As filed with the Securities and Exchange Commission on April 16, 2004

SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2003
Commission file number: 1-15156

TELEKOM AUSTRIA AG

AUSTRIA
(Jurisdiction of incorporation or organization)

Lassallestraße 9, 1020 Vienna, Austria (Address of principal executive offices)

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

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

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

     Common Stock, no par value                                         500,000,000

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by — Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. þ Yes      o No

     Indicate by check mark which financial statement item the registrant has elected to follow. o Item 17      þ Item 18

TABLE OF CONTENTS

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REFERENCES

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

FORWARD-LOOKING STATEMENTS

     This annual report contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are usually accompanied by words such as “believe”, “intend”, “anticipate”, “plan”, “expect” and similar expressions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including the risks described in “Item 3 — Risk factors”, and elsewhere in this annual report. Forward-looking statements involve inherent risks and uncertainties. We caution that a number of important factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. These factors include, but are not limited to, the following:

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

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PART I

Item 1. Identity of Directors, Senior Management and Advisors

     Not applicable.

Item 2. Offer Statistics and Expected Timetable

     Not applicable.

Item 3. Key Information

SELECTED FINANCIAL AND OTHER DATA

     The following tables present a summary of consolidated financial and operating data for Telekom Austria. The financial data presented in these tables are derived from the consolidated financial statements which have been prepared in accordance with U.S. GAAP and are included elsewhere in this annual report. You should read those sections for a further explanation of the financial data summarized here. For a description of other factors which have affected or may affect our financial results, see “— Risk factors” and “Item 5 — Overview”.

     Prior to June 28, 2002, Telekom Austria held a 74.999% interest in mobilkom austria. Due to certain substantive participating rights held by the minority shareholder, Telecom Italia Mobile International N.V., Telekom Austria’s investment in mobilkom austria was accounted for under the equity method. On June 28, 2002, we acquired 100% of Autel Beteiligungs GmbH, which held a 25.001% stake in mobilkom austria, from Telecom Italia Mobile International N.V., bringing our total interest in mobilkom austria to 100%. Consequently, we have consolidated mobilkom austria group effective June 28, 2002. The consolidated statement of operations for the year ending December 31, 2002 reflects Telekom Austria’s equity in earnings of mobilkom austria group through June 28, 2002 and mobilkom austria group’s results of operations for the period June 28, 2002 until December 31, 2002.

     The consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 have been audited in accordance with auditing standards generally accepted in the United States of America by KPMG Austria GmbH Wirtschaftsprüfungs- und Steuerberatungsgesellschaft and Grant Thornton — Jonasch & Platzer Wirtschaftsprüfungs- und Steuerberatungsgesellschaft-OHG. The consolidated financial statements of Telekom Austria for the years ended December 31, 2002 and 2003 have been audited in accordance with auditing standards generally accepted in the United States of America by KPMG Alpen-Treuhand GmbH, Wirtschaftsprüfungs- und Steuerberatungsgesellschaft. The consolidated financial statements of mobilkom austria group for the years ended December 31, 2002 and 2003 have been audited in accordance with auditing standards generally accepted in the United States of America by Grant Thornton Wirtschaftsprüfungs- und Steuerberatungs-GmbH.

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

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DIVIDENDS

     The following table sets forth the annual dividends declared and paid per share based on 500 million shares outstanding with respect to each of the financial years indicated. Dividends declared and denominated in U.S. dollars are based on the noon buying rate on December 31, 2003, which translated to EUR 1.00 = USD 1.2597.

     For fiscal year 1999, Telekom Austria paid an aggregate cash dividend of EUR 140.5 million in 2000. We did not pay dividends for 2000, 2001 and 2002.Under Austrian law, we may pay dividends only from net income as shown in the annual financial statements of Telekom Austria AG prepared under Austrian GAAP. The Management Board and Supervisory Board plan to propose to the shareholders at the annual general shareholders’ meeting on June 3, 2004 a distribution from unappropriated earnings of EUR 0.13 per zero par value share.

     The payment of future dividends depends on our earnings, financial condition and other factors, including cash requirements, our future prospects, taxation, regulations and the pay-out ratios of other European telecommunications operators. Investors should not assume that any dividend will actually be paid or make any assumption about the amount which may be paid in any given year. Our historical pay-out ratio of dividends should not be considered as indicative of our future dividend pay-out ratio. Any dividends paid will be subject to Austrian withholding tax. For further information on Austrian withholding tax, see “Item 10 — Taxation — Austrian taxation”.

     Dividends will be paid in Euro. Cash dividends payable to holders of ADSs listed on the New York Stock Exchange will be paid to The Bank of New York, which will convert the dividends into U.S. dollars, at the rate of exchange applicable on the date such dividends are paid, for disbursement to such holders. Cash dividends payable to the holders of shares listed on the Vienna Stock Exchange will be paid to an Austrian bank — which will be selected and announced in due time prior to our annual general meeting on June 3, 2004 — as paying agent, in Euro for disbursement to shareholders.

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EXCHANGE RATE INFORMATION

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

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

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

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

     The following table shows, for the periods indicated, information concerning the exchange rate between the U.S. dollar and the Euro. These rates are provided solely for your convenience. We do not represent that the Euro could be converted into U.S. dollars at these rates or at any other rate. The table below shows the averages of the relevant exchange rates on the last business day of each month during the period specified. The high and low columns show the highest and lowest quotes, respectively, on any business day during the relevant period. On April 9, 2004, the noon buying rate translated to EUR 1.00 = USD 1.2102.

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RISK FACTORS

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

Risks relating to our business

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

     As a result of liberalization, we have lost market share in the fixed line and mobile communications services markets and we have reduced our tariffs in response to increasing downward pressure on tariffs. Intensifying competition from existing and new operators may result in additional losses of market share and further tariff reductions. Other factors that may increase competition include new forms of telecommunications that circumvent conventional tariff structures as well as licensing schemes and alternative technologies such as providing wireless access. See “Item 4 — Business overview”.

     According to the new European Regulatory Framework the Austrian Telecommunications Act (implementation on August 19, 2003), requires mobile operators to make mobile number portability available to customers. There have been ongoing negotiations between operators since mid-2002 to agree on terms and conditions to provide that service. As no agreement could be concluded, Hutchison 3G Austria started regulatory proceedings against a small number of operators in October 2003. As mobilkom austria was not included in those proceedings, we filed an application against Hutchison 3G Austria at the end of December 2003, with the objective to be able to communicate our view regarding mobile number portability to the National Regulatory Authority. A decision is not expected before May 2004. Therefore, mobile number portability is not expected to be available for customers before the end of 2004. From then on, competition is likely to intensify even more, especially in the market for business customers.

     In Austria, we will compete with new operators that offer wireless communications services without maintaining their own networks (known as mobile virtual network operators) and which therefore incur substantially lower costs than we do. One of our competitors in the fixed line business, TELE 2, who entered the mobile communications market in February 2003 as a service provider reselling mobile communications services of another competitor under its own brand name, intends to become a Mobile Virtual Network Operator (MVNO), with its own access number, in the first half of 2004. The Austrian mobile communications market currently has four GSM operators with UMTS licenses, one operator holding only a UMTS license and the mentioned service provider. All UMTS license holders have launched UMTS services in 2003 and therefore the competition for 3G services is expected to further increase. We started the commercial launch of UMTS in April 2003. However, until sufficient UMTS handsets with adequate performance are available for our customers, we will not strongly promote UMTS services. A further threat for the UMTS business might be other mobile technologies for data transmission with equal or higher data transmission capacity such as Wireless Local Area Network (WLAN). The amount paid for UMTS licenses in Austria was only EUR 103 per capita, as compared to an average of EUR 630 per capita in other European countries. Although we are confident that revenues generated from the UMTS technology will justify the investment in license and network of UMTS, we cannot guarantee that this business will be profitable in the near future.

     We expect increased competition in our Croatian market due to the expected auction of UMTS licenses in 2004. The entry of a third operator may result in increased pressure on tariffs and the obligation to offer national roaming or to sell available capacity.

     Because of the increased competition, the main challenge we face is maintaining our leadership in the Austrian telecommunications market. If we do not manage to maintain this leadership, our revenues, profitability and growth may be adversely affected.

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     Approximately 89% of our revenues come from the Austrian market. Both, the Austrian mobile communications and fixed line markets are saturated and highly competitive and this has led to fierce competition in the mobile communications market. If this development continues our profitability may decline.

     Our primary business is the provision of communications services in Austria. We expect a decline in revenue in the fixed-line market, and lower growth in revenues for mobile communications in Austria. The number of fixed lines may further diminish as more customers migrate to mobile communications, substitute technologies like “Voice over IP” utilizing broadband internet access, and alternative fixed network operators.

     In the mobile communications business we face increasing competition. Austria has one of the highest penetration rates of mobile communications in Europe, reaching approximately 89.7% at December 31, 2003. Since the market has been reaching maturity in terms of customer growth, we are focusing on retention of the existing customer base leading to increased customer retention costs. Formerly, competition was based on handset subsidies. Lately our competitors have started to compete increasingly through lower tariffs resulting in the offer of mobile voice services for one Euro cent per minute or free for calls within their respective networks. As customer retention costs increase and the tariff reductions by our competitors are very aggressive, a continuation of the low tariffs would have a material adverse effect on our profitability.

     We generate only about 11% of our revenues in markets outside Austria and therefore our success is highly dependent on the Austrian market. However, the increasing saturation of the Austrian fixed-line and mobile communications markets may adversely affect our results of operations which might not be compensated by the profitability of our investments in telecommunications companies outside Austria.

     We are limited in our ability to adjust our operating expenses according to the changing market environment.

     In recent years we have taken measures in order to cut our costs and enhance our competitiveness. One of these measures was to reduce our existing workforce. Currently, 54% of all employees of our group are civil servants who cannot be dismissed except for cause. In the past we have implemented early retirement packages for voluntary retirement of our employees. Recent changes in Austrian law will no longer allow us to implement early retirement packages in the future. The telecommunications market in which we operate has become increasingly competitive in terms of prices. If this competitive environment continues, it will have an impact on our revenues. The restrictions of the Austrian Career Public Service Regulations Act to further reduce our current workforce could have a negative impact on our profitability.

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

     Changes to our tariff structure are generally subject to prior approval by the regulatory authority, whereas our competitors are generally free to alter their prices without any prior approval. As a consequence, our competitors may be more nimble at setting a pricing structure that exploits changes in the market, thus increasing their market shares. Our interconnection rates in our fixed and mobile networks may be lowered by the regulatory authority in 2004, which may adversely affect our profitability. Our competitors may also be more successful in bidding for contracts from the public sector which could have an adverse effect on our results of operations. For further information see “Item 4 — Regulation and legal framework — Legal framework — Procurement law and telecommunications act”.

     The extent to which we must share our infrastructure with our competitors remains to be settled by the implementation of the Telecommunications Act of 2003 through the Austrian regulatory authority and the courts. A regulatory framework unfavorable to us in any of the markets in which we operate could cause our revenues and growth to decline.

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

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

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

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

     Technological change could increase competition, render existing technologies obsolete or require us to make substantial additional investments.

     Our services are technology-intensive, and the development of new technologies could render our services non-competitive and require us to write-down the book-values of investments we have made in existing technologies. We are already making substantial investments, and may have to make substantial additional investments in new technologies in order to remain competitive. New technologies that we choose to develop or acquire, however, may not prove to be successful. In addition, we may not receive the regulatory or intellectual property licenses needed to provide services based on new technologies in Austria or abroad. As a result, we might lose customers, fail to attract new customers or incur substantial costs to maintain our customer base.

     We are in the process of evaluating the details and financial implications of a migration to next generation networks (NGN) with particular consideration of existing investments. The costs relating to the build-out of NGN and its implications on our business are expected to be substantial. The time frame for its development will depend on various factors including customer needs and competition. At this early stage, however, it is too early to quantify the capital expenditure requirements or to give a time horizon for its implementation. As a result this might lead to substantial investments in the future and might impair the value of existing investments which could have a negative impact on our profitability.

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

     We have made significant equity investments in telecommunications operators in the Czech Republic, Slovenia and Croatia and may make further investments in other markets with significant growth potential.

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These countries have political, economic, and legal systems that are still in the process of transformation. Political or economic disruption or changes in laws and their application may harm the companies in which we have invested. This may impair the value of these investments.

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

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

Risks relating to our shares

     Our major shareholder, ÖIAG, continues to exercise significant influence over our strategic direction and major corporate actions.

     Österreichische Industrieholding AG (ÖIAG) continues to hold a controlling interest in our shares. This level of shareholding gives ÖIAG significant rights to determine our strategic direction and to determine what matters are brought to shareholders for a vote. The issues that may be influenced by ÖIAG include any merger, any acquisition or divestiture of material assets, approval of the annual financial statements, declaration of dividends, capital increases, and the election and removal of members of our Supervisory Board. The interests of ÖIAG in deciding these matters and the factors ÖIAG considers in exercising its votes could be different from other shareholders’ interests. This could have the effect of delaying, or preventing a change of control, or a merger, consolidation, takeover or other business combination that shareholders might otherwise approve. For further information see “Item 7 — Relationship with the Republic of Austria and ÖIAG”.

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

     We and ÖIAG have agreed with investment banks that acted as joint book runners in connection with the sale of Telecom Italia International’s stake in us in January 2004 that each party will not issue, sell or pledge shares of Telekom Austria until May 31, 2004 without prior written consent of the investment banks. The Austrian government has declared to privatize us entirely by the end of the legislative period in 2006 (see “Item 10 — Memorandum and Articles of Association — Takeover rules”.

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

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

     In 2003, the Austrian government announced its intention to sell its 47.2% ownership in our share capital which is currently held through ÖIAG by the end of the legislative period in 2006. In connection with Telecom Italia International’s sale of our shares in January 2004, ÖIAG has agreed not to sell shares in Telekom Austria before May 31, 2004. As of June 1, 2004 ÖIAG will be free to sell its shares in us, which could lead to a change in control of Telekom Austria.

     A change of control as defined in the Austrian takeover Act would require the investor to make a compulsory offer to our remaining shareholder. A change of control followed by the compulsory offer would therefore be likely to reduce the liquidity of our shares in the public markets and could eventually lead to their delisting from the Vienna and New York Stock Exchanges. See “Item 10 — Memorandum and Articles of Association — Takeover rules”.

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

     The value of the Euro against the U.S. dollar has appreciated significantly since January 2002. Before that point the value of the Euro against the U.S. dollar had generally declined and had fluctuated significantly.

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Because our common stock is traded in Euro and our ADSs are traded in U.S. dollars, fluctuations in the exchange rate between the two currencies may affect the relative value of your investment. In addition, should we make any distribution on our common stock in Euro, the depositary will convert such distributions to U.S. dollars. If exchange rates fluctuate before the depositary converts the currencies, shareholders may lose some of the value of the distribution.

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

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

     It may not be possible for shareholders to enforce judgments of U.S. courts against members of our Supervisory Board or Management Board.

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

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Item 4. Information on the Company

     Telekom Austria AG is a stock corporation (Aktiengesellschaft) organized under the laws of the Republic of Austria. It is the parent company of the consolidated Telekom Austria Group (“Telekom Austria”) providing a wide range of advanced wireline and wireless communications services.

     The corporate headquarters and the principal executive offices of Telekom Austria were transferred to Lassallestraße 9, 1020 Vienna, Austria from Schwarzenbergplatz 3, 1010 Vienna, Austria on June 30, 2003. The telephone number is +43 (0)590591 0 and our website address is www.telekom.at. Reference to our website does not incorporate the information contained on the website into this annual report.

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

HISTORY AND DEVELOPMENT OF THE COMPANY

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

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

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

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

     In November 2000, ÖIAG, sold a portion of its shareholding in Telekom Austria as part of the initial public offering in Austria and the United States of America and as a private placement elsewhere. As a result, 22.4% of our share capital was held by widely dispersed retail and institutional investors. After the offering, ÖIAG retained 47.8% (currently 47.2%) of our share capital. Telecom Italia S.p.A., through a subsidiary, owned the remaining 29.8% and disposed of its entire stake in Telekom Austria in two transactions. On November 4, 2002 Telecom Italia sold 75 million shares in a private placement, reducing its level of ownership to 14.8%. On January 21, 2004 Telecom Italia sold its residual shareholding, corresponding to 73.9 million shares or 14. 8% of Telekom Austria’s share capital, in a private placement to institutional investors.

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

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Change in mobilkom austria’s corporate form and ownership

     In March 2001, in order to realize a number of benefits, including an increase in Telekom Austria’s liquidity and favorable tax treatment, we converted mobilkom austria AG into a limited partnership called mobilkom austria AG & Co KG. A newly formed mobilkom austria AG was created to act as general partner of mobilkom austria AG & Co KG.

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

Change in Telekom Austria AG’s ownership

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

     On January 21, 2004 TII sold its remaining stake of 73.9 million Telekom Austria shares in a private placement to institutional buyers. As a result of this transaction the agreements between Telecom Italia and ÖIAG that governed the phased exit terminated.

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BUSINESS OVERVIEW

     In 2003 we started to report our business in the following three segments:

     We are the market leader in Austria in both business segments, Wireline and Wireless.

     On May 21, 2002, our Supervisory Board approved the reintegration and merger of Datakom Austria GmbH, Datakom International Solutions GmbH, Jet2Web Internet Services GmbH and Jet2Web Network Services GmbH into Telekom Austria. On October 1, 2002 these companies have been incorporated into Telekom Austria with effect from December 31, 2001. As of January 1, 2003 we finalized the reorganization of our operations into two distinct operating segments, Wireline, and Wireless, and a third segment “Other activities” which includes primarily various centralized financial services that are provided by our subsidiary Telekom Finanzmanagement GmbH to both business segments, Wireline and Wireless. The two business segments also conduct business with each other which is accounted for in the form of eliminations. In order to give shareholders a clear view of our external performance as a company, we separately disclose these internal transactions when presenting our results.

     We have started reporting according to the new segments commencing with the first quarter of 2003.

Strategy

     Telekom Austria applies different strategies for the two business segments Wireline and Wireless. Different strategies and independent structures for the two segments are the basis for the success of our overall goal — to substantially strengthen the corporate value. The coordination of strategic issues between the business segments is the responsibility of the Management Board of Telekom Austria AG.

     In 2003, the major accomplishment of the Wireline segment has been the establishment of two strong marketing organizations to address the wholesale business and the retail business.

     In 2004, the Wireline segment will continue its efforts to reduce operational expenditures by optimizing both organizational and technical processes. We intensify our efforts to increase our revenues in the fields of internet, broadband and data products.

     The Wireless segment, consisting mainly of mobilkom austria in Austria, VIPnet in Croatia, Si.mobil in Slovenia and mobilkom [liechtenstein] in Liechtenstein, has adapted its strategy to the local needs of its respective country of operation. All companies are the leading or second strongest provider in their markets. Each of the subsidiaries of the Wireless segment independently seeks to improve the process of its customer relationship management and to maximize the benefits of mobilkom austria’s partnership with Vodafone. In 2003, we proved again our leadership in innovation and enhanced our international reputation with the launch of the first national UMTS service in Europe and the launch of one of the first European Enhanced Data Services for GSM Evolution (EDGE) networks by Si.mobil.

     A close cooperation among all Wireless companies at all levels enables us to generate synergies and therefore retain a lean organizational structure. International partnerships such as the cooperation with Vodafone, including visitor roaming agreements and joint product developments, will further strengthen our ability to offer our customers state-of-the-art technologies. We will further investigate possible acquisitions based on their ability to fit into our overall strategy.

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Overview of Telekom Austria’s revenues

     Our operating revenues are derived principally from fixed line communications services, which consist primarily of switched voice telephony services, and mobile communications services. The growth in mobile communications and internet services, including revenues from subsidiaries outside of Austria has offset the decline in fixed line services. The following table shows our operating revenues for each of our reporting segments for the years 2001 to 2003.

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

     Our consolidated figures are therefore not directly comparable with previous years. Furthermore, although we were unable to consolidate mobilkom austria group in prior years, we have always managed the business of mobilkom austria group. To facilitate a discussion of results on a comparable basis, we are providing supplemental total managed data below. The total managed data shown in this table include 100% of mobilkom austria group’s financial statements for all periods presented. In 2003 total managed and total consolidated figures are identical. For a discussion of our operating revenues and more details, see also “Item 5 — Results of operations”.

     Approximately 11% of Telekom Austria’s total operating revenues in 2003 are derived from activities outside of Austria, mainly in the mobile communications services.

     Austria has demonstrated a strong demand for communications services, with a mobile user penetration rate of 89.7% at December 31, 2003, one of the highest in Europe. Internet user penetration in Austria was approximately 55% at the same date.

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Wireline

     In 2003, our Wireline segment generated revenues of EUR 2,197.7 million. Switched voice telephony services in particular continue to be our most significant revenue contributor, representing approximately 46.2% of total Wireline revenues in 2003. Approximately 7.6% are internal revenues, generated from the Wireless segment. The Wireline segment replaces three segments reported in 2002: fixed-line services, data communications services and internet services.

     Market position

     We are the leading provider of Wireline telecommunications services in Austria. In 2003, we were able to retain our market position in the Wireline segment. At December 31, 2003, we had a market share of 52.9% of voice telephony, excluding internet dial-up, carried over fixed network based on traffic volume in comparison to 52.6% end of 2002. Due to a decrease of dial-up minutes our market share for voice telephony including internet dial-up traffic remained unchanged at a level of 55.3% in 2003 in comparison to 2002. We serviced 3.0 million access lines in Austria, of which 455,000 operate on our Integrated Services Digital Networks (ISDN). ISDN networks allow simultaneous, fully digital transmission of voice and data at higher speed than over normal access lines. Our network infrastructure covers all of Austria and is fully digital.

     We are the overall market leader in data communications and IT-solutions in the Austrian telecommunications market. In particular, we believe that we are the market leader in our core service areas of switched and routed data networks. Although the weak economic environment negatively impacted the Austrian data communications market, we managed to stabilize our revenues. In order to provide our customers one-stop-solutions and to stabilize our revenues we extended our business into a wide range of IT-services supplementing our provision of data communication services, which we market as “network centric IT services”.

     With approximately 1,026,600 internet customers we are the largest internet service provider in Austria in terms of customers. We had a 42% share of the residential internet market in the fourth quarter of 2003 (including 2% contributed by mobilkom austria’s mobile internet customers) up from 38% in the fourth quarter of 2002. According to the AIM Austrian Internet Monitor survey, Austria had an internet user penetration rate of 55%, up from 50% in the fourth quarter of 2002 based on a population of 6.8 million persons aged 14 and older which means that in total 3.7 million Austrians use the internet. At the same time, the number of online-shoppers has been growing. In the fourth quarter of 2003, 50% of all internet users were shopping online according to the AIM Austrian Internet Monitor survey.

     We are also the leading provider of wholesale fixed line services in Austria. In 1999, we were one of the first incumbent telecommunications companies in Europe to introduce Asymmetrical Digital Subscriber Lines (ADSL) services. ADSL is one of the xDSL technologies (all types of digital subscriber line technologies via copper lines) that permit the transmission of data at very high speeds using a standard copper access line.

     Primary services

     Wireline is our largest business segment and includes:

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     Switched voice telephony

     Services

     We provide traditional telephone line access, also called Public Switched Telephone Network access (PSTN), and ISDN basic and multi access. Unlike a PSTN telephone line which offers a single access channel, an ISDN basic line provides two channels and an ISDN multi-line provides 30 channels which can be used for simultaneous voice and data transmission at higher speeds. We are required by law to grant other operators access to our subscriber lines, also called the local loop. Under the Telecommunications Act 2003 we are required to act as the only universal service provider until December 31, 2004.

     We offer a variety of calling services to residential and business customers throughout Austria. These services include local, long distance, fixed-to-mobile and internet dial-up at different tariffs. We provide international fixed line voice services to destinations worldwide. We also offer a range of call management services comprising digital voicemail, call waiting, call forwarding, three-way conference calls and caller identification.

     Access lines

     The following table shows selected data relating to our PSTN and ISDN lines for the periods indicated. The figures exclude pay phones, but include our internal lines and approximately 247,800 lines for qualifying low income persons at December 31, 2003. The service for low income persons includes free monthly rental and one hour of free local traffic per month. We receive reimbursement from the government for each of these lines. For further information see “— Regulation and legal framework — Major regulatory decisions affecting Telekom Austria”. Each PSTN line includes one access channel, each basic ISDN line includes two access channels and each multi ISDN line includes 30 access channels.

     To date, the major portion of the demand for our ISDN lines has come from business customers. The number of our ISDN lines increased from approximately 438,200 at December 31, 2002, to approximately 455,000 at December 31, 2003, representing an increase of 3.8%. The decline in the number of our PSTN lines is primarily due to increased migration to mobile networks and substitution by ISDN lines.

     Traffic volume

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

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     The overall mix of our voice traffic continued to change during 2003, reflecting an increasingly competitive environment. In 2003, the decrease in voice traffic resulted from lower national traffic minutes due to increased migration of voice traffic to mobile networks.

     In 2003, our customers generated 484 million minutes of outgoing international traffic through our fixed line network, compared to 472 million minutes in 2002 and 476 million minutes in 2001. This resulted in an increase of 2.5% in 2003 compared to a decrease of 0.9% in 2002. Our principal outgoing international traffic routes are to Germany, Switzerland and Italy and accounted for approximately 53.7% of our total outgoing international traffic during 2003.

     Tariffs

     In 2001, we introduced a “pay-per-second” tariff scheme, the so-called TikTak tariffs, which is adapted to our customers’ calling patterns. As a result, we managed to increase our voice market share (excluding internet dial-up) to 52.9% at December 31, 2003, up from 52.6% at December 31, 2002. At the end of 2003, the TikTak tariff scheme accounted for 21.4% of our traffic volume. At December 31, 2003, more than 1.2 million customers had opted for one of the TikTak tariff packages.

     The table below shows the trend of our average tariffs. Due to increased marketing efforts and growing competition, our average tariffs fell in all categories in comparison to 2002. The total average tariff for voice services decreased by 3.7% in comparison to the prior year. The average tariffs are calculated by dividing the revenues in each category by the total minutes as reported in the table on traffic minutes.

     Besides the TikTak tariffs, we still offer a Standard Tariff which is billed based on pulse.

     In September 2003, we discontinued our Minimum Tariff, a tariff option for low usage customers. Existing customers of the Minimum Tariff were transferred to the Standard Tariff. Our former Minimum Tariff offered a low monthly fee in combination with higher rates on a per minute basis. Pre-selection customers were able to take advantage of this offer by choosing an alternative operator providing lower rates on a per minute basis. The monthly fee element of the Minimum Tariff did not cover our costs for the network that we provided to an increasing number of pre-selection customers. Therefore we filed an application for discontinuation of our Minimum tariff which was approved by the regulatory authority in September 2003.

     Pay phones and value-added services (VAS)

     Public pay phone services

     We are the principal provider of public pay phones in Austria and operate approximately 22,600 pay phones and about 100 public multimedia terminals across Austria. Multimedia terminals provide access to internet, e-mail, video telephony and various other multimedia services. At December 31, 2003, 38.5% of our pay phones were prepaid-card operated. The number of pay phones was reduced by 5.0%. The roll out of public multimedia terminals, primarily in premium locations, started in 2003.

     Tariffs for pay phones are separated from fixed voice tariffs. Therefore, tariff reductions for fixed line calls did not impact pay phone revenues.

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     Value-added services

     Our current portfolio of value-added services includes:

     In 2003 the demand for toll-free services, especially for customer service hotlines, has increased due to stronger competition and higher demands for professional customer services. Premium rate services allow our business customers to sell their products and services directly over the telephone in order to reduce sales costs and meet their customers’ needs. We expect to increase market share in the area of premium-rate, free-phone and shared cost services due to further product innovations and variations launched in 2003.

     Tariffs

     We adhere to the regulated tariffs for toll-free numbers, shared cost and premium rate services. Telekom Austria’s prepaid calling cards allow customers to make calls from both fixed-line and mobile telephones from Austria to about 200 countries and vice versa from about 40 countries to Austria at various prepaid price models.

     Data and IT-solutions

     Data and IT-solutions encompasses most business activities of the former Datakom Austria GmbH, which was reintegrated in 2002 enabling us to offer customers a full range of integrated services, bundling data, internet and IT services into customized solutions.

     Services

     We offer a wide range of national and international data communications and IT-solutions, including:

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

     Leased lines and connected services

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

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     Our leased line customers pay an initial installation charge and a recurring fee based on the type, length and capacity of the leased line. However, in recent years, the recurring fees have declined significantly. We expect that competition will continue to pressure leased line prices. Nonetheless, we expect demand for leased lines and connected services to continue to increase as telecommunications and internet service providers lease additional capacity to establish new, or extend existing, networks.

     Data services based on SDH Technology. Our Datastream/SDH network provides cost-effective broadband services for business customers requiring higher and more flexible levels of bandwidth. Datastream/SDH is an internationally recognized high speed digital transmission and switching device that permits integrated voice, data and multimedia communications, which we now market as Nx64 Service.

     Switched data services

     We offer a range of data services on our switched network, including packet switched, frame relay and ATM services.

     Packet-switched services. We provide packet-switched services on our public switched data network. These services allow data communications for a range of applications, such as database searches, electronic funds transfers, and e-mail. We use the X.25 protocol, which is a worldwide standard for transmitting data using packet-switched networks. Although traffic has grown in recent years, we expect that customers now using packet-switched services will increasingly migrate to frame relay or IP (internet protocol) -based services. The number of our service ports connected to our packet-switched service increased by 3.2% to 63,900 at the end of 2003 from 61.900 at the end of 2002.

     In 1999, we introduced a new product called Datacash, a solution which enables cashless payment systems to meet the increasing demand for electronic payment. In 2001, we introduced aircash, the wireless equivalent to Datacash. Aircash is a joint product of our Wireline and Wireless segments.

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

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

     The number of ports on our frame relay platform was reduced since we started to move customers to our new IP-based platform. The number of frame relay service ports declined by 11.6% to 3,800 at the end of 2003 from 4,300 at the end of 2002.

     ATM (asynchronous transfer mode) services. ATM is a high-performance, cell-oriented switching and multiplexing technology that utilizes fixed-length packets to carry different types of traffic. It offers standardized quality levels and flexible bandwidth connections in order to accommodate varying application requirements. We have developed products to counteract system failure and increase resilience. Thus, we are able to back up our customers’ networks in case of system break-downs. The number of ATM ports increased by 59.9% to 4,316 in 2003 from 2,699 in 2002.

     Corporate network services

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

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

     We expect that the demand for corporate network services will continue to increase as businesses increase internal efficiency and knowledge management, as well as to provide products and services to customers more quickly and conveniently. We also expect to provide corporate network services bundled with IT solutions and business applications and utilize additional synergies.

     IP-MPLS services (multi-protocol label switching technology based on the internet protocol standard)

     We were the first provider in Austria with a standalone business IP backbone, based on multi-protocol label switching technology (MPLS) with different classes of service features. Standalone means that we operate our customer VPNs (virtual private networks) on our network rather than on a public internet platform, which is important for security and performance reasons. MPLS is a technology to increase the performance of a routed network. In a routed network devices called “routers” determine the best path for forwarding packets of data using common protocols to communicate with each other and configure the best route between any two hosts. Each customer application can be assigned to one of five classes of service, each providing different performance levels. This business IP backbone is the basis network for our business IP products and solutions.

     Data value-added services

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

     Through our co-operation with A-Trust, in which we hold a 19.9 % stake, we provide a digital signature product allowing secure digital signatures to be used on-line, thereby enabling the secure processing of transactions and payments over the internet. The product is used in combination with our e-business services.

     IT-solution services

     IT-solution services — a new business line of Telekom Austria — deals with a wide range of IT-services supplementing our provision of data communications services which we market as “network centric IT services” and generates additional value for our customers beyond traditional data services. The service offering ranges from consulting to design and implementation of customer specific IT-solutions. These solutions are designed for outsourcing customers IT infrastructures to external service providers, in the way that analogous to customers’ needs several IT services modules can be flexibly and efficiently combined to a homogenous IT-solution. Moreover, Telekom Austria is responsible for the continuous surveillance, end-to-end management and maintenance of IT services, which ensures the ongoing success of customers’ business transactions.

     IT-solution services mainly include 5 different service definitions:

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     Business applications

     Business applications represent a wide range of services, which are mainly based on electronic data interchange services and e-business solutions.

     The e-business product portfolio was adjusted to the changing market requirements. We provide customized e-business solutions from customer relationship management, e-marketing or e-procurement to corporate website services. A new e-conferencing solution enables companies to conduct virtual meetings and share virtual presentations. New web-learning products provide virtual classrooms. As a full service provider we offer solutions including access to the platform, standard content, individual content creation and consulting.

     Recently, we were awarded a commission by Suzuki International Europe for an Application Service Provider (ASP)-based ordering system for 1,500 Suzuki dealers in Germany and France. This follows the successful implementation of an Austria-wide B2B portal for about 200 Suzuki dealers in 2003.

     On July 29, 2003, we acquired 74% of World-Direct eBusiness solutions GmbH, bringing our total interest to 100%. World Direct provides e-business solutions ranging from design and management of corporate websites to e-procurement applications.

     Internet access & media

     As part of our re-organization into two operating segments (Wireline, Wireless), Jet2Web Internet Services GmbH was re-integrated into Telekom Austria in 2002. We also provide internet services in the Czech Republic through our 100% subsidiary, Czech On Line.

     Services

     Internet access & media comprise the following services:

     The brand Aon combines all product and service offerings for private internet access and internet services.

     Access services

     We offer fixed network internet access through dial-up service and high speed broadband internet access service, ADSL.

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     The table shows the development of the number of our internet customers at the dates shown. At December 31, 2003, we had about 207,600 ADSL customers. In addition, we have approximately 53,500 ADSL subscriptions that were sold to our wholesale customers. Our one-time internet offer, Complete, is not included in the data presented above — see below for more information.

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

     Dial-up access

     In October 2001, we launched AonFlash, our dial-up product family with five different service packages. For our product AonFlash Easy, as with its predecessor AonPuls, we do not charge a monthly rental fee, but a special dial-up internet tariff for the connection via fixed line. In addition, we offer AonSuccess which is not a separate product but an add-on product available to customers who use one of the other internet products described above. In addition to the web space for homepages included in each of the other access products listed, AonSuccess provides 50 megabytes of additional web space for large homepages.

     In 2000, we also offered a special flat-rate internet product called Complete. Although we stopped offering this flat rate internet product in 2000, for which the minutes used are not charged, the corresponding traffic still exists. This one time internet offer accounted for 3,862 million traffic minutes in 2003, 3,801 million traffic minutes in 2002, and 3,593 million traffic minutes in 2001.

     Broadband ADSL access

     In the summer of 2003, the residential ADSL portfolio with modules for download volume or online time was re-launched and included Aon Speed FreeTime and add-on products like Aon Spamfilter, AonVirenchecker to better meet the changing customers’ needs and to satisfy their increasing demand for security products.

     The product AonSpeed FreeTime provides unlimited usage during evening and weekend hours within the limits of Telekom Austria’s fair use policy. Under this policy, Telekom Austria has the contractual right to block data transmission if customers exceed a predefined amount of transmitted data.

     AonSpamfilter enables residential customers to take control of their personal mailbox and protect themselves from junk mails. AonVirenchecker includes a local desktop virus protection software as well as a tool to scan incoming e-mails and attachments for viruses.

     For all products (except ISDN), residential customers can choose between self installation or installation by the technical customer service. They can also choose two additional packages which offer wireless connectivity in connection with several of our ADSL products.

     Aon.tv. In June 2003, Telekom Austria launched the paid service Aon.tv, succeeding our multimedia services field trial Jet2web-tv. Telekom Austria is one of the first European operators providing TV through broadband ADSL access. Customers can choose from a variety of live TV channels, on demand video clips and movies utilizing the PC as a user interface. The bandwidth was increased from 512/64 kbit/s to 768/128 kbit/s for all customers enabling optimal usage of our interactive TV service Aon.tv and other multimedia offers.

     Aon Gaming. Telekom Austria was the first official ADSL online gaming partner of Microsoft and Sony when they started their online services in Austria in 2003. We developed product bundles consisting of gaming consoles and broadband internet access.

     Business internet access

     For our business customer we re-launched the product group “Business Access” including Business Access Dial-in in 128 kbits/s for high bandwidth demand outside of our ADSL coverage areas and broadband SDSL access. SDSL (Symmetric DSL) — different from ADSL — provides data transmission at the same speed in both directions (upload and download) as an alternative to leased line services. We sell these products together with services such as secure e-mail, virus detection software and spam email filter as a response to the increasing need for secure access to internet services, as for example SecureMail, which is a central platform that allows business customers to search their company’s entire email traffic for viruses and other dangerous programs.

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

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

     Our main activities in 2003 were:

     We expect to continue to transform existing free services into paid services and focus on co-operations, entertainment, communication and local content in order to create new ways to generate and increase revenues and our profitability.

     The Telekom Austria portals led the Austrian portal market of internet service providers with 600 million page impressions excluding mobilkom austria’s portal A1.net in 2003. Page impressions refer to the number of times a specific website has been accessed or viewed by users.

     Czech On Line

     We are present in the Czech internet market through our Czech subsidiary, Czech On Line a.s. (COL), a leading provider of internet services and the first provider to introduce free dial-up internet access in the Czech Republic. In 2003 Czech On Line generated revenues of EUR 18.5 million. It was fully acquired by Telekom Austria during the fiscal year 2000. In 2001, COL evolved from an internet service provider to a full communications service provider and defended its leading position in an increasingly competitive environment. At December 31, 2003, Czech On Line had approximately 279,400 active customer accounts up from approximately 275,300 at the end of 2002.

     COL offers the following services:

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

     Due to changes in the regulatory environment in 2003, COL was able to enter into an interconnection agreement regarding the internet dial-up traffic with Cesky Telekom. Through the introduction of ADSL products COL entered the broadband market. In addition, COL introduced bundled voice and internet services for business customers and voice telephony for existing residential customers on the basis of carrier selection.

     Wholesale voice & internet

     We provide wholesale services for national and international mobile and fixed network operators and Internet Service Providers (ISP).

     National wholesale services include:

     At December 31, 2003, we had entered into interconnection agreements with 27 fixed-line and 6 mobile licensed operators in Austria. Separate fixed and mobile interconnection agreements were entered into with all six mobile operators. By the end of 2003 we had installed about 53,500 ADSL connections for our wholesale customers.

     International wholesale services include:

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     Traffic volume

     Our incoming and outgoing international traffic includes calls to and from our customers and customers of other network operators routed through our network. We processed more than 2.5 billion traffic minutes of international incoming and outgoing calls, especially incoming calls to fixed and mobile networks.

     Tariffs

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

     In addition, we receive payments for national interconnection traffic and pay other national carriers to carry and terminate calls from our customers in their networks. These tariffs are regulated by the Austrian regulatory authority.

     Our main source of interconnection costs arises from calls to mobile networks. mobilkom austria was required by the Austrian regulatory authority to lower its interconnection fees for call termination from EUR 0.1125 to EUR 0.1111 on April 1, 2003 and further to EUR 0.1086 on September 1, 2003. Interconnection fees for terminating calls in the network of other mobile operators range from EUR 0.1318 (T-Mobile), EUR 0.1380 (Connect Austria), and EUR 0.1962 (tele.ring and Hutchison 3G Austria).

     Interconnection costs also arise from calls to toll-free and value-added service numbers provided in our network which originated in networks of Austrian mobile operators. The underlying, so-called mobile origination tariffs are also regulated by the Austrian regulatory authority and range from EUR 0.1028 (mobilkom austria) up to EUR 0.1962 (tele.ring and Hutchison 3G Austria). Daytime, evening and weekend rates are identical.

     Wholesale data

     Leased line services

     The leased line business generates revenues by leasing fixed lines to customers for their exclusive and dedicated use. Our leased line basic service establishes a permanent connection for the transmission of voice and data traffic between two geographically separate points or between a point and several other points. These points can be entirely within Austria or partly in Austria and partly abroad. We lease lines to other local telephone operators and wireless service providers who use such lines as part of their networks. We also lease lines to providers of data services. In addition to leased line services we provide several service levels including express setup services.

     Other services (customer premises equipment and directory services)

     Customer premises equipment

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

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

     Directory services

     Directory services include mainly call center services and directory publications. The number of directory inquiries and connected services decreased further during 2003 due to the availability of electronic inquiry devices via internet, which at current are mostly free of charge, as well as electronic devices such as PDAs and mobile phones that include applications for directory management.

     Call center services. We provide national and international directory services through value added numbers and electronic interface, exchange of computerized national directory information with international carriers, hosting of directory service numbers of other carriers as well as cash collection services and weather information services. Furthermore, we offer telephone- and video-conferencing, InteractiveVoice Response (IVR) and audiotext services and complete call center solutions including sale and installation of call center equipment.

     Directory publications. According to the Austrian Universal Service Ordinance we collect and maintain a database of our subscriber data and other fixed-line and mobile service providers’ subscribers. This database is also offered to directory publishers.

     In July 2003, we sold our 26% stake in Herold to an investor group led by the two funds, Veronis Suhler Stevenson and 3i. Herold continues to publish our telephone directories. As of January 29, 2004, the online telephone directories “www.etb.at”, provided by Telekom Austria and “www.Herold.at”, provided by Herold Business Data AG merged into a joint search machine for Austrian telephone numbers. The newly created joint platform will soon be expanded by additional user-friendly features including new search masks for telephone numbers, data transfer for electronic organizers or the sending of telephone numbers as business cards via SMS.

     Competition

     We face intense competition that has resulted in a reduction of tariffs and prices throughout the market and we expect that pressure on tariffs will continue. We believe that market liberalization has contributed to market growth for internet services and intensified competition in voice telephony. Management believes that the market for data communications and IT solutions as well as internet services will continue to grow moderately whereas the fixed-line voice telephony market will further stabilize.

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

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     The Austrian government fully liberalized the Austrian data communications market in 1993 and the mobile communications market in 1996 together with the granting of the second license to provide digital mobile communications services, and voice telephony through fixed lines in 1998. The regulatory authority has determined that we have significant market power in the fixed telephony network and services market, leased line market and interconnection market as defined by the Telecommunications Act 2003. This partially limits our pricing flexibility. As a result, most of our pricing had to remain cost-based and significant changes have been subject to prior approval by the regulatory authority. For more information, see “— Regulation and legal framework — Regulation”.

     The procurement of goods and services by the Austrian federal government, state governments, municipalities and the public sector in Austria is subject to the Austrian public procurement law. Under the approval procedure for our tariffs and general terms and conditions we are limited in our ability to grant substantial price discounts and alter terms and conditions. The public procurement law requires the public sector to make its purchase decision on either the best price or quality among the offers. Our competitors are free to fix their tariffs and general terms and conditions and thus may have greater flexibility in the price discounts and general terms and conditions they may offer.

     In early 1998, call-by-call operators launched services in the Austrian market for voice telephony through fixed lines. Pre-selection of a carrier has been available since early 2000 for long distance, international, fixed-to-mobile calls, and calls to specific value-added service numbers. In early 2000, some of our competitors became full service providers by offering fixed line access. Carrier pre-selection for local calls has been made available since the beginning of 2001. We had interconnection agreements with 27 fixed line operators and 6 mobile network operators as of December 31, 2003.

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

     In the market for data communications and IT solution we face intense competition ranging from start-up companies to multinational alliances, like AT&T, Equant, T-Systems, Colt, tele.ring and UTA. We compete in all areas of data communications services based primarily on a combination of price and quality of service. We are the overall leader among data communications providers in Austria.

     We face many competitors in the provision of internet services, ranging from established global portal service providers to general telecommunications operators like UTA, UPC Telekabel (chello), T-Online or Inode. Our main ISP competitors are partly or wholly owned by international internet service providers. In the business market segment, we compete primarily with full-service telecommunications operators that offer internet access services, hosting services and voice telephony through fixed lines. Some of the operators in these market segments have longer operating histories abroad and greater name recognition in some European markets or in the United States. Our main competitor in the Austrian portal market for internet service providers is T-Online.at.

     In the wholesale services market we face intense competition as well. That has resulted in a reduction of prices and we expect that the pressure on prices will continue. Our primary competitors in the provision of wholesale services are T-Systems, Telecom Italia, BT, MCI, France Telecom, UTA, eTel, Colt and Level 3. We are the overall leader among wholesale services in Austria. The expansion of our fiber optic ring “Jet2Web Stream” enabled us to act as a major provider for the transmission of voice and data communications in Central and Southeast Europe.

     Sales and marketing

     In the Wireline segment, we classify our retail customer base into three customer groups:

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     In all three retail customer groups, marketing activities are based on integrated marketing analysis including customer needs, customer behavior and customer lifetime value. In accordance with their telecommunications preferences, we create individual customer target groups and provide them with special products and solutions. For each customer segment an individual communication core message and communication channel mix is developed. We target our customers by direct mailings, online advertising and sales promotions. Customers have the choice of ordering products and services by telephone, fax or mail and via online shopping on http://shop.telekom.at. Our call center hotline is another important sales channel through which customers can obtain information and order fixed line-related products and services.

     Our whole customer base comprises national and international mobile and fixed network operators and Internet Service Providers (ISP). Our marketing activities are customized to the individual needs of our customers focusing on the provision of integrated solutions and quality of service.

     At December 31, 2003, we had a network of 49 Telekom Austria Shops, offering competent customer service and advice concerning our entire service offerings for residential and business customers. In addition, we market our products and services through the offices of the Austrian Postal service and use retail chains as sales points. Furthermore, customers are directly solicited by professionals and by our employees.

     We target business customers in this segment with our dedicated sales force. Starting in 2002, we focused on retention of our large business customers and extension of our customer base by attracting medium and small-sized enterprises. As part of the integration of fixed-line, data communications and internet services into a single Wireline segment, we combined data communications services with Telekom Austria’s key account management and formed a new unit called Business Solutions. Moreover, we replaced the former technology and product-oriented organization with a customer-focused approach with a strong emphasis on all-in-one solutions.

     Our wholesale services are marketed and sold directly by our carrier managers, to national and international carriers. In 2003, we served more than 100 national and 250 international wholesale customers. We also plan to further push our sales activities through indirect Partner Sales in those countries which are covered by our fiber optic ring (Jet2Web Stream).

     Customer service

     We believe that a long lasting customer relationship is essential to outperform our competitors. Therefore, we continuously concentrate on service leadership. We handle about 23 million customer contacts per year with a focus on improving customer satisfaction.

     Selective training programs for our employees proved to be successful as customer satisfaction for service and installation of access lines improved significantly. On our hotlines we were able to increase the rate of immediate solution of customer request. Furthermore, our new more descriptive invoice design gained positive feedback from our customers.

     The customer service center was re-organized from a technology-based organization to a customer process-oriented organization. Our technical structure and functional organization facilitate but do not determine our customer service processes. We improved interfaces between operational support systems, billing and other customer service systems to achieve more efficient customer service management. As a result, we increased our performance and achieved significant cost savings. Our technical customer service realized efficiency growth of up to 24 % compared to the year 2002 in terms of daily order processing per employee. Installation time for fixed access lines was reduced by over 30 % due to further optimizations in our workflow. We increased our customer self care options to be more efficient while satisfying additional customer needs.

     To further improve efficiency and performance we will selectively invest into effective customer-orientated end-to-end processes.

     Networks

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

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     Switched network

     We operate a fully digital voice switching network serving 2.6 million PSTN access lines, about 447,200 ISDN basic access lines, and 7,800 ISDN multi access lines at December 31, 2003.

     Our network combines reliable technology with efficient network design. Our voice switching network operates on a double-tracked operation, administration, and maintenance system to assure network reliability. Our call success rate and exchange availability for 1999 through 2003 was between 99% and 100%. The call success rate is the percentage of originating calls resulting in successful connections (ringing tone) with the intended destinations.

     At December 31, 2003, more than 94% of the voice switches and remote units were connected to our transmission network by optical fiber cables, the highest capacity medium available.

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

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

     Data networks

     Technological innovations and advances in standardization allow us to provide a set of new telecommunications and multimedia services in connection with our large established network infrastructure. These innovations have occurred in three different areas: backbone network infrastructure, access infrastructure, and advanced services.

     Backbone network infrastructure. This infrastructure is based on optical signal transmission. We predominantly use optical fiber as the transport medium for high-speed digital transmission. Our core network was based on approximately 18,584 kilometers of optical fiber cables at December 31, 2003. In addition, we provide radio links in specific areas upon customer demand.

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

     Telekom Austria runs a state-of-the-art multiservice network which is based on ATM and IP technology. Through the deployment of MPLS networking technologies we are able to integrate the SDH, ATM and IP networking concepts in order to offer the required quality of service for the whole service portfolio of Telekom Austria, i. e. broadband access services based on ADSL and business customer services derived from fiber and SDSL access technology. Thus, we are implementing our networking infrastructure towards an “All IP” networking concept which is the basis for further cost reduction as well as offering new voice and data services.

     Access infrastructure. Our access infrastructure is the means by which our customers connect to our networks. The access network plays a key role in our business as it supports the entire range of services. Broadband technologies such as ADSL permit high-speed internet access and digital video transmission on normal telephone lines. Across Austria we have installed 765 ADSL relay stations covering more than 85% of Austrian households. We had 261,100 ADSL lines installed at the end of December 2003, up from 174,100 at the end of the year 2002 and we continue our expansion.

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

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

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     International network

     Our international voice traffic is routed through two international gateways. We have connections to 234 destinations (including global satellite networks) and direct links to 118 international operators in 86 countries. We partially own or have rights to use undersea cables in addition to satellite capacities of the corporations Intelsat and Eutelsat. We also take part in projects for the installation of international optical fiber-backbones such as Trans European Lines and Trans Asia European Lines.

     With the installation of Jet2Web Stream we have expanded our broadband activities abroad. The network now covers Prague, Frankfurt, Munich, Bratislava, Budapest and Milan. All parts of this network can be expanded up to 320Gbits, which would allow us to adjust capacity step-by-step to meet growing demand. The expansion of our fiber optic ring “Jet2Web Stream” enabled us to connect mobilkom austria’s subsidiaries to our networks at low costs and to act as a major provider for the transmission of voice and data communications in Central and Southeast Europe.

     Next generation network

     Similar to the way in which the entire telecommunications network had to be completely renewed through digitalization at the beginning of the 1980’s, new technology is being developed to enable a gradual transition from the digital networks to a packet oriented network, commonly referred to as Next Generation Network (NGN).

     A packet oriented network is expected to enable a more efficient simultaneous transmission of data services and voice telephony services. NGN is expected to give us more flexibility to satisfy customer wishes and to offer the exact services that are needed at the moment. Easier access to services like videoconferencing, multimedia messaging services, audio/video streaming applications or video mailboxes will generate additional business opportunities.

     We are in the process of evaluating the details and financial implications of a migration to NGN with particular consideration of existing investments (see “Item 5 — Liquidity and Capital Resources — Capital Expenditures”).

     Information technology/Operations support systems

     The quality of our operations support systems is critical to the success of our business. Our operations support systems store, manage and analyze essential business information. These operations support systems enable us to make timely business decisions and develop new products and services based on the needs of our customers. By increasing the automation of our business processes we improved the productivity of our operational units and improved access to information. Our operations support systems are mainly based on market-standard software, and we expect to further replace legacy systems with standard software solutions.

     In continuation of our projects in 2002 we have implemented several crucial improvements and enhancements to our operations support systems including:

     The above mentioned systems are interdependent and designed to improve customer service while reducing costs and increasing reliability through centralization of customer data and process management.

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Wireless

     Our Wireless segment is represented by mobilkom austria group which is comprised of mobilkom austria and its subsidiaries. mobilkom austria group generated revenues of EUR 2,030.2 million in 2003, EUR 1,909.4 million in 2002 and EUR 1,713.2 million in 2001, before intersegmental eliminations. In addition to providing mobile communications services in Austria, we also provide mobile communications services through VIPnet in Croatia, Si.mobil in Slovenia and mobilkom [liechtenstein] in Liechtenstein, representing 20.9% of our mobile communications revenues in 2003 compared to 20.3% and 16.4% in 2002 and 2001, respectively.

     We had more than 4.7 million mobile communications customers at the end of 2003 representing, a 6.4% increase compared to 2002. The Wireless segment covers a total population of close to 15 million. Wireless market penetration ranges from 55.0% in Croatia and 76.5% in Slovenia to 89.7% in Austria.

     On January 7, 2003 mobilkom austria group entered into an exclusive partnership with Vodafone to co-operate in the Austrian, Croatian and Slovenian market. The co-operation has extended the range of existing products and services of mobilkom austria group and has improved the product portfolio in particular for business customers. Both companies collaborate in the field of roaming, purchasing, development of new products and services, technical platforms, global account management and joint marketing initiatives. Vodafone Eurocall, the first joint product, was launched in the first half of 2003, offering favorable and transparent roaming prices to users in more than 30 European countries. In summer 2003, a new service was launched together with Vodafone enabling our customers to recharge their accounts in most Vodafone countries in Europe when traveling abroad.

     Competition has resulted in a reduction of tariffs and prices throughout the markets and we expect that it will continue to pressure tariffs downward. We believe that market liberalization has contributed to market growth and intensified competition in the Wireless segment. We expect that the market for mobile communications will continue to grow moderately. We expect that the growth in the Wireless segment will not be able to match the growth rates of prior years.

     Austria

     mobilkom austria is the leading provider of mobile communications services in Austria with approximately 3,2 million customers at December 31, 2003, which represented a total market share of about 43.3% of the Austrian mobile communications market, in comparison to 44.4% at the end of 2002. Our mobile business has experienced rapid growth in recent years as the mobile penetration rate in Austria increased from 14.4% at December 31, 1997 to 89.7% at December 31, 2003. The penetration rate increased by 6.6 percentage points compared to 2002. We believe that we have a strong market position as a result of our customer-focused services, two well recognized brands in Austria with A1 as the product brand and mobilkom austria as the company brand, broad network coverage and eligible customer service.

     In August 2000, we were one of the first mobile communications operators worldwide to launch a nationwide and commercially operated network based on general packet radio service, or GPRS. GPRS is a technology which is a data service enhancement for Global System for Mobile Communication, or GSM. GSM is one of the leading standards for digital wireless communications.

     On November 8, 2001, we purchased 49% of paybox österreich. paybox österreich was the holding company of paybox austria, which has offered mobile payment services since January 2001. Following a Europe-wide reorganization of the paybox group, we acquired 100% ownership of paybox CEE (Central Eastern Europe) in September 2003, thereby also assuming full ownership of paybox österreich. On December 17, 2003 paybox österreich was merged into paybox CEE. This acquisition allows us to offer m-commerce (mobile commerce) solutions both in Austria as well as in Central and Eastern Europe.

     In January 2002, mobilkom austria was the first mobile communications service provider worldwide who was assigned a bank license. This license allowed us to establish our 100% subsidiary A1 Bank, enabling us to provide a broad range of m-commerce services.

     We were the first European operator to set up a national UMTS network, with the commercial launch of our UMTS network in April 2003. In 2003 we did not heavily promote UMTS due to the fact that there were only a few adequate UMTS handsets available. The focus was on improving our network and testing our services in order to be prepared well in advance of our competitors. By the end of 2003, mobilkom austria covered all major cities and altogether about 50% of the Austrian population with its UMTS network and has therefore already

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fulfilled the regulatory obligations for the year 2005. The further expansion of the network will depend on the future development of revenues.

     Competition

     The Austrian mobile telecommunications market was liberalized in 1996 with the granting of the second Austrian license to provide digital mobile communications services.

     The Austrian mobile communications market currently has four GSM operators with UMTS licenses (mobilkom austria, T-Mobile Austria, ONE, and tele.ring) and one additional UMTS license holder (Hutchison 3 G Austria). Hutchison 3G Austria launched its operations shortly after mobilkom austria in May 2003. In December 2003, mobilkom austria acquired Telefonica-owned 3G Mobile, which also held a UMTS license, and thereby increased the available frequency spectrum. However, there is the obligation to sell 2x5 MHz of the acquired frequency spectrum by January 31, 2005. Therefore, mobilkom austria sold 2x5 MHz to the competitor T-Mobile Austria in March 2004. By the end of 2003, all UMTS license holders commercially launched UMTS, but only Hutchison 3G Austria is actively promoting the service. In addition, one of our competitors in the fixed line business, TELE 2, entered the market in February 2003 as a service provider using the network infrastructure of our competitor, ONE, reselling mobile communications services under its own brand name but without its own access number. TELE 2 intends to become a Mobile Virtual Network Operator (MVNO) and to introduce their own access number during the first half of 2004.

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

     Customers and traffic

     We have experienced substantial growth in our mobile customer base over the past few years. According to our own market research, there were about 7.31 million mobile customers in Austria in December 2003, representing a mobile penetration rate of 89.7% of the population, which is one of the highest penetration rates of mobile communications in Europe. The growth of the penetration rate has slowed down. As a result of the market saturation we have focused on retaining customers rather than acquiring new customers. We expect growth in the medium-term will be driven by new data services as well as the expansion of mobile technology to new products and services. In December 2003, our mobile customers represented approximately 43.3% of the mobile communications market in Austria, a 1.1 percentage points decrease compared with the end of 2002.

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

     Our customer base increased to nearly 3.2 million customers in 2003, of which approximately 1.7 million were contract customers and approximately 1.5 million prepaid customers. Our focus on contract customers resulted in a stronger increase of contract customers compared to prepaid customers.

     In addition, we were able to reduce our total churn rate from 19.5% in 2002 to 16.1% in 2003. The churn rate provides insight into the growth or decline of the customer base as well as the average length of participation in the service. Our Austrian churn rate is calculated based on the total number of customers who discontinue their use of our service in a 12 month period, divided by the average number of total customers during that period. A prepaid customer is disconnected 13 months following the last account deposit. In 2003, our contract

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churn rate was 10.8% and our prepaid churn rate was 22.0%. These rates are in line with the average churn rate of mobile operators in European Union countries where mobile operators subsidize handsets given to customers as an incentive to switch operators. Subsidized handsets have been available in Austria since late 1998.

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

     Sales, marketing and customer service

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

     In the Wireless segment, we group our customer base into three customer groups:

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

     At December 31, 2003, we operated 39 A1 shops in major metropolitan areas in Austria. A1 shops offer mobile communications products, services and accessories, technical information and advice, and the opportunity to test mobile communications products. We have also entered into distribution agreements with approximately 1,500 electronics equipment outlets throughout Austria as of December 31, 2003. Our shop-in-shop concept comprises 173 branded information counters in large consumer electronics outlets. In addition, our mobile communications products and services are also offered in our Telekom shops and in 1,650 post offices throughout Austria, which provide high visibility for our products and services.

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

     We operate one of the leading Austrian e-commerce websites (www.a1.net) for our mobile communications products and services, offering contract and prepaid subscriptions, accessories and re-loading of prepaid accounts via internet. The majority of these services may also be accessed via mobile handsets.

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     Customer service

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

     In 2003, we fully introduced a customer relationship management system which enables paperless operations at mobilkom austria’s customer service centers. We are continuously upgrading our billing systems in order to support the introduction of new products and services, and to increase our ability to offer more flexible tariff structures. These systems enable us to produce customized bills for our business and residential customers as well as to offer electronic bills (ONLINE BILL). After thorough usability testing, mobilkom austria’s customer bills including all electronic bill formats (online bill, electronic bill transfer formats) were redesigned and re-launched in 2003 with the objective of further increasing their comprehensibility and convenience to customers.

     Our contract customers receive itemized bills and are encouraged to pay by direct debit transfer. The direct debit ratio of above 90% has a big impact on mobilkom austria’s cash flow.We have a flexible billing system for corporate customers, which allows us to carry out customer segmentation and to offer multiple tariff rates and more tailored billing information. We monitor our exposure to credit loss and customer fraud through a credit scoring system that evaluates potential fraudsters among contract customers. A new, internationally interlinked fraud management system was put in place within all mobilkom austria group companies. The system provides near real time call behavior of potential fraudsters within all networks of mobilkom austria group.

     In 2001, our call center and inbound and outbound services were certified by the ÖNORM Institute, the Austrian Standards Institute, becoming the first certified call center in Austira. In 2003, the ÖNORM Institute audited mobilkom austria’s customer service quality and extended the certification for additional two years.

     We adjust our customer retention activities according to market requirements. We try to retain our customers and try to keep our churn rate low through various special offers. Our focus is on retaining high value customers and increasing their loyalty and satisfaction by optimizing our customer-related processes. As part of our aim to encourage customer loyalty, we introduced a points-based customer loyalty program in April 1999 for which approximately one million customers were registered at December 31, 2003. By the end of 2002, participants earned one point per call minute. This minute-based points accrual mechanism was changed into a revenue-based accrual in 2003. Existing participants have been migrated to the new program with the result that at year-end 2003 78% of our participants are in the new accrual program. The collected points entitle customers to purchase new subsidized handsets and accessories for mobile phones.

     We also provide the A1 Auskunft service. This directory assistance offers address and telephone number information. The information can be communicated by voice, sent by e-mail, SMS or fax, or the customer can be directly connected to the requested number.

     Services

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

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

     Contract services. For our contract customers we offer dedicated customer service and special tariff packages. Our customized products target all segments, from residential customers to large corporate accounts. Our large corporate customers benefit from a range of specialized corporate services such as mobile communications with full virtual private network functionalities. For instance, our A1 MOBILE OFFICE product combines hardware and software that allows internet access, voice, data and fax communications via

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mobile phone. Our GPRS product, A1 DATA GUARD, enables employees to have secure access to their employer’s internal computer network via their mobile phone. The A1 XTRACARD PRO enables customers to use three mobile phones with the same telephone number, allowing mobile data usage and voice calls at the same time. Furthermore, mobilkom austria offers solutions for virtual private networking (VPN) to its business customers.

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

     M-commerce services. In the past two years we enlarged our range of m-commerce (mobile commerce) services. For instance, since April 2001 customers have been able to order more than 50,000 items from an Austrian mail-order house via their mobile phones. In 2002, we continued to enlarge our service offerings: event ticketing, closing of a short-term insurance contract for major sports injuries, paying at vending machines and betting via mobile phone. In September 2003 we launched a ticketing solution for public transportation in Vienna, Austria which enables customers to purchase tickets via mobile phone. In October 2003, we started the m-parking service in Vienna, Austria. m-parking enables car drivers to pay short-term parking fees via their mobile phone, processed through our subsidiary A1 Bank. A1 Bank administers the funds generated through parking management in trust for the City of Vienna, Austria.

     International roaming services. International roaming enables our customers to make and receive calls with their mobile phones in other countries using the networks of operators with whom we have entered into international roaming agreements. These services are offered to our contract customers and registered prepaid customers. At December 31, 2003, we had international roaming agreements with 237 mobile network operators in 124 countries. Additionally, we offered to our prepaid customers roaming in 23 countries with 28 mobile operators without any registration necessary. At December 31, 2003, we offered GPRS roaming in 19 countries. In addition, we offered our customers additional convenient services (e.g. using the same short numbers for calling voice mail abroad).

     Other mobile phone services. The portfolio of entertainment services targeted primarily at the youth market was enlarged in 2002 by the A1 GAME ZONE, which offers games for mobile devices. These games can either be accessed through Wireless Application Protocol (WAP) or using the SMS technology. WAP allows access to the Internet using mobile handsets, even without the use of a computer. The second mainly youth-targeted service, A1 HANDY STYLING (ringtone and picture SMS service) was enlarged with new content categories as polyphonic ringtones or music files.

     In the telemetric business area, the A1 TELECOMMANDER received the tel.con award 2003 assigned by “NEC” and the “Institute for International Research” for innovative technical products. A1 TELECOMMANDER transforms the mobile phone into a remote control for auxiliary heating systems for cars, alarm devices or air-conditioning units via SMS, WAP and the Internet. With the A1 TELECOMMANDER we assigned co-operations with various car producers as well as the European Car Association. We phased out our paging network in September 2002. Instead, we offer SMS PRO for emergency and yellow cab services as a special, SMS-based, high performance solution. SMS PRO offers in comparison to paging a better standard of convenience, such as web-based group administration, web-based alert function, full compatibility to telemetries, delivery reports and high performance two-way emergency communication.

     Tariffs

     We offer promotional packages intended to attract and retain customers, such as bundled airtime minutes, or reduced monthly fees. With innovative tariff packages such as A1 Xcite and B-Free Komix, we are the only operator in Austria which applies a segmented marketing approach by limiting these services to certain age groups, therefore addressing the special needs of young consumers and children. In addition, we intend to continue to focus on attracting and retaining high-volume corporate customers by offering flexible corporate tariff structures, volume discounts and handset replacements. Eurocall, the first joint product with Vodafone, was launched in the first half of 2003, offering favorable and transparent roaming prices to users in 32 European countries.

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     Networks

     Our mobile networks in Austria consist of:

     mobilkom austria continuously monitors the quality of its network in terms of blocking, set-up success and drop call rate and reports the results on a monthly basis. During 2003 the GSM “call success rate” was 97.8% on average, which is the highest rate in comparison to our competitors.

     At December 31, 2003, mobilkom austria’s GSM network consisted of 14 mobile switching centers, 4 home location registers and 5,209 base stations. An intelligent network platform is installed for GPRS and value-added services. We have expanded our GSM network in recent years, particularly in areas of high traffic such as Vienna. In 2003, 252 new base stations were brought on-line, of which 174 were macrocell stations, which assure broad coverage, and 78 were microcell stations, which assure additional capacity in densely populated urban areas.

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

     We provide dual band services to accommodate our expanding customer base. At December 31, 2003, we operated nationwide a 2x10.4MHz (52 channels) spectrum in the 900MHz band and a 2x15.0MHz (75 channels) spectrum in the 1800MHz band. As was done in the past, we will expand dual band service to areas with significant amounts of mobile traffic like large and medium cities, technology parks, tourist sites, highways and airports.

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

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

     General Packet Radio Service (GPRS). GPRS enables high-speed mobile data-transfers, particularly for data applications such as mobile internet browsing and e-mail. We launched our GPRS services in August 2000. GPRS is available in the entire network. Maximum data rates are achieved by optimizing data compression. Based on this GPRS data transport capability, MMS was introduced in 2002. Through the implementation of Service Level Monitoring (concurrent monitoring of prime services taking the customer ´s view) we could further enhance our quality of service.

     Universal Mobile Telecommunication System (UMTS). mobilkom austria successfully bid for a UMTS license in Austria on November 3, 2000. UMTS allows for packet-switching and allows operators to transmit data rates significantly exceeding those of the preceding mobile systems. It also permits implementation of multimedia applications that integrate voice, video, and data communications. On September 25, 2002, the technical launch of UMTS was demonstrated with a live video conference over mobilkom austria’s UMTS network. As the first operator in Austria, mobilkom austria commercially launched the service on April 25, 2003, covering about 50% of the Austrian population at the end of 2003. The year 2003 provided sufficient time to improve our UMTS-network and build the necessary skills of our technical staff. Once the handsets will be

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available in sufficient numbers and quality, the growth of our UMTS customer base will increase. The takeover of 3G Mobile in December 2003 increased the available frequency spectrum for mobilkom austria from 2x10 MHz to 2x14.8 MHz which gives us ample capacity to handle potential growth of mobile services in the future and will allow us to reduce the number of our macrocell stations. Another 2x5 MHz frequency spectrum, that were acquired in the takeover, had to be re-sold due to regulatory requirements in March 2004. The following table shows the number of UMTS macrocell stations which assure indoor coverage and additional capacity for densely populated areas:

     Wireless Local Area Network (WLAN). WLAN uses high-frequency radio waves rather than wires to create a locally-limited, broadband connection to computer networks. In order to enable our customers different access technologies, mobilkom austria initiated a WLAN project with McDonald’s at the beginning of 2004 to install WLAN access points in McDonald’s restaurants.

     Information technology/Operations support systems

     Our operations support systems store, manage and analyze essential business information. These operations support systems enable us to make timely business decisions and develop new products and services based on the needs of our customers. Essential developments in 2003 were the enhancement of online bill presentment, creation of a new bill (replacement of hardcoded layout with modular structure; new bill design), and development of an interconnection billing system (to manage wholesale business of national / international traffic), implementation of an m-payment platform with the ability to handle micro payments for m-commerce applications.

     Our main IT systems include our billing systems, customer relationship management (CRM) system, mobile data applications and internal applications. Our billing systems collect and rate the individual customer transactions (voice and data) and produce the invoices either electronically via secure access or in print. Our CRM system covers the total range of customer contacts, serves as an information base for products and services, coordinates business-sales-activities, documents the individual history of customer contacts, and operates campaigns. Our mobile data applications — mobile portal (internet applications via web and WAP) enable the use of internet-based services via mobile phones, such as office solutions and portals (www.a1.net). Our internal applications comprise SAP as Enterprise Resource Management System (which is in use to support consolidated and streamlined business processes in the areas of logistics, material management, finance, investment, and procurement) and our Data Warehouse, which is continuously developed to deliver all relevant business information.

     Croatia

     In September 1998, Croatia awarded its second GSM license to VIPnet, a consortium in which we have held an interest through mobilkom austria since 1998. We increased our stake in VIPnet by 9% on January 30, 2003 and further by 19% on June 23, 2003, bringing our total interest in VIPnet to 99%. The remaining 1% of shares is still owned by Vecernji list, one of the largest media enterprises in Croatia. VIPnet shares the Croatian mobile communications market with the incumbent operator HTmobile, a subsidiary of HT (Hrvatske telekomunikacije d.d.), with Deutsche Telekom as its main shareholder.

     VIPnet started operations on July 1, 1999, and by December 31, 2003 it served 1.2 million customers (85% of them use prepaid services), increasing its customer base in 2003 by 10.3% compared to December 31, 2002. VIPnet had a low annual churn rate of 17.3% in 2003. VIPnet has a 50.0% share in the Croatian mobile communications market. Croatia’s mobile communications penetration rate was 51.9% as of December 31, 2002 and increased to 55.0% as of December 31, 2003.

     In mid-2001, VIPnet started targeting the corporate market by launching products for small and medium-sized enterprises such as Virtual Private Networks (VPN). Following the expiration of the first VPN contracts, VIPnet started an aggressive retention campaign.

     In 2003, customers sent more than 1 billion SMSs. On average, customers send 73 SMSs monthly, which is one of the highest SMS usage rates in Europe. This is partly due to successful services such as VIPparking

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introduced in September 2001 — a service that enables all GSM customers to pay their parking charges per SMS. This service can be used in 13 major towns in Croatia and almost 2.1 million SMSs were sent in 2003 in order to pay for parking charges.

     As a major tourist destination, Croatia has a high number of visitor roamers in the summer season. Visitors generated more than 12% of VIPnet’s total revenues. In March 2003, VIPnet presented Vodafone’s Eurocall service that offers VIPnet customers special roaming tariffs in 32 European countries. In addition, the new cooperation with Vodafone allows VIPnet to offer our customers as well as Vodafone’s customers the option of recharging their prepaid accounts with vouchers offered by VIPnet since July 2003.

     In October 2003, VIPnet started a new corporate identity campaign. Four corporate logos have been consolidated into a single VIPnet logo in order to simplify and strengthen VIPnet’s brand recognition.

     In 2003, VIPnet improved its customer relationship management, focusing on a segmentation of its customers based on their revenue contribution. Service levels for customer care were realigned according to customer segments. Churn prediction and campaign management tools for private and business contract customers were implemented. These systems enable a detailed track record of customers, thus facilitating marketing campaign management.

     In May 2003, VIPnet placed its first UMTS test call in Croatia. VIPnet intends to apply for a UMTS license in the first half of 2004. The commercial launch of VIPnet’s UMTS service is expected to take place in 2005.

     Furthermore, VIPnet intends to enter the market for fixed-line services. The granting of a license depends on two main factors: the foundation of the Croatian regulatory authority for telecommunication, which is not expected before April 2004; and new interconnection rules to be agreed upon between the new agency and HT. For both factors, no strict time limits have been set and the legally defined dates already passed. VIPnet does not expect the license for fixed-line services to be granted before September 2004.

     Slovenia

     In February 2001 we purchased a 75% plus one share interest in Si.mobil, a Slovenian mobile communications provider. We fully consolidate Si.mobil because we hold an option to purchase the shares which we do not currently own for a fixed price. At the end of December 2002 the final closing of the purchase of the remaining shares was postponed until 2007.

     In Slovenia there are currently three mobile operators, Mobitel as the dominant incumbent, Si.mobil and Vega. In addition, Debitel as a service provider provides mobile communications services using the infrastructure of an existing competitor whereas an operator relies on its own network infrastructure. The competitive environment is characterized by a dominant incumbent with a market share of around 69.2% and high market penetration at 76.5% at the end of 2003. At December 31, 2003 Si.mobil had a market share of 23.6% of the mobile communications market in Slovenia making it the second largest mobile operator in Slovenia. Si.mobil’s number of customers amounted to approximately 361,500 by the end of 2003, which represents an increase of the customer base by 3.3% compared to end of 2002. The contract customer base accounts for 43.5% of the total customer base.

     Si.mobil introduced its (dual-) brand “Si.mobil — Vodafone” for its entire market presence in September 2003. Further new and innovative tariff offers such as Vodafone Eurocall and IZI, the first, true flat-rate tariff in the Slovenian market were launched in 2003 as well.

     Besides being the first operator in Slovenia to introduce GPRS for prepaid customers, Si.mobil implemented the first Enhanced Data Service for GSM Evolution (EDGE) network in Europe in December 2003. This allows data transfer in broadband quality and further promotes the usage of existing and future data applications. For the time being EDGE, is an alternative to UMTS, as the state-owned incumbent Mobitel was the only operator to have auctioned a UMTS license in 2002 due to exceptionally high license fee compared to other European countries. Nevertheless, a second tender for UMTS licenses is expected. There are currently no indications concerning the timing of the tender.

     Although the mobile communications market is near saturation, the Slovenian regulatory authority has not yet taken any measures to increase competition. Therefore, Si.mobil took the initiative and came into an agreement with Mobitel on asymmetrical mobile-to-mobile interconnection fees providing Si.mobil with a

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favorable termination fee for calls from Mobitel customers. However, due to Slovenia’s upcoming entry into the European Union in May 2004, a harmonization of local laws with European standards is expected.

     Liechtenstein

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

     The penetration rate in Liechtenstein reached 76.3% at December 31, 2003. The customer base of mobilkom [liechtenstein] amounts to more than 2,500 (all of them contract customers), thus accounting for a 10.3% share of the mobile communications market in Liechtenstein. mobilkom [liechtenstein] is the second largest mobile communications provider in this highly competitive market.

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Properties

     Our consolidated financial statements (including mobilkom austria group) show a net value for property, land and equipment of EUR 4,457.7 million in 2003 and EUR 5,000.7 million in 2002. The acquisition costs were EUR 10,682.3 million in 2003, and EUR 10,650.5 million in 2002. The acquisition costs include, among others, communications network and other equipment totaling EUR 9,382.0 million, land totaling EUR 60.3 million and buildings totaling EUR 663.0 million at December 31, 2003. The item communications network and other equipment includes primarily switching and transmission technology as well as access and trunk cables.

     The properties of Telekom Austria consist primarily of buildings with integrated technical facilities, such as switching devices, transmission towers, antennas and, to a relatively small extent, administrative buildings. In addition to the buildings we own, we also lease space. At December 31, 2003, we used about 2096 facilities, of which approximately 35% were leased. The land and buildings comprise overwhelmingly the property owned by Post und Telekom Austria AG allocated between Österreichische Post and us as a result of the spin-offs described under “— History and Development of the Company.”

     On June 30, 2003 we finished the relocation of our headquarters to Vienna’s second district. The majority of our information technology equipment is located at our own premises of approximately 11,000 square meters in Vienna. Our main switching and transmission equipment is based in our Arsenal facility, which occupies approximately 90,000 square meters in Vienna’s third district.

     The contract with Post & Telekom Immobiliengesellschaft mbH, a wholly-owned subsidiary of Österreichische Post, for the planning, construction and administration of the buildings we own and use, terminated on December 31, 2003 and has not been renewed.

Research and development

     Research and development in combination with our innovation strategy, product lifecycle management and technology strategy is an integral part of our innovation management. We believe that research and development (“R&D”) is important to our continuing success and on retaining technological innovation leadership. We hold a variety of patents and licenses. No single patent or license is material to our business.

     We seek to stay ahead in promising areas of new research and scientific advances with focused investing in application-oriented research. We focus our research activities on trend-setting technologies particularly in the field of broadband communications, transmission technologies, service platforms, optical core technology and network security and support systems within our fixed line and mobile telecommunications networks. We consider these research areas indispensable for the creation of new services and for the build-up of efficient and reliable multi-service network structures. Related issues are being dealt with through participation in national and international initiatives.

     The establishment of two operating segments, Wireline and Wireless, as part of the reorganization of Telekom Austria has led to a bundling of forces. Through enhanced coordination of the activities based on an integrated research and development strategy, initiatives in R&D have been optimized.

     To assure technological leadership today and in the future, Telekom Austria considers the further study of changing user patterns as an integrated component of its innovation management. Within the past years there was a considerable shift in R&D to consumer-oriented topics. The social and cultural area has changed considerably through new technologies and vice versa. Thus, we opened our studies in topics of cultural, media & communications. As a result of the development of the internet from an information-source to an interactive multimedia-platform, audio and video content is expected to be delivered per “mouse click”. Telekom Austria looked into the challenges of broadband portals in terms of customer acceptance, service bundling and content delivery network infrastructure.

     Focus in our Wireless unit is also application and service-oriented. Many of our research activities in cooperation with partners from industry, research institutes and universities have dealt with services based on mobile data applications, integration of advanced service platforms based on 3G (3rd Generation Mobile Services architecture), multi-modal speech applications and concepts for prototyping new services for the 3G environment. Within these co-operations we have developed localization technologies to enhance accuracy. We also hold patents for enhanced localization methods and a Service Interaction Gateway.

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     In accordance with one of the national main strategies “Intelligent Infrastructure” presented by the Austrian ministry for transportation, innovation and technology we have started a research program for telematic services by using synergies through the co-operation with Arsenal Research and other partners from the Austrian Traffic Telematic Cluster.

     We continued our participation in European Union-funded research projects, with the objective of showing how multiple wireless standards and services they offer can be converged in a flexible manner within one mobile consumer terminal. In addition, we have worked on alternative mobile access technologies, such as WLAN and its convergence with 3G-technologies as well as service aspects due to packet oriented architectures in future mobile networks (3rd Generation Partnership Project).

     In the e-government sector we presented a prototype of a digital signature, which allows Austrian citizens to use their digital signature for public administration issues by using their mobile phone. The development in close cooperation with the Austrian Ministry of the Interior is based on the new e-government law which was enacted in March of 2004.

     Our consolidated research and development expenses amounted to EUR 42.8 million, EUR 30.3 million and EUR 21.8 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Capital expenditures

     For information relating to our capital expenditures, see “Item 5 — Liquidity and capital resources — Capital expenditures”.

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REGULATION AND LEGAL FRAMEWORK

Regulation

     Liberalization (1998-2002)

     The development of the Austrian law follows the regulatory actions taken by the European Union. As a result of implementing European Union directives, the Austrian telecommunications market was liberalized by the Austrian Telecommunications Act of 1997. In 1998, we lost our last exclusive right as the national incumbent to provide domestic and international voice telephony services to the public in Austria via fixed network.

     Recent developments (2002-today)

     In August 2003, a newly amended Austrian Telecommunications Act (the “Telecommunications Act of 2003”) implemented European Union telecommunication directives adopted in 2002 into Austrian law aligning the Austrian communications market from sector specific regulation to the principles of competition law. The act is also expected to lead to further harmonization of market conditions through an obligatory European Union-wide consultation process among national regulatory authorities, as well as by keeping national regulations technologically neutral. The Telecommunications Act empowers the Austrian Federal Minister for Transportation, Innovation and Technology (“the minister”) and the national regulatory authority to issue ordinances containing detailed provisions relating to the Austrian telecommunications market.

     Regulatory framework

     The amended Telecommunications Act of 2003 which entered into force on August 20, 2003, allows unrestricted market access to all entrants who qualify under the act and replaces the former licensing regime by a general notification requirement. Consequently, any telecommunications service provider is allowed to offer its services in Austria without a license. One of the principal objectives of the Telecommunications Act of 2003 is the promotion of competition within the Austrian communications sector and the provision of reliable, high-quality and innovative telecommunications services at a reasonable price. Regulatory measures are supposed to promote a modern telecommunications infrastructure that leads to high-quality sites and effective competition by stimulating investments in innovation and infrastructure. Additional objectives include the provision of universal service throughout Austria, the protection of customers and operators against the distortion of competition, access to information and transparency of prices and general terms, data protection, avoidance of significant market power and efficient and interference-free use of frequencies. Operators having significant market power in particular communications markets are subject to a special regulatory regime. In general, sector specific regulatory measures will be applicable only in the absence of effective competition. Regulatory measures must be kept technologically neutral and may not restrict the introduction of innovative products and services (generally referred to as “emerging markets”).

     Retail markets should be subject only to regulation if regulatory measures applied to the wholesale markets fail to ensure effective competition. In accordance with the principles of general competition law, markets which may be subject to sector-specific regulation are generally identified by the European Commission and accordingly defined by the Austrian regulatory authorities as subjects of market analysis. The European Commission can veto market definition and market analysis decisions proposed by the national regulatory authority. Where the minister or the national regulatory authority intend to take measures with material effect on the Austrian telecommunications markets, a national consultation process is required to take place.

     Under the new regime, the scope of sector-specific regulation shall be subject to a broader market concept and regulatory measures must be narrowly and proportionally directed at concrete market failures. As a further result of the intended transition to general competition law, the Cartel Court has been vested with sole jurisdiction over matters concerning abuse of significant market power.

     The mandate of the regulatory authority overseeing the Austrian communications markets is to ensure competition and the availability of high-quality communications services. Under the Telecommunications Act of 2003, the regulatory authority is responsible for notification, usage of frequencies, administration of the numbering system, ensuring unrestricted market access for new entrants and controlling the provision of universal service. The regulatory authority is required to define and analyze markets in order to identify operators with significant market power and to impose regulatory measures where it is deemed necessary. The authority’s role encompasses ensuring equal access to networks, internally used services and facilities for all competitors, particularly in the areas of interconnection, pre-selection of a carrier, number portability and opening of access to local subscriber lines, also called unbundling of the local loop. Access may be refused only

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on objective grounds, such as network-security or lack of interoperability of services. The Telecommunications Act of 2003 also generally deals with protection of data, technical infrastructure, numbering, rights of way and consumer protection.

     New markets and regulation of operators with significant market power

     Under the 2002 EU directives, the former sector-specific concept of market dominance, now called “significant market power” has been aligned with the concept of market dominance as used in European Union and Austrian competition law. In May 2003 the EU Commission identified the following 18 markets which may be subject to sector-specific regulation.

     Retail level:

     Wholesale level:

     With the exception of the market for broadcasting transmission services, the remaining 17 of these markets are relevant for telecommunication. To date, the Austrian regulatory authority has defined 16 nationwide markets which may be subject to sector-specific regulation in the Austrian communication sector by market ordinance (Märkteverordnung) which entered into force on October 17, 2003. The only market that remains to be identified is the market for wholesale broadband services.

     The regulatory authority analyses the actual status, development and progress of competition on these markets. Effective competition implies the absence of significant market power.

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     Under the new regime, an operator is considered to have significant market power if:

     If the regulatory authority concludes that no provider is exercising any significant market power, the regulatory authority will not take any measures to promote and strengthen competition.

     Where an operator is identified as having significant market power, the regulatory authority will impose at a minimum one of the following measures:

     On a wholesale market:

     On a retail market:

     Pursuant to the Telecommunications Act of 2003, the regulatory measures in the retail market may only be taken in case of failure of adequate measures in the respective wholesale markets. All operators which are deemed to have significant market power are obliged to provide a minimum set of leased lines according to the principles of non-discrimination, cost orientation and transparency.

     Every measure taken by the regulatory authority must be proportional and adequate and take into consideration existing capacities, investment risks, industrial or intellectual property rights, provision of European Union-wide services and long term competition.

     In late 2003, the regulatory authority began its analyses of the markets pursuant to the Telecommunications Act of 2003. We do not expect any decision identifying operators with significant market power on specific communication markets and regulatory actions before mid-2004. Until then, our current obligations in place will continue. The regulatory authority will start with its market analyses of mobile roaming charges after the European Commission has published its findings on this topic.

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     According to the regulatory authority’s decision issued in 2001, no mobile operator in Austria was deemed to have significant market power, either in the market of mobile voice telephony or in the market of interconnection. According to a 2002 decision by the regulatory authority, Telekom Austria is the only operator considered to have significant market power, but only in the markets defined according to the former regime:

     Pricing and price regulation for end users

     The regulatory authority may impose specific obligations for operators with significant market power in the relevant retail market if there is no effective competition in that (or end user) market and specific obligations for wholesale markets including carrier selection and carrier pre-selection are not likely to achieve the objectives of the Telecommunications Act of 2003.

     Once the regulatory authority has determined that we exercise significant market power in one of the relevant markets, the regulatory authority may subject us to the requirement that we not charge excessive prices, or provide unreasonable bundles. The regulatory authority has the power to control individual tariffs and cost orientation of these tariffs. The regulatory authority also has the right to approve the minimum offer of leased lines and the prices for those leased lines.

     If the regulatory authority subjects our tariffs and tariff-related business terms and conditions for services in special retail markets to its approval, the regulatory authority must approve the business terms and conditions and tariffs of these services prior to their introduction or change. Prices for these services must be cost-oriented and based on transparent criteria. We are required to maintain a cost accounting system which is certified each year by the regulatory authority.

     The regulatory authority has the right to approve or refuse the proposed tariffs and business terms within eight weeks. If the regulatory authority fails to act within this time, the terms and conditions or tariffs are deemed approved. Tariffs for services without the obligation for approval are subject only to a notification obligation concerning the service and business terms, conditions and tariffs.

     In addition, all terms and conditions which are modified in a way that is unfavorable for customers must be announced two months prior to their introduction. Furthermore, affected customers must obtain detailed information about the unfavorable modifications at least one month before the modification becomes effective and have the right to terminate their contracts.

     Special provisions exist for service number tariffs. The Price Ordinance for Service Numbers specifies maximum tariffs for the various services offered.

     Ordinances under the new Telecommunications Act 2003

     Since the enactment of the Telecommunications Act of 2003, the minister and the regulatory authority have issued several important ordinances:

     The Mobile Number Portability Ordinance, issued by the minister on November 4, 2003, establishes the legal and regulatory framework for the portability of mobile subscriber numbers between operators. The ordinance also stipulates the manner in which calls originating in the fixed networks will be routed to these ported numbers, customer protection and transparency of costs.

     The Telecommunications Market Ordinance, which entered into force on October 17, 2003 defines the markets which may be subject to regulation.

     The Ordinance on Itemized Billing, issued by the regulatory authority on December 1, 2003 stipulates special requirements for operators with regard to itemized bills.

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     We continue to be materially affected by former ordinances implementing the Telecommunications Act of 1997. The Interconnection Ordinance deals with interconnection under the Telecommunications Act, special network access and opening of the local access and joint use of facilities. It subjects operators with significant market power to a cost accounting system based on the forward-looking long-run average incremental costs. The Numbering Ordinance describes the numbering plan, including the national numbers regime, the proposed changes towards area codes, mobile numbers, personal numbers, toll-free numbers, shared cost and value-added service numbers, and numbers for services in the public interest and the structure of national and international numbers. Since legal competencies regarding issuing these ordinances have been moved from the minister to the regulatory authority we expect the Interconnection Ordinance and the Numbering Ordinance to be amended or reissued in 2004.

     The Ordinance on Tariffs for Value-Added Services, reissued on October 27, 2003 determines the maximum prices for calls to personal numbers, shared cost services and premium rate services.

     The Telecommunications Acts of 1997 and of 2003 contain provisions relating to the nation-wide availability of certain basic telecommunications services, referred to as universal service. Additional details concerning universal service requirements are provided in the Universal Service Ordinance which became effective in June 1999 and was amended during 2000. The ordinance which determines the amount operators are required to contribute to the funding of the regulatory authority entered into force on March 8, 2004. According to this ordinance, in 2004, operators with a revenues exceeding EUR 230,000 in the telecommunications sector are required to contribute to the financing of the regulatory authority.

     The regulatory authority

     The Telecommunications Act of 2003 and the Communications Authority Act establish the legal basis for the existing regulatory bodies in the telecommunications (Telekom-Control-Kommission) and the broadcasting media sector (Communications Authority). The Rundfunk und Telekom Regulierungs-GmbH serves as the administrative arm of both of these authorities. Within this report the term “regulatory authority” refers to “Telekom-Control-Kommission” and to “Rundfunk und Telekom Regulierungs-GmbH.”

     Telekom-Control-Kommission

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

     The competencies of the Telekom-Control-Kommission are ordering joint use in a dispute concerning rights of way; decisions in proceedings concerning data of subscriber directories; exercising the right to object pursuant to general conditions of business; determining financial compensation to be paid from the universal service fund; determining the amount to be paid to the universal service fund; determining if in a respective relevant market one or more operators have significant market power and imposing specific obligations; decisions in procedures concerning specific obligations (e.g. obligation of non-discrimination, access to network equipment and network features, interconnection, number portability and Carrier Selection); approval of conditions of business and charges and exercising the right to object; frequencies: decision on the licensing and allocating of frequencies as well as change and revoke of frequency allocations; decision on the right to provide communications networks or services, including the right to revoke these rights; decision on preliminary injunctions; identification and filing applications concerning skimming off enrichment; and filing applications with the Cartel Court.

     Rundfunk und Telekom Regulierungs-GmbH

     Generally, the Rundfunk und Telekom Regulierungs-GmbH a non-profit company with limited liability, is responsible for all issues, which are outside the responsibility of the Telekom-Control-Kommission. Its primary activities are in particular numbering or dispute resolution between end-users and operators and dispute resolution among operators. Pursuant to a modification of the Telecommunications Act of 2003, the Rundfunk und Telekom Regulierungs-GmbH can enact ordinances (such as those concerning numbering, value added services or relevant markets for regulation) and must resolve some disputes called “alternative dispute resolution” concerning the Telekom-Control-Kommission. Although it is wholly owned by the Republic of Austria, the Rundfunk und Telekom Regulierungs-GmbH is financially independent from the Austrian state. Its expenditures are covered by annual payments from communications service providers and broadcasting companies in relation to the total revenue of the respective markets. The minister supervises the Rundfunk und Telekom Regulierungs-GmbH’s activities. Rundfunk und Telekom Regulierungs-GmbH is required to publish a

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yearly report about the activities of the regulatory authority and it is also obliged to report annually in writing to the minister and to the Parliament on the implementation of the targets set by regulation.

     Communications authority

     Pursuant to the Communications Authority Act, the Communications Authority is responsible for the broadcasting media sector. In some cases, the Communications Authority may serve as the regulatory authority under the Telecommunications Act of 2003 or has at least the status of a party in proceedings.

     Other regulatory bodies

     The minister, the Telecommunications Offices and the Office for Radio Installations and Telecommunications Facilities are administrative authorities that is empowered to take all measures may take all measures requiring the exercise of administrative power in the area of telecommunications with regard to Austrian telecommunications law. Although not established at this point, the Telecommunications Advisory Board will advise the minister and the regulatory authority regarding telecommunications matters. Decisions of the regulatory authority may be appealed to the Supreme Administrative Court and in limited circumstances to the Constitutional Court.

     Regulation of market entry

     The Telecommunications Act of 2003 abolished the former licensing regime. Entry into the market by a new participant requires only notification with the regulatory authority and the payment of a processing fee.

     The new Telecommunications Act of 2003 also replaced the former licensing regime for mobile operators using the GSM technology with a notification regime. However, the provision of mobile telecommunication services continues to be limited by the allocation of frequency spectrum. Therefore, the number of GSM-network operators has remained the same as under the former Telecommunications Act. There are four GSM network operators:

     One GSM-service provider, Tele2, uses the network of One GmbH.

     UMTS

     On November 3, 2000, six mobile operator, including mobilkom austria, the three other GSM-operators in Austria and two new entrants (Hutchison 3G Austria and 3G Mobile), successfully bid for UMTS licenses. mobilkom austria bid for paired 10MHz and unpaired 10MHz frequency spectra in an auction held by the Austrian regulatory authority. Under the terms of the license award, mobilkom austria is required to cover 25% of the Austrian population by the end of 2003 and 50% by the end of 2005. At the time of the commercial launch of the service in April 2003 mobilkom austria’s UMTS network already covered 42% of the Austrian population.

     By the end of 2003, one of the new entrants, Telefonica, suspended its operations in Austria. mobilkom austria bought the Telefonica-owned Austrian company 3G Mobile, thereby acquiring additional paired 9.8 MHz frequency spectrum. However, prior to its approval, the National Regulatory Authority (NRA) imposed the obligation on mobilkom austria to sell 2x5 MHz frequency spectrum by January 31, 2005. Therefore mobilkom austria sold 2x5 MHz to the competitor T-Mobile Austria in March 2004.

     The Telecommunications Act of 2003 requires that UMTS licensees, like mobilkom austria, also hold digital GSM licenses. UMTS licenses grant national roaming services to any UMTS licensees who do not operate a GSM network provided that there is enough capacity. National roaming means that the customers of a UMTS operator are able to make and receive phone calls in areas not covered by their UMTS operator by using the network of another GSM operator. National roaming has been designed to allow UMTS operators which do not have an established GSM network to offer nationwide GMS services and thereby enhancing competition. UMTS providers that have a geographic coverage of 20% of Austria with their UMTS network are entitled to receive

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national roaming. If no agreement on roaming rights can be reached among the respective UMTS providers, the regulatory authority can determine the roaming rights and roaming fees after a hearing with the respective parties. mobilkom austria entered into an agreement with Hutchison 3G Austria for GSM and GPRS roaming services as Hutchison 3G Austria only provides its customers a UMTS network in congested areas. mobilkom austria is in the position to make additional revenues, mainly because commercial terms were agreed, not regulated. National roaming among UMTS operators is also permitted, although there is no legal obligation to provide this service.

     Major regulatory decisions affecting Telekom Austria

     Current tariffs: voice telephony services and leased lines

     Our current tariffs for voice telephony services and national leased lines have been approved under the Telecommunications Act of 1997. The last decisions concerning these approvals are dated July 21, 2003. The minimum tariff was cancelled on July 21, 2003.

     We did not file an application but only notified the regulatory authority about our international leased lines tariffs which became effective on May 2001. In our opinion these tariffs were not subject to approval. The regulatory authority instituted proceedings against us since it believes to have the authority to set the tariffs for international leased lines. The Supreme Administrative Court will decide whether these tariffs are subject to approval or not.

     Pending the completion by the regulatory authority of the market analyses the current regulatory obligations for dominant undertakings pursuant to the Telecommunications Act of 1997 continue to be in effect.

     The current obligation of price control for voice telephony services requires that we obtain approval from the regulatory authority prior to implementing new tariffs or changing existing tariffs. Under the Telecommunications Act of 2003, we may continue to be subject to such obligation in the future, depending on the outcome of the market analyses by the regulatory authority (see “ – New markets and regulation of operators with significant market power.”. The market analyses might also subject additional services to the pre-approval requirement by the regulatory authority.

     Fixed-to-mobile tariffs

     The regulatory authority set the amount which we may retain for each minute originating from our fixed line network, known as the mobile turnover retention, at EUR 0.06 per minute. We may retain this amount for each minute originating from our fixed line network, notwithstanding the mobile operator’s termination charge. Even if we increase the fixed-to-mobile tariff we are not allowed to retain more than EUR 0.06 per minute but have to pass the increase on to the mobile operator.

     Tariffs for special services

     In December 2000, the Austrian government enacted a special act (“Fernsprechentgeltzuschussgesetz”) providing for payments by the state for the communications costs of certain customers, such as those who are indigent, physically handicapped or poor. The Republic of Austria will pay telecommunications providers EUR 13.81 per month for each such customer. With this entitlement, the eligible person is granted free access plus one hour of free calls during day-time hours in their local zone. We also signed a contract with the minister that regulates until March 2007 the administration and payment concerning this subsidy. We are currently negotiating a new contract. At December 31, 2003 we served about 247,800 entitled customers.

     Interconnection and specific network access

     The issue of interconnection is still of particular importance to the development of a competitive market in telecommunications. The European Union Regulatory Framework for Interconnection is set out in Directive 2002/19/EC on access to and interconnection of electronic communication networks and associated facilities. These provisions were implemented into Austrian law by the Telecommunications Act of 2003, the Interconnection Ordinance and the Numbering Ordinance.

     The Telecommunications Act imposes specific obligations concerning network access and interconnection. The Interconnection Ordinance provides detailed regulations and specifies the manner in which interconnection

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and special network access is to be carried out. The Numbering Ordinance also lays down the principles of pre-selection of a carrier and number portability.

     General principles

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

     Provisions applicable to operators with significant market power

     An operator with significant market power of a communications network who offers communications services to the public must grant other operators specific access to its communications network and facilities.

     In imposing these obligations the regulatory authority takes into consideration the technical and economic viability of using or installing competing facilities (in the light of the rate of market development), the feasibility of providing the access proposed (in relation to the capacity available) and the initial investment by the facility by the facility owner plus the risks involved in making the investment. If the regulatory authority decides to impose any measures, a network operator must grant competitors access to its services on equal terms and conditions which it uses internally, unless different conditions can be objectively justified. In addition, the operator may be required to unbundle its services and therefore to offer its services used internally, including transmission, switching and operational interfaces in a way that competitors do not need to purchase services they did not request.

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

     An operator with significant market power must adhere to the harmonized technical standards for interfaces and service features in conformity with the Directives of the “New Regulatory Framework”, especially with the Access Directive, of the European Union.

     Operators with significant market power may be obliged to issue reference interconnection offers. The regulatory authority must publish reference interconnection offers. They also have the power to amend the reference interconnection offers at any time.

     Operators that are obliged to render reference interconnection offers must file agreements on interconnection and special network access to the regulatory authority. Agreements must be based on objective criteria and be comprehensible. Interconnection and special network access must be provided on a non discriminatory basis.

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     Interconnection in Austria

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

     At December 31, 2003, we had entered into interconnection agreements with 27 fixed-line and 6 mobile (GSM, Tetra, UMTS) registered operators in Austria. Separate fixed and mobile agreements were entered into with all six mobile operators. The most important services between operators are voice interconnection services, such as call termination, carrier selection, call origination to services (e.g. value-added services), and number portability as described below.

     Call termination in Austria

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

     Carrier selection

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

     We are required under the Numbering Ordinance to offer pre-selection and call-by-call selection. To date other fixed line operators are not required to do so, but are not prohibited.

     Number portability

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

     The Numbering Ordinance requires the introduction of three types of number portability to be implemented in two stages. The obligation to provide operator portability and service number portability became effective on January 1, 1998. The obligation to provide geographic number portability became effective on January 1, 2000.

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     The regulatory authority, in a 2002 decision, ruled that operator portability of geographic numbers and service number portability have to be offered at a one-off fee of EUR 21.79.

     The Telecommunications Act of 2003 now requires mobile operators to provide for number portability. The Number Portability Ordinance (“Nummernübertragungsverordnung”) entered into force in November 2003. Prior to the effectiveness of the ordinance in mid-2002 all GSM-operators, the new UMTS-licensees, and all fixed line operators established a working group with a goal to agree on the technical and commercial terms for mobile number portability. As no agreement was reached, several proceedings are pending with the regulatory authority to determine the details of the number portability ordinance. A decision is not to be expected before May 2004 and the implementation of the Number Portability is not to be expected before end of 2004.

     Access to local subscriber lines

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

     In light of these obligations, various competitors have requested a reference unbundling offer which contains the conditions according to which we provide them access to local subscriber lines, also called unbundling of the local loop. Allowing competitors to connect to customer access lines also gives them direct access to customers without having to construct local networks on their own. Therefore, competitors may use our customer access lines to offer a wide range of services. We receive a flat monthly fee from the operators, irrespective of the bandwidth transmitted. The regulatory authority’s decisions to date are not restricted to voice telephony or a certain bandwidth. We have always adapted our reference unbundling offer to these decisions. A resale of access lines by our competitors is not expected until 2005.

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

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

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

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

     At December 31, 2003, we had entered into agreements with about 22 competitors concerning unbundling the local loop. Due to advancing investments by our competitors in unbundling activities, the number of unbundled subscriber lines is increasing. At December 31, 2003, about 27,000 subscriber lines have been fully unbundled.

     An alternative to full unbundling is high speed bit stream access in which an operator installs a high speed access link to the customer’s premises, for example by installing its preferred DSL equipment and configuration in its local access network. The access link must be made available to third parties to enable them to provide high speed services to customers. This form of unbundling is available on demand as a result of an agreement with ISPA, the organization of Austrian Internet Service Providers, and put into force in March 2000. The agreement has been frequently amended to reflect technical changes.

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     In light of the European Union Regulation on Unbundling of the Local Loop which was put into force at the beginning of 2001, the regulatory authority requires us to offer shared use. We appealed against this decision. With shared use of the copper subscriber line, one of the operators provides telephone service, while the other delivers high speed data services over the same subscriber line using its own high-speed DSL modems. Telephone traffic and data traffic are separated by means of a splitter before the switch. The line remains connected to and part of the public switched telephone network. While we are presently required to offer shared use, there has been no significant demand in the Austrian market for such usage so far.

     Regulation of interconnection and access fees

     As previously discussed in more detail, according to the Telecommunications Act of 2003, the former market for interconnection will be redefined. The regulatory authority is now analyzing whether effective competition exists in the relevant markets. In the absence of effective competition, the regulatory authority will identify operators with significant market power in these markets. Remedies may be imposed on operators with significant market power. The regulatory authority’s decisions are expected by mid-2004. Until then, the existing obligation on operators with significant market power will remain valid.

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

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

     The following table shows the applicable interconnection fees, valid until September 30, 2003.

     A group of operators, UPC Telekabel, Tele2, UTA, MCI and IT Austria, initiated a proceeding regarding future fees with the regulatory authority. A decision is expected before mid-2004. The new fees will become effective retroactively on October 1, 2003. These interconnection fees apply to voice telephony services and other services, including access to value-added services in the fixed network. These interconnection fees have been prolonged with all operators except for the aforementioned operators starting October 1, 2003 and until new fees become effective. In case of a reduction of interconnection fees by the regulatory authority, the interconnection fees for the aforementioned operators will be adjusted retroactively as of October 1, 2003. For all other operators with whom we have bilateral agreements the new interconnection fees will be adjusted as of the dates set in these bilateral agreements.

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

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

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     Mobile interconnection tariffs are regulated in Austria as a result of decision Z 8/99 of November 11, 1999 (UTA against mobilkom austria). Due to the fact that mobilkom austria had significant market power in the markets of voice telephony and interconnection, these tariffs had to be offered to all fixed-line operators in Austria. mobilkom austria took the position that interconnection tariffs between mobile operators had to be applied reciprocally. Therefore mobilkom austria initiated regulatory proceedings against the three other mobile operators in Austria at that time: T-Mobile Austria (former max.mobil), One GmbH (former Connect Austria), and tele.ring. In decisions Z 6/00, Z 7/00, and Z 8/00 on July 31, 2000, the regulatory authority agreed with mobilkom austria’s position and decided, although in stages, on reciprocal termination rates. The next decision on termination rates to other mobile networks, Z 31/01, Z 3/02 between mobilkom austria and T-mobile Austria, was issued on May 6, 2002. However, contrary to the former decisions the regulatory authority decided in favor of non-reciprocal interconnection charges between mobile networks. The regulatory authority argued that other mobile networks incurred higher used-capacity costs per minute, and should therefore be entitled to charge higher interconnection fees. Due to the fact that since mid-2001 no mobile operator is considered to have significant market power, the determination of the fees was made on the basis of a general obligation to offer services at reasonable prices (the fee comprising used-capacity costs and parts of other cost factors). mobilkom austria filed appeals against all these regulatory decisions. The appeal against the decision Z 8/99 was dismissed in March 2004. All other appeals are still pending.

     In December 2002 UTA, T-Mobile Austria and tele.ring commenced regulatory proceedings against mobilkom austria, the main issue once again being interconnection fees. In decision Z 28/02, Z 29/02, Z 2/03 the regulatory authority established new interconnection tariffs for the involved mobile operators: for mobilkom austria EUR 0.1125 per minute from January 1, 2003 to March 31, 2003, EUR 0.1111 to August 31, 2003, and EUR 0.1086 from September 1, 2003 to September 30, 2003; for T-Mobile Austria EUR 0.138 from January 1, 2003 to March 31, 2003, EUR 0.1349 from April 1, 2003 to August 31, 2003, and EUR 0.1318 from September 1, 2003 to September 30, 2003; for tele.ring the rate remained unchanged at EUR 0.1962 until September 30, 2003. mobilkom austria has filed an appeal against this decision.

     Commercial agreements on interconnection tariffs have been reached with all mobile operators beginning October 1, 2003. Thereby tele.ring’s mobile termination rate will be lowered in stages to finally EUR 0.1381 in April 2005 reducing the asymmetry of interconnection fees between operators.

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

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

     GSM-frequency spectrum

     In December 2003, the regulatory authority granted a regional 5 MHz GSM-1800MHz-frequency spectrum to mobilkom austria, free of charge.

     Numbering

     Pursuant to the Telecommunications Act of 2003, the national telephone numbering system is administered by the regulatory authority and the minister. The regulatory authority must allocate numbers for all applications (geographical, non-geographical), including numbers which provide access to services (toll-free, shared cost and value-added services as well as emergency services and special numbers). The regulatory authority is also responsible for designing the numbering plan set out in the Numbering Ordinance.

     We expect a new Numbering Ordinance to be issued by the regulatory authority in 2004. Special regulations apply for numbers for value-added services, shared cost services and premium rate services. These numbers are

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also allocated by the regulatory authority and can be allocated to network operators as well as to end users. The number allocated to an operator or an end user will be implemented in a specific network at the request of an end user. Special fees apply for the implementation of these numbers in other networks.

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

     Under the Numbering Ordinance, Telekom Austria and other telecommunications network operators have to provide number portability, permitting customers to keep their assigned telephone numbers when they choose to change their network operator. As discussed in more detail above, number portability currently applies to geographic and service numbers but does not apply to emergency and special numbers. The Numbering Ordinance also requires operators to offer geographic portability within the same area.

     Since November 2003, mobile operators must also permit their customers to keep their assigned telephone numbers when changing their mobile network operator.

     Universal service

     The Telecommunications Act of 2003 sets forth the framework for universal service in Austria. Universal service is defined as the minimum public services that all users must have access to, at an affordable price and at a specific quality level, independent of their place of residence or business. The scope of universal service comprises access to public voice telephony via fixed line including fax, modem and functional access to internet (excluding broadband), access to a comprehensive directory enquiry service, access to a comprehensive telephone directory and the full area coverage of public payphones at accessible locations. The detailed technical quality criteria are further defined by the Universal Service Ordinance.

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

     Upon request of other providers of public telecommunications services and of publishers of comprehensive subscriber directories or comprehensive directory enquiry services, each provider of public telephone services has to provide them with subscriber data online or at least weekly in electronically readable form for cost oriented charges.

     We are the only provider that is required to provide universal service. Pursuant to the Telecommunications Act 2003 we are required to do so at least until December 31, 2004. The Federal Minister of Transport Innovation and Technology shall verify in due time if the conditions for a tender procedure exist. In case such conditions do not exist, verifications shall be repeated every five years. In case the provision of a universal service should lead to a deficit, the regulatory authority will create and manage a Universal Service Fund. All operators of telecommunications services who generate revenues of more than EUR 5 million per year will contribute according to their revenues in relation to the revenues of the other operators. The amount of the contribution will be fixed by the regulatory authority.

     We have so far not been reimbursed for any of our costs incurred for the provision of universal services by the Universal Service Fund. The Telecommunications Act of 2003 states that the costs of universal service which cannot be covered despite cost-efficient management are to be refunded to the provider upon application to the extent such costs constitute an unreasonable burden. However, costs are only to be refunded if the universal service provider has a market share of less than 80% in the relevant market. In the proceeding which determines the amount of compensation, the parties which are required to pay the universal services charge shall be considered one joint party. Under the Telecommunications Act of 2003 we have the right to submit an application for universal service costs for the years 1999 to 2002 until May 20, 2004. Applications for subsequent years will have to be submitted within one year after the end of the business year in which the services were provided.

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Legal framework

     Rights of way

     The Telecommunications Act of 2003 also regulates the principal matters which were previously governed by the no-longer effective Telecommunications Rights of Way Act. Each provider of communications services or communications networks has the ability to use land for establishing, developing, operating and maintaining communications lines. In exercising these rights, it is necessary to have an agreement with the landowner or to have a decision from the Telecommunications Offices.

     The use of public land, including streets, sidewalks, public places and the airspace above them, is free of charge. For the use of private land, compensation must be paid to the landowner. If the landowner wants to use his land in a particular way the provider has to move the communications line at the provider’s costs. There are also special obligations for the joint use of alternative operators’ telecommunications lines.

     Ordinance regulating lawful interception

     The ordinance regulating surveillance systems (lawful interception) which became effective on December 1, 2001 is based on a standardization recommendation by the European Telecommunications Standards Institute and comprises detailed technical descriptions of new technologies and interfaces which enable a harmonized Europe-wide surveillance system for use in criminal prosecution. The amount of the refund by the government for our investments in surveillance systems have not yet been determined.

     Competition law and general legal framework

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

     The main principles of the European Union competition rules are found in Articles 81 and 82 of the EC Treaty (the former Articles 85 and 86), the Competition Directive (recently amended in 2002) and in the European Union merger control regulations. Article 81 of the EC Treaty prohibits collusive behavior between competitors which may affect trade between member states and which restricts, or is intended to restrict, competition within the European Union. Article 82 prohibits any abuse of a dominant market position within a substantial part of the European Union that may affect trade between member states. These rules are enforced by the European Commission in co-operation with the national competition authority. In addition, the national courts have jurisdiction over alleged violations of European Union competition law.

     The Austrian Antitrust Act prohibits the abuse of dominant market position and the distortion of competition caused by horizontal and vertical agreements or collusion of market participants. While the Austrian Federal Competition Authority (Bundeswettbewerbsbehörde) focuses on improving EU-wide cooperation of competition authorities and streamlining proceedings in order to make competition law more effective, it is the Austrian Cartel Court which rules on these cases. Parties can appeal against the Cartel Court ´s decisions to the Austrian Supreme Court in the function of a Cartel Appellation Court.

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

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

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     Procurement law and telecommunications act

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

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

     Customer protection and data protection

     Customer protection

     The Telecommunications Act of 2003 identifies the protection of the customer as one of its major goals. Accordingly, the Act contains various provisions regulating the rights of the customers vis-à-vis the telecommunications services providers. All operators that provide public communications services must ensure that the services are available to everyone on the published terms and conditions. The Telecommunications Act creates a special dispute resolution mechanism to resolve billing disputes. We are obliged to issue itemized bills upon customers’ request to allow the customers to check the accuracy of the calls listed. If a dispute cannot be amicably settled, the customer can appeal to an Arbitration Board established within the regulatory authority without prejudice to the right to appeal to the courts.

     We automatically inform every customer whose bill exceeds a certain threshold value within one billing cycle (two months). The customer may choose lower limits and will be informed by us that he/she has reached this lower chosen threshold value.

     The Ordinance on Tariffs for Value-Added Services contains maximum prices for specific premium rate services. The customer is required to receive price information about the call before being connected.

     The Telecommunications Act of 2003 requires us to include in our description of terms and conditions and services certain mandatory information such as the level of quality, provision time, penalties to customers if services are not provided compliant to the service description, rules about billing disputes and information about actual tariffs. In order to allow customers better cost control, we have to provide free of charge a limitation of access for special value added services once a year. Furthermore, we have to offer universal services on a “prepaid” basis and the possibility to pay universal services in installments. For purposes of transparent billing, we are obliged to provide customers free of charge with an itemized call list. The Ordinance on Itemized Bills (Einzelentgeltnachweisverordnung) which will be enacted on May 1, 2004 sets forth the standards for itemized billing.

     Data protection

     Both the Telecommunications Act of 2003 and the Data Protection Act 2000 contain provisions concerning data protection.

     Tapping and other forms of surveillance of telephone calls by third parties are prohibited. Exceptions exist only for authorities investigating serious criminal offences. Special switches can be established to trace people who stalk or harass others by telephone.

     Telephone calls and faxes for the purposes of direct marketing are permissible only if a subscriber has given his prior consent. Likewise it is generally not permitted to send e-mails — including SMS-messages — to consumers for the purpose of direct-marketing or to more than 50 recipients without prior consent. In limited circumstances prior consent need not to be obtained. This applies, for example, where a customer provided his electronic contact details to the sender in connection with a sale of the sender’s products or services and where the subsequent direct marketing relates to an offer of a similar product or service by the sender. In such instance, the customer must be given an opportunity to object to the use of his/her contact details.

     Sending e-mails to non-consumers without prior consent is authorized when the recipient is given the opportunity to reject future messages.

     After having obtained the customer’s consent, data for the direct marketing of telecommunications services may be processed only to the extent necessary for such services. Any other data may only be used upon the

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customer consent. Customers have the right to request information about the storing and processing of their data and to request corrections or deletions of data that was not properly stored.

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

     The European Union

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

     In the 1990s, the European Commission had used its powers under new Article 86 (3) (former Article 90) of the EC-Treaty to open telecommunications markets in the European Union member states by issuing directives providing for liberalization, abolishing monopoly rights of the state-owned telecommunications operators. In the following years, the European Union has also adopted a number of directives and recommendations regarding open and efficient access to and use of public telecommunications networks and public telecommunications services, the Open Network Provisions. These requirements are intended to harmonize technical interfaces, usage conditions and tariff principles throughout the European Union and to ensure objectivity, transparency and non discrimination in access to and use of public telecommunications networks and public telecommunications services and foresaw first detailed regulatory measures like Carrier Pre-selection or Number Portability and universal services like directory services, public payphones or non-discriminatory access to the network.

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

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

     In February 2002 the European Union adopted a package of new directives, which was implemented by the Telecommunications Act in August 2003. The new legal environment is based on the framework-directive, which defines new rules for the market definition procedure and is more and more harmonized with general competition law which is the basis for any regulation of the telecommunications markets. The 25% threshold for “significant market power” no longer applies. The national regulatory authorities are required to consider more factors in determining whether a company has a dominant position in that market. Under the framework directive the national regulatory authorities will seek to harmonize their decisions on an EU-wide scale. Therefore, the competencies of the regulatory authorities to regulate the telecommunications markets will be extended.

     The Access- and Interconnection-directive provides for the legal instruments for regulating the telecommunications wholesale markets (carrier to carrier relations) based on the principle of technical neutrality, while the Universal Service directive focuses on the provision of universal service and limited ways of regulating retail prices. The licensing directive establishes a common ground for providing services and operating networks.

     By July 2002, the European Union adopted a new directive on processing of personal data and the protection of privacy in the electronic communications sector which contains provisions on the use of cookies, public directories and the confidentiality of communication. The directive also regulates unsolicited commercial communication provided by automatic calling machines, fax and e-mail which will be subject to the recipient’s prior consent (opt-in) unless the recipient is given the opportunity for opting out. Finally, the directive on competition in the markets for electronic communications networks and services, also adopted in September 2002, has replaced the former directive on full competition (90/388/EC) by July 25, 2003.

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Item 5. Operating and Financial Review and Prospects

OVERVIEW

     The following discussion should be read in conjunction with the consolidated financial statements included elsewhere in this annual report. Those financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

In 2003 we started to report our business in three segments:

     On May 21, 2002, our Supervisory Board approved the reintegration and merger of Datakom Austria GmbH, Datakom International Solutions GmbH, Jet2Web Internet Services GmbH and Jet2Web Network Services GmbH into Telekom Austria. On October 1, 2002 these companies have been incorporated into Telekom Austria. As of January 1, 2003 we finalized the reorganization of our operations into two distinct operating segments, Wireline, and Wireless, and a third segment “Other activities” which includes primarily various centralized financial services that are provided by our subsidiary Telekom Finanzmanagement GmbH to both business segments, Wireline and Wireless. The two business segments also conduct business with each other, which are eliminated in consolidation. In order to give shareholders a clear view of our external performance as a company, we separately disclose these internal transactions when presenting our segment results.

     We started reporting according to the new segments commencing with the first quarter of 2003. We have reclassified certain amounts in prior year financial statements to conform to the current year presentation.

Accuracy of forward-looking statements

     In the normal course of business, and in an effort to help keep shareholders and the public informed about our operations, we may from time to time issue certain statements, either in writing or orally, that contain or may contain forward-looking information such as statements made in this annual report. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, or projections involving anticipated revenues, earnings or other aspects of operating results. Such statements are subject to a number of factors that may tend to influence the accuracy of the statements and the projections upon which the statements are based. As noted elsewhere in this annual report, our operations are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, and any one of which, or a combination of which, could materially affect our results of operations. See “Forward Looking Statements”, “Item 3 — Risk factors”, “Item 4 — Regulation and legal framework”, “— Critical accounting policies” and “— Subsequent events”.

Certain factors affecting our financial results

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

     Open competition

     The Austrian fixed line market was opened to full competition on January 1, 1998. Since the Austrian market has been fully liberalized, a number of competitors have commenced operations in various market segments. In the Wireline segment, our competitors include international telecommunications carriers and

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domestic companies. In the wireless segment, several additional national licenses have been granted to our competitors in both the GSM and UMTS ranges. An additional competitor, TELE 2, started its operations as a service provider in cooperation with the existing mobile operator ONE in February 2003. In May 2003, Hutchison 3G Austria entered the Austrian mobile communications market as the first provider of UMTS service only. mobilkom austria entered into a national roaming agreement with Hutchison 3G Austria allowing our competitor to use our GSM network as a supplement to its own UMTS network. We expect competition to further intensify in the foreseeable future as our current competitors expand their operations.

     Because of increasing competition, the most important challenge is to maintain our leadership in the telecommunications market, and the extent to which we are able to do so will have a major influence on our future revenue and operating results. As the operator of a former state monopoly for public telecommunications, we previously lost market share in the Wireline segment as a result of the full liberalization of the telecommunications market. However, competition has also stimulated overall market demand for telecommunications services, and we expect further growth in the markets for data and IT solution services and internet services. In the mobile communications services market we expect growth primarily from the international sector. We expect a flat development in Austria.

     Technological change

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

     One of our objectives is to increase our medium-term infrastructure investments in growth areas such as internet, broadband transmission and access, which are the main elements of the future next generation network infrastructure, and new mobile communications services like UMTS. For further information see “Item 4 – Business overview”. On the other hand we intend to reduce our capital expenditures in mature business areas such as fixed line voice telephony, and to achieve a net decrease in our capital expenditures.

     Regulatory environment

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

     At December 31, 2003, we had interconnection agreements with 27 fixed-line operators and 6 mobile operators.

     In August 2003, the directives of the European Union were implemented into Austrian domestic law under the amended Telecommunication Act. See “Item 4 – Regulation and legal framework — Legal Framework — The European Union”. According to the amended Telecommunications Act of 2003, a more differentiated regulatory approach is possible. This may imply a shift from ex-ante regulation towards competition law in the long run and includes a further liberalization of the licensing regime. For further information see “Item 3 — Risk factors”.

     Tariff reductions

     We carried out major tariff reforms for the fixed line business in September 1999 and June 2000 in order to meet ongoing competitive conditions. With the introduction of our second-based tariff scheme in 2001, we managed to stop the declines and even increase our voice market share. From January 1, 2003 to September 30, 2003, mobilkom austria was required to lower its interconnection fees in stages to a final level of EUR 0.1086. As of October 1, 2003, mobilkom austria has managed for the first time to reach commercial agreements on interconnection tariffs with all mobile operators.

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     We expect competition to lead to continued pressure on tariffs. As interconnection fees are expected to decline, customer tariffs are assumed to fall as a result.

     Transformation program

     A number of organizational and strategic changes were implemented prior to full liberalization in order to prepare Telekom Austria for operating in a fully competitive environment. In June 2000, we began a transformation program that aimed to reduce operating expenses, implement new technologies, change our corporate culture and stabilize fixed line voice revenues. The financial impact of these measures, mainly in the form of reduced costs, has been visible in 2001, 2002 and 2003.

     To reduce personnel, we implemented three voluntary retirement incentive programs (VRIPs) in 1997, 1999 and 2000. These resulted in approximately 3,500 employees accepting early retirement. At December 31 of the years 2002 and 2003, 1,723 and 120 employees, respectively, were covered by our respective provisions. The other former employees have already left the program and no longer have claims representing any current or future liability to us. On January 1, 2002 a law was enacted that covers civil servants after the age of 55 by a governmental retirement plan with the effect of reducing our obligation under the VRIPs. Following that law we reversed EUR 26.8 million and EUR 57.4 million of these accruals in 2003 and 2002, respectively.

     As a result of the transformation program, we have employees who no longer report to work but who are paid a salary by us due to their civil servant status. We refer to these employees as our idle workforce. Costs related to such personnel are included in our results of operations.

     Until the end of November 2003 the Austrian government offered early retirement at reduced future pension payments to certain civil servants. We offered these eligible employees additional payments to alleviate financial losses from the reduction in future pension payments and to improve the acceptance of the offer by our civil service employees. Due to this measure we were able to reduce our workforce by 650 civil servants in 2003. We incurred a contractual obligation to civil servants taking advantage of this opportunity and accrued EUR 47.3 million in 2003. We will not face any future liabilities in addition to these accruals. Recent changes in Austrian law no longer allow us to implement early retirement packages in the future.

     Claims against the Republic of Austria

     In 2003 we filed a claim for a refund with the Austrian Ministry of Finance as representative of the Republic of Austria in the amount of EUR 245 million for certain expenses relating to the employment of civil servants. The claim is based on the Postal Restructuring Act and the argument that we have incurred higher costs for the employment of civil servants and their termination compared to our competitors. In August 2003 an amendment to the law with retroactive effect cancelled our claims. We are currently seeking a settlement with the Ministry of Finance. Due to the uncertainties involved we have not recorded the claim in our books.

     Enhanced customer focus

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

     Court Ruling on Value Added Services

     In 2003, the Austrian Supreme Court ruled that no contractual relationship exists between the customer and Telekom Austria, but rather that the contractual relationship is established directly between the VASP and the customers. As a consequence we are no longer considered the primary obligor towards our customers in respect to services provided by VASP on our lines and ceased reporting revenues from these services on a gross basis, beginning on October 1, 2003. Had the ruling been in effect for the full year of 2003, 2002 and 2001, revenues and expenses in the accompanying consolidated statements of operations would have been lower by EUR 45.9 million, EUR 51.2 million and EUR 41.4 million, respectively. This reduction in revenue would not have had any impact on consolidated operating income.

     Consolidated operating revenues and expenses would have been higher by EUR 16.0 million in 2003 if the change in revenue recognition had not taken effect beginning with the fourth quarter of 2003.

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Critical accounting policies

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

     Valuation of long-lived assets, intangible assets and goodwill

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

     Total fixed assets, intangible assets and goodwill were EUR 5,767.3 million, EUR 6,317.3 million and EUR 4,672.5 million at December 31, 2003, 2002 and 2001 respectively.

     Depreciable fixed assets are depreciated over estimated useful lives between 3 and 50 years and amortizable intangible assets are amortized over useful lives between 4 and 30 years. Although we have substantial historical evidence about estimated useful lives of these assets, there is the inherent risk of a change in useful lives. For example a one-year increase or decrease in the useful lives of all depreciable or amortizable assets would increase or decrease depreciation and amortization expense by approximately EUR 130 million. Depreciation and amortization expenses amounted to EUR 1,133.2 for the period ended December 31, 2003.

     Total impairment charges were EUR 6.8 million, EUR 41.9 million and EUR 145.1 million for the periods ended December 31, 2003, 2002 and 2001, respectively. The impairment charges in 2003 primarily relate to long-lived assets as future estimated net cash flows were below the carrying value of the related assets.

     Valuation of employee benefit obligations

     Employee benefit obligations are established for (i) contractual termination benefits available for eligible civil servants (ii) service awards that are granted to eligible employees after specified service periods, (iii) severance payments upon termination of employment of eligible employees and (iv) pension benefits granted to certain former employees.

     Contractual termination benefits. In order to reduce headcount and related operating expenses we have offered several programs in 1997, 1999 and 2000 whereby selected employees who were approaching the age of 55 were offered certain incentives to induce their voluntary retirement. We refer to these incentives as Voluntary Retirement Incentive Programs (VRIPs) or social plans. Generally, such plans target civil servants who can not be terminated without cause. In aggregate 3,500 employees accepted one of our VRIP offers in prior years. At the time an employee accepts a VRIP offer we recognize an accrual for the present value of the estimated future contractual obligations assuming an annual salary increase of 2.5% for future years and a discount rate of 4.5%. On January 1, 2002 a law was enacted that covers civil servants after the age of 55 by a governmental retirement plan with the effect of reducing our obligation under the VRIPs. Following that law we reversed EUR 26.8 million and EUR 57.4 million of these accruals in 2003 and 2002, respectively. As of December 31, 2003, the remaining accrual of EUR 31.9 million for the VRIPs relate to 120 employees. A change in the elected discount rate by 1% would either increase or decrease the accrual for contractual termination benefits by about EUR 0.4 million.

     Service awards are paid after 25 and 40 years of service and to retiring employees with at least 35 years of service. The compensation is accrued as earned over the period of service taking into account estimates of employees whose employment will be terminated or who will retire prior to reaching the required service period. Actuarial gains and losses are recognized immediately in the period realized.

     Severance consists of legal severance and voluntary severance. Eligible employees hired before January 1, 2003 receive legal severance payments upon termination of their employment or upon retirement. The amount of the severance payment equals a multiple of their monthly compensation depending on the employee’s years of service including variable elements like overtime and bonus. Following a legal change, obligations for

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employees starting to work for us after January 1, 2003 are covered by a defined contribution plan and we paid EUR 0.1 million to this defined contribution plan (BAWAG Allianz Mitarbeitervorsorgekasse AG) in 2003. Civil servants do not qualify for legal severance payments. Until the end of November 2003 the Austrian government offered early retirement at reduced future pension payments to certain civil servants. Under this legislation, civil servants had a one-time opportunity to retire before reaching their legal retirement age. We offered these eligible employees additional payments to alleviate financial losses from the reduction in future pension payments and to improve the acceptance of the offer by our civil servants. As a result we recorded accrued severance costs of EUR 39.6 million and other costs of EUR 7.7 million totaling EUR 47.3 million for 650 civil servants who accepted this offer in 2003. After making these payments Telekom Austria will not face any future liabilities.

     Pension benefits. We provide defined benefits for certain former employees. This unfunded plan provides benefits based on a percentage of the salary depending on the years employed not exceeding 80% of the salary before retirement including the pension provided by social security. We use the projected unit credit method to determine pension cost and amortize actuarial gains and losses using the corridor method. For further information see note (16) of the accompanying financial statements.

     The recorded amounts for service awards, severance payments and pensions are affected by the actuarial assumptions of discount rate, rate of compensation increase and rate of increase of pensions. The total obligation for these benefits amounted to EUR 124.1 million, EUR 100.2 million and EUR 90.8 million as of December 31, 2003, 2002 and 2001, respectively. A change of the selected discount rate of 5.0% by one percentage point would increase or decrease the obligation for these benefits by approximately EUR 17 million in 2003. For further information see note (16) of the accompanying financial statements.

     Valuation of tax assets

     At December 31, 2003, we had approximately EUR 701.5 million of operating loss carry-forwards. Thereof, EUR 110.6 million relate to foreign subsidiaries with EUR 110.1 million expiring between 2004 and 2010. The remaining amount is deductible in Austria and do not expire under current regulation. Their annual usage is limited to 75.0% of the taxable income in Austria for that year.

     In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that all the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As of December 31, 2003 we recognized a net deferred tax asset of EUR 123.5 million. In order to realize this deferred tax asset we will need to generate future taxable income exclusive of reversing taxable temporary differences of approximately EUR 486.8 million. Based on the level of historical taxable income and projections for future taxable income and tax planning strategies over the periods in which the deferred tax assets are deductible, management believes it is more likely than not we will realize the benefits of these deductible differences, net of the existing valuation allowance. The amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.

     A new Austrian tax reform act has been proposed stipulating a reduction of the corporate income tax rate from 34% to 25% and an expansion of the taxable base. The tax reform is planned to become effective in 2005. The promulgated changes, if effectuated, would immediately reduce the value of our Austrian deferred tax assets but reduce income taxes in future years. The effect of this tax reform on the realizability of deferred tax assets can not be estimated yet due to the early state of the proposal and the uncertainty about the provisions in detail.

Recent developments

     On January 21, 2004, Telecom Italia International N.V. sold its residual shareholding, corresponding to 73.9 million shares or 14.78% of Telekom Austria’s share capital, in a private placement to institutional investors at a price of Euro 10.55 per share. Following completion of this transaction, the free float in Telekom Austria’s share capital increased to 52.83%. The remaining stake is owned by ÖIAG, representing the Republic of Austria. ÖIAG and Telekom Austria have each entered into lock-up agreements that end on May 31, 2004.

     As of February 27, 2004, the average share price had exceeded the Initial Public Offering price by 30% or more for five consecutive days. Therefore, the 3,268,850 stock options discussed in note (17) of the

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accompanying financial statements became exercisable. In the first quarter of 2004 we recorded a compensation expense estimated in the amount of EUR 9.4 million.

     On February 27, 2004, we exercised our 3,326,881 American call options on treasury shares which were acquired in the Initial Public Offering in November 2000 to limit our exposure under the stock option plan that expired on February 27, 2004. The strike price of each call option was EUR 9. Following the exercise of the options, 3,326,881 Telekom Austria shares, i.e. 0.67% of the share capital, were credited to our accounts through an off-market transaction on March 3, 2004.

     On March 18, 2004, the Cartel Court found that the cancellation of one of our former tariffs (“Minimumtarif”) constitutes an abuse of our dominant position and imposed a fine of EUR 0.5 million. We will appeal against this decision with the Supreme Court.

     At the annual general meeting of June 4, 2003 the Management Board was granted authorization to increase our share capital by up to 10 million shares to serve stock options. The current proposal intends to grant the options in three annual tranches beginning in 2004. To issue the first tranche, on March 23, 2004 the Management Board decided to increase the share capital by up to EUR 6.5 million on the condition that the options issued in 2004 are served. This resolution still requires approval by the Supervisory Board.

     On March 24, 2004 our Management Board announced that it intends to make use of the authorization by the shareholders received at the annual general meeting in June 2003 to buy back up to 50 million shares at a price between EUR 9 and EUR 15 until December 3, 2004. Following the first repurchase by exercising our American Call Options on February 27, 2004 through an off-market transaction, there are currently up to EUR 270 million of reserves available for further buybacks. Telekom Austria intends to execute the share repurchases through market transactions and to limit such purchases so that the holding of our principal shareholder ÖIAG does not exceed 50% of our outstanding shares.

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RESULTS OF OPERATIONS

2003 compared to 2002

OVERVIEW

     On June 28, 2002 we acquired the remaining 25.001% of mobilkom austria from Telecom Italia Mobile International, which also held certain blocking rights. These blocking rights precluded us from consolidating mobilkom austria group prior to June 28, 2002. Our consolidated financial statements include mobilkom austria group’s results of operations for the entire year of 2003 and are therefore not directly comparable to 2002.

Consolidated operating results

     The following table shows our operating revenues, operating expenses and the resulting consolidated operating income as well as the percentage changes for the periods indicated.

     Operating revenues

     Our consolidated operating revenues increased by EUR 851.7 million or 27.3% to EUR 3,969.8 million in 2003. The operating revenues for 2002 do not include EUR 790.1 net of intersegmental eliminations, which were generated by mobilkom austria group before its consolidation as of June 28, 2002. If the change in revenue recognition for certain value-added services provided by third-party providers, in response to a decision by the Austrian Supreme Court had been in effect before October 1, 2003, revenues and expenses in the accompanying consolidated statements of operations would have been lower by EUR 45.9 million in 2003 and EUR 51.2 million in 2002. The effect in the fourth quarter of 2003 was a reduction in revenues in the amount of EUR 16.0 million. For further information see “— Court Ruling on Value Added Services”. This change had no impact on consolidated operating income. The increase is due to the growth in our Wireless segment due to the growth of the mobile customer base, higher average usage per customer, higher interconnection traffic through our mobile network and the introduction of interconnection fees for SMS in Austria. This revenue growth was partially offset by declining revenues in the Wireline segment as a result of lower revenues from switched voice base traffic and lower average voice tariffs.

     Operating expenses

     Our consolidated operating expenses increased by EUR 539.3 million or 17.6% to EUR 3,600.0 million in 2003. Total operating expenses do not include EUR 574.4 million net of intersegmental eliminations, which were incurred by mobilkom austria group before its consolidation as of June 28, 2002. A more detailed analysis of the individual expense items is presented below.

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     Material costs

     Our consolidated material costs increased by EUR 100.7 million or 51.3% to EUR 297.1 million in 2003. The material expenses for 2002 do not include EUR 97.6 million net of intersegmental eliminations, which were incurred by mobilkom austria group before its consolidation as of June 28, 2002. Taking into account this effect, the remaining change was an increase in material expenses of EUR 3.1 million. Material costs in the Wireline segment increased due to the expansion of the ADSL network to provide better coverage and higher bandwidth in Austria. In the Wireless segment rising demand for high quality handsets and handset replacements contributed to this increase.

     Employee costs, including benefits and taxes

     Our consolidated employee costs including benefits and taxes increased by EUR 98.6 million or 16.4% to EUR 699.3 million in 2003. The employee costs for 2002 do not include EUR 77.3 million net of intersegmental eliminations, which were incurred by mobilkom austria group before its consolidation as of June 28, 2002. Taking into account this effect, the remaining change was an increase in employee costs of EUR 21.3 million. Both business segments contributed to this increase. In the Wireline segment a one-time charge in connection with the early retirement of civil servants increased employee costs by EUR 47.3 million. Other factors concerning the development of personnel costs in the Wireline segment are described in “— Segment results — Wireline”. In the Wireless segment the headcount growth accompanying the growth of mobile business contributed to the rise in employee costs as well.

     Depreciation and amortization

     Our consolidated depreciation and amortization expenses increased by EUR 116.9 million or 11.5% to EUR 1,133.2 million in 2003. Depreciation and amortization for 2002 do not include EUR 133.0 million net of intersegmental eliminations, which were incurred by mobilkom austria group before its consolidation as of June 28, 2002.

     Taking into account this effect, the remaining change was a decrease in depreciation and amortization of EUR 16.1 million resulting primarily from a strong decline in depreciation expenses in the Wireline segment due to our efforts to cut capital expenditures relating to our fixed line network. For further information concerning our capital expenditures see “— Liquidity and Capital Expenditures — Capital Expenditures”. The growth of amortization expense in the Wireless segment partially offset this decline as a result of an increase in amortizable intangible assets and the start of amortization of the Austrian UMTS license in May 2003.

     Impairment charges

     Our consolidated impairment charges decreased by EUR 35.1 million or 83.8% to EUR 6.8 million in 2003. The impairment charges in 2003 primarily relate to long-lived assets as future estimated net cash flows were below the carrying value of related assets. In 2002, impairment losses were mainly driven by an impairment charge of EUR 40.4 million for our subsidiary Czech On Line based on lower profitability expectations.

     Other operating expenses

     Our consolidated other operating expenses increased by EUR 258.2 million or 21.4% to EUR 1,463.6 million in 2003. Other operating expenses for 2002 do not include EUR 266.5 million net of intersegmental eliminations, which were incurred by mobilkom austria group before its consolidation as of June 28, 2002. If the change in revenue recognition for certain value-added services provided by third-party providers, in response to a decision by the Austrian Supreme Court had been in effect before October 1, 2003, other consolidated operating expenses would have been lower by EUR 45.9 million in 2003 and EUR 51.2 million in 2002. The effect in the fourth quarter of 2003 was a reduction in other operating expenses in the amount of EUR 16.0 million. This change had no impact on consolidated operating income.

     Operating income

     Operating income increased by EUR 312.4 million or 544.3% to EUR 369.8 million in 2003. Operating income for 2002 does not include EUR 215.7 million net of intersegmental eliminations, which were generated by mobilkom austria group before its consolidation as of June 28, 2002. The factors described above contributed to the increase in operating income. Both business segments contributed to this positive development in operating income. The consolidated operating income of the Wireless segment increased to EUR 401.4 million in 2003 from EUR 164.8 million in 2002, while the Wireline segment decreased its consolidated operating loss

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to EUR 34.3 million in 2003 from EUR 115.3 million in 2002. For an analysis of the segmental operating revenues and expenses see “— Segment Results”.

Other income, taxation, minority interests, cumulative effect of change in accounting principle and net income

     Net interest

     Net interest expense decreased by 0.4% to EUR 155.8 million in 2003. The decline of interest expense by EUR 13.6 million to EUR 231.0 million resulted mainly from the continued reduction in net debt in 2003. The decline in interest income by EUR 13.0 million to 75.2 million in 2003 was mainly caused by the effects of the consolidation of mobilkom austria group beginning June 28, 2002. The decline of both, interest income and expenses, also resulted from lower recognized interest income and expenses in equal amounts for cross border lease transactions we had entered into in 1998, 1999 and 2001. For further information see note (15) of the accompanying financial statements.

     Equity in earnings of affiliates

     Equity in earnings of affiliates in 2002 includes primarily the equity income from the 74.999% participation held in mobilkom austria. As a consequence of the consolidation of mobilkom austria group beginning June 28, 2002 mobilkom austria’s operations are included in the financial statements of Telekom Austria and are no longer reported as equity in earnings of affiliates.

     Equity in earnings of affiliates amounted to EUR 19.1 million in 2003 down from EUR 140.5 million in 2002 and includes a gain of EUR 18.4 million resulting from the sale of the 26% stake in Herold Business Data AG in July 2003.

     Income tax expense

     Income tax expense increased from EUR 26.1 million in 2002 to EUR 83.1 million in 2003 as a result of the continued growth in profitability of our Wireless segment leading to a higher taxable base.

     The effective tax rate for the full year 2003 decreased from 59.6% to 35.7% compared to the prior year. Due to a higher tax base the effective tax rate came closer to the statutory tax rate of 34.0% in Austria where most of Telekom Austria’s operations are located. Our effective tax rate of 59.6% in 2002 was primarily due to non-deductible goodwill impairment charges and an increase in the deferred tax valuation allowance, partially offset by certain tax credits and incentives and lower tax rate differentials on equity in earnings of affiliates.

     A new Austrian tax reform act has been proposed stipulating a reduction of the corporate income tax rate from 34.0% to 25.0% and an expansion of the taxable base. The tax reform is planned to become effective in 2005. The effect of this tax reform on our financial results could not be estimated yet due to the early state of the proposal and the uncertainty about the provisions in detail.

     For the assessment of the recoverability of deferred tax assets see “— Critical accounting policies — Valuation of tax assets”.

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     Minority interests

     Due to the consolidation of mobilkom austria group effective June 28, 2002, minority shareholders’ earnings in some of mobilkom austria’s subsidiaries are presented as minority interests. Overall these companies contributed positively to mobilkom austria group’s result, the portion of the subsidiaries’ earnings attributable to the minority interests in the amount of EUR 3.4 million in 2003 are deducted in arriving at consolidated net income.

     Cumulative effect of change in accounting principle

     The Company adopted SFAS No. 143 as of January 1, 2003 and recorded a cumulative change in accounting principle for the retirement and decommissioning of existing base stations, buildings, booths for public payphones and wooden masts impregnated with tar or salt in the amount of EUR 11.9 million in 2003. For further information see note (13) of the accompanying financial statements.

     Consolidated net income

     Our consolidated net income increased by EUR 121.4 million to EUR 134.2 million in 2003. Continued growth in the Wireless segment combined with the effect of full consolidation of mobilkom austria as of June 28, 2002 mainly contributed to this strong increase in net income. The Wireline segment also supported the growth in net income through various cost cutting measures and lower depreciation, amortization and impairment charges leading to a stronger decrease in operating expenses than the loss in Wireline operating revenues.

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SUPPLEMENTARY INFORMATION

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

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

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

     The consolidated statements of operations exclude the operations of mobilkom austria group through June 28, 2002 and are thus not directly comparable to the consolidated financial statements for 2003. Thus, in order to provide investors with a more comprehensive picture of the development of our business, we are presenting supplementary to our consolidated statement of operations a comparison between the consolidated financial data for 2003 and total managed data for the entire fiscal year of 2002 together with a reconciliation between the total managed data for the year ended December 31, 2002 and our consolidated statements for the same period.

     As of January 1, 2003 we finalized the reorganization of our operations into two distinct operating segments, Wireline, which includes fixed line, data communications and internet services and Wireless, consisting of the mobile communications segment and a third segment “Other activities” which includes primarily various financial services that are provided by our corporate treasury department to both business segments, Wireline and Wireless. The two business segments also conduct business with each other which is accounted for in the form of eliminations and summarized together with “Other activities” in the category “Other activities & Eliminations”. In order to give shareholders a clear view of our external performance as a company, we separately disclose these internal transactions when presenting our results for Telekom Austria.

     Whereas our consolidated operating revenues increased by 27.3% to EUR 3,969.8 million in 2003 from EUR 3,118.1 million in 2002, our total managed operating revenues increased by only 1.6% in 2003 from EUR 3,908.2 million in 2002 as a result of the consolidation of mobilkom austria group as of June 28, 2002.

     If the change in revenue recognition for certain value-added services provided by third-party providers in response to a decision by the Austrian Supreme Court had been in effect before October 1, 2003, total managed operating revenues would have been lower by EUR 45.9 million in 2003 and EUR 58.4 million in 2002. Taking into account this effect, our total managed operating revenues would have increased by 1.9% to EUR 3,923.9 million from EUR 3,849.8 million in 2002. The effect from the change in revenue recognition in the fourth quarter of 2003 was a reduction in revenues in the amount of EUR 16.0 million.

     The increase is driven primarily by growth in revenues from our Wireless segment which were up by 6.3% to EUR 2,030.2 million in 2003 from total managed operating revenues of EUR 1,909.4 million in 2002. The rise was achieved through an increase in the number of mobile customers and a higher average usage per

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customer which reflects our focus on high value mobile customers. The increase came both from Austria and foreign operations. The growth in the Wireless segment more than offsets the decrease in revenues from our Wireline segment. The “Other activities” segment representing internally provided financial services did not generate any revenues in 2003 or 2002.

     We evaluate the performance of our segments using the non-U.S. GAAP financial measure “adjusted EBITDA” which is based on net income excluding interest, taxes, depreciation, amortization, impairment charges, dividend income, equity in earnings of affiliates, other non-operating income/expense, minority interests and the cumulative effect of changes in accounting principle. This equals operating income before depreciation, amortization and impairment charges. The following table provides an overview for the items that were excluded from net income to determine consolidated adjusted EBITDA for the periods indicated.