecommunications infrastructure, such ascustomer interaction management, consulting services, security solutions andlive event support.**Customer Services**. Solutions offers a full range of operations and maintenanceservices in the field of private branch exchanges (PBXs) and in-house local areanetworks (LANs).**Outsourcing**. Solutions’ outsourcing services range from telecommunicationoutsourcing up to complete ICT outsourcing. **•** **Other.**Solutions offers rental agreements or various other financing models throughthird parties to its business customers as financing alternatives for PBXs.
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The following table sets forth external revenue generated by Solutions for the periods indicated.             CHF in millions **Year Ended**   **December 31,**  **2005**  **2004**  **2003**    National and International Traffic  239   297   344 Leased Lines National  147   184   216 Intranet Services  152   173   179 Other Service Business  247   272   299 Solution Business  283   277   291 Other  55   76   96    **Total Solutions external revenue**  **1,123**   **1,279**   **1,426**    Solutions has increased its focus on large business customers with complex, solution-orientedtelecommunication needs. Depending on each customer’s size and the complexity of its communicationneeds, Solutions markets its services through a key-account management team and through direct andindirect sales channels.Due to general overcapacity in the telecommunications market, Solutions has experienced a generaldecrease in revenues in most of its customer segments. Solutions continues to focus its resourceson meeting customers’ needs for complex telecommunications services to ensure its long-term growthand, where necessary, will complement its portfolio through new developments, partnerships oracquisitions.**National and International Traffic**Solutions provides national and international fixed-line voice telephony services to businesscustomers. For a description of these voice telephony services, which Swisscom also provides toresidential customers, and of developments impacting the provision of fixed-line telephonyservices, see “*— Fixnet — Access*” and “ *— Fixnet — Retail Traffic*”.The following table sets forth, for the periods indicated, selected information relating toSolutions’ national and international fixed voice telephony traffic generated by businesscustomers.             Traffic (in millions of minutes)(1): **Year Ended**   **December 31,**  **2005**  **2004**  **2003**    Local and long-distance traffic  1,672   1,779   1,972 Fixed-to-mobile traffic  258   278   303    **Total national traffic**  **1,930**   **2,057**   **2,275** International traffic(2)  356   361   373    **Total traffic**  **2,286**   **2,418**   **2,648**     (1) Includes traffic on courtesy and service lines. (2) Based on minutes of outgoing international traffic as determined for retail customer billingpurposes. Does not include international wholesale traffic originating outside Switzerland.For information on tariffs for national and international traffic, see “*— Fixnet — RetailTraffic — Tariffs*”.In the future, Solutions expects traditional voice traffic to decline due to the introduction ofVoice over Internet Protocol (VoIP) services by Solutions and its competitors. VoIP makes itpossible to place phone calls through data connections using Internet Protocol (IP), making aseparate telephone line unnecessary. To use VoIP, consumers require a fairly fast data connection,which can be provided via a DSL line (which still requires access to a phone line), cable orthrough a broadband wireless connection. VoIP has the potential to offer greater functionalitycompared to traditional phone lines at minimal cost. When VoIP was first introduced, consumers hadto use a computer to place calls, and their counterparties required a computer to receive them.Today, it is possible to make calls via VoIP using phones that look and function like conventionalphones. As the quality and convenience of using these IP-based services has improved in recentyears, they have become a viablealternative to traditional fixed-line services for many users, a trend Swisscom expects to continueand accelerate in the future.
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**Leased Lines National**Solutions is the leading provider of national leased lines in Switzerland. Leased lines are fixedpoint-to-point connections between separate locations, which may be used by the customer for voiceand high volume data or video transmission. Leased lines are used by business customers toassemble their own private networks and by resellers to establish networks in order to offerinformation services. Swisscom also offers leased line services on a wholesale basis. See “*—Fixnet — Other*”.Solutions also offers managed leased line services to its national leased line customers. Throughactive fault management and automatic rerouting in case of network failure, Solutions’ managedleased line services guarantee up to 99.97% end-to-end availability.The number of national leased lines has declined in recent years, as customers increasingly migrateto high capacity services based on Internet Protocol (IP) due to customer applications requiringhigher flexibility.Solutions’ leased line subscribers pay an initial installation charge based on the type andcapacity of the line and, thereafter, pay a monthly fee based on the type, length and capacity ofthe leased line. In recent years, leased line tariffs have declined due to regulatory pressures andincreased competition from other infrastructure-based operators such as electrical power and cablenetwork operators with their own telecommunication infrastructure and services, whose highbandwidth offerings have become more widely available and have declined in price.**Intranet Services**Solutions’ Intranet services consist primarily of managed VPN services, based on multiprotocollabel switching (MPLS) technology. As of December 31, 2005, Solutions managed approximately 23,000routers, mainly on behalf of banking and insurance clients, as well as on behalf of largeretailers. Other services within the Intranet services portfolio include remote access services,which enable access to a company’s Intranet through all commercially available access technologiesand encryption services for customers with strict security requirements. In 2006, Solutions willlaunch a VoIP service, whereby customers will have access to different services, such as voice,data and the Internet over a single corporate network.**Other Service Business**Solutions offers customers private networks for data transmission based on a variety oftechnological platforms, including frame relay and asynchronous transfer mode (ATM) services. Inthe past couple of years, the increased substitution among large business customers of IP servicesfor frame relay and ATM services has resulted in decreased sales of such services. In 2005,however, Solutions launched an Ethernet service to provide its customers wide-area LAN serviceswith high bandwidths.Solutions’ business Internet service portfolio includes a full range of Internet access servicesfor customers with high bandwidth requirements (up to 155 Mbits/s). Solutions also offers servicesand applications for business customers and national Internet service providers (ISPs). Theseservices include managed firewall services and spam filtering IP transit services over a dedicatedbackbone.Solutions also offers customers “business numbers” — toll-free, cost-shared and premium ratenumbers for both national and international use, which business customers use to provide their owncustomers with access to information services. Solutions also offers premium rate services that,among other things, allow for flat rate charging on a per call or product basis. These numbers aremainly used by business customers as a retail sales channels and/or as an additional form ofpayment. Demand for business numbers has declined over the past few years, primarily as a resultof companies using the Internet and informational company websites to distribute informationinstead of toll-free or other numbers.Solutions offers international leased lines to its business customers with cross-borderrequirements. Such services were previously offered through Swisscom’s EOSNET Network. Followingthe transfer of Swisscom Fixnet’s international wholesale business and international network(including the EOSNET Network) to a joint venture formed with Belgacom (BICS), Solutions now offersthese services through partnerships. For moreinformation on the sale of leased lines activities, including the EOSNET Network, see “*— Networkand technology-Fixed Line Networks*” and “*— Divestments/Discontinued Operations*”.
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Effective September 12, 2005, Swisscom Solutions AG entered into a commercial partnership agreementwith UK-based Vanco plc. for a minimum term of ten years, with a view to offering its multinationaland international customers services outside its home markets of Switzerland and Liechtenstein.In November 2004, Swisscom agreed to sell its interest in Infonet Services Corporation (“Infonet”)to British Telecommunications plc (“BT”). Infonet provides global voice, data and networkingsolutions to companies seeking to outsource their worldwide communications needs. In February 2005,Swisscom received USD 170 million (approximately CHF 201 million) for its 17.7% stake. After thesale of its stake in Infonet, Swisscom remains the exclusive distributor of Infonet services inSwitzerland through Infonet Switzerland AG, in which Swisscom has a 90% interest, and which isaccounted for in the Solutions segment. As a result of the sale, Swisscom may lose certainmultinational business customers in Switzerland and related revenue.**Solution Business**The Solution Business provides customers with customized modular solutions, designing, installingand operating customers’ business communication infrastructure. Together with other Swisscomcompanies or external partners, Solutions is able to offer complete communication solutions.***System Integration***— Solutions provides a comprehensive portfolio of professional services,including consulting services, customer interaction management, security solutions and liveevent support. In addition, Solutions offers product integration services, including the design,provisioning, implementation and support of PBXs, LANs and other data and telecommunicationinfrastructure.Effective March 2006, Swisscom Solutions AG took over 300 mid- to large-sized customers and 129employees from Siemens Schweiz AG, extending its know-how in planning, installing, operating andmaintaining company-internal voice and data networks. Furthermore, the parties agreed thatSiemens will provide Swisscom Solutions with support, including technical support for itstechnicians and engineers, and current and future PBX-related products. Solutions has alsoagreed to a commercial collaboration with Siemens Schweiz AG.***Customer Service***— Solutions offers a full range of operations and maintenance services relatingto private branch exchanges (PBXs) and in-house LANs. Solutions operates and maintains thecustomer’s PBX or LAN remotely and/or via Solutions’ nationwide technical force, or viapartners. For inhouse LANs, Solutions introduced a variety of services in 2005 designed toprevent system failures and to ensure that systems are quickly repaired and made operational ifa failure does occur.***Outsourcing***— Solutions’ outsourcing services range from telecommunication outsourcing (*i.e.,*companies outsourcing their voice traffic needs) up to complete ICT outsourcing (*i.e.,*comprehensive planning, building and operations designed to meet customers’ ICT needs). In 2005,Solutions continued to expand its outsourcing activities by winning further major national andinternational contracts. Solutions believes that its outsourcing business will grow in thefuture as technologies converge and demand for combined IT and telecommunications solutionsincreases.
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**Other**Through third parties, Solutions offers its business customers rental agreements or other financingmodels for PBXs.**Competition***Cablecom*— Cablecom, the largest cable network operator in Switzerland, operates its owninfrastructure and has invested heavily to upgrade it. This network allows Cablecom to compete withSwisscom in the following areas: traffic, leased lines, intranet services, and PBX relatedservices. Furthermore, Cablecom has entered into a partnership with NextiraOne and redIT, therebyaugmenting its product and service portfolio. Cablecom offers interregional connections throughoutSwitzerland.*TDC (Sunrise) —*TDC (Sunrise) is one of Solution’s most significant competitors in traffic, leasedlines, intranet services, PBX related services and the operation and maintenance of in-house LANs.TDC (Sunrise) is positioning itself as a full-service provider and has strengthened its marketposition by purchasing Ascom’s PBX business. TDC (Sunrise) offers interregional connectionsthroughout Switzerland.*NextiraOne*— NextiraOne competes with Swisscom in the following areas: PBX related services,telecommunication infrastructure services, and the operation and maintenance of in-house LANs.NextiraOne’s partnership with Cablecom has strengthened its market presence.*Getronics —*Getronics is one of Solutions’ primary competitors in telecommunication infrastructureservices and the operation and maintenance of in-house LANs.*Utilities and Municipalities —*Electrical power providers and local municipalities compete withSolution’s leased line business by offering telecommunication services to customers via their ownhigh-capacity fiber networks. Competition in the national leased line market may also increase as aresult of the recent adoption of amendments to the Telecommunications Act. See *“— Regulation —Unbundling of the Local Loop and Other Access Regulation*”.*International telecommunication companies —*Solutions faces intense competition from Colt, Equant,MCI/Verizon, British Telecom (BT) and Deutsche Telecom in its international business. This haslead to stiff price competition and a decline in market share. Overcapacity in internationalnetworks continues to place market prices under high pressure. With regard to outsourcingservices, BT and T-Systems (which has a strong position in the local market due to a portfolio ofcontracts with mid- and large-sized entities) are Solutions’ main competitors. BT competes on thebasis of its wide service offering and existing consulting know-how as well as its world-wideoutsourcing experience within the telecommunications industry.*Consultants —*IBM and Accenture compete with Swisscom in the operation and maintenance of in-houseLANs, consulting services and security solutions. Other consulting competitors includeBearingPoint, Capgemini and EDS. IBM is also a strong competitor with regard to the newinternational telecommunications offerings by Swisscom Solutions.*Local and niche players —*Many local IT providers with long-established customer relationships playan important role in the market for telecommunication infrastructure services. With regards toconsulting services and security solutions, specialized niche players are also significantcompetitors.
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**Other**Swisscom is also active in a variety of other businesses, including the provision of IT,broadcasting and billing services as well as the provision of high-speed Internet access tobusiness travelers across Europe.The following table sets forth external revenue for the periods indicated.             CHF in millions **Year Ended December 31,**  **2005**  **2004**  **2003**    Swisscom IT Services  249   207   214 Swisscom Broadcast  150   148   149 Antenna Hungária  26   —   — Accarda Group  115   112   52 Swisscom Eurospot  31   9   1    **Total Other**  **571**   **476**   **416**    **Swisscom IT Services**Swisscom IT Services offers end-to-end business solutions, primarily in the financial services andtelecommunications industries. In addition to business solutions, Swisscom IT Services focuses onsystems integration, IT outsourcing and infrastructure services, including desktop services anddatacenter services. Swisscom IT Services currently manages 60,000 desktop computers nationwide.Approximately two-thirds of these became part of Swisscom IT Services’ service portfolio over thelast three years through outsourcing deals.Swisscom IT Services’ customers are largely the Swisscom group companies and several small tolarge-sized financial institutions. Swisscom IT Services provides IT outsourcing services to majorcompanies in the telematics, media, airline and health care sectors, and to parts of thegovernment. One of Swisscom IT Services’ main objectives for 2006 is to increase its profile in thetelecommunications, financial and health care industries.Swisscom IT Services increased the number of full time employees from 2,100 as of December 31,2004, to 2,285 as of December 31, 2005.On January 4, 2006, Swisscom IT Services acquired Comit, an IT group specializing in the financialservices industry, for CHF 66 million, subject to certain purchase price adjustments. Swisscom ITServices’ financial services unit has been incorporated into the new company. The acquisitionstrengthens Swisscom IT Services’ know-how in the banking sector and will allow it to offer ITservices along the entire value chain.***Competition.***In the professional IT services market, Swisscom IT Services competes with IBM,Hewlett-Packard, T-Systems, EDS, Accenture, CSC and a number of local players.
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**Swisscom Broadcast**Swisscom Broadcast operates a national network for the transmission and broadcast of analog anddigital signals for television and radio broadcasting. Such services are provided primarily to theSwiss Broadcasting Corporation (*Schweizerische Radio- und Fernsehgesellschaft*) (“SRG”), the mainprovider of public television and radio broadcasting in Switzerland.Swisscom Broadcast provides its services to SRG on freely negotiated commercial terms under along-term contract with SRG that was terminated effective December 31, 2006. In March 2005,Swisscom Broadcast agreed on a new long-term contract with SRG that will become effective at thebeginning of 2007 and run at least until the end of 2010. In 2005, Swisscom Broadcast was paidapproximately CHF 110 million to broadcast SRG programs.Swisscom Broadcast acquired Tele Rätia AG in December 2004, a company providing terrestrial retailTV services. In mid-2005, Tele Rätia launched a new digital video broadcasting terrestrial(“DVB-T”) program offering, which had been developed jointly with Swisscom Broadcast. The roll-outof this project is expected to be finished by mid-2006.Swisscom Broadcast has started a pilot project with digital video broadcasting handheld (“DVB-H”)technology, offering mobile users TV reception on handheld devices.Swisscom Broadcast also provides services and solutions for the roll-out of the Tetrapoltechnology, which has been chosen as the standard infrastructure for security networks withinSwitzerland.On December 18, 2002, the Federal Council presented the Swiss Parliament a draft of a revised radioand television law. After extensive consultations, the amended law was adopted by the SwissParliament on March 24, 2006. According to the new law, certain obligations will be imposed onproviders of multiplexing devices used to broadcast signals, requiring them to provide otherbroadcasters with access to these devices so that they can deliver their own broadcasting signalsto the public. In addition, operators of transmission and broadcasting networks will have to offertheir services on a non-discriminatory basis to all broadcasting companies. The new law is expectedto enter into effect during the first quarter of 2007. Accordingly, Swisscom Broadcast does notexpect the new law to have any economic effect before this date.**Antenna Hungária**On October 25, 2005, Swisscom acquired a 75% stake plus 1 share in the Hungarian broadcastingnetwork operator Antenna Hungária for CHF 293 million. Following a mandatory public tender offer inwhich Swisscom purchased an additional 22.99% and acquired the remaining shares in a squeeze out.Antenna Hungária was delisted from the Budapest Stock Exchange on February 16, 2006. For furtherinformation, see Note 5 of the consolidated financial statements.Antenna Hungária also provides both analog and digital satellite program transmission. AntennaHungária’s business communication services include managed leased-line, LAN, voice-dataintegration, Internet, VPN, VoIP and VSAT services through the country-wide microwave network(2,638 end points for managed lease lines; 2,403 end points for VSAT). Antenna Hungária alsoprovides field maintenance services to other telecom network operators. Swisscom intends tocontribute its knowledge of digital broadcasting to promote the growth of digital televisionservice in Hungary.The Hungarian Fair Competition Bureau (FCB) commenced competition proceedings against AntennaHungária in February 2005. The FCB is investigating whether the company abused its economic powerin the broadcasting and primary program distribution market for the period between January 1, 2003and June 30, 2005. The FCB’s suspicion of abuse of economic power is based on allegedly unfairbroadcasting and program distribution charges. At present, it cannot be established whether or notAntenna Hungária’s broadcasting and program distribution charges are excessive. In 2005, AntennaHungária established new contracts with the broadcasters at significant discounts over the nextseven years.
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**Accarda Group**The Accarda Group comprises the business activities of Billag AG and the former Billag CardServices AG. Swisscom founded Accarda AG as a fully-owned subsidiary and, effective July 1, 2005,all activities that had previously been provided by Billag Card Services were transferred toAccarda AG and Billag AG is now controlled by Accarda AG. Accarda AG provides customer loyalty cardprocessing and billing services in the private sector. Some of the billing services include thefinancing of purchases billed to the customer on a delayed basis when using a loyalty card. AccardaAG is seeking to expand its business and is providing from 2006 onwards debt collection services toSwisscom Group companies. In addition, Accarda acquired Medipa AG, a leading company inSwitzerland’s medical billing industry, effective July 1, 2005.Billag AG provides billing services to the public sector as part of an agreement to collect radioand television licensing fees for the Swiss Broadcasting Corporation (SRG). The current agreementwill expire at the end of 2007, but after a recent bidding process, the Federal Department ofEnvironment, Transport, Energy and Communications (UVEK) announced in April 2006 that it wouldextend the agreement with Billag AG regarding the collection of radio and TV license fees toinclude the period from 2008 to 2014.**Swisscom Eurospot**Swisscom Eurospot is a leading pan-european provider of high-speed Internet access and services toguests of the hospitality industry across Europe (excluding Switzerland, where the market is servedby Swisscom Mobile). Swisscom Eurospot operates its network in premium hotels and is focused onoffering tailored services to business travelers, enabling them to remain in contact with theircompanies or business partners in an efficient and flexible way. The company’s infrastructure spansmore than 2,200 active properties in 14 countries providing approximately 190,000 hotel rooms withcommunication services.During 2005, Swisscom Eurospot strengthened its market presence in Western Europe and developed itspresence in Eastern European markets. Furthermore, in June 2005 the Hilton Group and SwisscomEurospot extended their partnership, which reinforced Swisscom Eurospot’s leadership in thehigh-end European hospitality industry.In order to strengthen its position in the European conference services market, Swisscom Eurospotwill acquire the US-based Core Communications Corporation, a company specialized in datacommunications and Internet solutions for the hospitality industry. The deal is expected to closein May 2006. Core Communications supports conference events in conference centers and businesshotels throughout North America and is recognized as an innovative leader in technology servicesfor the meetings and events industry. The acquisition is subject to the approval of the competitionauthorities of Switzerland.
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**Corporate**The Corporate segment encompasses Swisscom’s headquarter functions, group-company shared services,the real-estate company Swisscom Immobilien AG (“SIMAG”) and its social plan programs(PersPec and Worklink). For a description of PersPec and Worklink, see “*Item 6: Directors,Senior Management and Employees — Employees — Workforce Reduction and Productivity Improvement*”.**SIMAG**SIMAG manages Swisscom’s portfolio of real estate properties, some of which it leases to othergroup companies and, to a limited extent, to third parties. In addition, it provides facilitymanagement services, such as energy purchasing, and security and cleaning, for third parties aswell as for internal purposes. Furthermore, SIMAG expanded its service portfolio with fleet andbusiness travel management for the Swisscom Group, which it took over from headquarters in 2005.For more information on Swisscom’s real estate, see “— *Property, Plant and Equipment*”.**Other Participations****Cinetrade**On April 8, 2005 Swisscom acquired a 49 % stake in CT Cinetrade AG, a Swiss media company whoseactivities include a movie theater chain, a pay-TV channel, video and DVD film rights and which hasextensive experience managing media content and related rights. Cinetrade’s current license(“*Veranstalterkonzession*”) for the pay TV channel will expire on April 30, 2006, but is expected tobe renewed by the relevant authorities.Although the Competition Commission has approved Swisscom’s participation in CT Cinetrade AG from amarket point of view, certain issues regarding the Swiss constitutional law of media independenceand the Swiss Confederation’s majority interest in Swisscom remain to be decided by regulatoryauthorities.In 2005, Swisscom generated revenues of CHF 1.5 million from transactions with Cinetrade and paidan amount of CHF 1.3 million for services purchased from Cinetrade.**Belgacom International Carrier Services**Effective July 1, 2005, Swisscom and Belgacom, the leading telecommunications company in Belgium,formed a new joint venture company, named Belgacom International Carrier Services (BICS), combiningtheir international wholesale activities. As part of the transaction (the Belgacom transaction),Swisscom received a 28% interest in the joint venture in exchange for its international wholesalebusiness and international network, valued at CHF 36 million.In 2005, after founding the joint venture on July 1, 2005, Swisscom generated revenue with BICS inthe amount of CHF 83 million and paid CHF 60 million for services purchased from BICS. Revenues andexpenses derived from transactions with BICS relate primarily to incoming and outgoinginternational voice traffic.
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**Divestments/Discontinued Operations****debitel**As of December 31, 2003, Swisscom owned 93% of debitel AG, which it had acquired in a series oftransactions in 1999 and 2001. debitel is a network-independent mobile communications serviceprovider in Europe.On June 8, 2004, Swisscom sold its 95% stake in debitel, including 2% it had acquired fromElectronicPartner in connection with this transaction, in a leveraged buyout by funds advised bythe private equity firm Permira (Permira Funds), for a purchase price of EUR 640 million (equityvalue). The purchase price paid in cash amounted to EUR 430 million. The remainder was financed bySwisscom through the conversion of existing intercompany loans in the amount of EUR 210 millioninto two vendor loan notes of EUR 105 million each, assumed by debitel Konzernfinanzierungs GmbH,an indirect 100% owned subsidiary of the entity acquired by Permira Funds in the transaction.Consideration from the sale, including the vendor loan notes, was recorded at fair value uponcompletion of the transaction.A portion of the purchase price was also financed on a senior secured basis by a consortium ofbanks, and repayment of Swisscom’s vendor loan notes was subordinated to the full repayment of thesenior facilities provided by these banks. The vendor loan notes were repaid in full in the firstsix months of 2005 by means of a payment of CHF 351 million, representing the nominal value of theloan and the contractually agreed interest. The difference of CHF 59 million between the estimatedrecoverable value of the loan and the payment received was recorded as income from discontinuedoperations.In connection with the transaction, Swisscom agreed to indemnify the purchaser for any breach ofthe representations and warranties made by it in the purchase agreement and for certainliabilities, including tax liabilities, of debitel. A tax audit is currently being conducted inGermany which may lead to higher taxes payable. Based on current estimates, the maximum amount thatcould become due relating to the tax indemnity was approximately EUR 70 million as of December 31,2005. A provision of CHF 50 million was recorded for this potential indemnification at the end of2005. As a result of the sale, debitel is treated in the consolidated financial statements as adiscontinued operation. Prior years have been restated to facilitate comparison. For furtherinformation, see Note 37 to the consolidated financial statements.
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**Networks and Technology****Overview**Swisscom owns and operates a number of fixed and mobile telecommunications networks to support itsdiverse range of products and services. Swisscom’s fixed-line network and almost all of its datanetworks are managed by Fixnet. Swisscom’s mobile networks are the direct responsibility of Mobile.For more information on Swisscom’s technical equipment relating to its networks, see “ *— Property,Plant and Equipment*”.Reduction of network complexity and cost optimization have been central aspects of Swisscom’snetwork strategy in the past. This strategy was accompanied by a rigorous investment policyfocusing Swisscom’s resources on developing and enhancing strategic growth platforms for broadbandand IP technologies.In order to implement Swisscom’s triple play strategy, technical preparation and planningactivities were initiated in 2004. Swisscom began to introduce the necessary functionality to itsfixed network in 2005 and significantly upgraded capacity. Swisscom’s capital expenditures relatedto its fixed network totaled CHF 353 million in 2005. The triple play program will continue torepresent the focal point of capital expenditures in the years to come.With respect to its mobile network, Swisscom continues to make significant investments ininfrastructure in order to maintain high service quality, enable new services, increase broadbandcoverage and increase capacity. In 2005, Swisscom’s capital expenditures related to its mobilenetwork totaled CHF 238 million.**Fixed-Line Networks**Swisscom operates a highly sophisticated PSTN/ISDN network, principally for the provision of publicvoice telephony, and several data networks used for the provision of packet switched, frame relayand asynchronous transfer mode (ATM) data services and, to an increasing extent, IP and Ethernetcommunication. These networks are supported by Swisscom’s access networks and its extensivenational transmission infrastructure. Effective July, 2005, Swisscom transferred its internationalnetwork assets to a joint venture with Belgacom, the leading telecommunications company in Belgium.In keeping with the general trend toward IP-based networks and services, Swisscom continues toupgrade and optimize its broadband and IP capabilities. With respect to voice services, customersare beginning to shift towards Voice over IP, though the timing of widespread adoption of thetechnology is less clear. Swisscom is monitoring industry trends very closely and continues toco-operate closely with major equipment suppliers in Europe and the U.S., in particular withrespect to its triple play strategy.***Access Networks*****.**Swisscom’s access network is divided into 923 individual access networks.The local loops which connect customers to Swisscom’s local exchanges use a variety oftechnologies, including radio and copper and fiber optic cables. The triple play program will leadto a significant increase of fiber optic cable in the access network.In 2000, Swisscom implemented a broadband connectivity service which connects end-customers toSwisscom’s IP backbone via ADSL technology in the local loop and allows Internet service providersto 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. The serviceis now available to more than 98% of the population of Switzerland.Swisscom’s current service offering provides speeds of up to 6 Mbit/s (downstream) and Swisscomcurrently has the ability to offer ADSL bandwidth of up to 4 Mbit/s (downstream) to approximately80% of Swiss households. However, in the mid- to long-term this bandwidth capacity will not besufficient for rich multimedia services, in particular for simultaneous transmission of several TVchannels. Swisscom therefore started the rollout of the next generation of DSL technology known asvery high bit-rate digital subscriber line (VDSL) that will allow downstream speeds well above 10Mbit/s. VDSL requires closer proximity of active network elements to customer locations and hencemore fiber in the access network. VDSL-based services will be launched in 2006, with VDSL coverageexpected to reach approximately 45% of Swiss households by mid-2006. In addition, Swisscom launchedits symmetric digital subscriber line (SDSL) service in August 2005. SDSL technology permits datato be sent (upstream) at the same rate that it is received (downstream), thereby
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eliminating one of the major drawbacks to ADSL technology. SDSL holds the potential to greatlyincrease business communication efficiency.***Transmission Infrastructure***. Swisscom’s domestic interexchange transmission system is 100% digitaland, as of December 31, 2005, consisted of approximately 32,500 kilometers of fiber optic cablerepresenting 930,000 kilometers of individual optical fibers. Capable of operating at speeds of upto 10 Gbit/s, fiber optic cable vastly exceeds the capacity of traditional copper cable or radiolinks. All of Swisscom’s exchanges have been connected with fiber optics.Swisscom’s core network contains a synchronous digital hierarchy (SDH) transmission system and itsregional network has SDH self-healing rings in selected areas. SDH is a transmission standard fornetworks that use fiber optics, which allows for a simpler and more easily managed network withenhanced reliability. Swisscom also continues to use and maintain its plesiochronous digitalhierarchy (PDH) infrastructure, which, in accordance with its investment policy, is not beingproactively replaced but phased out whenever economically viable.In addition to its “classic” SDH networks, in 2005 Swisscom continued to build out regionalEthernet rings that are used to deliver Ethernet service to business customers as well as toconnect the next generation of DSL technology, in particular VDSL. This constitutes an importantstep towards a simple but powerful “all-IP” network.Effective July 1, 2005, Swisscom and Belgacom, the leading telecommunications company in Belgium,formed a new joint venture company, named Belgacom International Carrier Services (BICS), combiningtheir international wholesale activities. As part of the transaction, Swisscom received a 28%interest in the joint venture in exchange for its international wholesale business andinternational network, valued at CHF 36 million. For more information on this transaction, see “–*Fixnet – Wholesale Traffic*”.***PSTN/ISDN Network***. Swisscom’s domestic network connects virtually all Swiss homes and the vastmajority of Swiss businesses, with traffic routed, as of December 31, 2005, through 95 localexchanges and 30 transit exchanges. These switches are connected by Swisscom’s transmissioninfrastructure.Swisscom’s ISDN service, which is fully integrated with the PSTN, is based on the ETSI (EuropeanTelecommunication Standards Institute) standard. Swisscom is capable of providing ISDN service to100% 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-foldredundancy on the switching layer, Swisscom is able to ensure a very high level of availability.On top of its network switches, Swisscom operates an intelligent network platform, which supports arange of value-added services by associating advanced computer technologies with traditionalswitching techniques.***Data and IP Networks***. Swisscom owns leased line networks used for managed and unmanaged servicesand a number of switched data networks used for packet switched (X.25), frame relay and ATM datatransmission services. These platforms still serve customers, although they are earmarked to bephased out in the years to come. By contrast, Swisscom accelerated the expansion of its IP platformthat is used for all of Swisscom’s broadband services and which will form the backbone of itstriple play strategy. In 2005, Swisscom’s IP capacity was significantly increased.The platforms used for the provision of leased lines and managed bandwidth services include adedicated multiplexing platform which allows transmission speeds ranging from below 64 kbit/s up to2 Mbit/s. Swisscom’s PDH platform supports unmanaged leased lines from 2 Mbit/s up to 34 Mbit/s,whereas its SDH platform supports managed and unmanaged services starting at 2 Mbit/s and rangingup to 155 Mbit/s and in some cases even up to 622 Mbit/s.
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**Mobile Telecommunications Network**Swisscom currently operates one national mobile telephony network, capable of providing service toover 99% of the populated areas in Switzerland. Swisscom’s current mobile network is a digitalmobile dual band network, based on the international GSM standard that operates at both 900 MHz and1800 MHz. Swisscom currently operates 13.6 MHz in the 900 MHz band and 12.4 MHz in the 1800 MHzband. In addition, Swisscom operates a third generation, high bandwidth UMTS mobile radio systemusing 20 MHz in the 2.1 GHz band. The state of the art network architecture allows Swisscom toextend its network in a very flexible, market driven and cost optimized way.Swisscom’s mobile network consists of base transceiver stations for GSM and UMTS, base stationcontrollers, mobile switching centers and radio network controllers. The base transceiver stationstransmit calls to and from mobile handsets. The base transceiver stations used for UMTS are calledNode B. The base station controllers relay calls between the base transceiver stations and mobileswitching centers, which in turn are connected to the PSTN and ISDN network. The base stationcontrollers for UMTS are referred to as radio network controllers.The following table shows data relating to Swisscom’s mobile network as of the dates indicated.               **As of December 31,**  **2005**  **2004**  **2003**    Base Transceiver Stations  5,551   5,481   5,247 Node B  1,609   1,308   695 Base Station Controllers  43   43   43 Mobile Switching Centers  31   32   31 Radio Network Controller  17   16   9 The design of the core network allows for the efficient integration of new technologies such asGPRS, EDGE and UMTS.***GPRS.***In 2001, Swisscom completed implementation of general packet radio service (GPRS) technologyin 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 asimilar way to data transmission on computer networks or when surfing on the Internet. With thistechnology, the user is always online and can send and receive data at any time. In February 2002,Swisscom launched its GPRS service with data capacities of up to 50 kbit/s.***EDGE.***In order to further improve its GPRS services, Swisscom implemented Enhanced Data Rates forGSM Evolution (EDGE) technology in all active GSM locations in early 2005. EDGE is a furtherdevelopment of the GPRS standard that allows considerably highertransmission speeds of between 150kbit/s and 200 kbit/s.***UMTS.***In 2000, Swisscom was awarded one of four universal mobile telecommunication system (UMTS)licenses auctioned in Switzerland, for which it paid CHF 50 million. The license took effect onJanuary 1, 2002 and will be valid for 15 years. Swisscom received one Frequency Division DuplexChannel and one Time Division Duplex Channel in the allocated Frequency Band of 2.1 GHz. UMTS is athird generation mobile radio system that creates additional mobile radio capacity and enablesbroadband media applications while also providing high speed Internet access. Swisscom launchedits UMTS service in 2004. As of December 2005, Swisscom had installed over 1,600 UMTS basetransceiver stations (Node B), ensuring population coverage of approximately 90%. Swisscom hasfulfilled all of the requirements set forth in the terms of the UMTS license.Swisscom is investing in its mobile network to upgrade its existing network, and to further extendthe coverage of UMTS. Swisscom expects to make significant additional investments over the nextseveral years in connection with the continued build-out of its UMTS network. To providedcustomers with enhanced services, Swisscom will enable high-speed downlink packet access (HSDPA) inselected dense urban areas in the course of 2006. HSDPA is a packet-based data service withtheoretical downlink data transmission of up to 8-10 Mbps over a 5MHz bandwidth.***PWLAN.***Swisscom offers a public wireless LAN (PWLAN) service in Switzerland through SwisscomMobile and across Europe through Swisscom Eurospot. For more information, see “ — *Mobile*” and “ —*Other —*
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*Swisscom Eurospot*”. PWLAN provides complementary wireless broadband Internet access throughgateways connected to a fixed-line network. Swisscom intends to further expand its PWLAN network in2006.**Broadcasting Networks**Swisscom Broadcast operates a terrestrial broadcasting network, including a wireless backbone. Thenetwork components are installed throughout Switzerland on over 500 towers, which are owned bySwisscom Broadcast. Eleven sites are located outside Switzerland in the border regions ofneighboring countries. Swisscom Broadcast’s broadcasting network serves as a feeder network and asa distribution network by gathering signals from their sources (e.g., radio and TV studios) andfeeding them to radio and television transmitters, which then distribute the programs to individualhouseholds. Swisscom Broadcast’s feeder network for gathering and transmitting signals uses bothmicrowave and fiber-optic ATM networks ensuring coverage on a redundant basis. The microwave partof the feeder network is also used to feed TV programs from neighboring countries to local cablenetwork operators. Swisscom Broadcast operates approximately 800 FM radio transmitters, over 1,000analog TV transmitters and approximately 20 digital audio broadcasting transmitters. In addition,Swisscom Broadcast operates approximately 60% of the transmitters used by private broadcasters inSwitzerland.Antenna Hungária operates a terrestrial broadcasting network with more than 200 towers throughoutHungary. Antenna Hungária operates approximately 118 FM radio transmitters and 44 analog TVtransmitters, and 212 relay stations. Antenna Hungária’s broadcasting network serves as a feedernetwork and as a distribution network by gathering signals from their sources (e.g., radio and TVstudios) and feeding them to radio and television transmitters. The feeder network for gatheringand transmitting signals uses both microwave and fiber-optic networks. The telecommunicationsnetwork consists of a ring-protected national microwave SDH backbone connecting transmitterstations nationwide, and a fiber optical network in Budapest. The access network is built bypoint-to-point and point-to-multipoint microwave links, VSAT and leased wireline connections fromother operators.Antenna Hungária’s nationwide TV networks provide 86% and 96% of the population with access tocommercial and public TV content, respectively. Antenna Hungária’s nationwide commercial and publicradio network covers between 60% and 100% of the population.
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**Property, Plant and Equipment****Real Estate Property**As of December 31, 2005, Swisscom has real estate property with an aggregate net book value of CHF839 million. Of this amount, CHF 451 million relates to property which Swisscom uses under theleaseback contracts described below and in Note 22 of the consolidated financial statements. Suchproperty was not subject to any mortgages or other security interests as of December 31, 2005.Substantially all of Swisscom’s properties are used for telecommunications installations, researchcenters, service outlets and offices.Swisscom’s real estate portfolio is managed by real estate professionals with a view to realizingvalue from the portfolio. Swisscom previously sold a significant portion of its real estateportfolio and has entered into leaseback contracts for some of the buildings sold, a number ofwhich have been qualified as finance leases. The gain from the sale of these buildings, CHF 239million in 2001, will be recognized in income over the duration of these leasing contracts. Due toa change in IAS 17 as of January 1, 2005, the land and building elements of a lease of land andbuildings are considered separately for the purposes of lease classification and the land elementis no longer classified as a finance lease. This resulted in a reduction of real estate propertyand corresponding leasing liabilities on Swisscom’s balance sheet. For further information on thechange in IAS 17, see Notes 2.4 and 24 to the consolidated financial statements. In 2005, Swisscomimplemented the IAS 16 component approach to depreciating assets.Over the last few years, Swisscom implemented a strategy to steadily reduce its real estatemanagement costs. This strategy included the outsourcing of certain real estate managementfunctions, especially cleaning and maintenance. Starting in 2004, Swisscom introduced a new programwith the aim of optimizing workplace infrastructure by moving employees to main buildings and byreducing the office space allocated per employee. These measures allowed Swisscom to terminatevarious lease-back contracts as of March 31, 2006, and will result in reduced rental and facilitymanagement costs.**Technical Equipment**As of December 31, 2005, Swisscom carried assets on its balance sheet which primarily related toits network infrastructure in the amount of CHF 3,957 million. Of this amount, CHF 60 millionrelates to technical equipment for which Swisscom has entered into sale and leaseback contracts.For more information, see Note 22 to the consolidated financial statements.
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**Research and Development**Swisscom’s central research and development expenses (not including software development costs)amounted to CHF 39 million in 2005 and CHF 39 million in 2004.Swisscom believes that continued research and development activities enhance its competitiveness.Swisscom currently focuses its research and development efforts on three main areas: (1) extendingits range of communication services by exploiting the increasing convergence of fixed-linetelecommunication, mobile telecommunication, information and entertainment technologies; (2)enhancing the quality of service and customer care; and (3) exploring network technologies toenable new services as well as to achieve cost efficiencies.Swisscom’s research and development activities include programs to explore and develop newopportunities in: (1) advanced communication and information services that seamlessly integrate awide range of networks, applications and devices using state-of-the-art technologies such as Voiceover IP, web technologies, voice-controlled interactions and intelligent network technologies, (2)current software technology trends and their impact on the efficiency of creating new services andon the quality of service, as well as on related areas such as digital identity management fortransaction and authentication services, and on management of the security of communicationnetworks, computer systems, and communication devices, (3) multimedia information and entertainmentservices enhanced by broadband access through various access networks and terminals, focusing inparticular on mobile entertainment and quadruple play (voice, Internet, and TV over the samenetwork, fixed and mobile), (4) emerging network technologies enabling wired and wireless, fixedand mobile broadband services including home-networking applications, with special emphasis onseamless access across different networks, and (5) electromagnetic compatibility and perceivedhealth issues arising from existing and emerging service delivery technologies.Swisscom responds quickly to promising new technologies with high business potential by developingthem as so-called “Innovation Ventures.”Swisscom explores strategies and technologies to increase customer satisfaction and customers’ useof new services. In particular, Swisscom takes into account social and socio-economic trends,diffusion and adoption of telecommunication services, management of customer expectations and newmarketing approaches. Moreover, Swisscom applies usability testing, which means that Swisscomobserves potential users interacting with prototype applications and services with a view toimproving interface and dialog design.Swisscom monitors, on a continuous basis, the consortia that develop technologies and applicationsthat serve as industry-wide standards, such as the global system for mobile communications (GSM)association, the third generation partnership project (3GPP) consortium (UMTS services and beyond),the WiFi and WiMax fora (wireless access technologies), the moving picture experts group (MPEG,making video signals suitable for transmission at lower bandwidths), the liberty alliance (virtualidentity management and authentication services), and the digital living network alliance (DLNA,home-networking applications). In addition, Swisscom participates in a number of internationalorganizations, e.g. the home gateway initiative (HGI), the WiMesh alliance and the Wireless WorldResearch Forum (WWRF).Swisscom pursues a number of research initiatives with industrial partners, universities,institutes and other research labs. Under these initiatives, Swisscom and its partners cooperate incarrying 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 orlicense is material to its business.
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**Regulation****Overview**The regulatory framework governing telecommunications services in Switzerland was established withthe entry into effect on January 1, 1998 of the Telecommunications Act. The Telecommunications Actand the implementing ordinances thereunder opened domestic and international public fixed-linetelephony in Switzerland to competition and provided for the granting of national mobiletelecommunications licenses to Swisscom and to new competitors. Switzerland is not a member stateof the EU and therefore is not subject to EU legislation relating to telecommunications. However,EU directives and implementing legislation in various EU countries have served as points ofreference for the development of the Swiss regulatory regime.In March 2003, the Federal Council adopted significant amendments to the TelecommunicationsOrdinance (*Verordnung über Fernmeldedienste*), which is the principal ordinance ontelecommunications services. However, based on a decision issued by the Federal Court in November2004, these amendments currently are not applicable on the grounds that the Telecommunications Act,as currently in effect, does not provide a sufficient legal basis for such amendments.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act which are notexpected to enter into force prior to January 1, 2007. These amendments are intended to bring theSwiss telecommunications regulatory regime in line with regulatory developments in the EU andreflect some of the amendments to the Telecommunications Ordinance. Swisscom will be required tooffer, among other things, unbundled access to its local loop in the form of full access on acost-oriented basis as well as access rebilling. In the form passed by the Swiss Parliament,unbundling of the local loop will require market-dominant providers to also offer bitstream accessto other providers on demand for four years on a cost-oriented basis. Market-dominant providerswill have to make bitstream access available at the main distributor frame and over their coppernet in the local loop. Competitors will not be entitled to use Swisscom’s investments in fiberoptic lines. The amendments are expected to increase competition when they become effective.In February 2006, the Federal Council published a proposal for the new Universal Serviceobligation, which would apply beginning in January 2008 when the existing Universal Service licenseheld by Swisscom will expire. The proposal was prepared by the Swiss Ministry for Environment,Traffic, Energy and Communication (UVEK) and the Federal Office for Communications (“OfCom”). Asproposed, the new Universal Service obligation would require the provision of broadband services,but omit directory information and call-forwarding services. Interested parties have until May 31,2006 to respond to the proposal.The Telecommunications Act is intended to ensure that (1) reliable universal service is provided ataffordable prices to the entire population of Switzerland; (2) telecommunications traffic is freefrom interference and respects personal and intellectual property rights; and (3) effectivecompetition in the provision of telecommunications services is allowed to develop. Importantfeatures of the current regulatory framework include:**•** **Open Competition Subject to Licensing and NotificationRequirements.**A basic principle of the Telecommunications Act isto permit open competition in telecommunications services, subjectto licensing and notification requirements. With limitedexceptions, anyone who provides telecommunication services andindependently operates a significant portion of thetelecommunications installations used to provide transmission andanyone who wishes to make use of radiocommunication frequenciesmust obtain a license from the regulatory authority. Anyonemeeting the conditions for a license application is entitled toreceive a license, subject to frequency availability in the caseof a license to use radiocommunication frequencies. Anyone whoprovides telecommunications services without being required toobtain a license must notify the regulatory authority. At the endof 2005, more than 400 operators had been licensed or registeredunder this requirement.**•** **Swisscom to Provide Universal Service until December 31, 2007.**Asa transition measure under the Telecommunications Act, Swisscomwas required to provide Universal Service throughout Switzerlanduntil December 31, 2002. In June 2002, ComCom renewed Swisscom’sUniversal Service license for another five year term. ComCom willopen the tender for the new Universal Service licence in fall2006. The new license will apply after the expiration ofSwisscom’s current Universal Service license in December 2007.
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**•** **Price Ceilings on Universal Service.**According to theTelecommunications Ordinance and under the terms of its UniversalService license, Swisscom may not increase the prices charged forcertain specified Universal Services above the price ceiling foreach such service set forth in the regulatory ordinance. Witheffect from January 1, 2003, ISDN has been included in UniversalService and the provision of ISDN access is subject to a priceceiling. The price ceilings limit Swisscom’s ability to rebalancetariffs by increasing prices for services such as basic access orlocal telephone calls, although the ordinance does not restrictSwisscom from offering selective discounts in connection withtailored service packages or to particular customer segments. Theproposal published by the Federal Council in February 2006 wouldinclude broadband service in the Universal Service obligation, andinclude a price ceiling to ensure that people without access tocompeting services would not have to pay too high a price. Theproposal also includes a suggested price ceiling for calls withinSwitzerland of CHF 0.075, which would be lower than SwisscomFixnet’s current peak rates for domestic fixed-fixed calls.**•** **A Market-Dominant Service Provider Must Allow Interconnection toits Network.**A tele-communications service provider that isdominant in a particular market must allow interconnection to itsinstallations and services by other service providers on anon-discriminatory basis, and in particular may not put otherservice providers in a worse position than its internaldepartments or affiliates. The Telecommunications Act andordinances require a market-dominant service provider to publish astandard offer of interconnection services, and contemplates thatthe market-dominant provider and those providers seekinginterconnection will reach negotiated interconnection agreements.Otherwise, the regulatory authority is empowered to determineinterconnection conditions.**•** **Interconnection Prices**. In any market where an operator is deemedto be dominant, it must set its prices for the relevantinterconnection service in a transparent and cost-oriented manner.Since January 1, 2000, such prices have had to be based on thelong-run incremental cost of providing the interconnectionservice, which may include an appropriate return on capitalemployed.**•** **Carrier Selection**. In order to promote competition in nationaland international telephony services, public fixed-line telephonyservice providers are required to provide their users with theability to select their desired national and international serviceproviders on both a call-by-call basis (by dialing a five-digitprefix number), known as “easy access”, and a pre-selection basisfor all calls (subject to call-by-call override), known as “equalaccess”. Mobile telephony service providers are currentlyrequired to provide their users with the ability to select theirdesired international service provider on an easy access basisonly. Public telephony service providers offering Voice-over-IPare required to provide their customers with the ability to selecttheir desired national and international service providers on acall-by-call basis.**•** **Number Portability**. Under “number portability”, public fixed-linetelephony service providers, mobile telephony service providersand providers of certain services such as toll-free numbers mustallow customers who switch to another service provider within thesame category of service to retain the same telephone number. Thecost of implementing number portability is borne by each serviceprovider. The original service provider may charge a fee to thenew service provider to cover the direct administrative costs ofconnection for a particular customer change.Important features of the amendments to the Telecommunications Act recently passed by the SwissParliament (but not yet in force) include:**•** **Unbundling of the Local Loop and Other Access Regulation.**Market-dominant service providers will be required to offer fullaccess to the unbundled local loop (but only with respect tocopper lines), bitstream access for a limited period of fouryears, access to ducts, access to leased lines and accessrebilling on a cost-oriented basis.**•** **Elimination of Licensing Requirement to Reduce Barriers to Entry.**The existing requirement that telecommunications service providersobtain a license to provide most services will be eliminated.The existing Telecommunications Act sets forth an overall regulatory framework and provides for thepromulgation of ordinances establishing more detailed rules. The Federal Council has issued anumber of ordinances, the most important of which is the Telecommunications Ordinance (*Verordnungüber Fernmeldedienste*), which covers licensing conditions and procedures, universal servicerequirements (including price ceilings), usage of public lands, interconnection, telecommunicationsconfidentiality and privacy requirements, services in extraordinary circumstances such as civildefense and other matters. The Federal
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Council has also issued the Frequency Management and Radio Licenses Ordinance (*Verordnung überFrequenzmanagement und Funkkonzessionen*), as well as ordinances concerning signal protocols andnumbering systems, telecommunications installations and fees. ComCom has issued an ordinance underthe Telecommunications Act specifying requirements for number portability and carrier selection.OfCom and the Department of Environment Transport, Energy and Communication (*EidgenössischesDepartement für Umwelt, Verkehr Energie und Kommunikation*) (“UVEK”) have also issued ordinancesunder the Act.Many important matters of regulatory policy were not resolved by the Telecommunications Act, havingbeen left to the legislative bodies and regulatory agencies responsible for the promulgation ofsuch ordinances. As has occurred in other countries, legal challenges to application of theTelecommunications Act and the interpretation of the ordinances promulgated thereunder have arisenand may continue to arise. While amendments to the Telecommunications Act have to be approved bythe Parliament and therefore take considerable time, ordinances can be amended or revised quitequickly.**Regulatory Authorities**Under the Telecommunications Act, responsibility for regulation of the telecommunications sectorand 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 forCommunication (*Bundesamt für Kommunikation, BAKOM*) (“OfCom”) and the Federal CommunicationsCommission (*Eidgenössische Kommunikationskommission*) (“ComCom”). OfCom is responsible forday-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 withdecision-making authority in the telecommunications sector. The Federal Council has also delegatedcertain limited powers to UVEK.OfCom was created by the Swiss Telecommunications Act of 1992, which separated the principalregulatory functions of Swiss Telecom PTT from its commercial operations and transferred thoseregulatory functions to OfCom, whose senior officers are appointed by the Federal Council. Underthe Telecommunications Act, all residual regulatory functions of Swiss Telecom PTT were transferredto OfCom. OfCom’s duties include supervising compliance by license holders with theTelecommunications Act and the ordinances thereunder, as well as with the terms and conditions oftheir respective licenses, proposing interconnection terms to ComCom for approval in cases wherethe parties fail to agree on interconnection terms, managing the radiocommunication frequencyspectrum, managing signal protocols and numbering systems, and issuing certain technical andadministrative regulations. OfCom’s responsibilities also include proposing the text of anyamendments to the ordinances for approval by the Federal Council, UVEK or ComCom, as the case maybe. Decisions made by OfCom may be appealed before an Appeals Board (*Rekurskommission*). OfCom alsorepresents Switzerland in specific international bodies. In order to separate the role of theConfederation as shareholder from its role as regulator, the Telecommunications Act created ComComas a fully independent regulatory agency, and provided that ComCom would have responsibility forall matters affecting the development of competition in the telecommunications market. ComCom actsas the exclusive licensing authority under the Telecommunications Act, rules on the terms ofinterconnection in cases where the parties are unable to reach agreement, has the power to obligatea license holder to provide Universal Service if the request for tenders fails to result inadequate Universal Service coverage, and approves the national radiocommunications frequencyallocation plan and national numbering plans. The Telecommunications Act allows ComCom to delegateresponsibility for certain tasks to OfCom. ComCom has delegated responsibility for granting alllicenses 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 withinthe 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 onceappointed, but the Federal Council has the right to not renew the appointment of a member upon theexpiration 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 TelecommunicationsOrdinance, the Federal Council has delegated to UVEK the power to regulate the provision ofUniversal Service in remote areas. In addition, UVEK has the right to order the expropriation ofprivate property for the establishment of telecommunications installations if in the publicinterest. UVEK also fixes the amount of administrative charges necessary to cover the expenses ofthe regulatory authorities.
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**Licensing and Notification Requirements**The Telecommunications Act requires that anyone who provides telecommunication services andindependently operates a significant portion of the telecommunications installations used toprovide transmission must obtain a license. In addition, licenses are required for users of theradiocommunication 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 isnot required to obtain a license. Under the amendments to the Telecommunications Act recentlypassed by the Swiss Parliament, licenses will only be required for service providers with aUniversal Service obligation and for users of radio frequencies.Under the existing Telecommunications Act, telecommunications services are subject to suchlicensing and notification requirements if they involve the electrical, magnetic, optical orelectromagnetic transmission of information for third parties over lines or radio waves. TheTelecommunications Ordinance excludes service providers from such licensing and notificationrequirements who transmit information solely (1) within a corporate network, (2) within a buildingor (3) on a single property or on two adjoining or separated properties. In addition, a purereseller or broker of telecommunications services is not considered a “provider oftelecommunications services” under the Telecommunications Act and is therefore not required tosatisfy the licensing or notification requirements. A provider of international telecommunicationsservices whose services are provided through a connection in Switzerland with another carrier isnot required to satisfy the licensing or notification requirement if the carrier through which itis connected meets such requirement.In general, anyone meeting the conditions for a license application, subject to the availability offrequencies in the case of a license to use radiocommunication frequencies, is entitled to receivea license. Conditions include the requirement that the applicant have the necessary technicalcapabilities, and that the applicant provide assurances that it will comply with theTelecommunications Act, the ordinances thereunder and the terms of the license, respect Swiss laborlaw and maintain working conditions customary for the industry. ComCom may also impose otherconditions in particular situations. An applicant incorporated in a foreign country may be denied alicense if its home country law does not provide reciprocal treatment. Licenses are granted forspecified periods determined by ComCom by reference to normal market and industry standards for therecovery of investments.Licenses for the use of radiocommunication frequencies are subject to availability, taking intoaccount the national frequency allocation plan, and must not eliminate or constitute a seriousobstacle to effective competition unless an exception can be justified on grounds of economicefficiency. In questions relating to effective competition, ComCom may consult with the CompetitionCommission. Radiocommunication frequency licenses are normally granted on the basis of an openrequest for tenders if there are not enough frequencies to meet all applicants’ present and futureneeds. As discussed below under “Mobile Telecommunications”, in 1998, ComCom adopted a frequencyallocation plan, under which there were three national mobile telephony licenses, consisting of themobile telephony license automatically granted to Swisscom pursuant to the Telecommunications Actand two licenses awarded through a competitive process based on designated criteria. In 2003, thisfrequency allocation plan was revised to cover two additional mobile telephony licenses, which wereawarded to In&Phone and Tele2 in December 2003.Under the Telecommunications Act, the regulatory authorities require the payment of administrativecharges to cover their expenses. For 2005, Swisscom was required to pay charges of CHF 7 million,which includes license and administrative fees and fees for the use of radiocommunicationfrequencies and numbering/naming/addressing elements. Under the amendments to theTelecommunications Act which were recently adopted by the Swiss Parliament, ComCom will be entitledto levy certain additional charges.Under the Telecommunications Act, a failure on the part of a licensee to abide by the terms ofapplicable law, including the Telecommunications Act, the ordinances thereunder and the terms ofthe license, may be sanctioned by ComCom. Such sanctions may include the suspension, revocation orwithdrawal of the license. In addition, to the extent that a provider of telecommunicationsservices fails to comply with the terms of its license or with a decision having force of law, suchservice provider may be required to pay a monetary penalty equal to up to three times the amount ofany gain resulting from such failure to comply. In the event such gain cannot be determined orestimated, the service provider may be required to pay up to 10% of the amount of its revenue inthe prior year in Switzerland.
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**Universal Service**One of the principal objectives of the Telecommunications Act is to ensure that affordableUniversal Service is provided to all sections of the Swiss population. Under the TelecommunicationsAct transition provisions, Swisscom was required to provide Universal Service throughoutSwitzerland until December 31, 2002. In June 2002, ComCom renewed Swisscom’s Universal License foranother five year term. In its bid for the new license, Swisscom renounced the right to receivecontributions 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 areevaluation would be required if the regulations were changed, and in particular if Swisscom wererequired to offer unbundled access to its local loop. Competitors of Swisscom are free to offersome or all of the services included in Universal Service.The Telecommunications Ordinance, as amended in October 2001, defines “Universal Service” ascomprising the following services:**•** **basic access**, consisting of a network connection that enables users to make national and international telephone callsin real-time as well as telefax and data connections with data transmission rates appropriate for Internet access, andentry in the public telephone subscriber directory;**•** **additional services,**consisting of information concerning unsolicited calls, call forwarding, suppression of calleridentification, billing information and blockage of outgoing calls;**•** **emergency call services**, including routing to the competent authority, with the ability to determine the caller’slocation;**•** **directory services**, including access to Swiss subscriber directories in electronic form or through voice information ineach official Swiss language;**•** **public payphones**in sufficient number around the clock for incoming and outgoing national telephone calls and outgoinginternational telephone calls, each in real time, with access to emergency call services and to telephone directoriesin each official Swiss language;**•** **transcription services**for the hearing-impaired; and**•** **directory and connection services**for the blind and seeing-impaired.The Federal Council is authorized to periodically modify the services included under the UniversalService obligation in accordance with social and economic requirements and technologicaldevelopments. Since January 1, 2003, Swisscom has been required to provide digital access, inaddition to analog access, based on ISDN or its equivalent, capable of supporting two simultaneousconnections and three different access numbers. In February 2006, the Federal Council published aproposal for the new Universal Service obligation, which would apply after the expiration ofSwisscom’s current Universal Service license in December 2007. As proposed, the new UniversalService obligation would require the provision of broadband services, but omit directoryinformation and call-forwarding services. Providing broadband services to the entire Swisspopulation may be difficult as a practical matter, and would likely require significant capitalexpenditures.**Price Ceilings for Universal Service**The Telecommunications Act provides that the Federal Council is periodically to fix upper limitsfor the price of Universal Service. In periodically determining such tariff ceilings, the FederalCouncil is to strive to set tariffs that are not dependent on distance. The ceilings are to applyuniformly over the entire region covered by the license and are to be determined in light of thedevelopment of the market.In the Telecommunications Ordinance, the Federal Council established price ceilings for specifiedUniversal Services, effective January 1, 1998. In amending the Telecommunications Ordinance inOctober 2001, the Federal Council imposed new price ceilings for the services comprised withinUniversal Service, which took effect on January 1, 2003, including a price ceiling on ISDN access.In the case of PSTN access, the price ceiling was not changed. The conditions of the currentUniversal Service license are expected to remain in
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effect until at least 2007, though existing price ceilings may be lowered when the new UniversalService license becomes effective in January 2008.The following table sets forth the price ceilings (excluding VAT) which took effect on January 1,2003:             Maximum charge activation CHF 40.00        Basic Access Line Rental Charge — PSTN (per month) CHF 23.45        Basic Access Line Rental Charge — ISDN (per month) CHF 40.00        Public 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-impairedpersons, for which a per use charge of CHF 0.50 applies. Traffic charges for calls from publicpayphones 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 onSaturdays, 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 islimited in its ability to rebalance tariffs by increasing the tariff for access service tocompensate for reduced traffic tariffs. However, the Ordinance does not restrict Swisscom fromoffering selective discounts in connection with tailored service packages or to particular customersegments, and Swisscom is also free to raise prices for a particular service at any time up to thethen-applicable price ceiling. In addition to the price ceilings established by the FederalCouncil, Swisscom is subject to certain consumer price legislation in setting its prices. The levelof prices charged by a market-dominant telecommunications service provider can be subject to reviewby the Supervisor of Prices (*Preisüberwacher*) under the Federal Act on the Supervision of Prices ofDecember 20, 1985 (*Preisüberwachungsgesetz*).The proposal published by the Federal Council in February 2006 concerning the Universal Serviceobligation would include broadband service in the Universal Service obligation, and include a priceceiling of CHF 69 per month (excluding VAT) to ensure that people without access to competingservices would not have to pay too high a price. The proposal also includes a suggested priceceiling for calls within Switzerland of CHF 0.075, which would be lower than Swisscom Fixnet’scurrent peak rates for domestic fixed-fixed calls.**Interconnection by a Market-Dominant Provider**The Telecommunications Act provides that a telecommunications service provider that has a dominantposition in a particular “market” must provide interconnection to other telecommunications serviceproviders on a non-discriminatory basis and in accordance with a transparent and cost-orientedpricing policy, stating the conditions and prices separately for each interconnection service. TheTelecommunications Act authorized the Federal Council to determine the principles governinginterconnection.The Telecommunications Act and ordinances do not define what the relevant “markets” are forpurposes of this interconnection requirement. Under the Telecommunications Act, OfCom is requiredto consult the Swiss Competition Commission (*Wettbewerbskommission*) to determine whether a providerhas a dominant position in a “market”. Under the Swiss Cartel Act, an enterprise is deemed to havea dominant market position if it is able, as regards supply or demand, to behave in a substantiallyindependent manner with regard to the other participants in the market. Market share is only oneamong several criteria for assessing whether or not an enterprise has a dominant market position.In the Telecommunications Ordinance, the Federal Council has specified that a market-dominantprovider must provide interconnection to the necessary equipment, services and information to otherproviders on a non-discriminatory basis, in no worse manner than the market-dominant providersupplies 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 tointerconnection from a market-dominant provider under the terms of the Telecommunications Ordinanceare (1) licensed providers of
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telecommunications services, (2) providers of telecommunicationsservices 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 thefollowing in its basic offering of interconnection services: (1) origination, termination andtransit of all call services included within Universal Service; (2) call identification services,including identification of incoming connections, completed calls, uncompleted calls and similarservices; (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 seekingaccess as necessary to accomplish the services connection; and (5) access to any other services asto which the provider is market-dominant.Upon request, a market-dominant provider must make known the technical and commercial terms andconditions of its interconnection services, and the basis on which the interconnection service isoffered must be disclosed in an understandable and unbundled manner. In addition, themarket-dominant provider is required to publish at least once a year the following information: thebasic offering; a description of standard interconnection points and access conditions; and acomplete description of the applicable interfaces and signal protocols. To satisfy theserequirements, Swisscom publishes an interconnection brochure on the Internet and in paper format. Amarket-dominant provider must further promptly make known any changes in the terms of itsinterconnection services offering expected in the following twelve months.The Telecommunications Ordinance requires that prices charged for interconnection services by amarket-dominant provider be cost-oriented. Since January 1, 2000, prices have had to be based onthe following principles: a component related to the cost of providing interconnection; acomponent based on the long-run incremental cost (“LRIC”) of providing the requested services usingthe required network components; a constant mark-up for joint and common costs; and a return oncapital invested at a rate customary for the industry. Costs must assume the expenses andinvestments of an efficient operator using modern equivalent assets and must be forward-looking. Aprovider 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 interconnectionrates. Swisscom believes that its current interconnection rates are in line with the Europeanaverage and represent a fair, transparent and consistent implementation of the applicableregulatory requirements. Swisscom expects to continue to reduce its interconnection charges fromtime to time as it realizes further cost savings through network optimization or improvements inefficiency. Since 2000, Swisscom has been involved in four legal proceedings relating tointerconnection. In November 2003, ComCom issued a decision which requires Swisscom to lowerinterconnection prices with retroactive effect for the years 2000 to 2003 by 25-35%. Swisscom filedan appeal against this decision and in October 2004, the Federal Court overturned ComCom’s decisionon procedural grounds and remanded the petitions for re-hearing before ComCom. On June 10, 2005,the ComCom confirmed its November 2003 decision, requiring Swisscom to retroactively reduce theinterconnection charges charged TDC (Sunrise) and MCI between 2000 and 2003 by approximately 30%.ComCom also required TDC (Sunrise) and MCI to reduce their prices on a reciprocal basis. On July13, 2005, Swisscom and TDC (Sunrise) both lodged an appeal against this decision with the FederalCourt, which has yet to issue a decision. See “*Item 8:Financial Information – Legal Proceedings*”.In addition to market-dominant telecommunications service providers, providers of universalservices 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 providersin the Swiss market eligible for interconnection under the Telecommunications Act. See “ — *Fixnet*—*Wholesale Traffic — Wholesale National*”. As of December 31, 2005, Swisscom had concludedinterconnection agreements with 31 operators. Interconnection agreements, except for confidentialportions thereof, can be consulted by the public at the offices of OfCom.The Telecommunications Act provides that if a service provider that is required to provideinterconnection and an applicant for interconnection cannot reach agreement within three months,ComCom is authorized, on a proposal from OfCom, to set the interconnection conditions. If theinterconnection provider cannot demonstratethat its prices are properly related to costs as required, ComCom may determine the interconnectionconditions on the basis of market and industry comparisons.
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**Unbundling of the Local Loop and Other Access Regulation**Until April 1, 2003, under the terms of the Telecommunications Act and the TelecommunicationsOrdinance, market-dominant service providers were not required to offer unbundled access to thelocal loop or access to leased lines on a cost-oriented basis. This principle was confirmed by theFederal Supreme Court in October 2001 in the Commcare case, in which the Court ruled that leasedlines and transmission media do not fall within the interconnection provisions of theTelecommunications Act and related Ordinance and stated that there is no legal basis for arequirement that Swisscom unbundle the local loop.In response to this decision, and supported by ComCom, in July 2002, the Federal Council proposedamendments to the Telecommunications Act and the Telecommunications Ordinance that would requireSwisscom to offer unbundled access to its local loop and interconnection to leased lines on acost-oriented basis. The proposal would have provided for all three kinds of unbundling, “FullAccess”, “Shared Line Access” and “Bitstream Access”.In March 2003, the Federal Council adopted the amendments to the Telecommunications Ordinance, witheffect from April 1, 2003. However, based on a decision issued by the Federal Court in November2004, these amendments currently are not applicable on the grounds that the Telecommunications Actas currently in effect does not provide sufficient legal basis for those amendments.In March 2006, the Swiss Parliament adopted amendments to the Telecommunications Act which are notexpected to enter into force prior to January 1, 2007. These amendments are intended to bring theSwiss telecommunications regulatory regime in line with regulatory developments in the EU andreflect some of the amendments to the Telecommunications Ordinance. Swisscom will be required tooffer, among other things, unbundled access to its local loop in the form of full access on acost-oriented basis as well as access rebilling. Unbundling of the local loop in the form of fullaccess will allow competitors to offer access services to customers in Switzerland without havingto build local loops of their own, although they will still have to make significant investments intheir own network infrastructure in order to connect to the local loop. Moreover, with accessrebilling, competitors will be able to bill customers directly for the access services provided bySwisscom. As a result, Swisscom’s competitors will be able to offer their customers a full range offixed-line services, including access, and their customers would receive a single bill covering allthese services.In the form passed by the Swiss Parliament, unbundling of the local loop will requiremarket-dominant providers to also offer bitstream access to other providers on demand for fouryears on a cost-oriented basis. Market-dominant providers will have to make bitstream accessavailable at the main distributor frame and over their copper net in the local loop. This willrequire Swisscom’s competitors to make significant upfront investments in their own networkinfrastructure in order to reach Swisscom’s main distributor frame for bitstream data traffic andto build their own access lines within four years or switch to full access. In addition,competitors will not be entitled to use Swisscom’s investments in fiber optic lines. The amendmentsare expected to increase competition when they become effective.**Mobile Telecommunications**In connection with the opening of the mobile market to competition, ComCom has adopted aradiocommunication frequency allocation plan under which there were to be a total of three nationalmobile GSM telephony licenses. One mobile telephony license was automatically granted to Swisscompursuant to the Telecommunications Act.ComCom awarded the two additional national mobile telephony licenses through a competitive processbased on designated criteria in May 1998 to diAX (now TDC (Sunrise) Switzerland AG or “TDC(Sunrise)”) and Orange. diAx was granted the right to use frequencies in the 900 MHz and 1800 MHzbands and Orange the right to use frequencies in the 1800 MHz band. The three GSM licenses areeffective for a ten-year period expiring on May 31, 2008. To renew its GSM license, SwisscomMobile was required to submit its renewal application at least two years in advance of the licenseexpiration date. Swisscom Mobile submitted its renewal request to ComCom on December 21, 2005.ComCom has yet to issue a decision on Swisscom Mobile’s application, and may impose certainconditions on the renewal, such as requiring Swisscom Mobile to payhigher fees or give access to its network to mobile virtual network operators or to sell to itscompetitors mobile telephony minutes on a cost-oriented basis for resale.
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In October 2000, ComCom put further frequencies (GSM 900 MHz and GSM 1800 MHz) in the extended GSMband up for auction. The auction was ultimately suspended, and the frequencies were allocated bymutual agreement. Pursuant to this agreement, Swisscom received 5 MHz, TDC (Sunrise) received 7 MHzand Orange received 2.2 MHz in the GSM 900 MHz band, including frequencies in the extended GSMband. A concession of seven years was granted on the basis of this agreement, with each contenderpaying the minimum price. In 2003, a third frequency block of 2x25 MHz on the GSM 1800 MHz bandbecame available for civilian use and a GSM license was awarded to each of In&Phone and Tele2. Withthe aim to fostering competition in the mobile telecommunication market, Swisscom and the other twoGSM operators were not allowed to participate in the bidding process.In November 2004, ComCom decided to award the remaining frequencies reserved for the GSM standardto the three GSM operators currently active in Switzerland (Swisscom, TDC (Sunrise) and Orange)with the aim of facilitating nationwide coverage in Switzerland for broadband mobile data services.On December 6, 2000, an auction for four UMTS licenses commenced with four operators participating.The UMTS licenses were sold for a total of CHF 205 million to Swisscom, dSpeed (a wholly ownedsubsidiary of TDC (Sunrise)), and Telefónica, each paying CHF 50 million, and Orange, paying CHF 55million. Under the original terms of the UMTS license, each licensee was required to build out itsnetwork to achieve 20% population coverage by the end of 2002 and 50% by the end of 2004, unless itis unable to fulfill this obligation for reasons beyond its control and can prove that it has madeevery effort to do so. In June 2002, ComCom amended the terms of the licenses to eliminate therequirement that 20% population coverage be achieved by the end of 2002. Licensees were stillrequired to achieve 50% population coverage by the end of 2004. Swisscom achieved this thresholdin May 2003.While the Telecommunications Act opened the Swiss mobile telephony market to competition, mobiletelephony in Switzerland has not yet been the subject of extensive regulation. However,developments in the EU and Switzerland could result in additional regulation in the future.The Commission of the European Union is analyzing the markets for various mobile telephonyservices, including mobile access and call origination, mobile termination and mobile roaming witha view to determining whether additional regulation is required to ensure effective competition andprevent market abuse. These initiatives could ultimately lead to regulation of mobile access andcall origination and/or a significant reduction in mobile termination fees for individual companiesdetermined to have significant market power in their local markets, depending on the individualapplication by national regulators within the European Union. They could also lead to asignificant reduction in international roaming charges. While Switzerland is not a member state ofthe EU and therefore is not subject to EU legislation, EU directives and implementing legislationin various EU countries have served as points of reference for the development of the Swissregulatory regime.Pressure on the Swiss regulatory authorities to regulate mobile access has increased as a result ofthe award of new mobile licenses to two service providers who started their mobile serviceoperations in 2005 and requested national roaming in areas where they do not have their ownnetwork. See also “*Item 8: Financial Information — Legal Proceedings — Other RegulatoryProceedings*” for further information on a regulatory proceeding currently pending, which could alsoresult in Swisscom being required to reduce its mobile termination fees.On December 22, 1999, the Federal Council adopted an ordinance relating to protection againstnon-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 toprotect 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. TheOrdinance applies to mobile and any telecommunications services transmitted over radio, such as GSMor UMTS services. For mobile antennae with a minimum power exceeding 6 watts, constructionauthorizations issued by local authorities are required. Newly-built stations are required tocomply with the emissions standards and existing stations have had to be upgraded to bring theminto compliance. Swisscom has completed the upgrade of its existing stations for compliance withthese standards.The NIS Ordinance is implemented by the cantons, which in the past have used different methods ofmeasuring radiation emissions to determine compliance with the NIS Ordinance, resulting insignificant regional variationsin effective emission standards. In July 2002, the Swiss Agency for the Environment, Forests andLandscape (“BUWAL”) issued final guidelines for enforcement authorities on the appropriate methodsby which to measure electromagnetic emissions from base stations and masts in the GSM network, butwhich did not address
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emission standards for UMTS networks. Final guidelines relating to emissionstandards for UMTS networks were adopted in 2005. These guidelines are generally binding on thecantons, but deviations are permitted under certain circumstances. In order to comply with theapplicable emission standards and maintain its current level of service, Swisscom could be requiredto install additional antennae. However, Swisscom does not expect the associated costs in 2006 tobe materially different from those incurred in previous years.**Carrier Selection and Number Portability**Under the Telecommunications Act and ComCom’s ordinance relating to carrier selection and numberportability, public fixed-line telephony service providers are required to provide their users theability to select their desired national and international service providers on both a call-by-callbasis (by dialing a five-digit prefix number), known as “easy access”, and on a pre-selection basis(subject to call-by-call override), known as “equal access”. Public mobile telephony serviceproviders are also required to provide their users the ability to select their desiredinternational service provider on an easy access basis.ComCom has provisionally suspended a further requirement that public mobile telephony serviceproviders implement equal access in their mobile networks until technical development andinternational standards allow implementation thereof.In addition, public fixed-line telephony service providers, public mobile telephony serviceproviders and non-geographical services, such as providers of toll-free numbers, are required toprovide number portability. Number portability means that customers must be given the ability toswitch to another service provider within the same category of service (i.e., fixed-line tofixed-line, mobile to mobile) while retaining the same telephone number. The cost of implementingnumber portability is borne by each service provider. The original service provider may charge afee to the new service provider to cover the direct administrative costs of connection for aparticular customer move.At the end of March 2002, a new numbering plan was introduced in Switzerland. Under the plan, allphone numbers in Switzerland consist of ten digits, with the former area code having become anintegral part of a subscriber’s phone number. As a result, subscribers who have pre-selected analternative carrier have their local calls, in addition to their long-distance calls, automaticallyrouted over that carrier’s network.**Leased Lines**Under the Telecommunications Act and the Telecommunications Ordinance, ComCom is authorized torequire a licensed telecommunications services provider to provide leased lines at cost-orientedprices in a particular region if it is determined that demand for such lines has not otherwise beenfully met. To date, ComCom has not taken any action under these provisions.For information on the recent amendments to the Telecommunications Act that will require Swisscomto offer access to leased lines on a cost-oriented basis, see “ — *Unbundling of the Local Loop andOther Access Regulation*” and “*Item 8: Financial Information — Legal Proceedings*”.**Ownership of Lines and Rights of Way**The Telecommunications Act provides that a licensee who has installed lines for the transmission ofinformation by means of telecommunications techniques, or who has acquired such from third parties,owns the respective transmission lines.Prior to the enactment of the Telecommunications Act, Swisscom had the right to use public land(roads, footpaths, squares, waterways, lakes, etc.) free of cost to install and operate lines. TheTelecommunications Act provides that every holder of a telecommunications service license is tohave such a right to use public land free of cost to install and operate lines and publicpayphones, provided that such use does not interfere with the common use of such public land. Theowner of such land (e.g., the Confederation, the cantons or the communities) is to grant thelicensee a corresponding approval in a short and simple procedure. Except for the administrativecosts for such procedure, no charges may be levied on the licensee. Under theTelecommunications Ordinance, every holder of a telecommunications service license is also entitledto install and operate lines that cross railway lines.
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If the holder of a telecommunications service license cannot reach agreement with the owner ofprivate property on the use of such property by the licensee for the installation and operation oflines, UVEK may grant the licensee the right of expropriation if the establishment of atelecommunications installation on private property is in the public interest.OfCom may, for reasons of public interest, and in particular to protect the national heritage andthe environment, also require the holder of a license for telecommunications services to grantother licensees the right to make joint use of its existing installations if they have sufficientcapacity and in return for appropriate compensation. With respect to this right to joint use ofexisting installations, the interconnection provisions are to be applied by analogy.**International Obligations**Over 70 member countries of the World Trade Organization (“WTO”), representing a substantialmajority of the world’s basic telecommunications revenue, including Switzerland, the members of theEU and the United States, have entered into the Basic Agreement on Telecommunications (“BATS”) toprovide market access to some or all of their basic telecommunications services. This agreement hasbeen 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 madecommitments to provide “market access”, under which they are to refrain from imposing certainquotas or other quantitative restrictions in specified telecommunications services sectors and toprovide “national treatment”, under which they are to avoid treating foreign telecommunicationsservice suppliers differently than national service suppliers. In addition, a number ofsignatories, including Switzerland, agreed to the pro-competitive principles set forth in areference paper relating to anti-competitive behavior, interconnection, universal service,transparency of licensing criteria, independence of the regulator and allocation of scarceresources.In a decision dated October 3, 2001, (re Commcare AG vs. Swisscom), the Swiss Federal Supreme Courtfound that even if the WTO/BATS provisions were directly applicable in Switzerland, which isuncertain, they do not grant any right to unbundling or to obtain leased lines or transmission oninterconnection terms.
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**ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS***The following discussion should be read in conjunction with Swisscom’s consolidated financialstatements, which have been prepared in accordance with International Financial Reporting Standards(IFRS), which differ in certain significant respects from U.S. GAAP. For a reconciliation of thesignificant differences between IFRS and U.S. GAAP, see Note 44 to the consolidated financialstatements.***Introduction**Swisscom is the principal telecommunications provider in Switzerland, offering a comprehensiverange of products and services to residential and business customers. Swisscom’s core business isthe provision of fixed-line and mobile telephony as well as data services. Fixed-line services areprovided through the business segments Fixnet and Solutions, generating 44% and 11% of Swisscom’stotal revenue in 2005, respectively. Mobile services are provided through the business segmentMobile, generating 38% of Swisscom’s total revenue in 2005. For a more detailed description of theservices provided by each of these segments, see “*Item 4: Information on the Company”*.The principal sources of revenue within each of these segments are: **•** ***Fixnet:***monthly subscription fees for providing telephone and Internet access,charges for making calls from fixed-network access lines, wholesale interconnectioncharges and fees from providing data services to other telecommunication companies;  **•** ***Mobile:***monthly subscription fees, traffic charges for calls made in Switzerland byMobile’s customers, roaming and termination fees paid by other mobile operators, andfees from data services;  **•** ***Solutions:***charges for fixed-line voice telephony services to business customers,fees for providing leased lines and Intranet services as well as integratedcommunications solutions, including outsourcing services.The principal components of Swisscom’s operating expenses include: **•** ***Goods and services purchased***, mainly consisting of interconnection fees for nationaland international voice and data traffic and cost of customer equipment purchased forresale;  **•** ***Personnel expenses***, consisting of payroll and other employee related cost;  **•** ***Other operating expenses***, including cost for customer acquisition and retentionmeasures, marketing and selling expenses, information technology cost, and expenses forrepairs and maintenance.Swisscom’s revenue and results of operations are and may be affected by a number of importantfactors, including:***Regulatory environment.***Since the entry into force of the Telecommunications Act, the Swisstelecommunications market has been open to competition. The Telecommunications Act containsnumerous provisions designed to facilitate competition, which primarily affect the traditionaltelecommunications services Swisscom offers. For example, under the Telecommunications Act,Swisscom is required to offer standard interconnection services on a cost-oriented basis. As aresult, Swisscom has had to substantially reduce its interconnection rates in recent years — by anaverage of 8% per year over the three year period under review. Swisscom expects further reductionsin 2006. With interconnection rates declining, retail tariffs in the fixed-line business have comeunder pressure, which has negatively affected revenue. Swisscom has also experienced increasedprice pressure in the business customer segment of its mobile business and competition is expectedto further increase after the entry of new mobile virtual network operators (“MVNO”) in 2005.A number of regulatory initiatives, that are currently pending, are likely to further increasecompetition and put additional pressure on margins. Under amendments to the Telecommunications Act,Swisscom will be required to offer, among other things, unbundled access to its local loop on acost-oriented basis in the form of full access
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as well as bitstream access for a limited period of four years. The adoption of these amendmentswill facilitate competition in the access market and can cause Swisscom to lose additional marketshare in the national and international calling markets.Furthermore, Swisscom’s mobile termination tariffs and roaming charges may become subject toregulation in the future. Regulation of mobile termination fees or roaming charges would have asignificant impact on Swisscom’s mobile revenue and reduce margins and profitability.***Competition and pricing.***Several years ago Switzerland experienced an economic slowdown duringwhich customers became more conscious of usage levels and tariffs. Since then, many of Swisscom’sfixed-line customers have been switching to newly introduced tariff plans, which has led to adecline in average tariffs. In the Mobile segment, the introduction of budget service packages,including those offered by new low-cost competitors, has led to a significant decline in the numberof subscribers to higher priced services, effectively resulting in an overall reduction of theaverage revenue per user (ARPU). As competition in the low-cost market segment has increased,Swisscom Mobile has introduced new services with lower prices and limited features, which hasfurther reduced ARPU. Pressure on prices is expected to remain high due to continuing strongcompetition, especially from cable network operators in the fixed-line business and from newlow-cost network operators in the mobile business. To stimulate demand in its fixed-line and mobilebusinesses, Swisscom has introduced new services based on broadband technologies such as ADSL andUMTS/EDGE, in which Swisscom has made, and continues to make, substantial investments. Should theeconomy slow down again, however, customers may again become more reluctant to use higher pricedservices.***Customer needs and industry trends.***Customer needs and industry trends are changing. The demand forinteractive services is increasing, and communication has to be guaranteed irrespective of time orplace. The importance of content, attractive applications and information management is rising, andtechnology is migrating to standardized IP platforms. This is opening up opportunities for Swisscomto develop attractive new offerings. Thanks to a very broad market position, Swisscom can createnew added value for the customer with bundled offerings and drive forward into fields that arebeing transformed in related markets under the influence of digitization and broadband penetration.Swisscom is therefore looking to grow in the field of convergence and multimedia, in theTelecommunication, Information, Media and Entertainment (“TIME”) market. The aim is to offset thedecline in traditional activities with new activities from around 2008 / 2009 onwards. The futurebusiness of successful telecommunications companies looks set to be very different from theircurrent activities: by moving into the TIME market, Swisscom can respond to changing customerneeds.***Technological developments.***In recent years, the telecommunications industry has seen rapidtechnological developments that have resulted in a change in user patterns and given rise to newcompetitive challenges. Traditional telecommunication services, such as fixed-line services, areincreasingly being replaced by mobile phones and other communication technologies, such as Voiceover IP. The availability of alternative technologies capable of supporting telecommunicationsservices is enabling competitors to provide services which fully substitute for Swisscom’s coreservices (fixed-line voice and data services and mobile telephony).***Personnel expenses*****.**Personnel expenses make up a significant portion of Swisscom’s cost base. Inorder to improve productivity and reduce cost, Swisscom has implemented a workforce reductionprogram. During the three years under review, the program reduced Swisscom’s workforce byapproximately 1,950 positions by eliminating positions or transferring them to Swisscom’semployment programs. While this program has resulted in an overall decline in personnel expenses,the benefit has been muted by the fact that Swisscom has had to incur expenses associated withtermination benefits for its outplacement program (PersPec) and incurs salary expenses relating toemployees for the period in which they participate in its employment program (Worklink). Swisscom’scontinued ability to implement staff reductions and reduce personnel expenses will have asignificant impact on its future profitability.***Capital expenditure and depreciation.***Swisscom’s results may also be affected by the level of itsdepreciation expense, which in turn depends on the timing and extent of its capital expenditure. Inaddition, the rapid pace of technological change may require Swisscom to reduce its estimates ofthe useful lives of its equipment, which would cause depreciation expenses to increase. Swisscom’sdepreciation expenses declined in the periods under review as a decline in depreciation in theFixnet segment due to an increase in the number of fully depreciated assets was only partiallyoffset by an increase in the Mobile segment due to increased investments in UMTS / EDGE technologyand the resulting reduction of the useful lives of certain GSM equipment. In the medium term,depreciation expenses are expected to remain relatively stable, as a decrease in depreciationexpenses due
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to an increase in the number of fully depreciated assets is expected to be offset by an increasedue to an increase in capital expenditure mainly related to new broadband technologies.**Summary of Results**The year 2005 has been very challenging for Swisscom. In competition with over 300 national andinternational competitors Swisscom has shown a steady performance, has overall defended its marketshares and increased operating income and net profit, despite a decline in revenue.Revenue mainly decreased as a result of the transfer of the International Carrier Servicesactivities to a new joint venture with Belgacom and a significant reduction in the wholesale pricefor call termination on Swisscom’s mobile network. Declining revenue in the traditional fixed-linetelephony business, mainly due to increased competition from cable network operators as well as thesubstitution of fixed-line telephony by mobile telephony, was offset by an increase in broadbandaccess revenue, reflecting an increase in ADSL subscribers, and an increase in mobile telephonyrevenue due to new data services and an increase in the number of subscribers. Pressure on pricesin the business segment due to strong competition is unchanged.Overall, operating income increased, despite a decline in revenue, primarily due to a significantdecrease in depreciation expenses following an impairment charge in 2004 as well as an increase inthe number of fully depreciated assets. An improvement in financial result and the omission of theloss from discontinued operation (debitel) have added to a significant increase in net income.Swisscom’s cash flows from operating activities in 2005 declined compared to 2004, mainly due to aspecial contribution to Swisscom’s pension fund as well as an increase in taxes paid. In accordancewith its return policy, Swisscom returned approximately CHF 2.9 billion to its shareholders throughdividends and share buy backs. However, Swisscom still maintains a balance sheet with a significantcash position and has proposed to the shareholders’ meeting that an even larger amount be returnedto shareholders in 2006.Swisscom expects the trends from 2005 to continue in the future and expects a further decline inrevenue as a result of the strong competition and price reductions especially in the Mobile andFixnet segments. Regulatory risks such as unbundling of the local loop and a reduction ininterconnection tariffs will further increase pressure on margins in the traditional fixed-linebusiness. One of the key factors for future success in the fixed-line segment is Swisscom’s tripleplay strategy of combining its core activities with multimedia services to counter competition fromcable network operators. Mobile revenue is expected to be driven by Swisscom’s ability to retainhigh-value customers and to stimulate usage through the implementation of innovative services.**Critical Accounting Policies**Swisscom’s financial statements are prepared in accordance with International Financial ReportingStandards (IFRS). In addition, Swisscom reconciles net income and shareholders’ equity to U.S.GAAP. See Note 44 to the consolidated financial statements. The preparation of these financialstatements requires management to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenue and expenses as well as the disclosure of contingent assets andliabilities. Set out below are the details of certain significant estimates made by management inthe financial statements where it is possible that the estimate of a condition, situation or set ofcircumstances that existed at the date of the financial statements will change in the future due toone or more future confirming events and that the effect of the change would be material to thefinancial statements.
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***Pension fund accrual***The determination of the liability and expense for pension benefits is dependent on the selectionof assumptions, which attempt to anticipate future events, used by Swisscom’s actuary to calculatesuch amounts. Those assumptions are described in Note 11 to the consolidated financial statementsand include the discount rate, expected long-term rate of return on plan assets and rates ofincrease in future compensation levels. In addition, Swisscom’s actuary also uses subjectivefactors such as withdrawal and mortality rates. The assumptions used for IFRS are consistent withthose used for U.S. GAAP. Approximately 23.8% of the pension plan assets at December 31, 2005 wereheld in stocks and bonds denominated in foreign currencies, primarily USD and EUR.For 2005, the expected rate of return on plan assets was 4.5% or CHF 234 million. Due to thefavorable performance of the stock markets, the actual return on assets in 2005 was 13.1% or CHF703 million, generating an excess return of CHF 469 million. However, from the date of inception ofSwisscom’s pension plan in January 1999 to December 31, 2005, the cumulative actual return onassets has been lower than the expected return, which resulted in a cumulative loss of CHF 195million at December 31, 2005. The expected rate of return has been reduced to 3.9% for 2006. WhileSwisscom believes that the assumption for the long-term return is appropriate, should the stockmarkets underperform or exchange rates change, this would affect Swisscom’s future expense andcould lead Swisscom to increase its contributions.The discount rate used for the calculation of the pension liability at the end of 2005 was 2.6%.Should the discount rate decrease by 0.5%, the pension liability would increase by approximatelyCHF 709 million and the annual pension expense would increase by approximately CHF 8 million.The rate of increase in future compensation levels used in 2005 was 2.3%. Should this rate increaseby 0.5%, the pension liability would increase by approximately CHF 85 million and the annualpension expense would increase by approximately CHF 10 million.In connection with the settlement of its obligation to retired employees in 1998, Swisscom retaineda liability for pension indexation based on a contract with the confederation, which up untilDecember 31, 2004, was a guaranteed rate. Effective January 1, 2005, new legislation was introducedto abolish the previously guaranteed pension indexation. As a result of this new legislation,Swisscom reduced its assumption for pension indexation from 1.0% to 0.5%, which resulted in asignificant decrease in the liability in 2004. At December 31, 2005, the liability amounted to CHF173 million. While Swisscom believes that the assumption used to determine this liability isappropriate, should the Government decide to change the indexation, this would affect Swisscom’spension liability and future expense. The law for PUBLICA is currently under review. However, basedon the existing draft law, the contractual obligation of Swisscom will not be effected andtherefore not change.In 2005, under U.S. GAAP, Swisscom recorded a minimum liability of CHF 871 million, of which CHF113 million reflected the unrecognized prior service cost and was recorded as an intangible asset.The remaining CHF 758 million, excluding a tax benefit of CHF 169 million, was recorded againstequity. An increase of the minimum liability would result in a further reduction of shareholder’sequity.***Useful lives of technical equipment***Technical equipment, with a net book value of CHF 3,957 million at December 31, 2005, represents asignificant portion of Swisscom’s total assets. Swisscom estimates the useful lives based onhistorical 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. Usefullives under U.S. GAAP are consistent with those under IFRS. Changes in technology or in Swisscom’sintended use of these assets may cause the estimated period of use or the value of these assets tochange, which would result in increased or decreased depreciation expense. Swisscom performsinternal studies annually or when events or circumstances indicate that the useful life may nolonger be appropriate. Additionally, technical equipment is reviewed for impairment whenever eventsindicate that their carrying amounts may not be recoverable. In assessing impairment, Swisscomfollows the provisions of IAS 36 “Impairment of Assets” and SFAS 144 “Accounting for the Impairmentor disposal of Long-Lived Assets” utilizing cash flows which take into account management’sestimates of future operations under IFRS and U.S. GAAP, respectively.
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***Provision for dismantlement and restoration***As detailed in Note 26 to the consolidated financial statements, management has included aprovision of CHF 360 million at December 31, 2005 for the dismantlement and restoration of mobilestations and analog transmitter stations. In 2005, Swisscom adjusted primarily the cost ofdismantlement and remaining useful lives following a strategic revaluation of the analogtransmitter stations. The dismantlement costs are now expected to be incurred mainly after 2020. Thepresent value of the adjustment to the future expected cost was CHF 77 million. The extension ofthe useful lives resulted in a reduction in the present value of CHF 75 million, of which CHF 50million was recorded against the corresponding assets and CHF 25 million under financial income. In2003, Swisscom extended the expected timing of the dismantlement as a result of a change in therequirements of a major customer, which would result in the stations being used for a longerperiod. That resulted in a reduction in the present value of the provision of CHF 43 million, whichincreased financial income in 2003 by a corresponding amount. The provision was based on futureestimated cost and was discounted using an appropriate discount rate. While management believesthat the assumptions used are appropriate, should they not be accurate, the amount required coulddiffer from the amount of the provision.With the adoption of IFRIC 1 “Changes in Decommissioning, Restoration and Similar liabilities”effective January 1, 2005 and the adoption of SFAS 143 “Accounting for Asset RetirementObligations“ effective January 1, 2003 the difference between the asset retirement obligationunder IFRS compared to U.S. GAAP is no longer material. The net impact of adopting SFAS 143, whichwas a credit to the income statement of CHF 31 million, was recorded as a cumulative effect ofaccounting change on January 1, 2003. See Note 44 to the consolidated financial statements.***Provisions and contingent liabilities******Interconnection proceedings.***Since 2000 Swisscom has been involved in proceedings with regard tointerconnection prices (see Note 34). Swisscom has recorded a liability and a provision fordoubtful debts for receivables on the basis of their own estimate of the possible financialconsequences. Further development of the proceedings or a decision by the Federal Court may resultin a different assessment of the financial consequences in subsequent years and require an increaseor decrease of the recorded liability.***Proceedings before the competition commission (WEKO).***WEKO is currently leading various proceedingsagainst Swisscom. The individual proceedings are described in Note 34. If WEKO proves that Swisscomhas violated Antitrust law, they can impose sanctions. Based upon its legal assessment as of the end of 2005, Swisscomconsidered it unlikely that WEKO would impose sanctions. Consequently no provisions were recognizedin 2005 in connection with these proceedings. Further development of the proceedings may result ina different assessment of the financial consequences in the following year and require an increaseor decrease in the provision recorded.**Changes in accounting policies**Effective January 1, 2005 the International Accounting Standards Board IASB modified its standardIAS 17, Leases. As a result, long-term leases of real estate must be evaluated and disclosedseparately for land and building components and the land element is no longer classified as afinance lease but as an operating lease. In 2001, Swisscom sold buildings and leased them back atdifferent lease terms. Some of these sale and leaseback agreements were classified as financeleases under IAS 17 and no distinction was made between the land and building components. Thechange in the standard, which had to be applied retrospectively, resulted in an increase inshareholders’ equity at December 31, 2002 of CHF 105 million, and comprises reductions in the leaseobligations, the carrying amount of real estate and the deferred profit from these transactions. Asa result, lease expense increased and depreciation expense and interest expense decreased in 2003,2004 and 2005. Prior years’ numbers have been restated accordingly.
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**RESULTS OF GROUP OPERATIONS**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**  **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Net revenue  9,732   10,057   10,026   (3.2)  0.3 Other income  260   195   231   33.3   (15.6)**Total**  **9,992**   **10,252**   **10,257**   **(2.5****)**  **(0.0****)**Goods and services purchased  1,831   1,847   1,706   (0.9)  8.3 Personnel expenses  2,173   2,194   2,266   (1.0)  (3.2)Other operating expenses  1,817   1,823   1,798   (0.3)  1.4 Depreciation  1,286   1,542   1,537   (16.6)  0.3 Amortization  108   151   142   (28.5)  6.3 **Total operating expenses**  **7,215**   **7,557**   **7,449**   **(4.5****)**  **1.4** **Operating income**  **2,777**   **2,695**   **2,808**   **3.0**   **(4.0****)**Financial result  82   (134)  (13)  n.a.   n.a. Income tax expense  (535)  (392)  (467)  40.9   (16.1)Equity in net income of affiliatedcompanies  13   22   (9)  (40.9)  n.a. **Net income from continuing operations**  **2,337**   **2,191**   **2,319**   **6.7**   **(5.5****)**Discontinued operations(1)  9   (243)  (408)  n.a.   (40.4)   **Net income**  **2,346**   **1,948**   **1,911**   **20.4**   **1.9**    Net income attributable to equityholders of Swisscom AG  2,022   1,596   1,571   26.7   1.6 Net income attributable to minorityinterests  324   352   340   (8.0)  3.5  (1) On June 8, 2004 Swisscom completed the sale of its stake in debitel. As a result, debitelis reported separately as a discontinued operation in the consolidated financial statements.The previous years’ figures were restated accordingly.**Net Revenue**Revenue decreased from CHF 10,057 million in 2004 to CHF 9,732 million in 2005, mainly reflecting adecrease in revenue from the fixed-line segments Fixnet and Solutions. Fixnet’s revenue decreasedas a result of the Belgacom transaction. For details see *“Item 4: Information on the Company —Fixnet — Wholesale Traffic*”, as well as a decrease in traffic revenue reflecting primarily adecline in volumes and lower average tariffs as a result of a loss in market share to cable networkoperators and mobile substitution. This decrease was partially offset by an increase in accessrevenue as a result of an increase in the number of ADSL subscribers. The decrease in revenue fromSolutions was mainly due to a decrease in revenue from traffic and leased lines as a result ofprice pressure due to fierce competition and migration to IP based services. These decreases in thefixed-line segments were partially offset by other businesses, especially by Swisscom IT Servicesthrough an increase in revenue from outsourcing services, Swisscom Eurospot and the acquisition ofAntenna Hungária. Mobile revenue remained relatively stable, as a decrease in revenue due to areduction of termination rates and an introduction of new tariff models was offset by a continuinggrowth of the subscriber base as well as an increase in the usage of new data services.Revenue slightly increased from CHF 10,026 million in 2003 to CHF 10,057 million in 2004,reflecting an increase in revenue from Mobile, partially offset by a decrease in revenue fromFixnet and Solutions. The increase in revenue from Mobile mainly reflects an increase in the numberof subscribers as well as increased usage of new data services and revenue from the sale ofhandsets. The decrease in revenue from Fixnet was mainly due to a decrease in traffic revenuereflecting primarily a decrease in Internet traffic as customers continued to migrate to ADSL. Thisdecrease was partially offset by an increase in access revenue as a result of a substantialincrease in the number of ADSL subscribers, reflecting a continuing growth in demand for highbandwidth connectivity. The decrease in revenue from Solutions was mainly due to a decrease invoice and data traffic as a result of fierce competition.
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**Other income**Other income increased from CHF 195 million in 2004 to CHF 260 million in 2005, primarily due to anincrease in gains from the sale of real estate property and an increase in capitalized cost.Other income decreased from CHF 231 million in 2003 to CHF 195 million in 2004, primarily due tothe gain of the sale of a former subsidiary, Telecom FL AG, in 2003.**Goods and services purchased**Goods and services purchased decreased from CHF 1,847 million in 2004 to CHF 1,831 million in 2005,primarily due to a decrease in expenses as a result of the Belgacom transaction. The decrease waspartially offset by an increase in expenses for customer equipment and services purchased relatingto outsourcing and system integration services at Swisscom Solutions and Swisscom IT Services.Goods and services purchased increased from CHF 1,706 million in 2003 to CHF 1,847 million in 2004,primarily due to an increase in Mobile’s cost of equipment purchased for resale reflecting anincrease in the number of handsets sold due to a growing subscriber base and higher averagepurchase prices for more sophisticated handsets. The increase in the number of mobile subscribersalso resulted in an increase in expenses that Mobile had to pay other carriers for its customersroaming on the other’s networks as well as for national and international interconnection.**Personnel expenses**Personnel expenses decreased from CHF 2,194 million in 2004 to CHF 2,173 million in 2005 due to adecrease in pension expenses of CHF 34 million, reflecting a decrease in total interest cost on thepension liability due to a reduction in the interest rate by 0.6% in 2005, and a decrease in costfor social plan measures. A decrease in personnel expenses reflecting headcount reductions mainlyat Fixnet was offset by an increase in the average number of employees in the segment Other, anoverall salary increase and an increase due to the consolidation of Antenna Hungária as of October25, 2005.Personnel expenses decreased from CHF 2,266 million in 2003 to CHF 2,194 million in 2004 mainly asa result of a decrease in termination benefits from CHF 88 million in 2003 to CHF 48 million in2004, a decrease in the average number of employees resulting from restructuring measuresimplemented in 2002 and 2003 and a decrease in pension expense of CHF 38 million, as described inNote 11 of the consolidated financial statements. These effects have partially been offset by anoverall salary increase.**Other operating expenses**Other operating expenses remained relatively stable at CHF 1,817 million in 2005 (CHF 1,823 millionin 2004). A decrease in expenses for repair and maintenance, rental of infrastructure andinformation technology was partially offset by an increase in expenses for consultancy andtemporary personnel due to Swisscom IT Services’ growing outsourcing business and costs relating toSwisscom’s triple play strategy.Other operating expenses slightly increased from CHF 1,798 million in 2003 to CHF 1,823 million in2004 due primarily to an increase in expenses for consultancy and temporary personnel and theconsolidation of Billag Card Services (now Accarda AG), which was acquired in December 2003. Theseincreases were partially offset by a decrease in other operating expenses by Fixnet due to anincrease in the provision that was recorded in 2003 for the case against Swisscom relating to itsinterconnection prices.**Depreciation**Depreciation decreased from CHF 1,542 million in 2004 to CHF 1,286 million in 2005 mainly due tothe impairment in 2004 of CHF 155 million relating to sea cable owned by Fixnet as described belowand due to lower depreciation in the Fixnet segment mainly as a result of an increase in the numberof fully depreciated assets.Depreciation slightly increased from CHF 1,537 million in 2003 to CHF 1,542 million in 2004 mainlydue to (i) an increase in depreciation at Mobile due to an increase in capital expendituresrelating to the rollout of new broadband technologies and a respective reduction in the usefullives of older network equipment and (ii) an
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impairment of CHF 155 million relating to sea cable owned by Fixnet, as described in Note 22 of theconsolidated financial statements. These effects were partially offset by lower depreciation in theFixnet segment mainly due to an increase in the number of fully depreciated assets and to the phaseout of one of Fixnet’s switching platforms in 2004, which resulted in only partial yeardepreciation in 2004.**Amortization**Amortization decreased from CHF 151 million in 2004 to CHF 108 million in 2005, principally due togoodwill no longer being amortized as of 2005 in accordance with IFRS 3. For further information,see Note 23 to the consolidated financial statements.Amortization increased from CHF 142 million in 2003 to CHF 151 million in 2004 due to theamortization of goodwill for Billag Card Services, which was acquired in December 2003.**Financial result**Financial result changed from a net expense of CHF 134 million in 2004 to a net income of CHF 82million in 2005, mainly as a result of the recognition of a provision in 2004 relating tocross-border tax lease agreement, part of which was reversed in 2005. Further, the increase was dueto a reversal of a provision for dismantlement and restoration in 2005, due to a strategicrevaluation of cost and the remaining useful lives of the analog transmitter stations and awrite-down of the participation in Infonet Service Corporation in 2004 before it was sold at thebeginning of 2005. See Note 13 to the consolidated financial statements.Financial result decreased from a net expense of CHF 13 million in 2003 to CHF 134 million in 2004,mainly due to a reduction in the present value of the provisions for dismantlement in 2003 due tothe extension of the expected timing of the dismantlement. See Note 26 to the consolidatedfinancial statements. The decline in financial result was also due to a decrease in foreignexchange gains from CHF 48 million in 2003 to CHF 5 million in 2004.**Income tax**Income tax expense increased from CHF 392 million in 2004 to CHF 535 million in 2005, mainlyreflecting an increase in operating income as well as a capitalization of deferred tax assets ofCHF 113 million in 2004 as described below. The effective tax rate is 18.6% in 2005.Income tax expense decreased from CHF 467 million in 2003 to CHF 392 million in 2004. In prioryears, a valuation allowance was recorded on certain deferred tax assets as it was consideredimprobable that benefits would be realized in the future. In 2004, this assessment changed as aresult of organizational changes and deferred tax assets of CHF 113 million were capitalizedagainst expenses. In 2003, income tax expense decreased by CHF 80 million as a result of animpairment of the goodwill relating to debitel, which was tax-deductible. The effective tax ratefor 2004 was 15.2%.For further information relating to income tax expense, see Note 14 to the consolidated financialstatements.**Equity in net income of affiliated companies**Equity in net income of affiliated companies declined from CHF 22 million in 2004 to CHF 13 millionin 2005, mainly due to a reversal of a provision for liquidation cost of Swisscom’s investment inAUCS in 2004.Equity in net income of affiliated companies improved from a loss of CHF 9 million in 2003 to anincome of CHF 22 million in 2004. The loss in 2003 included a loss from the disposal of theindirectly held investment in Cesky Telecom in 2003.**Discontinued operation**On June 8, 2004, Swisscom sold its stake in debitel to Telco Holding S.à r.l. Luxembourg. As aresult, debitel is reported separately in the consolidated financial statements as a discontinuedoperation. For details on this transaction, see Note 37 to the consolidated financial statements.
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The following table sets forth debitel’s results for the periods indicated:         CHF in millions **Period from**  **Year Ended**   **January 1 to**  **December 31,**   **June 8, 2004**  **2003**    Net revenue  1,917   4,555 Expenses(1)  (1,913)  (4,938)**Operating (loss) income**  **4**   **(383****)**Other net (expenses) income  1   (25)   **Net (loss) income from discontinued operation (debitel)**  **5**   **(408****)**    (1) Includes goodwill amortization in 2003 and 2004 of CHF 172 million and CHF 57 million,respectively, and impairment of goodwill in 2003 of CHF 280 million.In 2005, income from discontinued operation (debitel) amounted to CHF 9 million and consistsof a gain of CHF 59 million from early repayment of the vendor loans granted to the buyers ofdebitel in 2004, which was partially offset by recognition of a provision of CHF 50 million forrisks relating to representations and warranties in connection with the sale.Revenue and net income of debitel up to the date of completion of the sale in 2004 amounted to CHF1,917 million and CHF 5 million, respectively, including goodwill amortization of CHF 57 million. Aloss on the sale of CHF 248 million was recorded in 2004 reflecting primarily the removal of thecumulative currency translation loss of CHF 238 million from equity into the income statement.Net operating loss of debitel in 2003, including goodwill amortization of CHF 172 million andgoodwill impairment of CHF 280 million, was CHF 383 million. The impairment charge was calculatedbased on the value in use of the investment which approximated the net proceeds expected from thesale. Excluding the expenses relating to goodwill, debitel had net operating income of CHF 69million.**Outlook**Based on continuing strong competition and assuming no significant unexpected regulatory changes,Swisscom expects consolidated net revenue as well as operating income to decrease in 2006. The mainreasons for the decline are lower termination charges for mobile telephony and the sale ofSwisscom’s international wholesale activities, both of which will negatively effect the entire yearwhereas these factors affected only a portion of the 2005 results. Continuing price pressure onMobile and Fixnet is expected to be partially offset by growth in other segments.
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**Results of Operations by Segment**Effective January 1, 2005, Swisscom Enterprise Solutions was merged with Swisscom Systems, formerlyaccounted for in the segment “Other”, into a new business segment named Solutions. Prior years’numbers for the segments “Other” and “Solutions” have been restated accordingly. For details see“*Item 4: Information on the Company — Solutions*”.The reporting segments for 2005 were defined as follows: **•** **Fixnet**provides access, fixed-line voice, Internet and a comprehensive range ofother fixed network telecommunication services to residential and business customers.In addition, Fixnet provides wholesale services and also offers a variety of otherservices, including the sale of customer equipment, the provision of leased lines andthe operation of a directories database.  **•** **Mobile**provides mobile telephony, data and value-added services in Switzerland andsells mobile handsets.  **•** **Solutions**provides national and international fixed-line voice telephony services tobusiness customers and offers leased lines, Intranet and other data services as well asintegrated communication technology solutions, including outsourcing services, tobusiness customers.  **•** **Other**covers mainly the provision of IT services through Swisscom IT Services, thebroadcasting businesses of Swisscom Broadcast and Antenna Hungária in Switzerland andHungary, the business with billing services and customer cards of Accarda and theoperation of a pan-European network for broadband Internet connectivity throughSwisscom Eurospot.  **•** **Corporate**includes Swisscom’s headquarter divisions, group-company shared services,property rentals through the real estate company Swisscom Immobilien and Swisscom’sprograms under its social plan.The following table sets forth net revenue and operating income for the segments in place in 2005for the periods indicated.**Segment results**                         CHF in millions **Net revenue**  **Operating income**  **2005**  **2004**  **2003**  **2005**  **2004**  **2003**    Fixnet  5,308   5,715   5,781   1,294   1,098   1,045 Mobile  4,168   4,356   4,140   1,477   1,617   1,674 Solutions  1,268   1,437   1,592   35   87   49 Other  1,059   979   945   2   (12)  (44)Corporate  690   608   703   (31)  (101)  82 Intersegment elimination  (2,761)  (3,038)  (3,135)  —(1)  6(1)  2(1)   **Total**  **9,732**   **10,057**   **10,026**   **2,777**   **2,695**   **2,808**     (1) Intersegment profits and losses occur as a result of offsetting intersegment services andsales of assets. These are eliminated in the consolidated financial statements and disclosedin segment reporting in the column “Intersegment elimination”.
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**Fixnet**Revenue from Fixnet comprises primarily revenue from access services and fixed retail telephonytraffic in respect of residential and business customers, revenue from wholesale traffic servicesoffered to national and international telecommunication providers and revenue from payphoneservices, operator services and prepaid calling cards. Fixnet also provides leased lines, sellscustomer equipment and operates a directories database. See “*Item 4: Information on the Company —Fixnet*”.The following table sets forth the segment results for Fixnet and the percentage changes thereinfor the periods presented:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**  **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Net revenue from external customers  4,319   4,555   4,601   (5.2)  (1.0)Intersegment net revenue  989   1,160   1,180   (14.7)  (1.7)   **Net revenue**  **5,308**   **5,715**   **5,781**   **(7.1****)**  **(1.1****)**Segment expenses  4,014   4,617   4,736   (13.1)  (2.5)   **Segment operating income**  **1,294**   **1,098**   **1,045**   **17.9**   **5.1**    ***Segment margin***  ***24.4******%***  ***19.2******%***  ***18.1******%***        The following table sets forth net revenue from external customers generated by Fixnet for theperiods indicated:**Net revenue from external customers**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**  **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Access  1,992   1,876   1,715   6.2   9.4 Retail traffic  1,082   1,240   1,329   (12.7)  (6.7)Wholesale traffic  483   691   677   (30.1)  2.1 Other traffic  130   158   247   (17.7)  (36.0)Other revenue  632   590   633   7.1   (6.8)   **Total Fixnet external revenue**  **4,319**   **4,555**   **4,601**   **(5.2****)**  **(1.0****)**   Fixnet’s total external revenue decreased by 5.2% in 2005, mainly due to a decrease in wholesaletraffic revenue as described below and a decrease in retail traffic revenue reflecting a decline intraffic volumes as a result of a loss in market share to cable network operators and lower averagetariffs through the introduction of flat rates as well as a reduction of mobile termination rates.These effects were partially offset by higher access revenue reflecting an increase in the numberof ADSL subscribers.On February 23, 2005, Swisscom and Belgacom, signed an agreement to combine their internationalwholesale activities by forming a new joint venture company, named Belgacom International CarrierServices (BICS, the Belgacom transaction). The transaction, in which Swisscom received a 28%interest in the joint venture in exchange for its international wholesale business andinternational network, was effective as of July 1, 2005. After the completion, a large portion ofSwisscom’s wholesale international traffic is no longer routed through Swisscom Fixnet, butdirectly through BICS and as Fixnet only has a minority stake in the joint venture, associatedrevenue (and cost) are no longer recorded by Fixnet. However, mainly for technical reasons,international incoming traffic to be routed through BICS Switzerland to third party networks and toSwisscom Mobile’s network will continue to be routed through Fixnet’s network until 2007.Accordingly, associated revenues and costs are still being recognized by Fixnet. These revenues andcosts were recorded under international incoming traffic until December 31, 2005 and under wholesalenational traffic from January 1, 2006. After 2007, BICS traffic will no longer be routed throughFixnet under this arrangement. Revenue from Fixnet’s international wholesale operations was CHF 445million and CHF 256 million in 2004 and 2005, respectively. For details see *“Item 4: Informationon the Company — Fixnet — Wholesale Traffic”.*
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In 2004, Fixnet’s total external revenue decreased by 1.0% due primarily to a decrease in retailtraffic revenue reflecting a decrease in Internet traffic as customers continued to migrate toasynchronous digital subscriber lines (ADSL) and a decrease in other traffic revenue due to therelease of deferred revenue in 2003 relating to prepaid calling cards. These effects were partiallyoffset by higher access revenue reflecting an increase in the number of ADSL subscribers.Fixnet expects total revenue from external customers to further decrease in 2006, mainly due to (i)a decrease in average tariffs and traffic volumes as well as in the number of PSTN and ISDN linesdue to continuing strong competition from cable network operators and substitution by mobiletelephony and (ii) the full-year effect of the Belgacom transaction. On the other hand, the numberof ADSL subscriber lines is expected to grow further and should be able to partially compensate forthese declines in revenue.***Access.***Revenue from access services consists principally of monthly subscription fees charged tocustomers for providing analog (PSTN) and digital (ISDN) telephone access lines to residences andbusinesses in Switzerland, broad- and narrowband Internet access as well as access line activationfees.The following table sets forth certain data relating to Swisscom’s access services:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**  **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) PSTN access revenue  824   851   866   (3.1)  (1.8)ISDN access revenue  512   514   507   (0.3)  1.3    **Total PSTN/ISDN access revenue**  **1,336**   **1,365**   **1,374**   **(2.1****)**  **(0.7****)**                     ADSL retail revenue  345   228   112   51.7   103.6 ADSL wholesale revenue  185   138   85   34.2   62.4    **Total ADSL revenue**  **530**   **366**   **197**   **45.1**   **85.8**                      Other access revenue  125   146   144   (14.2)  1.2                         **Total access revenue**  **1,992**   **1,876**   **1,715**   **6.2**   **9.4**                         Access lines (at period end, inthousands)(1):                    PSTN lines(2)  2,922   3,007   3,086   (2.8)  (2.6)ISDN lines(3)  900   924   924   (2.6)  0.0    **Total access lines**  **3,822**   **3,931**   **4,010**   **(2.8****)**  **(2.0****)**                        ADSL subscribers lines (at periodend, in thousands of lines):                    Retail subscriber lines  708   490   274   44.5   78.8 Wholesale subscriber lines  390   312   213   25.0   46.5    **Total ADSL subscribers lines**  **1,098**   **802**   **487**   **36.9**   **64.7**     (1) Based on lines in service, including courtesy and service lines. (2) Each PSTN line provides one access channel. (3) ISDN lines consist of basic ISDN lines and primary ISDN lines. A basic ISDN line provides twoaccess channels and a primary ISDN line provides 30 access channels.Total access revenue increased by 6.2 % and 9.4 % in 2005 and 2004, respectively, mainlydriven by an increase in revenue from ADSL. The number of ADSL subscriber lines continued toincrease substantially in 2005, but at a declining growth rate.PSTN revenue continued to decrease in 2005 due to strong competition from cable network operatorsand the continuing mobile substitution. Revenue from ISDN access remained relatively stable in 2005and 2004 reflecting the high penetration rate in Switzerland and the fact that the fast growingADSL technology can also be offered over a traditional PSTN line.
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***Retail traffic.***Retail traffic revenue consists of charges to customers for making nationaland international calls from a fixed-network access line, including calls made from the fixednetwork to mobile operators’ networks (“fixed-to-mobile”), as well as charges to customers foraccessing the Internet through narrowband access.The following table sets forth certain information relating to Swisscom’s retail traffic:                       **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) CHF in millions (except percentages) (1)                    Local and long distance traffic revenue  391   435   470   (10.3)  (7.4)Fixed-to-mobile traffic revenue  407   466   464   (12.8)  0.4 Internet traffic revenue  74   109   162   (31.8)  (32.7)International traffic revenue  210   230   233   (8.5)  (1.3)   **Total retail traffic revenue**  **1,082**   **1,240**   **1,329**   **(12.7****)**  **(6.7****)**                        Traffic (in millions of minutes)(2):                    Local and long distance traffic  6,628   7,205   7,732   (8.0)  (6.8)Fixed-to-mobile traffic  925   949   950   (2.5)  (0.1)Internet traffic  2,252   3,323   4,842   (32.2)  (31.4)International traffic(3)  926   955   968   (3.0)  (1.3)   **Total retail traffic**  **10,731**   **12,432**   **14,492**   **(13.7****)**  **(14.2****)**    (1) Figures do not include traffic or revenue, as appropriate, generated from Swisscom-operatedpublic payphones or from calling cards. (2) Includes traffic on courtesy and service lines. (3) Based on minutes of outgoing international traffic as determined for retail customer billingpurposes. Does not include international wholesale traffic originating outside Switzerland.Total retail traffic revenue declined by 12.7% in 2005 and 6.7% in 2004, primarily due to adecrease in local and long distance traffic revenue and Internet traffic revenue. In addition,revenue from fixed-to-mobile traffic decreased in 2005 as a result of a reduction in terminationrates by Swisscom Mobile which were introduced on June 1, 2005 and passed on to Fixnet’s customerson July 1, 2005.In both 2004 and 2005, the decrease in local and long distance as well as International trafficrevenue is mainly due to a decrease in tariffs reflecting the introduction of new price models atthe end of 2004, an increase in competition from cable network operators which resulted in a lossof market share, a substitution effect from an increased use of mobile phones and other newcommunication technologies and the migration of local Internet dial-up traffic to ADSL.In 2004 and 2005, the decrease in revenue from Internet traffic is a result of the migration ofInternet dial-up traffic to ADSL. ADSL customers pay a fixed monthly fee, irrespective of theamount of usage, which is recorded under access revenue.***Wholesale traffic.***Swisscom recognizes revenue in the Swiss market from providing network servicesto other telecommunication companies. Such services include primarily the standard interconnectionservices Swisscom is required to provide to other telecommunication service providers eligible forinterconnection under the Telecommunications Act. Wholesale international revenue comprisesprimarily revenue from international termination traffic, and revenue for international incomingtraffic.On February 23, 2005, Swisscom and Belgacom, signed an agreement to combine their internationalwholesale activities as of July 1, 2005 by forming a new joint venture company, named BelgacomInternational Carrier Services (Belgacom transaction). For details ofthis transaction see “*— Netrevenue from external customers*” above.
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The following table sets forth certain information relating to Swisscom’s wholesale traffic:                       **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) CHF in millions (except percentages)                    Wholesale national traffic revenue  227   246   300   (7.7)  (18.0)International incoming traffic revenue  146   200   208   (27.2)  (3.8)International termination traffic revenue  110   245   169   (55.3)  45.0    **Total wholesale traffic revenue**  **483**   **691**   **677**   **(30.1****)**  **2.1**                         Total wholesale telephony traffic (millions ofminutes):                    Wholesale national traffic(1)  15,947   17,055   17,871   (6.5)  (4.6)International incoming traffic(2)  1,577   1,521   1,607   3.7   (5.4)International termination traffic(3)  755   1,508   1,188   (49.9)  26.9    **Total wholesale traffic**  **18,279**   **20,084**   **20,666**   **(9.0****)**  **(2.8****)**    (1) Based on minutes as determined for customer billing purposes. Includes traffic related tothird party revenue for access, termination and transit services. (2) Minutes of incoming traffic terminated in Switzerland as determined for internationalsettlement purposes. (3) Minutes of outgoing traffic terminated outside of Switzerland.Total wholesale traffic revenue decreased by 30.1% in 2005 primarily as a result of theBelgacom transaction.Wholesale national traffic revenue decreased by 7.7% and 18.0% in 2005 and 2004, respectively,mainly due to reductions in interconnection rates and a decline in traffic volume by 6.5% and 4.6%as a result of the migration of third-party Internet traffic to ADSL and direct access ofresidential and business customers to other operators’ networks.In 2005, international incoming traffic revenue decreased by 27.2% due to a reduction in mobiletermination rates and international termination traffic revenue decreased by 55.3% mainly as aresult of the Belgacom transaction as described in net revenue from external customers above.International termination traffic revenue increased by 45.0% in 2004 compared to 2003 as a resultof an increase in traffic volume by 26.9% due to the expansion of the business as a result offocused marketing activities as well as a greater share of higher tariff traffic to mobilenetworks.***Other traffic.***Fixnet operates public payphones as part of its obligation to provide UniversalService. Also, Fixnet generates revenue from operator services and the sale of prepaid callingcards.The following table sets forth Fixnet’s other traffic revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Other traffic revenue(1)  130   158   247   (17.7)  (36.0) (1) Includes revenue from prepaid calling cards, operator services and Swisscom-operated publicpayphones.Excluding the one-time release of deferred revenue in 2003 described below, other trafficrevenue decreased by 17.7% and 9.7% in 2005 and 2004, respectively, mainly due to increasedcompetition and online substitution for operator services and substitution of Swisscom-operatedpublic payphones’ services through the use of mobile phones.Revenue from the sale of telephone cards, which are valid for 3 years, is deferred and recognizedeither when the services are provided or once the card is no longer valid. Historically, Swisscomwas not able to reliably track the total amount of unutilized credit for cards that were no longervalid. In 2003, however, Swisscom
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implemented changes to the system to allow it to reliably track this amount and released CHF 72million to revenue.***Other revenue.***Other revenue comprises primarily revenue from the sale of customer equipment, theprovision of leased lines and the operation of a directories database.The following table sets forth Fixnet’s other revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Customer equipment(1)  253   250   252   1.5   (0.8)Leased lines  158   136   143   16.3   (4.9)Directories  120   113   107   5.8   5.6 Revenue from other activities(2)  101   91   131   11.1   (30.5)   **Total other products revenue**  **632**   **590**   **633**   **7.2**   **(6.8****)**    (1) Includes fixed-line customer premises equipment and mobile handsets sold through SwisscomShops. (2) Includes primarily revenue from Internet narrowband traffic to third-party ISP numbers andvalue added and data services to residential customers.Other revenue increased by 7.2% in 2005 due primarily to an increase in revenue from leasedlines as a result of the resolution of a pricing dispute and new services provided to BICS. In2004, Fixnet recorded a provision for a discount as a result of a dispute with one of itscompetitors. This dispute was settled in 2005 and the provision of CHF 9 million that had beenrecorded in 2004 was released in 2005.Other revenue declined by 6.8% in 2004 mainly due to a decline in revenue generated from otheractivities, mainly reflecting the sale of Swisscom’s wholly owned subsidiary Telecom FL AG inOctober 2003.**Intersegment net revenue**Fixnet is responsible for building and maintaining the fixed-line network and sells networkcapacity to Solutions and Mobile. Therefore, intersegment revenue comprises primarily revenue fromSolutions and Mobile for the use of the fixed network as well as revenue from Mobile for handsetcommissions due for new mobile subscribers that sign up in a Swisscom shop.                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Intersegment net revenue  989   1,160   1,180   (14.7)  (1.7)Intersegment revenue decreased by 14.7% and 1.7% in 2005 and 2004, respectively, primarily as aresult of a reduction in traffic volumes and leased lines from Swisscom’s business customersrecorded under the segment Solutions (see *“— Solutions”)*. In 2005, the decrease was also due to theBelgacom transaction. In 2004, a decrease in commissions received from Swisscom Mobile for the saleof prepaid cards was partially offset by an increase in commissions received from Swisscom Mobilefor the sale of mobile handsets through Swisscom Shops.
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**Segment expenses**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Goods and services purchased  606   693   690   (12.6)  0.4 Personnel expenses  944   954   1,017   (1.0)  (6.2)Other operating expenses  530   580   643   (8.6)  (9.8)Depreciation and amortization  797   1,072   1,083   (25.7)  (1.0)Other operating income(1)  (111)  (85)  (108)  30.6   (21.3)   **Total external segment expenses**  **2,766**   **3,214**   **3,325**   **(13.9****)**  **(3.3****)**Intersegment expenses  1,248   1,403   1,411   (11.0)  (0.6)   **Total segment expenses**  **4,014**   **4,617**   **4,736**   **(13.1****)**  **(2.5****)**    (1) Includes mainly capitalized cost and gains on sale of property, plant and equipment.**External segment expenses**External segment expenses decreased by 13.1% in 2005 primarily due to a decrease in depreciationand amortization as well as goods and services purchased. **•** Goods and services purchased decreased in 2005 by 12.6% mainly as a result of theBelgacom transaction. This effect was partially offset by an increase in expenses forthe purchase of ADSL modems, reflecting the growing number of ADSL subscribers.  **•** Personnel expenses decreased by 1.0% mainly due to continuing headcount reductionsin 2005*.*These decreases were partially offset by an overall salary increase as well asan increase in termination benefits from CHF 40 million in 2004 to CHF 50 million in2005.  **•** Other operating expenses decreased by 8.6% mainly due to expenses for energy asstarting in 2005, such expenses were billed as intersegment expenses by Swisscom’sreal-estate company Swisscom Immobilien AG following the introduction of a centralizedenergy cost settlement. Cost reductions in the areas of rental as well as maintenanceand repair were partially offset by an increase in expenses for information technologyrelating primarily to Swisscom’s triple play strategy and IT restructuring projects.  **•** Depreciation and amortization expenses decreased by 25.7% mainly due to (i) aone-time impairment charge of CHF 155 million in 2004 relating to assets in theinternational wholesale business; (ii) an increase in the number of fully depreciatedassets; and (iii) the phase out of one of Fixnet’s three switching platforms in 2004.External segment expenses decreased by 3.3% in 2004 primarily due to a decrease in personnelexpenses and other operating expenses. **•** Goods and services purchased remained stable in 2004. An increase in internationaltermination traffic expenses reflecting an increase in revenue was partially offset by(i) a decrease in expenses due to the sale of Swisscom’s wholly owned subsidiaryTelecom FL in October 2003, (ii) a decrease in international incoming traffic expensesreflecting a decrease in the volume of traffic terminating on other operators’ networksand (iii) a decrease in expenses for fixed-line customer premises equipment reflectinga decrease in sales.  **•** Personnel expenses decreased by 6.2% due to a decrease in termination benefits fromCHF 63 million in 2003 to CHF 40 million in 2004. Excluding termination benefits,personnel expenses decreased by 4.2%, mainly reflecting the headcount reductions in2003 and 2004, partially offset by an overall salary increase.  **•** Other operating expenses decreased by 9.8% mainly due to an exceptional expense in2003 for an increase in the provision recorded for the case against Swisscom by two ofits competitors
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   relating to Swisscom’s interconnection prices. See“*Item 8: Financial Information —Legal Proceedings*”. In addition, commissions paid to third parties relating to thesale of card products decreased.  **•** Depreciation and amortization expense decreased by 1.0% mainly due to an increase inthe number of fully depreciated assets and the phase out of one of Fixnet’s threeswitching platforms in 2004, which resulted in only partial year depreciation for thisplatform in 2004 as compared to the previous year. These effects have partially beenoffset by an impairment charge of CHF 155 million relating to assets in theinternational wholesale business mainly consisting of long-term utilization rights ofsea cables. See Note 22 to the consolidated financial statements for furtherinformation relating to this impairment.**Intersegment expenses**Intersegment expenses comprise primarily network fees to Mobile for calls from other networksterminating on the mobile network, expenses payable to Mobile for the purchase of mobile handsetsand amounts payable to other divisions for information technology, rental of real estate andmanagement fees.Intersegment expenses decreased by 11.0% in 2005 mainly reflecting a reduction in Mobiletermination rates on June 1, 2005 and a decrease in expenses as a result of the Belgacomtransaction. A decrease in expenses payable to Mobile for the purchase of mobile handsets as wellas a decrease in expenses for information technology were partially offset by energy cost billed bySwisscom’s real-estate company Swisscom Immobilien AG. The introduction of a centralized energycost settlement in 2005 resulted in such cost being recorded as intersegment expenses whereas theypreviously had been recorded as external expenses.Intersegment expenses remained relatively stable in 2004. An increase in expenses payable to Mobilefor the purchase of mobile handsets was offset by a decrease in traffic from other mobile networkoperators terminating on Swisscom Mobile’s network through Fixnet as an intermediary as a result ofincreased competition from other mobile network operators offering direct mobile interconnection aswell as a decrease in expenses payable to other group companies for information technology, rentalof real estate and management fees.Fixnet expects total segment expenses to decrease in 2006, mainly due to the full-year effect ofthe Belgacom transaction as well as a decrease in personnel expenses following the headcountreductions in 2005.**Segment margin**Segment margin increased from 19.2% to 24.4% in 2005, mainly due to a decrease in depreciationexpenses reflecting a one-time impairment charge of CHF 155 million in 2004 relating to assets inthe international wholesale business as well as an increase in the number of fully depreciatedassets. The Belgacom transaction also had a positive effect on the margin as this business wascharacterized by extremely low margins.Segment margin increased from 18.1% in 2003 to 19.2% in 2004, due to cost reductions mainly throughlower personnel expenses as a result of headcount reductions.Fixnet expects its margin to slightly decrease in 2006. A further decrease in revenue is notexpected to be fully compensated with cost reductions.
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**Mobile**Revenue from Mobile consists principally of monthly subscription fees, domestic and internationaltraffic charges for calls made in Switzerland or abroad by Swisscom’s customers and roaming feespaid by foreign operators whose customers use their mobile telephones over Swisscom’s networks. Italso consists of fees for using value-added services numbers, data traffic and sending SMS and MMSmessages as well as the sale of mobile handsets through channels other than Swisscom shops. See“*Item 4: Information on the Company — Mobile — Connectivity Voice — Principal Products*”.The following table sets forth the segment results for Mobile and the percentage changes thereinfor the periods presented:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Net revenue from external customers  3,651   3,679   3,511   (0.8)  4.8 Intersegment net revenue  517   677   629   (23.6)  7.6    **Net revenue**  **4,168**   **4,356**   **4,140**   **(4.3****)**  **5.2** Segment expenses  2,691   2,739   2,466   (1.8)  11.1    **Segment operating income**  **1,477**   **1,617**   **1,674**   **(8.7****)**  **(3.4****)**   ***Segment margin***  ***35.4******%***  ***37.1******%***  ***40.4******%***        The following table sets forth net revenue from external customers generated by Mobile for theperiods indicated:**Net revenue from external customers**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Base Fees  677   691   685   (2.0)  0.9 Connectivity Voice  2,203   2,286   2,221   (3.6)  2.9 Connectivity Data and VAS  604   521   454   15.9   14.8 Other mobile revenue(1)  167   181   151   (7.7)  19.9    **Total Mobile external revenue**  **3,651**   **3,679**   **3,511**   **(0.8****)**  **4.8**     (1) Includes revenue from the sale of handsets sold to sales channels other than Swisscom shopsand from SICAP, a prepaid billing platform.Mobile’s total external revenue remained relatively stable in 2005. A decrease in ConnectivityVoice revenue as a result of a reduction in termination rates as well as the introduction of newtariff models was offset by an increase in the number of subscribers due to an increase inpenetration as well as an increase in the usage of new data services.In 2004, Mobile’s total external revenue increased by 4.8%, primarily due to the increase inConnectivity Voice revenue reflecting an increase in the number of subscribers. Data andvalue-added services (VAS) revenue had a further positive effect on revenue in 2004 reflecting theincreased revenue from new data services.Mobile expects total revenue from external customers to remain relatively stable in 2006. Adecrease in revenue due to the full-year effect of the reduction of termination rates and to thegrowing number of subscribers transferring to new cheaper tariff models is expected to becompensated by an increase in the subscriber base reflecting a further increase in mobilepenetration and an increase in the service penetration and usage of new data services.The following table sets forth certain data relating to Mobile’s subscribers and traffic:
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                       **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Average number of subscribers(in thousands)(1):                    Postpaid  2,569   2,449   2,333   4.9   5.0 Prepaid(2)  1,502   1,441   1,353   4.2   6.5    **Average number of subscribers**  **4,071**   **3,890**   **3,686**   **4.7**   **5.5**                         Average monthly minutes of use per user(AMPU)(1)(3)  120   118   121   1.7   (2.5)Averagemonthly revenue per user (ARPU)(4)  74   81   81   (8.2)  0.0                      Traffic (in millions of minutes)(1):                    Connectivity voice(5)  3,688   3,404   3,335   8.3   2.1                      Number ofSMS messages (in millions)(1)(6)  1,991   1,986   1,847   0.3   7.5  (1) Includes service accounts and traffic generated by service accounts. (2) Excludes inactive customers. Swisscom no longer includes accounts of any inactive prepaidcustomer in its subscriber figures. A customer is deemed inactive after a period of twelvemonths without making a call or sending an SMS message. On a yearly average, inactivecustomers were 196,172 in 2003, 209,461 in 2004 and 141,910 in 2005. (3) Includes traffic from all outgoing calls made by Mobile subscribers, excluding inactivecustomers, plus traffic from all incoming calls made to Mobile subscribers from all othernetworks. (4) Includes revenue from all outgoing calls made by Mobile’s subscribers, excluding inactivecustomers, including roaming and data and value added services, plus revenue from all incomingcalls made to Mobile subscribers from all other networks as well as base fee revenue.   ARPU reconciliation             CHF in millions (except where indicated) **Year Ended**   **December 31,**   **2005**  **2004**  **2003**    Net revenue  4,168   4,356   4,140 less non-connectivity revenue(a)  336   386   298 less inbound roaming revenue(b)  169   165   199 less other non-service revenue  43   39   46    **Service revenue relevant to ARPU**  **3,620**   **3,766**   **3,597**                 Average subscribers (in thousands)  4,071   3,890   3,686              ARPU/month (in CHF)  74   81   81  (a) Consists mainly of revenue from the sale of mobile handsets (b) Consists of roaming fees paid by foreign operators whose customers use their mobiletelephones over Swisscom’s networks and until 2003, roaming fees from the nationalroaming agreement with another domestic mobile network operator.  Swisscom believes that ARPU provides its management and investors with useful informationconcerning the financial performance of its product and service offerings and its abilityto attract and retain high-value customers. (5) Includes minutes from all outgoing calls made by Mobile’s customers and foreign visitorsusing the network of Swisscom Mobile. (6) Excludes wholesale SMS messages.
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***Base Fees.***Net revenue from base fees consists principally of monthly subscription charges,which includes revenue from the sale of SIM cards.Base fee revenue remained relatively stable in 2005 and 2004. An increase in the subscriber basewas offset by the continued migration of customers from higher price to lower price tariffsubscriptions.***Connectivity Voice.***Net revenue from connectivity voice consists principally of the domestic andinternational traffic charges for calls made in Switzerland by Mobile’s customers, roaming feespaid by operators whose customers use their mobile telephones over Mobile’s network and revenuefrom the termination of traffic on Mobile’s network from other Swiss mobile operators. Further,fees from a roaming agreement with Orange, whereby Orange subscribers could use the Mobile networkin parts of Switzerland, were recorded under Connectivity Voice. The roaming agreement with Orangewas terminated in July 2003.Connectivity Voice revenue decreased by 3.6% in 2005, mainly due to the reduction of terminationrates by approximately 40% from CHF 0.335 to CHF 0.20 effective June 1, 2005. At the same timeMobile introduced the Natel Liberty product family, a new tariff model charging customers on a percall basis, rather than on a per-minute basis, for which 635 thousand subscribers had registered asof the end of 2005. These effects were partially offset by an increase in the number ofsubscribers. The reduction of termination rates and the introduction of new tariff models alsoresulted in a decrease of the average monthly revenue per user (ARPU) from voice telephony. Thesetariff reductions had a stimulating effect on traffic thereby slightly increasing the averagemonthly minutes of use per user (AMPU).Connectivity Voice revenue increased by 2.9% in 2004, mainly due to an increase in the number ofsubscribers as well as an increase in roaming revenue, partially offset by a decrease in theaverage monthly minutes of use per user (AMPU) as well as a decline in revenue due to thetermination of the national roaming agreement with Orange in July 2003. The increase in thesubscriber base is mainly the result of an increase in market penetration and a value-based churnmanagement. However, lower AMPU as well as increasing price competition in the business segmentresulted in a decrease of the average monthly revenue per user (ARPU) from voice telephony, whichwas offset by an increase in the ARPU from data services.***Connectivity data and value-added services.***Net revenue from data and value-added services consistsprincipally of fees generated from SMS messages, data traffic and services, especially from a newservice launched in September 2004, enabling seamless data download/synchronization via a PC cardintegrating all mobile broadband technologies.Connectivity data and value-added services revenue increased by 15.9% and 14.8% in 2005 and 2004,respectively, mainly due to an increase in service penetration within the existing subscriber baseas well as higher usage of new data services per user. In 2004, the increase in revenue was alsodue to the introduction of termination fees for SMS’s in January 2004, based on a new interworkingagreement with another mobile network operator.***Other Mobile revenue.***Other Mobile revenue mainly consists of revenue from the sale of mobilehandsets to third-party outlets and revenue from services provided by SICAP AG, a wholly ownedsubsidiary, to other GSM operators.Key drivers for revenue from the sale of handsets are the demand and sourcing strategies ofthird-party handset resellers as well as the average price per handset sold to the resellers, whichare mainly dependant on the technology and features of the handsets. As this business has a verylow margin, Swisscom Mobile does not actively manage handset sales to resellers and externalrevenue from the sale of mobile handsets may therefore be very volatile.In 2005, other mobile revenue decreased by 7.7%, mainly as a result of lower average prices ofhandsets sold, whereas in 2004, revenue increased by 19.9%, due to an increase in the number ofhandsets sold and an increase in the average price per handset due to more sophisticated features.
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**Intersegment net revenue**Intersegment net revenue comprises principally revenue from Fixnet for incoming calls made toMobile subscribers from other networks and revenue from the sale of mobile equipment in theSwisscom shops.                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Intersegment net revenue  517   677   629   (23.6)  7.6 Intersegment net revenue decreased by 23.6% in 2005 due to a reduction of mobile termination ratesas of June 1, 2005 as well as lower average prices of handsets sold through Fixnet’s Swisscomshops.Intersegment net revenue increased by 7.6% in 2004 due to an increase in the number of handsetssold through Fixnet’s Swisscom shops.**Segment expenses**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Goods and services purchased  975   971   801   0.4   21.2 Personnel expenses  322   310   297   3.9   4.4 Other operating expenses  483   505   473   (4.4)  6.8 Depreciation and amortization  373   359   310   3.9   15.8 Other operating income(1)  (17)  (16)  (14)  6.3   14.3    **Total external segment expenses**  **2,136**   **2,129**   **1,867**   **0.3**   **14.0** Intersegment expenses  555   610   599   (9.0)  1.8    **Total segment expenses**  **2,691**   **2,739**   **2,466**   **(1.8****)**  **11.1**     (1) Includes mainly capitalized cost and gains on sale of property, plant and equipment.**External segment expenses**External segment expenses remained relatively stable in 2005. An increase in personal expenses aswell as depreciation and amortization expenses was offset by a decrease in other operatingexpenses. **•** Goods and services purchased remained stable in 2005. A decrease in the number andaverage prices of handsets purchased for resale was offset by a transfer of expensesfrom Fixnet (which was recorded as intersegment expense) to Belgacom InternationalCarrier Services as a result of the Belgacom transaction. Since this transaction,Mobile now routes international outgoing traffic directly through Belgacom. For detailsof the Belgacom transaction see “*Item 4: Information onthe company — Fixnet —Wholesale Traffic”.*  **•** Personnel expenses increased by 3.9% due to an overall salary increase as well astermination benefits of CHF 8 million in 2005. These effects were partially offset by aslight decrease in the number of employees as a result of cost reduction measuresinitiated in 2005.  **•** Other operating expenses decreased by 4.4%, mainly due to a decrease in expenses foradvertising and maintenance and repair as part of cost reduction measures. In addition,energy costs are no longer recorded under other operating expenses but underintersegment expenses, following the introduction of a centralized energy costsettlement by Swisscom’s real-estate company Swisscom Immobilien AG in 2005.  **•** Depreciation and amortization increased by 3.9% due to investments made in 2004 forthe rollout of new broadband technologies.
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External segment expenses increased by 14.0% in 2004 primarily due to an increase in goods andservices purchased and in depreciation and amortization expenses. **•** Goods and services purchased increased by 21.2% primarily due to an increase in thenumber of handsets purchased for resale and higher average purchase prices for mobilehandsets supporting new technologies as well as an increase in national andinternational interconnection and roaming expenses reflecting the increase in thesubscriber base.  **•** Personnel expenses increased by 4.4% as a result of an increase in the number ofemployees required to manage the growth of the business and an overall salary increase.  **•** Other operating expenses increased by 6.8%, mainly due to an increase in expensesrelated primarily to the retention of mobile customers as a result of value-based churnmanagement.  **•** Depreciation and amortization increased by 15.8% due to an increase in investmentsfor the rollout of new broadband technologies and the resulting reduction of the usefullives of certain GSM equipment.**Intersegment expenses**Intersegment expenses comprise primarily network fees to Fixnet for mobile calls terminated onother networks, commissions payable for the acquisition of new customers or the extension ofexisting contracts in the Swisscom shops, rent, information technology cost and management fees.Intersegment expenses decreased by 9.0% in 2005 primarily due to the Belgacom transaction, whichresulted in Mobile routing its international outgoing traffic directly through the new companyinstead of Fixnet. This effect was partially offset by energy cost billed by Swisscom’s real-estatecompany Swisscom Immobilien AG. The introduction of a centralized energy cost settlement in 2005resulted in such cost being recorded as intersegment expenses whereas they previously had beenrecorded as external expenses.Intersegment expenses increased by 1.8% in 2004 primarily due to an increase in expenses payable toFixnet as a result of an increase in the number of new customers and contract extensions acquiredthrough the Swisscom shops in 2004. Expenses for leased lines from Fixnet also increased due to theincreased number of GSM and UMTS sites.Mobile expects total segment expenses to increase in 2006, mainly due to a further increase indepreciation and amortization expenses relating to investments for new broadband technologies aswell as a further increase in expenses related to the retention and acquisition of customers,partially offset by a decrease in expenses as a result of cost reduction measures introduced inlate 2005 as well as a decrease in intersegment expenses, mainly due to the full-year effect of theBelgacom transaction.**Segment margin**Segment margin decreased from 37.1% to 35.4% in 2005 primarily reflecting the reduction oftermination rates as of June 1, 2005 as well as the introduction of new tariff models.Segment margin decreased from 40.4% to 37.1% in 2004 compared to 2003 due primarily to an increasein expenses for subscriber retention as a result of value-based churn management and an increase indepreciation and amortization expenses reflecting an increase in investments for new broadbandtechnologies.Mobile expects segment margin to further decrease in 2006 mainly as a result of the full-yeareffect of the reduction in termination rates and the increasing number of subscribers transferringto new cheaper tariff models.
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**Solutions**Effective January 1, 2005, Swisscom Enterprise Solutions was merged with Swisscom Systems, formerlyaccounted for in the segment “Other”, into a new business segment named Solutions.Revenue from Solutions comprises primarily revenue from national and international fixed-line voicetelephony services to business customers, revenue from leased lines, revenue from Intranetservices, revenue from other service business and revenue from solution business. See *“Item 4:Information on the Company — Solutions”*.The following table sets forth the segment results for Solutions and the percentage changes thereinfor the periods presented:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Net revenue from external customers  1,123   1,279   1,426   (12.2)  (10.3)Intersegment net revenue  145   158   166   (8.2)  (4.8)   **Net revenue**  **1,268**   **1,437**   **1,592**   **(11.8****)**  **(9.7****)**Segment expenses  1,233   1,350   1,543   (8.7)  (12.5)   **Segment operating income**  **35**   **87**   **49**   **(59.8****)**  **77.6**    ***Segment margin***  ***2.8******%***  ***6.1******%***  ***3.1******%***        The following table sets forth net revenue from external customers generated by Solutions for theperiods indicated:**Net revenue from external customers**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) National and international traffic  239   297   344   (19.5)  (13.7)Leased lines national  147   184   216   (20.1)  (14.8)Intranet Services  152   173   179   (12.1)  (3.4)Other Service Business  247   272   299   (9.5)  (9.0)Solution Business  283   277   291   2.2   (4.8)Other revenue  55   76   96   (27.6)  (20.8)   **Total Solutions external revenue**  **1,123**   **1,279**   **1,426**   **(12.2****)**  **(10.3****)**   In 2005 and 2004, Solutions’ total external revenue decreased by 12.2% and 10.3%, respectively,primarily due to a decrease in national and international traffic revenue as a result of a decreasein traffic volumes and lower average tariffs as well as a decline in revenue from leased lines,Intranet services and other services business due to price pressure and the substitution of oldertechnologies through IP-based services.Solutions expects revenue from external customers to further decrease in 2006, mainly due tocontinuing price pressure for traffic and data services as well as substitution through IP-basedservices, partially offset by growth in revenue from its business with integrated communicationssolutions, which will include revenue from the takeover of 300 customers from Siemens Schweiz AG inMarch 2006. For details see “*Item 4: Information onthe Company — Solutions — Solution Business —System Integration*”.**National and International Traffic**. Revenue from national and international traffic consists ofcharges to business customers for making national and international calls and comprises the sameproducts as those of the Fixnet segment. See *“ — Fixnet— Access” and “— Fixnet — Retail Traffic”.*
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The following table sets forth certain information relating to Solutions’ national andinternational fixed-line traffic revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Local and long-distance traffic revenue  87   107   134   (18.7)  (20.1)Fixed-to-mobile traffic revenue  96   122   136   (21.3)  (10.3)   **Total national traffic revenue**  **183**   **229**   **270**   **(20.4****)**  **(15.2****)**International traffic revenue  56   68   74   (17.6)  (8.1)   **Total traffic revenue**  **239**   **297**   **344**   **(19.5****)**  **(13.7****)**                        Traffic (in millions of minutes)(1):                    Local and long-distance traffic  1,672   1,779   1,972   (6.0)  (9.8)Fixed-to-mobile traffic  258   278   303   (7.2)  (8.3)   **Total national traffic**  **1,930**   **2,057**   **2,275**   **(6.2****)**  **(9.6****)**International traffic(2)  356   361   373   (1.4)  (3.2)   **Total traffic**  **2,286**   **2,418**   **2,648**   **(5.5****)**  **(8.7****)**    (1) Includes traffic on courtesy and service lines. (2) Based on minutes of outgoing international traffic as determined for retail customer billingpurposes. Does not include international wholesale traffic originating outside Switzerland.Total traffic revenue decreased by 19.5% and 13.7% in 2005 and 2004, respectively, mainly dueto lower average tariffs due to intense competition as well as a decrease in tariffs forfixed-to-mobile traffic following a reduction of termination rates from Swisscom Mobile. Inaddition, traffic volumes decreased as a result of the continuing substitution of fixed-linetraffic by mobile phones or other technologies that enable customers to route traffic directly overthe mobile instead of the fixed-line network. Also, the increased use of e-mail had a negativeimpact on traffic volumes. However, as a result of successful customer win-back and retentionprograms, Solutions’ share in the voice traffic market stabilized in 2005.***Leased Lines national*****.**Revenue from leased lines national comprises revenue from business customersin Switzerland for the provision of leased lines services. See “*Item 4: Information on the Company—Solutions — Leased Lines National”.*The following table sets forth, for the periods indicated, certain information relating toSolutions’ leased lines national revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Leased lines national revenue  147   184   216   (20.1)  (14.8)   Revenue from leased lines national decreased by 20.1% and 14.8% in 2005 and 2004, respectively,mainly due to the migration from leased lines to IP-based services, which is recorded underIntranet services revenue, and as a result of a decline in prices due to continuing competitivepressure.***Intranet Services*****.**Revenue from Intranet Services comprises revenue from managed VPN services,based on multiprotocol label switching (MPLS) services offered to business customers. See “*Item 4:Information on the Company —Solutions — Intranet Services”.*
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The following table sets forth, for the periods indicated, certain information relating toSolutions’ Intranet services revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Intranet services revenue  152   173   179   (12.1)  (3.4)Intranet service revenue decreased by 12.1% and 3.4% in 2005 and 2004, respectively, mainly as aresult of the substitution of services based on older technologies by new IP based technologies(phase out of products at the end of their lifecycles) as well as a decline in prices due to strongcompetition. This substitution effect was partially offset by an increase in Intranet services as aresult of the migration from other technologies such as leased lines.***Other Service Business*****.**Revenue from Other Service Business comprises mainly revenue from privatenetwork services, business Internet services, international data services, as well as revenue frombusiness numbers. See “*Item 4: Information on the Company –Solutions – Other Service Business”.*The following table sets forth, for the periods indicated, certain information relating toSolutions’ Other Service Business revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**                  (% change) Total OtherService Business revenue(1)  247   272   299   (9.2)  (9.0) (1) Includes revenue from Infonet Switzerland.Total other service revenue decreased by 9.2% and 9.0% in 2005 and 2004, respectively, mainlyas a result of a decrease in private networks revenue due to the phase out of platforms with oldertechnologies and a decrease in international leased lines revenue due to price pressure and themigration to IP-based services.***Solution Business*****.**Revenue from Solution Business comprises primarily revenue from CustomerService, System Integration and Outsourcing, providing customers with customized modular solutionsto design, install and operate customers’ business communication infrastructure. Together withother Swisscom companies or external partners, Solutions is able to offer complete communicationsolutions. For a description of these services, see “*Item 4: Information on the Company – Solutions– Solution Business*”.The following table sets forth, for the periods presented, certain information related to revenuefrom solution business of Solutions:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Customer Service revenue(1)  130   148   155   (12.5)  (4.5)System Integration revenue(2)  122   104   128   17.8   (18.8)Outsourcing revenue  31   25   8   26.0   212.5    **Total Solution Business revenue**  **283**   **277**   **291**   **2.2**   **(4.8****)** (1) Includes primarily maintenance of private branch exchanges (PBX) and local area networks(LAN). (2) Includes primarily the sale and integration of private branch exchanges PBX and local areanetworks (LAN).Total revenue from solution business increased by 2.2% in 2005, mainly as a result of anincrease in System Integration revenue as a result of an increasing demand for the integration ofdata and telecommunication infrastructure and an increase in Outsourcing revenue due to newlyacquired outsourcing projects. These effects were partially offset by a decrease in Customer Services revenue due to a declining number ofcontracts for maintenance of PBX equipment and price pressure.
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Total revenue from solution business decreased by 4.8% in 2004, mainly as a result of a decrease incustomer services revenue due to a declining number of contracts for maintenance of PBX equipmentand price pressure as well as a decrease in System integration revenue due to a decrease in pricesand volume of PBX equipment sold, partially offset by an increase in revenue from the growingOutsourcing business.***Other revenue***comprises primarily revenue from the rental of private branch exchanges (PBX) tobusiness customers. For a description of these services, see *“Item 4: Information on the Company—Solutions — Other*”.The following table sets forth, for the periods indicated, certain information with respect toSolutions’ other revenue:                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Other revenue  55   76   96   (27.6)  (20.8)Total other revenue decreased by 27.6% in 2005 and 20.8% in 2004, due to a reduction in PBX rentalcontracts reflecting a decreasing demand for PBX rentals.***Intersegment revenue.***Intersegment revenue comprises primarily revenue from networking services,outsourcing and business numbers.                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Intersegment net revenue  145   158   166   (8.2)  (4.8)Intersegment revenue decreased by 8.2% in 2005, mainly due to a decrease in revenue for servicesand repairs of fixed and mobile network telephony equipment mainly from Swisscom Fixnet andSwisscom Mobile as Solutions’ service and repair center was sourced out to a third-party providerin the course of 2004.Intersegment revenue decreased by 4.8% in 2004, mainly due to a decrease in revenue from data andtraffic services as a result of a decline in the number of ports and traffic volumes with otherSwisscom companies due to a decrease in the number of employees. In addition, the outsourcing ofSolutions’ service and repair center as described above also accounts for a decrease inintersegment revenue in 2005.
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**Segment expenses**                     CHF in millions (except percentages) **Year Ended**  **Year Ended**   **December 31,**  **December 31,**   **2005**  **2004**  **2003**  **2005/2004**  **2004/2003**               (% change) Goods and services purchased  197   150   169   31.3   (11.2)Personnel expenses  261   289   357   (9.7)  (19.0)Other operating expenses  43   59   65   (27.1)  (14.5)Depreciation and amortization  39   46   75   (15.2)  (38.7)Other operating income  (7)  (4)  (3)  75.0   33.3    **Total external segment expenses**  **533**   **540**   **663**   **(1.3****)**  **(18.6****)**Intersegment expenses  700   810   880   (13.6)  (8.0)   **Total segment expenses**  **1,233**   **1,350**   **1,543**   **(8.7****)**  **(12.5****)**   **External segment expenses**Total external segment expenses decreased by 1.3% in 2005 primarily due to a decrease in otheroperating expenses and personnel expenses partially offset by an increase in goods and servicespurchased. **•** Goods and services purchased increased by 31.3% mainly reflecting an increase inequipment and services purchased relating to the increase in revenue from outsourcingand system integration services.  **•** Personnel expenses decreased by 9.7% due primarily to a decrease in terminationbenefits from CHF 23 million in 2004 to CHF 0 million in 2005. Excluding terminationbenefits, personnel expenses decreased by 1.9% due to a decrease in the average numberof employees.  **•** Other operating expenses decreased by 27.1% mainly due to a decrease in expenses forinformation technology. Expenses in 2004 included extraordinary expenses for thedevelopment of a new billing system as well as expenses relating to the preparation ofthe merger of Swisscom Enterprise Solutions and Swisscom Systems.  **•** Depreciation and amortization expenses decreased by 15.2%, mainly due to a decreasein capital expenditures in 2004 as a result of continuing retrogressively investmentsin customer premises equipment, since the customers increasingly invest in thisequipment by themselves.Total external segment expenses decreased by 18.6% in 2004 primarily due to a decrease in goods andservices purchased, personnel expenses and depreciation and amortization expenses. **•** Goods and services purchased decreased by 11.2% mainly reflecting a decrease inrevenue from the sale of communication equipment as part of the system integrationbusiness.  **•** Personnel expenses decreased by 19.0% due primarily to a decrease in terminationbenefits from CHF 41 million in 2003 to CHF 23 million in 2004. Excluding terminationbenefits, personnel expenses decreased by 15.8% as a result of a decrease in theaverage number of employees.  **•** Depreciation and amortization expenses decreased by 38.7%, mainly due to a decreasein capital expenditures in 2003 as a result of retrogressively investments in customerpremises equipment, since the customers increasingly invest in this equipment bythemselves.**Intersegment expenses**Intersegment expenses comprise primarily network fees payable to Fixnet for telephony and leasedlines and amounts payable to other divisions for information technology, rental of real estate andmanagement fees.Intersegment expenses decreased by 13.6% and 8.0% in 2005 and 2004, respectively, primarily due toa reduction in network fees charged by Fixnet, mainly reflecting a decrease in the volume andprices of telephony
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traffic and leased lines as well as lower expenses for information technology, since Solutions’ newbilling system became operational at the beginning of 2005*.*Solutions expects total segment expenses to decrease in 2006, mainly due to a decrease inintersegment expenses as a result of a further decrease in prices and volumes of national andinternational traffic and data services, partially offset by an increase in goods and servicespurchased reflecting an increase in revenue from the solution business and from new businesses suchas Voice over IP.**Segment margin**Segment margin decreased from 6.1% in 2004 to 2.8% in 2005 due to a decrease in revenue that couldnot be compensated by cost reductions.Segment margin increased from 3.1% in 2003 to 6.1% in 2004 despite a decrease in revenue of 9.7%,mainly due to significant cost reductions, in particular lower personnel expenses as a result ofheadcount reductions and a decrease in termination benefits.Solutions expects its margin to slightly decrease in 2006 as cost reductions are expected to onlypartially offset a further decrease in revenue.
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**Other**The following table sets forth the results for the segment Other and the percentage changes thereinfor the periods presented:                         CHF in millions (except percentages) **Year Ended**  **Year Ended**      **December 31,**  **December 31,**      **2005** **2004** **2003** **2005/2004** **2004/2003**                  (% change)    Net revenue from external customers  571   476   416   20.0   14.4     Intersegment net revenue  488   503   529   (3.0)  (4.9)       **Net revenue**  **1,059**   **979**   **945**   **8.2**   **3.6**     Segment expenses  1,057   991   989   6.7   0.2        **Segment operating (loss) income**  2   (12)  (44)  n.a.   (72.7)       ***Segment margin***  *0.2**%*  *(1.2**%)*  *(4.7**%)*            The following table sets forth net revenue from external customers generated by the segment Otherfor the periods indicated:**Net revenue from external customers**                         CHF in millions (except percentages) **Year Ended**  **Year Ended**      **December 31,**  **December 31,**      **2005** **2004** **2003** **2005/2004** **2004/2003**                  (% change)Swisscom IT Services  249   207   214   20.3   (3.3)    Swisscom Broadcast  150   148   149   1.4   (0.7)    Antenna Hungária  26   —   —   —   —     Accarda Group  115   112   52   2.7   115.4     Swisscom Eurospot  31   9   1   244.4   800.0        **Total other external revenue**  **571**   **476**   **416**   **20.0**   **14.4**        ***Swisscom IT Services.***Swisscom IT Services offers end-to-end business solutions primarily in thefinancial services and telecommunications industries. In addition to business solutions, SwisscomIT Services focuses on system integration, outsourcing and IT infrastructure services, includingdesktop services and data-center services. Effective December 31, 2004, Swisscom increased itsstake in Swisscom IT Services to 100% through the acquisition of the minority stake held by eightcantonal banks.IT Services revenue increased by 20.3% in 2005, mainly due to an increase in revenue from IToutsourcing services. In 2005, IT Services has further strengthened its position in theoutsourcing market and has acquired and prolonged contracts with significant volumes. IT Servicesrevenue decreased by 3.3% in 2004, mainly as a result of lower revenue from its former minorityshareholder. This decrease has been partially offset by an increase in revenue from IT outsourcingservices.Effective January 4, 2006, Swisscom IT Services has acquired the IT specialist in Banking, ComitAG. Comit is operated as an independent subsidiary and has taken over the Financial Servicesbusiness unit of Swisscom IT Services. The new company will focus on integrated IT solutions forthe banking industry. See *“Item 4: Information on theCompany — Other — Swisscom IT Services”*.As a result of this acquisition and further growth from IT outsourcing services, Swisscom ITServices expects revenue to increase in 2006.***Swisscom Broadcast.***Broadcasting revenue stems from fees for the transmission and broadcasting ofanalog and digital signals for television and radio broadcasting. Such services from SwisscomBroadcast are provided primarily to the Swiss Broadcasting Corporation (the “SRG”).Broadcasting revenue remained stable in 2005 and 2004.
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Swisscom Broadcast expects revenue to decrease slightly in 2006, due to a reduced usage of analogantennas as a result of a switch from analog to digital broadcasting in 2006 and a better coverageof digital broadcasting signals.***Antenna Hungária.***On October 25, 2005, Swisscom acquired a majority stake (75% plus 1 share) in theHungarian broadcasting network operator Antenna Hungária for CHF 293 million. In a mandatory publictender offer, Swisscom increased its total interest to 97.99% until January 5, 2006. Following thepublic tender offer, Swisscom acquired in a squeeze out the remaining shares and Antenna Hungáriawas delisted from the Budapest Stock Exchange on February 16, 2006. For further details see Note 5to the consolidated financial statements.Antenna Hungária generates most of its revenue from analog TV and radio broadcasting providedprimarily to Hungarian broadcasting stations.The effect of full-year consolidation of Antenna Hungária in 2006 will lead to an increase inrevenue in 2006.***Accarda Group.***Accarda Group comprises the business activities of Billag AG and the former BillagCard Services AG, a company that Swisscom acquired in December 2003. Effective July 1, 2005, allactivities that had previously been provided by Billag Card Services were incorporated into a newlyfounded company named Accarda AG that also assumed control over Billag AG as of this date.Accarda AG provides customer card services and billing services in the private sector domain.Billag AG provides billing services to public sector authorities, primarily as part of an agreementto collect radio and television licensing fees in favor of SRG.Accarda Group revenue remained relatively stable in 2005.Accarda Group revenue more than doubled in 2004, reflecting the acquisition of Billag Card Servicesin December 2003.Accarda Group expects revenue to increase in 2006, mainly due to the expansion of Accarda AG intonew business areas such as healthcare and collection services*.****Swisscom Eurospot.***Swisscom Eurospot provides high-speed Internet access services to guests of thehospitality industry mainly in premium hotels across Europe (excluding Switzerland; where suchservices are provided through Swisscom Mobile).Eurospot revenue increased significantly in 2005 and 2004, reflecting the continuing rollout of itsbusiness activities in Europe and an increase in the usage of its services.Eurospot expects this trend to continue and revenue to further increase in 2006.
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**Segment expenses**                         CHF in millions (except percentages) **Year Ended**  **Year Ended**      **December 31,**  **December 31,**      **2005** **2004** **2003** **2005/2004** **2004/2003**                  (% change)Goods and services purchased  69   41   46   68.3   (10.9)    Personnel expenses  419   388   431   8.0   (10.0)    Other operating expenses  325   296   259   9.8   14.3     Depreciation and amortization  140   169   158   (17.2)  7.0     Other operating income(1)  (25)  (8)  (15)  212.5   (46.7)       **Total external segment expenses**  **928**   **886**   **878**   **4.7**   **0.9**     Intersegment expenses  129   105   111   22.9   (5.4)       **Total segment expenses**  **1,057**   **991**   **989**   **6.7**   **0.2**         (1) Includes mainly capitalized cost and gains on sale of property, plant and equipment.Total segment expenses increased by 6.7% in 2005 primarily due to an increase in goods andservices purchased, personnel and other operating expenses, including the effects resulting fromthe acquisition of Antenna Hungária, as well as intersegment expenses, partially offset by adecrease in depreciation and amortization expenses. **•** Goods and services purchased increased by 68.3%, mainly reflecting an increase inrevenue from IT outsourcing services by Swisscom IT Services.  **•** Personnel expenses increased by 8.0%, mainly due to an increase in the averagenumber of employees at Swisscom IT Services reflecting the takeover of employees fromoutsourcing contracts as well as the first-time consolidation of Antenna Hungária as ofOctober 25, 2005.  **•** Other operating expenses increased by 9.8% mainly due to an increase in expenses forexternal employees of Swisscom IT Services, the first time consolidation of AntennaHungária and a provision recorded in 2005 upon a revision of long-term contracts ofSwisscom IT Services. These effects were partially offset by a decrease in expenses forenergy as starting in 2005, such expenses are billed as intersegment expenses bySwisscom’s real-estate company Swisscom Immobilien AG as a result of the introductionof a centralized energy cost settlement.  **•** Depreciation and amortization decreased by 17.2% primarily due to the omission ofgoodwill amortization since, starting in 2005, goodwill is no longer amortized inaccordance with IFRS 3. For further information, see Note 23 to the consolidatedfinancial statements.  **•** Intersegment expenses increased by 22.9%, mainly due to an increase in energy costbilled by Swisscom’s real-estate company Swisscom Immobilien AG. The introduction of acentralized energy cost settlement in 2005 resulted in such cost being recorded asintersegment expenses whereas they previously had been recorded as external expenses.Total segment expenses increased by 0.2% in 2004 primarily due to an increase in other operatingexpenses and depreciation and amortization, partially offset by a decrease in personnel expenses. **•** Personnel expenses decreased by 10.0% due to a decrease in termination benefits fromCHF 48 million in 2003 to CHF 1 million in 2004 as well as a decrease in the averagenumber of employees at IT Services, partially offset by an increase in the number ofemployees at Swisscom Eurospot and the acquisition of Billag Card Services (nowAccarda) in December 2003.  **•** Other operating expenses increased by 14.3%, mainly due to the consolidation ofBillag Card Services (now Accarda), which was acquired in December 2003.
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 **•** Depreciation and amortization increased by 7.0% primarily due to an increase ingoodwill amortization as a result of the acquisition of Billag Card Services (nowAccarda) in December 2003.Total segment expenses are expected to increase in 2006 due to the full-year consolidation ofAntenna Hungária and an increase in expenses reflecting the expected growth in revenue, inparticular from Swisscom IT Services, Accarda and Swisscom Eurospot.**Segment margin**Segment margin increased from a negative margin of 1.2% in 2004 to a positive margin of 0.2% in2005, primarily due to an increase in revenue and a reduction in goodwill amortization, partiallyoffset by a provision recorded in 2005 relating to outsourcing projects of Swisscom IT Services.Segment margin in 2004 increased from a negative margin of 4.7% in 2003 to a negative margin of1.2%, due primarily to a reduction in termination benefits.It is expected that revenue growth, mainly at Swisscom IT Services, will result in a furtherincrease of the margin of the segment Other.
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**Corporate**The Corporate segment encompasses Swisscom’s headquarter divisions, group-company shared services,the real-estate company Swisscom Immobilien AG (“SIMAG”) and its social plan programs(PersPec and Worklink). For a description of PersPec and Worklink, see “*Item 6: Directors,Senior Management and Employees — Employees — Workforce Reduction and Productivity Improvement*”.SIMAG manages Swisscom’s portfolio of real estate properties, some of which it leases to othergroup companies and, to a limited extent, to third parties. In addition, it provides facilitymanagement services, such as energy purchasing, and security and cleaning, for third parties aswell as for internal use. For more information on Swisscom’s real estate, see “*Item 4: Informationon the Company*— *Property, Plant and Equipment*”.The following table sets forth the results for the segment Corporate and the percentage changestherein for the periods presented:                         CHF in millions (except percentages) **Year Ended**  **Year Ended**      **December 31,**  **December 31,**      **2005** **2004** **2003** **2005/2004** **2004/2003**                  (% change)Net revenue from external customers(1)  68   68   72   (0.0)  (5.6)    Intersegment net revenue  622   540   631   15.2   (14.4)       **Net revenue**  **690**   **608**   **703**   **13.5**   **(13.5****)**    Segment expenses  721   709   621   1.7   14.2        **Segment operating (loss) income**  **(31****)**  **(101****)**  **824**   **69.3**   **n.a.**         (1) Net revenue from external customers includes rental income, facility management servicesand other revenue.Net revenue increased by 13.5% in 2005 mainly due to an increase in intersegment revenue fromSIMAG following the introduction of a new centralized settlement system for energy costs throughwhich energy costs are charged to other group companies by SIMAG. Intersegment revenue from SIMAGalso increased due to a group wide space optimization program carried out by SIMAG, whose cost werecharged to the other group companies.Net revenue decreased by 13.5% in 2004 due to lower revenue from other group companies as a resultof (i) lower management fees reflecting a decrease in the amount of shared services offered; (ii)the elimination of revenue for the operation of two central systems as the system ownership wastransferred from Swisscom headquarters to other group companies in 2004; and (iii) a reduction inheating and additional services relating to real estate sold in 2001, for which SIMAG receivedfinal bills in 2003 that were higher than anticipated.Net revenue is expected to decrease in 2006 mainly due to a decrease in management fees charged bythe group headquarters to other group companies as a result of reduced headcount and costoptimization by headquarters.**Segment expenses**                         CHF in millions (except percentages) **Year Ended**  **Year Ended**      **December 31,**  **December 31,**      **2005** **2004** **2003** **2005/2004** **2004/2003**                  (% change)Personnel expenses  228   253   164   (9.9)  54.3     Other operating expenses  436   382   355   14.1   7.6     Depreciation and amortization(1)  48   48   56   0.0   (14.3)    Other operating income(2)  (56)  (27)  (24)  107.4   12.5        **Total external segment expenses**  **656**   **656**   **551**   **0.0**   **19.1**     Intersegment expenses  65   53   70   22.6   (24.3)       **Total segment expenses**  **721**   **709**   **621**   **1.7**   **14.2**         (1) Excluding amortization of goodwill. (2) Includes mainly capitalized cost and gains on sale of property, plant and equipment.Total segment expenses increased by 1.7% in 2005 primarily due to an increase in otheroperating expenses, partially offset by a decrease in personnel expenses and an increase in otheroperating income.
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 **•** Personnel expenses decreased by 9.9% due to the following:    Cost relating to workforce reduction measures are calculated per segment for theemployees participating in one of the workforce reduction programs and are recordedas part of that segment’s expense. Not all of the cost relating to terminationbenefits recorded by the segments meet the criteria for recognition under IFRS.These cost are eliminated in the Corporate segment, i.e. are deducted from personnelexpenses. However, expenses related to employees who have been transferred intoWorklink are recorded in the Corporate segment. For further information, see Note 9to the consolidated financial statements.    The amount of termination benefits eliminated from the Corporate segment increasedfrom CHF 18 million in 2004 to CHF 21 million in 2005, primarily as a result of anincrease in the number of employees who were transferred into Worklink. The decreasein personnel expenses is also due to a decrease in the expense for employees who areemployed by Worklink from CHF 81 million in 2004 to CHF 74 million in 2005reflecting a lower average number of employees**.**    Decrease in pension expense of CHF 9 million. For further details relating topension expenses see Note 11 of the consolidated financial statements.  **•** Other operating expenses increased by 14.1% mainly as a result of the centralizationof energy purchases through SIMAG as well as the cost for the group-wide spaceoptimization program carried out by SIMAG in 2005.  **•** Other operating income increased by 107.4% due to an increase in gains from the saleof real estate property by SIMAG.Total segment expenses increased by 14.2% in 2004 primarily due to an increase in personnelexpenses and other operating expenses. **•** Personnel expenses increased by 54.3% due to the following:    A reduction in the amount of termination benefits eliminated from the Corporatesegment, as described above, from CHF 106 million in 2003 to CHF 18 million in 2004,primarily as a result of an overall decrease in the amount of termination benefitsrecorded by other segments.    An increase in the expenses for employees who are employed by Worklink from CHF 53million in 2003 to CHF 81 million in 2004 reflecting an increase in the number ofemployees that were transferred into Worklink in 2004.    This increase in cost for social plan measures was partially offset by a decrease intermination benefits from CHF 42 million in 2003 to CHF 2 million in 2004, mainlyreflecting the reorganization of SIMAG in 2003 and a provision for partial earlyretirement of CHF 18 million that was recorded in 2003.  **•** Other operating expenses increased by 7.6% mainly as a result of the release of aprovision in 2003 for dismantlement and restoration cost due to the elimination of theliability resulting from the sale of stations, which reduced expenses in 2003 by CHF 22million. For further information, see Note 26 to the consolidated financial statements.Total segment expenses are expected to decrease in 2006, mainly due to cost reduction measures atSIMAG and the group headquarters.
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**Liquidity and Capital Resources****Cash flows**Swisscom’s primary source of liquidity is cash generated from operations. The following table setsforth certain information regarding Swisscom’s cash flows:                         CHF in millions (except percentages) **Year Ended**  **Year Ended**      **December 31,**  **December 31,**      **2005** **2004** **2003** **2005/2004** **2004/2003**                  (% change)Net cash provided by operating activities  3,432   4,066   4,708   (15.6)  (13.6)    Net cash used in investing activities  (1,417)  (1,354)  (625)  4.7   116.6     Net cash used in financing activities  (3,381)  (3,420)  (2,555)  (1.1)  33.9        **Net (decrease) increase in cash and cashequivalents from continuing operations**  **(1,366****)**  **(708****)**  **1,528**   **92.9**   **n.a.**        Net decrease in cash and cash equivalentsfrom discontinued operations  0   4   (50)  n.a.   n.a.     ***Cash provided by operating activities***Net cash provided by operating activities decreased by 15.6% in 2005 mainly due to a specialcontribution of CHF 288 million to Swisscom’s pension fund in connection with changes to the planand an increase in income taxes paid.Net cash provided by operating activities decreased by 13.6% in 2004 mainly as a result of lowercash generated from operations, an increase in income taxes paid and due to dividends received in2003 from Cesky Telecom of CHF 121 million. An increase in working capital had a further decreasingeffect on operating cash flows in 2004, due to an increase in mobile handset inventory, reflectingthe increased demand for handsets and a less significant decrease in trade accounts receivables in2004 compared to 2003 as a result of significant efforts that were made in 2003 to collect oldoutstanding debts in particular from Fixnet Wholesale international business customers.***Cash used in investing activities***Net cash used in investing activities increased from CHF 1,354 million in 2004 to CHF 1,417 millionin 2005, mainly due to an increase in cash used for net investments in subsidiaries and affiliatedcompanies from CHF 112 million in 2004 to CHF 404 million in 2005. For details, see Notes 5 and 24to the consolidated financial statements. In addition, cash received from the sale of debiteldecreased in 2005 compared to 2004. Proceeds from the sale in 2004 amounted to CHF 485 million(representing proceeds from the sale of CHF 616 million less cash and cash equivalents of CHF 131million that remained with debitel) and cash received from early repayment of the vendor loansgranted to the buyer of debitel in 2005 amounted to CHF 351 million. For details regarding thistransaction, see Note 37 to the consolidated financial statements. These effects were partiallyoffset by a slight decrease in capital expenditure (see description below) and a decrease in thenet investment in other current and non-current financial assets from CHF 757 million in 2004 toCHF 330 million in 2005.Net cash used in investing activities increased from CHF 625 million in 2003 to CHF 1,354 millionin 2004 mainly due to the investment of CHF 757 million in other current and non-current financialassets, partially offset by the proceeds from the sale of debitel in 2004 of CHF 485 million.Capital expenditure remained relatively stable in 2004 (description see below), whereas the netamount for investments in subsidiaries and affiliated companies changed from cash received of CHF480 million in 2003 to cash used of CHF 112 million in 2004. For details, see Notes 5 and 30 to theconsolidated financial statements.
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***Capital Expenditure.***The following table sets forth Swisscom’s capital expenditure by category forthe periods presented:                         CHF in millions (except percentages) **Year Ended**  **Year Ended**      **December 31,**  **December 31,**      **2005** **2004** **2003** **2005/2004** **2004/2003**                  (% change)Fixed-line network  353   360   497   (1.9)  (27.6)    Mobile network  238   434   381   (45.2)  13.9     Other intangible assets  189   103   98   83.5   5.1     Buildings and leasehold improvements  104   13   6   700.0   116.7     Other  203   226   183   (10.2)  23.5        **Total capital expenditure**  **1,087**   **1,136**   **1,165**   **(4.3****)**  **(2.5****)**       Capital expenditure in the fixed-line network remained relatively stable in 2005. A decrease incapital expenditures following the completion of the optimization of the voice switching platformat the end of 2004 was partially compensated by an increase in capital expenditures for theintroduction of functionalities and the expansion of capacity as part of Swisscom’s triple playstrategy to offer innovative multimedia services such as TV and video on demand over the fixed-linenetwork.Capital expenditure in the fixed-line network decreased by 27.6% in 2004, mainly due to a decreasein capital expenditures for ADSL ports due to lower purchase prices. In addition, a major part ofthe increase in the number of ADSL subscriber lines was realized with spare capacity and did notrequire additional capital expenditures. Furthermore, the optimization of the voice switchingplatform, which was finalized at the end of 2004, required less capital expenditure than in 2003.Capital expenditure in the mobile network decreased by 45.2% in 2005 after an increase by 13.9% in2004, due to significant expenditures in 2004 for new network technologies such as EDGE, UMTS aswell as PWLAN in accordance with Mobile’s strategy for an integrated wireless broadband serviceoffering. Contrary to this in 2003, total investment included expenditures to increase both thecapacity and coverage of the GSM mobile telephony network.Capital expenditure in other intangible assets increased by 83.5% in 2005, mainly due to anincrease in expenditures related to the development of new products and services within Swisscom’striple play strategy to offer innovative multimedia services such as TV and video on demand overthe fixed-line network.Capital expenditure in buildings and leasehold improvements increased significantly due to agroup-wide space optimization program as well as a project to introduce new, standardizedworkspaces carried out by Swisscom’s real-estate company Swisscom Immobilien AG (SIMAG).Swisscom expects capital expenditure in the fixed network to increase in 2006 as a result of theongoing implementation of Swisscom’s triple play strategy, which includes the rollout of the nextgeneration DSL technology, a prerequisite for simultaneous transmission of several TV channels andrich multimedia services. Expenditures in the mobile network are expected to remain relativelystable in 2006.***Cash used in financing activities***Net cash used in financing activities in 2005 reflects primarily dividend payments to Swisscomshareholders of CHF 861 million and to minority interests of CHF 367 million, the share buy-back of7.75% of Swisscom’s outstanding shares of CHF 2,001 million (excluding part of the relatedwithholding tax payment of CHF 136 million which is due in 2006, but including the respectivepayment of CHF 119 million resulting from the share buy-back of 2004 which was due in 2005).Net cash used in financing activities in 2004 reflects primarily dividend payments to Swisscomshareholders of CHF 861 million and to minority interests of CHF 360 million, the share buy-back of7.13% of Swisscom’s outstanding shares of CHF 1,882 million (excluding part of the relatedwithholding tax payment of CHF 119million, which is due in 2005) and the repayment of a short-term credit facility of CHF 256 millionrelating to the business with loyalty cards from Billag Card Services, which was acquired inDecember 2003.
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Net cash used in financing activities in 2003 reflects primarily the repayment of debt of CHF 787million, the par value reduction of CHF 8 per share (totaling CHF 530 million), as well as dividendpayments to Swisscom shareholders of CHF 794 million and to minority interests of CHF 390 million.***Cash used in discontinued operation (debitel)***Net cash provided by discontinued operation from January 1 to June 8, 2004 of CHF 4 million,resulted from cash used in investing activities of CHF 19 million and financing activities of CHF62 million, partially offset by cash from operating activities of CHF 85 million.Net cash used in 2003 of CHF 50 million resulted primarily from investing activities of CHF 23million and financing activities of CHF 49 million, partially offset by cash provided fromoperating activities of CHF 22 million.**Sources of liquidity**Swisscom expects to be able to meet its financing requirements, including the funding of itspension obligations, from cash flows from operations and bank borrowings. Financing of anyacquisition may also include bond issuances.However, Swisscom is limited in taking on additional debt by the Swiss Confederation’s strategicgoals for the period 2006 to 2009. These goals restrict the maximal permissible net debt ofSwisscom to, at most, one and a half times earnings before interest, taxes, depreciation andamortization (EBITDA).**Capital requirements*****Interconnection proceedings***. Since 2000, Swisscom has been involved in proceedings with regard tointerconnection prices. See Note 34 to the consolidated financial statements. Swisscom has recordeda provision relating to these proceedings based on management’s best estimate of the outcome.Swisscom expects the Federal Court to rule on these proceedings in the second half of 2006 or in2007. At such time, Swisscom will be required to settle the disputed amounts, which will result ina significant cash outflow. If the Federal Court’s decision differs from Swisscom’s estimate, *e.g.,*by requiring Swisscom to retroactively offer discounted prices to all of its customers rather thanjust to the parties to the proceedings, the settlement could vary significantly from the amountprovided for in the consolidated financial statements as of December 31, 2005.***Capital Expenditure*****.**Swisscom expects capital expenditure to increase to approximately CHF 1,400million in 2006, mainly as a result of an increase in investments in the fixed network as part ofthe triple play strategy and in new infrastructure necessary to support growth in new businessareas such as ICT outsourcing of Swisscom IT Services and Swisscom Solutions. For more information,see *“— Cash flow — Cash used in investingactivities — Capital Expenditure”*above.***Financing activities***The key element of Swisscom’s return policy is the annual distribution of all freely availablefunds, or the so-called “Equity Free Cash Flow”. For more information on Swisscom’s return policy,see *“Item 8: Financial Information — Dividend Policy”*.
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The following table sets forth Swisscom’s equity free cash flow:                         CHF in millions (except percentages) **Year Ended**  **Year Ended**      **December 31,**  **December 31,**      **2005** **2004** **2003** **2005/2004** **2004/2003**                  (% change)Net cash provided by operating activities  3,432   4,066   4,708   (15.6)  (13.6)    Capital expenditure  (1,087)  (1,136)  (1,165)  4.3   (2.5)    Net proceeds from investments in othernon-current financial assets(1)  240   72   11   233.3   554.5     Proceeds from sale of debitel  351   616   —   (43.0)  n.a.     Net proceeds (payments) from investments insubsidiaries and affiliated companies  (404)  (112)  480   260.7   n.a.     Repayment of financial liabilities  —   (256)  (750)  n.a.   (65.9)    Dividends paid to minority interests  (367)  (360)  (390)  1.9   (7.7)    Other cash flow from investing and financingactivities, net(2)  38   23   19   65.2   21.1        **Equity free cash flow**  **2,203**   **2,913**   **2,913**   **(23.4****)**  **0.0**         (1) Comprises cash flows from (i) the purchase and sale of other non-current financial assets;and (ii) loans receivable granted and repaid. (2) Comprises cash flows from (i) proceeds from the sale of fixed assets; (ii) other cash flowsfrom 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 willpropose a dividend of CHF 16 per share (totaling CHF 907 million) to the Annual General Meeting,which will take place on April 25, 2006. In the course of 2006, Swisscom intends, in accordancewith its return policy, to return to its shareholders the remainder of the equity free cash flow ofCHF 1.25 billion in the form of a share buy-back. Additionally, the share buy-back in 2006 will beincreased by CHF 1 billion. See *“Item 8: Financial Information – Dividend Policy”.****Contractual Obligations and Commercial Commitments.***The following tables show Swisscom’s totalcontractual obligations and commercial commitments as of December 31, 2005:                         **Contractual Cash Obligations** **Payments due by period in**    CHF in millions     **Less than**         **more than**      **Total** **1 year** **1 – 3 years** **4 – 5 years** **5 years**       Cross-border tax lease obligations(1)  **3,866**   77   385   157   3,247     Finance lease obligations(2)  **1,762**   70   257   74   1,361     Operating leases(3)  **1,103**   81   130   124   768     Unconditional purchase obligations(4)  **272**   190   82   —   —     Other current liabilities(5)  **104**   104   —   —   —        **Total contractual cash obligations**  **7,107**   **522**   **793**   **355**   **5,376**         (1) Represents total future payment commitments for the liability that is recorded on thebalance sheet as described below. Under the terms of the agreements, Swisscom incurred debtthe majority of which it defeased by making cash deposits. At December 31, 2005, the netpresent value of the lease obligations is CHF 1,474 million and the amount on deposit is CHF1,125 million. The net present value of cash outflows in the future is therefore only CHF 349million. (2) Represents total future payment commitments under finance leases. In 2001, Swisscom enteredinto two agreements for the sale of real estate and at the same time entered into agreementsto lease back part of the sold property space. A number of the leaseback agreements qualify asfinance leases. Total payments of CHF 1,546 million relating to these finance leases areincluded in the table above. Also included in the table above is a payment of CHF 216 millionrelating to one additional cross border lease transaction. No amounts were placed on depositfor these leases. (3) Represents the total future minimum lease payments resulting from operating lease contracts. (4) Represents primarily total contractual commitments for future capital expenditures. (5) Represents the remaining purchase price relating to the acquisition of Antenna Hungària. SeeNote 5 to the consolidated financial statements.
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**Conditional obligations*****Pension plan***The total underfunding of Swisscom’s pension plan as of December 31, 2005 was CHF 1,727 million, ofwhich CHF 805 million were recognized in the balance sheet. This accrued liability, which isimpacted by various actuarial assumptions, is expected to differ from the present value ofestimated future payments. In 2006, Swisscom expects to make contributions to the pension plan inthe amount of CHF 258 million, including CHF 45 million to build up reserves. Swisscom does notexpect to have material funding requirements for the plan and the amounts for future payments aretherefore not included in the table above. See Note 11 to the consolidated financial statements formore information.***Vodafone’s conditional right to sell its shares in Swisscom Mobile***In 2001, Swisscom sold 25% of the shares of Swisscom Mobile AG to Vodafone for CHF 4.5 billion. Atthe time of the disposal, Swisscom entered into a shareholder’s agreement with Vodafone for anunlimited period of time. In accordance with the shareholders’ agreement, Vodafone has a right tosell its shares in Swisscom Mobile to Swisscom if the Government sells its controlling shareholdingin Swisscom and another party or a group of parties were to obtain control of Swisscom. Control isdefined as the power to have a controlling influence on the company. The shareholders’ agreementoutlines the price to be paid by Swisscom shall be the proportional fair market value of SwisscomMobile at the time the sale is agreed. The Telecommunication Enterprises Act (TUG) stipulates theGovernment of Switzerland (“the Government”) is required to control Swisscom by holding themajority of its capital and voting rights. A change of control of Swisscom is currently not allowedby law and therefore Vodafone’s right to sell its shares in Swisscom Mobile cannot be exercised.Accordingly, Swisscom did not record a corresponding liability and the minority interests relatingto Vodafone were classified under equity.In November 2005, the Government announced that it was going to investigate the possibility ofselling its majority shareholding in Swisscom. The Swiss Federal Council published a consultationdocument containing a proposal for a change of law. To change the law, the proposal must first bepassed by parliament and in the case of a public referendum would need to be approved by the peopleof Switzerland. If the law is changed, it is possible that the Government would dispose of itsmajority of shares in Swisscom and that at a later date a new shareholder or group of shareholderswould obtain control of Swisscom. If there is such a change in the law, the conditional right ofsale of Vodafone would have to be recorded at fair value as a financial liability.**Off-balance sheet arrangements/Cross-border leases**Between 1996 and 2002, Swisscom entered into several cross-border sale-leaseback or lease-leasebackarrangements under the terms of which parts of its fixed and mobile networks were sold or leased ona long-term basis to US equity trusts which simultaneously leased the equipment back to Swisscom.The initial sale or lease and the leaseback transactions were settled at the inception of theagreements, and Swisscom recorded the income from each transaction at the time it was entered into.No other cash payments are currently expected to be made by Swisscom under the lease agreements.The U.S. equity trusts funded the initial purchase or lease transaction through debt and equityfinancing. Swisscom used the proceeds it received from the U.S. equity trusts to defease a majorpart of its lease payment obligations by investing a part of the proceeds in highly ratedsecurities and/or depositing the balance with financial institutions with minimal credit risk. Amajor part of these investments were irrevocably placed with trusts and serve to make leasepayments due as set forth in the lease agreement.In one of the transactions, Swisscom was required to provide a letter of credit to secure a part ofits obligations to the equity investors. If the Swiss Confederation were to reduce its shareholdingto below a majority, Swisscom would be required to enter into additional letters of credit tosecure its obligations to the equity investors in the other transactions as well.As of December 31, 2005 the assets and liabilities resulting from these transactions totaled USD3,732 million (CHF 4,908 million) and USD 3,996 million (CHF 5,258 million), respectively. Inaccordance withInterpretation SIC-27 “Evaluating the substance of transactions involving the legal form of alease”, USD 2,878 million (CHF 3,785 million) met the offsetting criteria and both the asset andthe corresponding liability were removed from the balance sheet. The remaining liability and assetof CHF 1,474 million and CHF 1,125 million,
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respectively, recorded in the balance sheet at December31, 2005, relate primarily to one lease agreement entered into in 2000. For more information, seeNote 25 to the consolidated financial statements.In connection with these lease transactions, Swisscom agreed that certain securities would continueto meet minimum credit ratings. Shortly before the end of 2004, the credit rating of a portion ofthe securities in two transactions dropped below the minimum rating agreed in the contract.Therefore Swisscom provided CHF 34 million to cover any resulting cost of replacing the affectedcollateral with securities meeting the agreed minimum rating. This expense was recorded in theincome statement in 2004. During the third quarter of 2005 Swisscom could finalize this replacementresulting in cost of CHF 10 million. As a result, Swisscom could release CHF 24 million tofinancial income.In the event Swisscom were to default on certain of its obligations, the equity investors would beentitled to terminate these agreements. In case of early termination, Swisscom would be requiredto pay the equity investors a contractually agreed amount that is a percentage of the transactionvalue and changes over time, and which could be significant in amount.In case of a reduction of the participation of the confederation in Swisscom below 50%, thecross-border sale-leaseback and lease-leaseback arrangements foresee a provision of additionalsecurities such as letters of credit in case that Swisscom’s rating will be below AA-/Aa3 at thattime. It is assumed that Swisscom would not comply with this minimum rating requirement. For threecontracts, the additional securities have to be provided upon change of the TelecommunicationsEnterprise Act. If Swisscom provides additional securities as required, the contracts will continueunchanged.**Inflation**Swisscom’s results in recent years have not been substantially affected by inflation and changes inprices related thereto.**IFRS compared with U.S. GAAP**Swisscom’s consolidated financial statements have been prepared in accordance with IFRS, whichdiffer in certain significant respects from U.S. GAAP. See Note 44 to the consolidated financialstatements for a reconciliation of Swisscom’s net income for the years ended December 31, 2003,2004 and 2005 and shareholders’ equity as of December 31, 2003, 2004 and 2005 under IFRS to U.S.GAAP. The following table sets forth Swisscom’s net income and shareholders’ equity under IFRS andreconciled to U.S. GAAP for the periods presented:                 CHF in millions **Year Ended December 31,**      **2005** **2004** **2003**       **Net income (loss):**                IFRS  2,022   1,596   1,571     U.S. GAAP  2,329   2,113   2,096     **Shareholders’ equity (at period end):**                IFRS  6,001   6,790   7,776     U.S. GAAP  5,191   5,863   6,523     The key differences between IFRS and U.S. GAAP in 2003, 2004 and 2005 relate to (1) the impairmentcharge and amortization of goodwill of debitel, (2) the gain on the disposal of debitel, (3) thetreatment of the gain on the sale and leaseback transactions and (4) the treatment of the incomerelating to the cross border tax lease transactions. (1) Effective January 1, 2002 Swisscom adopted SFAS 142 “Goodwill and OtherIntangible Assets”. Under SFAS 142, goodwill and intangible assets withindefinite useful lives are no longer amortized, but are tested for impairment uponadoption and are tested at least annually thereafter.Upon adoption of SFAS 142, Swisscom recorded an impairment charge of CHF 1,649 millionunder U.S. GAAP. In 2002, Swisscom recorded an additional impairment charge of CHF 985million under U.S. GAAP, which reduced the carrying value of the debitel goodwill tozero. The impairment charge recorded under IFRS in 2002 was CHF 702 million. CHF 106million and CHF 213 million of goodwill that was amortized under IFRS in 2004 and 2003,respectively, was reversed under U.S. GAAP. As of 2005, following the adoption of IFRS 3“Business
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   Combinations”, goodwill is no longer subject to amortization under IFRS. In2003, Swisscom recorded an additional impairment charge of CHF 280 million under IFRS.As the goodwill balance under U.S. GAAP had a value of zero, the impairment booked underIFRS was reversed under U.S. GAAP.  (2) In 2004, Swisscom disposed of its investment in debitel. Due to the differencein the carrying amount of Swisscom’s investment in debitel under IFRS and U.S. GAAP andthe deferred proceeds receivable under the vendor loans, the sale of debitel resultedin a gain under U.S. GAAP of CHF 94 million, compared to a loss of CHF 248 millionunder IFRS. The amount of the gain that was deferred under U.S. GAAP reflected thevalue, as of December 31, 2004, of the two vendor loans provided by Swisscom. Thisamount was deferred, as Swisscom’s ability to recognize this portion of the gain wasdependent on debitel’s ability to repay the vendor loans. As the vendor loans wererepaid in full in the first six months of 2005, Swisscom recognized the previouslydeferred gain of CHF 254 million and interest income of CHF 21 million in 2005. Thisgain will be realized upon receipt of the vendor loans.  (3) Under IFRS, the gain on the sale of buildings in a sale and leasebacktransaction qualifying as an operating lease is recognized immediately. Under U.S.GAAP, the rules defining when a gain can be realized on sale and leaseback transactionsare different to those under IFRS. Swisscom entered into several such sale andleaseback transactions, a number of which do not meet the criteria for immediate gainrecognition under U.S. GAAP. The gain on the sale of these buildings has been deferredand will be amortized over the lease term.  (4) Under IFRS, the profit on the cross-border lease transactions is recorded whenthe transaction is closed. Under U.S. GAAP, the profit is recognized over the life ofthe leases, which range from 12 to 30 years.**New Accounting Pronouncements**There are a number of new accounting standards that have been issued that will effect Swisscom’spreparation of its consolidated financial statements in accordance with IFRS and U.S. GAAP. Adiscussion of these new standards and their effect on Swisscom, to the extent known, is included inNote 44 to the consolidated financial statements.
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**ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES****Directors and Senior Management****Board of Directors**The Telecommunications Enterprise Act of 1997 (the “TUG”) provides that the Board of Directors(*Verwaltungsrat*) of Swisscom has the duties set forth for Boards of Directors under the Swiss Codeof Obligations (*Obligationenrecht*). The Board of Directors of a Swiss corporation is ultimatelyresponsible for the policies and management of the corporation. The Board establishes thestrategic, accounting, organizational and financing policies to be followed by the corporation.The Board further appoints the executive officers and the authorized signatories of thecorporation, and supervises the management of the corporation. Moreover, the Board is entrustedwith shareholders’ meetings and carrying out shareholders’ resolutions. The Board may, pursuant toits regulations, delegate the conduct of day-to-day business operations to management under itscontrol. 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 tonine members. Directors are elected for a term of office of two years with a maximum total term ofoffice of eight years. Under Swisscom’s Articles, the Confederation has the right to appoint twoDirectors as its representatives, although it currently has 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 ofDirectors, and Swisscom’s Articles provide that there must be two representatives of employees onthe Board. The employees are entitled to propose candidates to the Board of Directors who areultimately elected by the Annual General Meeting. Currently, Jacqueline Françoise Demierre andMichel 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 delegatedoverall executive management of Swisscom to the CEO. The CEO is entitled to delegate his powers toother members of the Group Executive Board (*Gruppenleitung*) comprising senior executive officers ofSwisscom. The Board of Directors is also authorized to delegate certain powers to committees or toindividual members of the Board, and pursuant thereto, the Board has established the followingcommittees: **•** The Audit Committee, chaired by Mr. Vock, meets five to seven times per year. Itassists the Board in observing its responsibility to ensure that Swisscom’s financialsystems provide accurate and up-to-date information on its financial position and thatSwisscom’s published financial statements present a true and fair reflection of thisposition. It also assists the Board in ensuring that appropriate accounting policies,internal financial controls, risk management controls and compliance procedures are inplace. In particular, the Audit Committee monitors the implementation of the internalcontrol over financial reporting provisions under Section 404 of the Sarbanes-Oxley Actof 2002. The Audit Committee has advisory powers, to the extent permitted by Swiss law,with respect to the appointment, compensation and retention of Swisscom’s auditors.The Audit Committee is also responsible for overseeing Swisscom’s internal and externalauditors and for approving any engagement to render audit or permitted non-auditservices.  **•** The Finance Committee, chaired by Mr. Kreindl, advises the Board on investmentpolicies, including decisions regarding acquisitions and divestments, the granting ofloans and financing. The Finance Committee meets an average of three times per year.  **•** The Personnel and Organization Committee, chaired by Mr. Rosenberg, is responsiblefor the preparation and execution of decisions relating to personnel matters,compensation policies and collective bargaining, including determining the compensationplans of senior management, the granting of loans and guarantees to senior managementas well as management staffing plans. The Personnel and Organization Committee meetsan average of six to eight times per year.  **•** The Compensation Committee has rotating membership. It advises the Board on overallcompensation policy and meets on an ad hoc basis.
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 **•** The Nomination Committee nominates members of the Group Executive Board. It alsohas rotating membership and meets on an ad hoc basis.Swisscom does not have service contracts with its directors that provide for benefits upontermination of employment, beyond their legal entitlement in accordance with applicable employmentlaws.The members of the Board of Directors of Swisscom and their ages at December 31, 2005, positionsand committee memberships were as follows:                     **First** **Current****Name** **Age** **Title** **Appointed** **Term Ends**Markus Rauh(1)(2)(3)  66  Chairman  1998  April 2006Anton Scherrer(3)  63  Vice-Chairman  2005  April 2006Fides P. Baldesberger(3)  52  Director  2005  April 2007Jacqueline Françoise Demierre(1)^  51  Director  1998  April 2006Michel Gobet(1)^  51  Director  2003  April 2007Torsten G. Kreindl(3)  42  Director  2003  April 2007Felix Rosenberg(1)*  64  Director  1998  April 2007Richard Roy(2)  50  Director  2003  April 2007Othmar Vock(2)  62  Director  2005  April 2007 (1) Member of the Personnel and Organization Committee (2) Member of the Audit Committee (3) Member of the Finance Committee * Representative of the Confederation ^ Employee Representative**Dr. Markus Rauh**is Chairman of the Board of Directors of Swisscom. He is Chairman of the Boardof Directors of Synthes AG Chur and Anova Holding AG and Vice Chairman of the Board of Directors ofDietiker AG. He is also a member of the Board of Directors of several Swiss companies, includingThe Generics Group AG, Madison Management AG and St. Galler Kantonalbank AG. In addition, since1999, 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 wasPresident and Chief Executive Officer of Philips Kommunikationsindustrie AG. Dr. Rauh is a memberof several industry associations, including Economiesuisse, and is President of the Board ofTrustees of the Institute for Technology Management at the University of St. Gallen. Dr. Rauh holdsa doctorate in physics from the Swiss Institute of Technology (Dr. sc. Tech. ETH).**Dr. Anton Scherrer**is Vice-Chairman of the Board of Directors of Swisscom. He served as Chairman ofthe Board of Directors of Migrosbank and the Globus retail group and is a member of the ManagerialCommittee of the Institute for Marketing and Trade at the University of St. Gallen. Dr. Scherrerhas held research, consultation and managerial positions in a variety of industrial and brewingcompanies in Switzerland and abroad. He used to be a delegate to the Board of Directors ofHürlimann Holding AG and has held managerial positions in the Migros Cooperative Association (MGB).For the last four years prior to his retirement in 2005, Dr. Scherrer was responsible for 14industrial enterprises and logistics for the Migros Cooperative Association and served as Chairmanof the Board of Directors and Chairman of the Retail Trade Committee of the Migros CooperativeAssociation. Dr. Scherrer graduated with a degree in food engineering (Dipl. Lebensmitteling.) andholds a doctorate in technical sciences (Dr. sc. Tech. ETH) from the Swiss Federal PolytechnicalHigh School ETH in Zurich.**Fides P. Baldesberger**is the sole shareholder, CEO and Chairman of the Board of Directors of OutilsRubis SA. She is also a member of the VBS (Swiss Federal Department of Defence, Civil Protectionand Sports) Armament Commission, of the Board of Trustees of the W. A. de Vigier Foundation for thePromotion of Young Swiss Entrepreneurs and of the foundation for the International Committee of theRed Cross. Ms. Baldesberger holds a degree in art history, archaeology and English literature and adiploma in gemology.**Jacqueline Françoise Demierre**is a member of the Board of Directors of Swisscom, a position she hasheld in her capacity as an employee representative since January 1, 1998. Ms. Demierre previouslyserved in various
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sales and marketing functions in the national and international telecommunications business of PTTand Swisscom, such as multinational account manager, commercial contract manager and senior salesmanager of corporate accounts. Ms. Demierre is a member of the Transfair and CASC Unions as wellas of the board commission for the deactivation fund for nuclear power plants (*StiF KA*) anddisposal fund for nuclear power plants (*EntsF KKW*). Ms. Demierre holds a federal diploma in salesmanagement.**Michel Gobet**is Secretary of the Communications Union as well as Vice President of the Comitédirecteur européen des télécommunications of Union Network International. Prior to this, he wasCentral Secretary and Deputy General Secretary of the PTT Union for several years. From 1994 to1999, Mr. Gobet was a member of the worldwide executive committee of the PTT International. Mr.Gobet holds a degree in history.**Dr. Torsten G. Kreindl**is a partner of the European private equity firm Grazia Equity and a memberof the Supervisory Board of VoiceTrust AG, a global leader in voice identification technology. From1999 to 2005, he was a partner of the US venture capital company Copan Inc. Dr. Kreindl has heldvarious positions in the high-tech sector over the past 15 years. From 1996 to 1999, he oversawthe broadband cable networks of Deutsche Telekom AG as senior executive director and was ChiefExecutive Officer of MSG Media Services GmbH. Prior to this, he was a member of the Germanexecutive board of Booz Allen & Hamilton, where he advised international companies in the areas ofcommunications, media and technology. Previously, he had worked as an area manager at ChemieHolding AG before moving to W.L. Gore & Associates Inc. as a business segment leader. Dr. Kreindlholds a doctorate in industrial engineering.**Felix Rosenberg**is the Confederation representative 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 memberof the Board of Directors of Huser & Peyer AG, Buswil and President of the Board of Trustees of theSwiss Pro Patria Foundation. He was the CEO of Swiss Telecom PTT from 1989 until the beginning of1998. From 1974 to 1989, Mr. Rosenberg was a member of the Cantonal Government of the canton ofThurgau. Mr. Rosenberg, who is a member of the Fribourg University Councel, holds a law degreefrom the University of Fribourg in 1966.**Richard Roy**is an independent management consultant and has been rendering consulting services to anumber of companies, including Permira Beteiligungsberatung GmbH, since 2002. He is also VicePresident of the Supervisory Board of Realtech AG, Balda AG, Permira Beteiligungs GmbH, UpdateSoftware AG and, as of November 2004, of Premiere AG. He has spent five years at Microsoft GmbH,Germany as Chief Executive Officer and as Vice President of the Corporate Strategy Division ofMicrosoft EMEA. From 1995 to 1997, Richard Roy served as Executive Vice President and ManagingDirector of Siemens Nixdorf Informationssysteme AG. From 1981 to 1995, he worked for HewlettPackard (HP) in Germany, serving among other things as President of the Executive Board of variousorganizations within HP and as member of the Management Board. Mr. Roy holds a degree inengineering.**Othmar Vock**worked for the Ciba-Geigy Group as Commercial Financial Director, for the Roche Groupas Director of Internal Audit and as Financial Director of Company Treasury/Controlling, and forGivaudan as the Chief Financial Officer prior to his retirement at the end of 2004. Mr. Vock is amember of the SWX Swiss Exchange registration office, a member of the Board of Directors ofIvoclar-Vivadent, Schaan and a member of the Supervisory Board of Balda AG. Mr. Vock holds a degreein Trade, a degree in Export Management and a master’s degree in Business Administration degree.Dr. Markus Rauh, the current Chairman of the Board, will stand down at the Swisscom Annual GeneralMeeting on April 25, 2006, having served the maximum eight-year term of office. The current ViceChairman, Anton Scherrer, will be proposed as Dr. Rauh’s successor as Chairman. Having served themaximum term of office, Jacqueline Demierre will also stand down at the forthcoming Annual GeneralMeeting. Catherine Mühlemann and Hugo Gerber (Employee Representative) will be proposed forelection to the Board at the Annual General Meeting.Catherine Mühlemann is head of MTV Central & Emerging Markets and has worked in the media industrysince 2001. Hugo Gerber is a qualified postal administrative assistant with additional managementtraining and has been President of the Transfair union since 2003.
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**Group Executive Board**The Board of Directors has delegated overall executive management of Swisscom to the CEO. The CEOis 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 ExecutiveBoard is headed by the Chief Executive Officer (CEO, *Präsident der Gruppenleitung*) and includes theChief Financial Officer (CFO, *Finanzchef*), the CEOs of the strategic group companies as well as theheads of group functions.In addition to the benefits in their employment contracts, members of the Group Executive Board areentitled to a termination payment equal to their annual salary (including bonus) should a newmajority shareholder and/or new chairman of the Board of Directors of Swisscom terminate thisemployment relationship within 12 months of any takeover. However, those members who were electedto the Group Executive Board as CEO of a strategic group company are entitled to such a terminationpayment only if a new majority shareholder and/or a new chairman of the respective group companyterminate the employment relationship within 12 months following any takeover.The members of Swisscom’s Group Executive Board are appointed for an unlimited term. The followingtable shows their ages and positions at December 31, 2005:         **Name** **Age** **Position** **Appointed**Jens Alder  48  Chief Executive Officer December 1999Carsten Schloter  42  CEO of Swisscom Mobile AG March 2001Christoph Brand  36  Chief Strategy Officer August 2005Adrian Bult  46  CEO of Swisscom Fixnet AG October 2001Ueli Dietiker  52  Chief Financial Officer April 2002René Fischer  40  CEO of Swisscom Solutions AG(1) September 2002Stefan Nünlist  44  Head of Group Communications July 2001Günter Pfeiffer  47  Head of Group Human Resources June 2004Jürg Rötheli  42  CEO Related Businesses July 2001Michael Shipton  49  CEO of Swisscom IT Services AG August 2001 (1) Effective January 1, 2005, Swisscom Systems and Enterprise Solutions were merged to formSwisscom Solutions.**Jens Alder**was appointed Chief Executive Officer in December 1999. Prior to his appointmentas Chief Executive Officer, Mr. Alder served as Executive Vice President at Swisscom NetworkServices, a position he held since January 1998. From 1996 until immediately prior to joiningSwisscom, Mr. Alder was General Manager of the Telecom Unit of Alcatel Switzerland AG. From 1993until that date, he was Senior Vice President of Network Systems Export of Alcatel STR AG, apredecessor of Alcatel Switzerland AG. Mr. Alder is president of the Schweizerische Gesellschaftfür Konjunkturforschung, a member of the management board of the Swiss Information andCommunications Technology Association SICTA, a member of the Board of Trustee of ETH ZurichFoundation, and a member of the management board of the Swiss Employers’ Federation. Mr. Alderholds a master’s degree in business administration from INSEAD, Fontainebleau (1987) and graduatedwith a degree in electrical engineering from the Swiss Federal Institute of Technology (ETH) in1982.**Carsten Schloter**was appointed CEO of Swisscom Mobile AG in March 2001, after serving as Head ofPublic Com and Mobile Com since March 1, 2000. Prior to this, Mr. Schloter held various managementpositions at debitel AG. In 1992, Mr. Schloter founded debitel France, where he was member ofmanagement until 1994. He is also Chairman of the “Forum Mobil” Association and a member of theSupervisory Board of Vodafone D2 GmbH. Mr. Schloter graduated from the University of Paris,Dauphine, with a degree in business administration in 1986.**Christoph Brand**was appointed Chief Strategy Officer in August 2005. Prior to his appointment asChief Strategy Officer, Mr. Brand served as Head of Swisscom Fixnet Wholesale, a position he heldsince April 2002. Prior thereto, he served for four years as CEO of Bluewin, Swisscom’s retailInternet service provider. Mr. Brand graduated in business economics, sociology and politicalscience from the University of Berne and joined Swisscom in 1995.**Adrian R. Bult**was appointed CEO of Swisscom Fixnet AG on October 1, 2001 after serving as Head ofthe Consumer Communications’ division (now Fixnet). From September 1997 to December 2000, he wasHead of Corporate Information & Technology (CIT). From 1984 until immediately prior to joiningSwisscom, Mr. Bult
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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 incharge of Swiss banks (1993 - 1994). Mr. Bult is a member of the board of the Swiss MarketingSociety (*Schweizerische Gesellschaft für Marketing*) and holds a master’s degree in businessadministration from the University of St. Gallen (1983).**Ueli Dietiker**was appointed Chief Financial Officer on April 1, 2002 after having served as Head ofStrategic Growth and Related Business since joining Swisscom in September 2001. From July 2003until June 2004, he served as Head of Group Human Resources on an interim basis. From January 1999to June 2001, he was Chief Executive Officer and, from January 1995 to December 1998, ChiefFinancial Officer of Cablecom Holding AG. Mr. Dietiker is a certified accountant (*DiplomierterWirtschaftsprüfer*).**René Fischer**was appointed CEO of Swisscom Systems AG in September 2002 after having served as CFOof Swisscom Fixnet AG. Since July 2004, Mr Fischer has also been CEO of Swisscom EnterpriseSolutions AG which, effective January 1, 2005, was merged with Swisscom Systems AG to form SwisscomSolutions AG. From June 1994 until immediately prior to joining Swisscom in December 1998, he heldseveral leading positions at SIG Pack Systems AG, where he last held the position of ChiefFinancial Officer. From 1989 to 1994, he held various positions atTelekurs AG (1992 - 1994) andat Bank Leu AG (1989 - 1992). Mr. Fischer is President of the Board of Infonet SwitzerlandIncorporation and holds a degree in business administration from the University of Zurich (1994).**Stefan Nünlist**was appointed to the Group Executive Board in July 2001. Mr. Nünlist has been ChiefCommunications Officer of Swisscom since January 2001. Prior to joining Swisscom he held variouspositions at Atel AG (1999 - 2000), the Federal Department of Economic Affairs (*EidgenössischesVolkswirtschaftsdepartement EVD*) (1997 - 1998) and the Federal Department of Foreign Affairs(*Eidgenössisches Departement für auswärtigeAngelegenheiten EDA*) (1991 - 1996). Mr. Nünlist is amember of the management board of the Swiss Advertisers’ Federation and member of the Swiss TourismCouncil. Mr. Nünlist holds a degree in law from the University of Fribourg and is an attorney atlaw and a notary.**Günter Pfeiffer**was appointed Head of Group Human Resources in June 2004 after having served asHead of Participation Management of Swisscom AG since 2000. Prior to this, he held variousmanagement positions at VEBA-Telecom (Vice President Marketing, 1997 - 1999), T-Mobile (SeniorDirector International, 1995 - 1996) and Detecon (Director Holding Projects, 1988 - 1995). Mr.Pfeiffer holds a Ph.D. in economics from the University of Cologne.**Jürg Rötheli**was appointed CEO of Related Businesses in April 2005 after having served on the GroupExecutive Board as Head of Group Operations & Related Businesses since July 1, 2001. Prior to this,he was General Counsel to Swisscom since 1999. From 1993 to 1999, he was a partner with the lawfirm Stampfli, Keller & Partner, and from 1995 to 1999, also General Counsel to InterdiscountHolding 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 ManagementProgram at the University of Pennsylvania in 2001.**Michael Shipton**was appointed CEO of Swisscom IT Services AG in August 2005 and has served on theGroup Executive Board and been Chief Strategy Officer of Swisscom AG since January 1, 2001. FromJanuary 1997 to December 2000, he was a member of the management board of Swisscom’s NetworkServices and Wholesale Division. From 1994 until 1997, Mr. Shipton was Member of the managementboard of the Division Informatik Telecom of Telecom PTT. Prior to this, he has held variouspositions at British Telecom and Ascom. Mr. Shipton holds a BSc degree in electrical engineeringand received a Ph.D. degree in broadband communications (1980) at the University of Bath, UnitedKingdom.Effective August 1, 2005, Urs Stahlberger, former CEO of Swisscom IT Services, left Swisscom’sGroup Executive Board, but continued working for Swisscom until his retirement at the end of 2005.At his own request, Mr. Alder resigned as CEO on January 20, 2006 and was succeeded by CarstenSchloter effective January 21, 2006. In March 2006, Mario Rossi, who had been CFO of SwisscomFixnet, was appointed as the new CFO of Swisscom AG and Ueli Dietiker, who had been CFO of SwisscomAG, was appointed the new CEO of Swisscom Fixnet. At the same time, Adrian Bult, who had been CEOof Swisscom Fixnet, was appointed CEO of Swisscom Mobile and Urs Schaeppi, who had been the Head ofCommercial Business at Swisscom Mobile, was appointed the new CEO of Swisscom Solutions. RenéFischer, who had been CEO of Swisscom Solutions, left the company by mutual agreement.
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**Mario Rossi**was appointed Chief Financial Officer of Swisscom AG and joined the Group ExecutiveBoard on March 8, 2006, after having served as Chief Financial Officer and member of the ExecutiveBoard of Swisscom Fixnet since 2002. From 1998 until 2002, Mr. Rossi served as Head of Reportingand Controlling at Swisscom AG. Prior to joining Swisscom, Mr. Rossi held various positions asChief Financial Officer of Karl Steiner Group (1994 – 1998) and in corporate controlling for Lindt& Sprüngli AG (1992 – 1994) and the Elco Looser Group (1988 – 1992). Mr. Rossi is a certifiedaccountant (*Diplomierter Wirtschaftsprüfer*).**Urs Schaeppi**was appointed CEO of Swisscom Solutions and joined the Group Executive Board on March8, 2006, after having served as Head of Commercial Business and a member of the Executive Board atSwisscom Mobile since 1998. Prior to joining Swisscom, Mr. Schaeppi held various positions asManaging Director of Papierfabrik Biberist (1994 - 1998) and as Head of Marketing Electronics atAscom AG (1991 - 1994) as well as at Iveco Motorenforschungs AG (1987 - 1991). Mr. Schaeppi isalso a member of the board of the BV Group and holds degrees in engineering at the University ofSwiss Federal Institute of Technology (ETH), Zurich and business administrations from the GraduateSchool of Business, Economics, Law and Social Sciences, University St. Gallen.**Compensation**The aggregate compensation paid by Swisscom to its Board of Directors as a group in respect of 2005amounted to CHF 2.5 million. Swisscom’s Board of Directors approves its own compensation. Theaggregate compensation paid by Swisscom to its Group Executive Board members as a group in respectof 2005 amounted to CHF 9.9 million. Such amount included CHF 4.0 million in bonus compensation.No payments or compensation relating to contractual commitments for members either leaving orjoining the Group Executive Board were paid in respect of 2005. Total compensation includes fees,salary, bonuses, pension fund and social security contributions and other contractual obligations.25% of the Group Executive Board’s bonuses and 25% of the Board of Directors’ fixed compensationwas paid pursuant to Swisscom’s management incentive plan. Total compensation paid by Swisscom tothe CEO and to the Chairman of the Board of Directors in respect of 2005 was CHF 1.6 million andCHF 0.5 million, respectively. See Note 36 to the consolidated financial statements.**Employees****Overview**Swisscom is one of the largest employers in Switzerland. As of December 31, 2005, it employed atotal of 16,088 employees (full-time equivalents). The following table sets forth the number ofSwisscom’s full-time employees in each segment for the periods indicated.                   **As of December 31,**      **2005** **2004** **2003**       Fixnet  7,118   7,500   7,775     Mobile  2,412   2,491   2,418     Solutions(1)  1,795   1,858   2,174     Other(1)(2)  3,868   2,719   2,746     Corporate(3)  895   909   966        **Total****(4)**  **16,088**   **15,477**   **16,079**         (1) Effective January 1, 2005, Enterprise Solutions merged with Swisscom Systems, formerlyaccounted for under the segment “Other”, to form a new business segment, named Solutions.Figures for prior years have been adjusted accordingly. (2) Includes 858 employees from the Antenna Hungária acquisition on October 25, 2005. (3) Does not include the participants in the Worklink and PersPec programs. (4) Excludes apprentices.In recent years, Swisscom has undertaken steps to streamline its organization and improve itswork processes, achieving labor efficiencies which have enabled it to substantially reduce the netnumber of its employees. See “— *Workforce Reduction and Productivity Improvement*”.
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**Status of Employees**Until January 1, 2001, the substantial majority of Swisscom’s employees, other than middle andupper level management, had civil servant status (*Beamtenstatus*) under Swiss law or were hiredunder public law contracts. Since then, in accordance with the TUG, all Swisscom employmentcontracts have been governed by private law. In addition, all Swisscom employees, other than middleand upper level management, temporary employees and trainees, are covered by the collectivebargaining agreement (*Gesamtarbeitsvertrag*, or “GAV”). The original GAV, concluded with the tradeunions in July 2000, was effective until the end of 2003 and was extended with minimalamendments until the end of 2005. In September 2005, Swisscom and the trade unions reached anagreement on a new GAV and social plan. The new GAV has only minimal changes relating to newregulations for temporary staff, child allowances for single parent with low employment levels andthe implementation of a two-week paternity leave. The new social plan increasingly focuses on thepersonal situations of affected employees and, with regard to its benefits, differentiates betweencertain groups (e.g. age groups). Both the GAV and social plan will remain in effect for at leasttwo years beginning January 2006.Swisscom believes that the GAV offers its employees flexibility and progressive working conditionsand enables them to cope with the demands of the labor market. Under the terms of the GAV, anincentive based salary system is used, taking into account personal performance, team performanceand the overall performance of Swisscom. The average work week is 40 hours, with employees entitledto five weeks’ holiday. In addition, flexible working time models, such as “annual working time”(*Jahresarbeitszeit*), prolonged flexible working hours (*Variable Arbeitszeit*) and telecommuting areprovided under the GAV.Under the GAV, Swisscom employees are not permitted to go on strike. However, Swisscom employeeshave a right to be heard on a variety of questions. The GAV also provides for arbitration in casesof conflict.**Workforce Reduction and Productivity Improvement**Disregarding the effects of acquisitions, particularly the acquisition of Antenna Hungária (858employees), Swisscom eliminated approximately 280 positions in Switzerland during 2005. Inparticular, Swisscom Mobile was able to achieve a modest reduction in the number of employees to2,412 in 2005 from 2,491 in 2004, after seven years of growth in its workforce. Due to furtherrestructuring plans, additional job cuts of 260 posts will be undertaken in 2006. Affected segmentswill be Fixnet, Mobile and Corporate.Swisscom has achieved its workforce reduction goals to date without unilateral termination ofregular employees, using a social plan which features a variety of measures. The main features ofthe social plan are an outplacement program (PersPec), and an employment program (Worklink). Onlyemployees in Switzerland covered by the GAV are entitled to benefit from Swisscom’s social plan.The outplacement program PersPec provides employees affected by workforce reduction measurestraining and assistance in finding employment outside of Swisscom. At the end of 2005, theoutplacement program counted 291 participants (in full-time positions). In connection with thisprogram and other social plan measures, Swisscom incurred termination charges of CHF 48 million in2004 and CHF 39 million in 2005. See Note 9 to the consolidated financial statements.The employment program Worklink aims at finding temporary positions for long-serving Swisscomemployees above a certain age who could not find new employment through PersPec. Worklink is ajoint venture initiated by Swisscom in 2001, together with the personnel service company ManpowerAG and the trade unions. At the end of 2005, Worklink counted 512 participants (full timeequivalents). Under IFRS, the costs of Worklink do not qualify for the creation of provisions, asthe employment relationship with the employees concerned has not been terminated. Salaries andwages for Worklink participants amounted to CHF 81 million in 2004 and CHF 68 million in 2005.On December 31, 2005, the obligation relating to Worklink participants and other social planmeasures for which provisions cannot be created under IFRS amounted to CHF 133 million.**Employee Representation and Labor Relations**In conformity with the TUG, which requires that Swisscom’s employees be afforded adequate boardrepresentation, Swisscom’s Articles provide for two employee representatives on Swisscom’s Board ofDirectors.
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Swisscom maintains an open, constructive, fair and sustainable relationship with its employees.Under the GAV, Swisscom employees have been represented by employees’ commissions(*Betriebskommissionen*) since January 2002. These commissions fulfill an important role in thedirect representation of employees. Swisscom continues to discuss and negotiate issues of centralimportance, such as salary increases or amendments to the GAV, with the trade unions. Swisscomplaces great value on successful and progressive industrial relations and particularly on goodrelationships with its employees and their representatives.**Pensions**Swisscom’s pension plan, known as “comPlan”, covers the risks of old age, death and disability inaccordance with Swiss pension legislation. Up to the end of 2005, comPlan offered two pensionplans. Around 4,200 employees participated in the final salary plan (“*Leistungsprimatplan*”). Underthis plan, a full pension of 60% of the employee’s final insured salary is paid out after theemployee has been insured for 40 years. The normal retirement age is 65, although early retirementis possible subject to reductions in the pension percentage paid. Around 14,200 employeesparticipated in the cash balance plan (“*Duoprimatplan*”). Under this plan, an employee’s retirementbenefit is determined by the amount in the employee’s retirement savings account at the time ofretirement. If an employee retires at age 65, the savings account is converted into a retirementpension at the rate of 7.2%. If an employee retires early, a lower rate applies.On November 22, 2005, the comPlan trustees decided to amend the plans. These amendments becameeffective January 1, 2006. The most significant amendment was the transfer of employees insuredunder the final salary plan to the cash balance plan, resulting in lower future pension benefits.These amendments resulted in Swisscom transferring CHF 288 million to comPlan in December 2005 asthe estimated total amount to be credited to employee accounts in 2006.In addition, the rates for converting savings accounts into pensions were reduced and employer andemployee contributions increased. Swisscom has also committed to pay additional contributions of3.0% of employees’ total insured salaries for a period of five years to comPlan to build upreserves in the plan. The additional contributions will total approximately CHF 225 million and canbe used to fund future employer contributions if comPlan’s investments generate sufficient returnsto build up these reserves themselves. The plan amendments resulted in a decrease in the pensionliability of CHF 104 million. In 2006, Swisscom expects to make contributions to the comPlan in theamount of CHF 258 million, including CHF 45 million to build up reserves.The determination of Swisscom’s pension liability and net periodic pension expense in itsconsolidated financial statements is based on guidelines established by the International FinancialReporting Standards (IFRS). As of December 31, 2005, the amount of the pension liability in excessof plan assets was CHF 1,727 million (CHF 2,050 million as of December 31, 2004), of which only CHF805 million (CHF 1,118 million as of December 31, 2004) was recorded in the balance sheet as aliability. The liability and expense amounts for pension benefits are dependent on the actuarialassumptions used by Swisscom’s actuary. From the date of comPlan’s inception in January 1999 toDecember 31, 2005, the cumulative actual return on assets has been lower than the expected return.Due to this unfavorable development of the capital markets, Swisscom has an unrecognized actuarialloss and unrecognized prior service cost totaling CHF 922 million, both of which are subject tofuture recognition as described in Note 2.19 to the consolidated financial statements.Swisscom’s employer contributions to comPlan were calculated on the basis of an anticipatedlong-term rate of return of at least 4. 5%. If the actual rate of return on plan assets is lowerthan 4. 5%, contributions would have to be increased to maintain pension benefits. Swisscom’spension expense under IFRS for 2006 is calculated using an expected return of 3.9%.Effective January 1, 1999, all Swisscom employees who were members of PUBLICA, the pension plan ofthe Swiss government, were transferred to comPlan. All employees who were already retired as ofthat date remained members of PUBLICA. Swisscom settled its liability relating to these employeeson December 31, 1998, but, in accordance with a contract with the government, retained a liabilityfor pension indexation. In accordance with this contract, Swisscom must pay PUBLICA the differencebetween the actual return on plan assets and the government prescribed discount rate, increased byan account maintenance fee. On January 1, 2005, new legislation was introduced to abolish thepreviously guaranteed annual pension increases and to substitute pension increases based on anannual government review. The PUBLICA legislation is currently being revised and has not beenpassed. Based on the draft legislation, Swisscom does not expect its liability to change. For moreinformation on Swisscom’s pension plan, see Note 11 to the consolidated financial statements.
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**Share Ownership**As of March 31, 2006, the members of Swisscom’s Board of Directors and Executive Board owned atotal of approximately 12,000 Swisscom shares and options exercisable for approximately 21,000Swisscom shares. The members of the Board of Directors and Executive Board beneficially holdindividually and in the aggregate less than 1% of Swisscom’s shares.***Management Incentive Plans***In order to link the interests of Swisscom management with those of shareholders generally,Swisscom regularly offers shares to management pursuant to management incentive plans.Until 2003, Swisscom typically offered members of middle and upper management, including members ofthe Board of Directors and Group Executive Board, the opportunity to invest in a package ofSwisscom shares and options. Each option had a strike price based on the price of the shares atthe time of grant. The outstanding options may be sold or exercised at any time during theapplicable exercise period.The following table provides summary information relating to options granted under these managementincentive plans to the members of Swisscom’s Board of Directors in office at December 31, 2005:       **2003**Exercise Period  05/01/2006