As filed with the Securities and Exchange Commission on April 13, 2005

SECURITIES AND EXCHANGE COMMISSION

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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:

     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 AG & Co KG and its subsidiaries are a part of. If mobilkom austria AG & Co KG or one of its subsidiaries is being referred to, the full name of the Company is used. “mobilkom austria group” or the “Wireless segment” refers to mobilkom austria AG & Co KG 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 3.4. 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

3.1. 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 “— 3.4. Risk factors” and “Item 5.1. Overview”.

     Prior to June 28, 2002, Telekom Austria held a 74.999% interest in mobilkom austria AG & Co KG. 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 AG & Co KG, from Telecom Italia Mobile International N.V., bringing our total interest in mobilkom austria AG & Co KG to 100%. Consequently, we have consolidated the Wireless segment 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, 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, 2003 and 2004 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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3.2. DIVIDENDS

     The following table sets forth the annual dividends declared and paid per share based on 496.8 million shares outstanding with respect to the financial year 2003 and 500 million shares outstanding with respect to the financial years 2002, 2001 and 2000. Dividend amounts have been converted into U.S. dollars based at the noon buying rate on the respective dividend payment dates.

     We did not pay dividends for 2000, 2001 and 2002. For fiscal year 2003, we paid an aggregate cash dividend of EUR 64.6 million in 2004. 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 meeting on May 25, 2005 a distribution from unappropriated earnings of EUR 0.24 per no par value share.

     The payment of future dividends depends on our earnings, financial condition and other factors, including cash requirements, our future prospects, taxation and regulations. 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 10.2. Taxation — Austrian taxation”.

     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 (AGM) on May 25, 2005 — as paying agent, in Euro for disbursement to shareholders. 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.

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3.3. EXCHANGE RATE INFORMATION

     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 (ATS) 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 = ATS 13.7603.

     Beginning with fiscal year 2000, Telekom Austria began publishing its financial statements in Euro in accordance with U.S. GAAP.

     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 high and low columns show the highest and lowest quotes, respectively, on any business day during the relevant period. On April 8, 2005, the noon buying rate translated to EUR 1.00 = USD 1.2912.

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3.4. 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

     We expect continuing competition in the fixed line and mobile communications markets which may have a negative impact on our revenues and profitability.

     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 Wireline 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. Particularly as a consequence of the recent merger of two of our main competitors in the fixed line market we expect that competition will increase. The combined competitor has publicly announced its intention to aggressively pursue the market. 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 4.2. Business overview”.

     According to the new European Regulatory Framework, the Austrian Telecommunications Act requires mobile operators to make mobile number portability available to customers. A regulatory decision was filed in August 2004 forcing operators to implement mobile number portability by October 16, 2004. Due to this, competition may intensify in the future, especially in the market for business customers. For further information see “Item 4.3. Regulation and legal framework — Regulation — Ordinances under the Telecommunications Act of 2003” and “— Numbering”.

     In Austria, we also compete with operators that offer wireless communications services without maintaining their own networks (known as mobile virtual network operators, MVNO) and which therefore incur substantially lower costs than we do. Two of our competitors in the fixed line business offer their services as a mobile virtual network operator, with its own access numbers, respectively as a service provider reselling mobile communications services of another competitor under its own brand name. All UMTS (Universal Mobile Telecommunications System — third generation mobile communications network) license holders have launched UMTS services, but competition for 3G (third generation mobile networks which are designed for high data transmission rates) services is expected to increase in 2005 as a sufficient amount of UMTS handsets will be available for a broader customer base. 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 recent 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.

     Approximately 88% of our revenues come from the Austrian market. Both, the Austrian mobile communications and fixed line markets are saturated, highly competitive and characterized by fierce competition. If this development continues our profitability may decline.

     Our primary business is the provision of communications services in Austria. We expect a decline in revenues 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.

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     In the mobile communications business we face increasing competition. Austria has one of the highest penetration rates of mobile communications in Europe, reaching approximately 98.0% at December 31, 2004. Since the market has been approaching saturation 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 offering mobile voice services for one Euro Cent per minute or free 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 12% 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 may neither realize the expected level of demand for our products and services nor the expected level or timing of revenues generated by those products and services as a result of lack of market acceptance or technological change.

     Through the rapid technological progress and the trend towards technological convergence (where different technologies are combined into a new service), there is a danger that new established products or services will not only complement, but also substitute each other. Voice over IP and Wireless Local Area Networks (WLAN) are new technologies that have the potential to replace existing technologies and services and reduce our market share and revenues.

     Moreover there is a risk that we will not succeed in making customers sufficiently aware of existing and future value added services and creating customer acceptance of these services. This risk exists in particular with respect to our anticipated future growth drivers in the mobile communications area (e.g. mobile data services provided via UMTS or other technologies) and in the fixed line communications area (e.g. Asymmetric Digital Subscriber Line (ADSL)). Furthermore additional competition may exist from IT companies which position themselves as full IT and telecommunications providers on the Austrian market and compete strongly for the large corporate accounts.

     A lack of market acceptance of services based on 3G technology like UMTS or EDGE (Enhanced Data Rates for Global Evolution mobile communications systems with high transmission rates conceived for video- or internet-telephony use) could have a negative impact on revenues and results of operations including the possibility that we will not be able to secure our investments in 3G technology.

     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, 51% of all employees of Telekom Austria are civil servants who cannot be dismissed without cause. In the past we have implemented early retirement packages for voluntary retirement of our employees. Changes in Austrian law will no longer allow us to implement early retirement packages in the future. In view of the increasingly competitive environment in which we operate, such restrictions may have an adverse impact on our results of operations. The restrictions of the Austrian Career Public Service Regulations Act on further reducing our current workforce could have a negative impact on our profitability.

     Our customer tariffs for fixed line services are widely 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 share. Our interconnection rates in our fixed and mobile networks may be lowered by the regulatory authority in 2005, 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 4.3. Regulation and legal framework — Legal framework — Procurement law and telecommunications act”.

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     The extent to which we must share our infrastructure and services 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 among others the following:

     We will be obliged to adopt new accounting standards in 2007 which may have a material impact on our financial statements and may render a comparison between financial periods more difficult.

     In June 2002, the European Union adopted new regulations requiring all listed EU companies to apply International Financial Reporting Standards (“IFRS”, previously known as International Accounting Standards or “IAS”) in their financial statements from January 1, 2005. Member States may defer mandatory application of IFRS until 2007 for companies that either have listed debt securities only or already use other internationally accepted standards for purpose of a listing outside the EU.

     Telekom Austria currently reports under U.S. generally accepted accounting principles (U.S. GAAP), but will be obligated to adopt IFRS as its new accounting standards in 2007 which may have a material impact on its financial statements and comparability to the financial statements in accordance with U.S. GAAP previously published. For further information on the impact of IFRS, see “Item 5.1. Overview — New accounting pronouncements”.

     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.

     The risk relating to system failures due to natural or human failure and the technological dependency on third parties may have an impact on our reputation and the rate of customer satisfaction.

     Our technical infrastructure (including our network infrastructure for fixed line network services and mobile telecommunications services) may be damaged or disrupted by fire, lightning, flooding, earthquake and other calamities, technological failures, human errors and other similar events. Moreover, the technological backbone of Telekom Austria depends on third party software and hardware. Although we have taken measures to safeguard against such problems, we cannot be sure they will be effective under all circumstances. Damage or

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disruption of our infrastructure, technology or software may result in reduced user traffic and reduced revenues as well as increased costs, and might deteriorate our reputation and customer satisfaction.

     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 licenses and 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 expansion 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 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 Bulgaria (see also “Item 4.2. Business overview — Wireless — Bulgaria”) and other markets with significant growth potential. These countries have political, economic, and legal systems that are in different stages of 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 antennas 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 disputes and litigation with regulators, competitors and other private parties.

     We are subject to numerous risks relating to legal and regulatory proceedings in which we are currently a party or that could develop in the future. We cannot guarantee that the ultimate outcome of such legal proceedings will not have a material adverse effect on our results of operations or financial condition. For information concerning some of the litigation in which we are involved, see “Item 8.2. Other information — Litigation”. For information concerning our regulatory environment, see “Item 4.3. Regulation and legal framework — Regulation”.

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,

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acquisition or divestiture of material assets, approval of the annual financial statements and 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 initiating, accelerating, delaying, or preventing a change of control, or a merger, consolidation, takeover or other business combination or restructuring 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 and could lead to a change in control in Telekom Austria in case they are sold to another investor.

     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 are available for sale.

     In 2003, the Austrian government announced its intention to sell its 47.2% ownership in our share capital which was held through ÖIAG, by the end of the legislative period in 2006. In December 2004, ÖIAG sold 85,000,000 shares in us through a private placement, corresponding to 17%, thus reducing their stake in us to 30.2% and has agreed not to sell any shares in us until June 5, 2005. However, after this date ÖIAG will be free to sell the shares they own in us, which could lead to a change of control in us.

     A change of control as defined in the Austrian Takeover Act would require the investor to make a compulsory offer to our remaining shareholders. 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 10.1. 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. 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 negatively affect the 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.

4.1. 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. 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 December 2004, ÖIAG reduced the share capital held in Telekom Austria through a private placement to institutional investors by 17%, from 47.2% to 30.2% of our share capital.

     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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     In December 2004, we entered into call option agreements giving us the right to acquire 100% of the share capital of MobilTel AD, the leading Bulgarian telecommunications provider, exercisable from July until August 2005. For further information see “— 4.2. Business overview — Wireless — Bulgaria”.

     For further information concerning the structure of Telekom Austria see “Item 19 Exhibits — Structure of Telekom Austria”.

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 AG & Co KG to 100%.

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4.2. BUSINESS OVERVIEW

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

     We are the market leader in Austria in both the Wireline and Wireless business 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 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 pursues separate strategies for the Wireline and Wireless business segments. In the Wireline segment we seek to generate a stable cash flow, and in the Wireless segment we strive to achieve moderate growth in our existing Wireless markets and sustainable growth through acquisition, in order to reach our overall goal of substantially strengthening corporate value. Strategic issues between the two business segments are coordinated by our management board.

     In 2004, the Wireline segment continued its efforts to reduce operational expenditures by optimizing both organizational and technical processes. We also intensified our efforts to increase our revenues in the fields of internet, broadband and IT-solutions.

     In order to achieve this goal we will significantly strengthen customer relations through service leadership, an attractive offering of bundled wireline services, the promotion of advanced new services over broadband access (Triple Play; combines voice, data and video services) as well as tailored voice and internet packages to the market.

     We will exploit growth opportunities from new technologies and applications and strive to become one of the most cost-efficient operators in Europe.

     The Wireless segment, consisting mainly of mobilkom austria AG & Co KG 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.

     In 2004 we fostered our international cooperation between our foreign subsidiaries to enable a smooth implementation of products of our Vodafone partnership and mobilkom austria group products (see “— 4.2. Business overview — Wireless”). We expect that the international partnership with Vodafone, including roaming agreements and joint product developments, will further strengthen our ability to offer our customers cutting edge services and to reduce costs. mobilkom austria AG & Co KG, VIPnet and Si.mobil simultaneously launched Vodafone live! on their markets and benefit from a vast range of services available to customers. A close cooperation among our Wireless companies at all levels enables us to generate synergies and therefore retain a lean organizational structure.

     In Austria and Croatia we focus on quality and innovation to intensify our customer retention measures and maintain a strong market position through innovative voice and data products. In Slovenia we improved our

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image among the young and heavy users and are now perceived as a price leader accompanied by selected innovative products and services from the Vodafone portfolio.

     To enable further growth we will continue to investigate possible acquisitions mainly in Southeastern Europe and have already taken further steps increasing our share in VIPnet to 100% and buying call options for 100% of MobilTel AD, the leading Bulgarian mobile operator.

Overview of Telekom Austria’s revenues

     Our operating revenues are derived principally from fixed line communications services and mobile communications services. The growth in mobile communications and internet services and revenues from subsidiaries outside of Austria has offset the decline in switched voice telephony. The following table shows our operating revenues for each of our reporting segments for the years 2002 to 2004.

     On June 28, 2002 we acquired Telecom Italia Mobile International’s stake in mobilkom austria AG & Co KG. 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 set forth below are therefore not directly comparable. However, although we were unable to consolidate mobilkom austria group prior to June 28, 2002, 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. Since 2003 total managed and total consolidated figures have been identical. For a discussion of our operating revenues and more details, see also “Item 5 — Results of operations”.

     Approximately 12% of Telekom Austria’s total operating revenues in 2004 were derived from activities outside of Austria, mainly in the Wireless segment.

     Austria has demonstrated a strong demand for communications services, with a mobile user penetration rate of 98% at December 31, 2004, one of the highest in Europe. Internet user penetration in Austria was approximately 58% on that same date.

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Wireline

     In 2004, our Wireline segment generated revenues of EUR 2,184.7 million. Switched voice telephony services in particular continue to be our most significant revenue contributor, representing approximately 44.6% of total Wireline revenues in 2004.

     Market position

     We are the leading provider of Wireline telecommunications services in Austria. In 2004, we were able to retain our market position in the Wireline segment. At December 31, 2004 we had a voice telephony market share of 54.4%, which is based on traffic volume excluding internet dial-up traffic, compared to 52.7% at the end of 2003. Our market share for voice telephony including internet dial-up slightly increased to 55.2% in 2004 compared to 54.1% in 2003, although there was a decrease of dial-up minutes. We serviced 2.9 million access lines in Austria, of which 451,200 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 communications services, which we market as “network centric IT-services”.

     With approximately 1,187,000 internet customers we are the largest internet service provider in Austria in terms of customers. In the fourth quarter of 2004 our market share in the residential internet market remained stable at 42% (including 3% contributed by mobilkom austria AG & Co KG’s mobile internet customers) compared to the fourth quarter of 2003. According to the Austrian Internet Monitor (AIM) survey, Austria had an internet user penetration rate of 58%, up from 55% in the fourth quarter of 2003 based on a population of 6.8 million persons aged 14 and older which means that in total 3.9 million Austrians use the internet.

     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:

     Switched voice telephony

     Services

     We provide traditional telephone line access, also called Public Switched Telephone Network (PSTN) access, and Integrated Services Digital Network (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

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by law to grant other operators access to our subscriber lines, also called the local loop. Under the Telecommunications Act 2003 we were required to act as the only universal service provider until December 31, 2004. We will be obliged to render universal services until a new service provider has been appointed by the Austrian Federal Minister for Transportation, Innovation and Technology.

     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 249,800 lines for qualifying low income persons at December 31, 2004. The service for low income persons includes free monthly rental and one hour of free local traffic per month. We partly receive reimbursement from the government for each of these lines. For further information see “— 4.3. Regulation and legal framework — Regulation — 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 decreased slightly from approximately 455,000 at December 31, 2003, to approximately 451,200 at December 31, 2004, representing a decrease of 0.8%. The decline in the number of our access lines is primarily due to continuing migration to mobile networks.

     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 decrease of our voice traffic by 5.6% in 2004 reflects the competitive environment and the further migration to mobile communication. The overall mix of our voice traffic in 2004, only slightly changed when compared with 2003.

     In 2004, our customers generated 467 million minutes of outgoing international traffic through our fixed line network, compared to 484 million minutes in 2003 and 472 million minutes in 2002. This resulted in a decrease of 3.5% in 2004 compared to an increase of 2.5% in 2003. Our principal outgoing international traffic routes are to Germany, Switzerland and Italy and accounted for approximately 59.3% of our total outgoing international traffic during 2004.

     Tariffs

     We currently have two tariff schemes. One of the tariff schemes is based on “pulses” and the other is based on “pay-per-second”. In regards to the tariff scheme based on pulse, the number of pulses per minute determines the exact charge, however the number of pulses per minute varies depending upon the calling time, day and destination. At December 31, 2004 we had about 1.2 million customers using tariff schemes based on pulse.

     In 2001, we introduced a “pay-per-second” tariff scheme, the so-called TikTak tariffs, which is adapted to our customers’ calling patterns and re-launched it in 2004. As a result, we managed to increase our voice market share (excluding internet dial-up) to 54.4% at December 31, 2004, up from 52.7% at December 31, 2003. At the end of 2004, the TikTak tariff scheme accounted for 69.4% of our traffic volume. At December 31, 2004, more than 1.4 million customers had opted for one of the TikTak tariffs.

     The table below shows the trend of our average tariffs. Due to increased marketing efforts and growing competition, our average national and international tariffs fell in comparison to 2003. The fixed-to-mobile tariff increased because more calls terminated in higher priced networks. The total average tariff for voice services decreased by 3.8% 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 of traffic minutes excluding internal traffic.

     In September 2003, we discontinued our Minimum Tariff, a tariff option for low usage customers, because revenues did not cover costs. Existing customers of the Minimum Tariff were transferred to the Standard Tariff. For further information see “Item 8.2. Other information — Litigation”.

     In May 2004, we launched a complete tariff reform, offering competitive prices to all destinations. We essentially created tariffs specific to our main market segments. We offer TikTak privat for the residential segment, TikTak office for small and home offices and TikTak business for all other companies. In addition, we launched tailor-made packages which entitle the customer to specific price reductions for an additional monthly fee, adapted the charge by second and adjusted the call charge to key destinations. Within these packages we introduced the flat rate tariff for residential customers in off-peak time. At December 31, 2004 more than 320.000 packages were in use.

     The new TikTak tariffs resulted in an improvement of price perception and the possibility of selling additional or upgraded products.

     Pay phones and value-added services

     Public pay phone services

     We are the principal provider of public pay phones in Austria and operate approximately 21,700 pay phones including about 500 public multimedia terminals across Austria. Multimedia terminals provide access to internet,

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e-mail, video telephony and various other multimedia services. The number of pay phones was reduced by 4.0%. The roll-out of public multimedia terminals, primarily in premium locations, began 2003 and increased in 2004 by approximately 400%.

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

     In 2004, we began using the payphones and multimedia stations as advertising media, renting advertising space to different companies.

     Value-added services (VAS)

     Our current portfolio of VAS includes:

     In 2004, 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, thus reducing sales costs and meeting 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 2005. In particular, new event-based services show high growth rates and we are able to gain from the early adoption of our services. Event-based services are believed to establish new markets in which we expect to perform highly in terms of market shares and revenues.

     The strategic aim of VAS for 2005 is to provide more services and cover a broader range of the value-added chain on the customer side.

     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

     We 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:

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     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. 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 one point and several other points. These points can be entirely within Austria or partly in Austria and partly abroad.

     Moreover, we offer our leased lines 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.

     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 (Synchronous Digital Hierarchy). Our transmission network provides cost-effective broadband services for business customers requiring higher and more flexible levels of bandwidth and permits integrated voice, data and multimedia communications.

     Switched data services

     We offer a range of data services on our switched network, including packet switched, frame relay, ATM (asynchronous transfer mode), video connection and IP-MPLS (multi-protocol label switching technology based on the internet protocol standard) 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. The number of our service ports connected to our packet-switched service increased by 0.7% to approximately 56,400 at the end of 2004 from 56,000 at the end of 2003.

     Frame relay services. Frame relay is a high speed open protocol, which is well suited to data-intensive applications, such as connecting local area networks and is a cost-effective alternative to leased lines for some of our business customers. After being re-launched in 2004, frame relay now provides QoS (Quality of Service) and premium service levels.

     The number of frame relay service ports declined by 13.2% to approximately 3,300 at the end of 2004 from 3,800 at the end of 2003 because of the migration to our new IP-based platform. The provided bandwidth increased by 5% during the same period.

     ATM services. ATM is a high-performance, cell-oriented and multiplexing technology that utilizes fixed-length packets to carry different types of traffic. We have developed products to counteract system failure and increase resilience. As a result, we are able to back up our customers’ networks in case of system break-downs. The number of ATM ports increased by 3.7% to 4,475 in 2004 from 4,316 in 2003.

     Video Connection services. The Video Connection service provides access to our domestic Video Connection platform and our international Video Connection gateway. The service started experimentally in the fourth quarter of 2004.

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     IP-MPLS services

     We were the first provider in Austria with a stand alone business IP backbone, based on MPLS technology with different classes of service features. Stand alone 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 determining the best path for forwarding packets of data between any two hosts. Each customer application can be assigned to one of five classes of services, each providing different performance levels. This business IP backbone is the basis network for our business IP products and solutions.

     IP-MPLS services is a segment with substantial growth since it allows new features and applications, such as data prioritization, high class video and voice applications or integration of home and mobile users.

     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:

     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 the need to provide products and services to customers more quickly and conveniently. We also expect to provide corporate network services bundled with IT-solutionsions and business applications and utilize additional synergies.

     Electronic payment systems. Datacash is a solution which enables cashless payment systems with online verification and meets the increasing demand for secure electronic payment. Aircash is the wireless equivalent to Datacash. Aircash is a joint product of our Wireline and Wireless segments.

     Telemetry and Security Services (TuS) enables the transmission of emergency calls and alarms to security firms (public emergency units and private sentries) as well as telemetry data from the customer to its central security and control office. The TuS network is a uniform area-wide, highly available and 24-hour-monitored high security network that is on par with international security network specifications.

     IT-solution services

     IT-solution services 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

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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:

     Business applications

     Business applications represent a wide range of services, which are focused on e-business, e-office and e-customized solutions.

     E-business mainly consists of our well established business-to business communication services and some newer products associated with e-commerce services.

     Through our cooperation 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.

     E-office solutions, such as the new e-conferencing solution, enable companies to conduct virtual meetings and share virtual presentations. New web-learning products provide virtual classrooms.

     A typical customized e-business solution is the electronic data interchange service of legal documents (Elektronischer Rechtsverkehr). This is a secure on-line system operated for the Austrian Federal Ministry of Justice in cooperation with the Austrian Bar Association which enables customers to file legal documents electronically with the Austrian courts. We also provide a service called the European Business Register (Europäisches Firmenbuch) providing access to commercial register databases in 13 European countries.

     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. Recently, we signed a contract to take part in the national health insurance project “E-Card” (Electronic Card), which is designed to replace the paper-based health insurance certificates and in a future step, to process electronically approvals granted by the health insurance authorities for special medical treatment.

     As a full service provider we offer solutions including access to the platform, standard content, individual content creation and consulting and customized solutions from customer relationship management, e-marketing or e-procurement to corporate website services. This is due to the successful cooperation with our 100% subsidiary World-Direct eBusiness solutions GmbH.

     Internet access & media

     We provide internet services in Austria and in the Czech Republic, through our 100% subsidiary, Czech On Line.

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     Austria

     Internet access & media includes the following services:

     Our 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, XDSL (ADSL and SDSL).

     The table below shows the development of the number of our internet customers at the dates shown:

     At December 31, 2004, we had about 298,400 ADSL customers, of which 27,100 were business internet customers and 271,300 residential customers. In addition, we have approximately 85,200 ADSL subscriptions that were sold to our wholesale customers. The table excludes traffic related to our one-time internet offer, Complete, a flat-rate internet product, for which the minutes used are not charged. We ceased offering this product in 2000.

     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 an add-on product available to customers who use one of the other internet products described above providing 50 megabites of additional web space for large homepages.

     Broadband Residential ADSL access

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

     In October 2004 the entire AonSpeed Portfolio was re-launched. Five different ADSL product versions are targeted to specifically fit light users, average users and heavy users. Customers can choose between three bandwidth alternatives and different data transfer volume categories.

     AonSpamfilter enables residential customers to take control of their personal mailbox and protect themselves from unsolicited commercial e-mail. 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 an additional package offering wireless connectivity in connection with several of our ADSL products.

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     aon.tv. Telekom Austria continued its success with the broadband television service Aon.tv by signing several new contracts with international partners. The service offers both, national and international broadcast channels as well as a variety of on demand content such as feature films, TV-series, music clips or news exclusively to AonSpeed customers.

     Buntes Fernsehen. In October 2004 Telekom Austria experimentally launched the first village television service in Engerwirtzdorf (Upper Austria) where customers create content for their community.

     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 customers we re-launched the whole product group “Business Access” in 2004, consisting of a new pricing scheme for XDSL, higher transfer limit, lower high usage fee and included many more than the standard features. This re-launch made the XDSL products more competitive and resulted in an increase of the product activations.

     With XDSL Office Light Telekom Austria closed the gap between AonSpeed and XDSL Office. Now Telekom Austria can offer products for each target group which provides for more flexibility to the customer. In addition we launched a wide product portfolio for business internet customers consisting of Top Service, Business Access Backup and Business Access IP-Sec (Access Internet Protocol Security). Top Service includes lower reaction and problem solving time. Business Access Backup increases the availability of Internet access with a backup line based on ISDN or XDSL. Business IP-Sec gives the customer the possibility to access the internet and to contact the main office on a secure channel, all using the same line.

     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, information and 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, customer services and content. Revenues are generated from business-to-consumer services, multimedia services, aon.tv, sales of online advertising, paid services and online shops.

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

     The Telekom Austria portals including mobilkom austria AG & Co KG’s portal A1.net led the Austrian portal market of internet service providers with approximately 815 million page impressions and 2.0 million unique visitors in 2004. 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 2004 and 2003 COL generated revenues of EUR 20.3 million and EUR 18.5 million, respectively. We acquired 100% of COL in 2000. In 2001, COL evolved from an internet service provider to a full communications service provider and has since then defended its leading position in an increasingly competitive environment. At December 31, 2004, COL had approximately 247,100 active customer accounts, down from approximately 279,400 at the end of 2003. The decrease in the number of customers results from a decrease of low-end dial up customers due to stronger competition, which could not be compensated by the increase in the more valuable ADSL and voice customers.

     COL offers the following services:

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     During 2004 COL continued to roll out its direct access microwave network in the 3.5 GHz bandwidth spectrum covering 22 cities.

     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. In 2004 COL launched voice telephony via carrier pre-selection for residential customers.

     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, 2004, we had entered into interconnection agreements with 24 fixed-line and 5 mobile licensed operators in Austria. Separate fixed and mobile interconnection agreements were entered into with all five mobile operators. By the end of 2004 we had installed about 85,200 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 2.8 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 (RTR). In 2004, RTR decreased fixed line interconnection tariffs by 3.3% on average.

     Our main source of interconnection costs arises from calls to mobile networks. Interconnection fees for terminating calls in the network of other mobile operators range from EUR 0.1318 (T-Mobile), EUR 0.1380 (Connect Austria, tele.ring since April 2005), EUR 0.1599 (tele.ring until April 2005), to EUR 0.1962 (Hutchison 3G Austria). The Austrian regulatory authority recently announced its intention to decrease incrementally all mobile termination tariffs until December 31, 2011.

     Interconnection costs also arise from calls to toll-free and VAS numbers provided in our network which originated in networks of Austrian mobile operators. The underlying, so-called mobile origination tariffs range from EUR 0.1028 (mobilkom austria AG & Co KG) up to EUR 0.1962 (Hutchison 3G Austria). Daytime, evening and weekend rates are identical.

     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 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 Austria 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, systems integration and internet services.

     Directory services

     Directory services mainly include directory assistance services, directory data selling, directory publications and information-services. The number of directory inquiries and related services decreased further during 2004 due to the availability of electronic inquiry devices via internet, which are mostly free of charge, as well as electronic devices such as PDAs (Personal Digital Assistant) and mobile phones that include applications for directory management.

     Directory assistance services & information services. We provide national and international operator-supported directory services through value added numbers. New products like directory services per SMS for reverse searches of names and addresses were launched during 2004 and now complete the directory assistance portfolio. Furthermore, we provide directory assistance for other carriers and are also hosting directory service numbers for other service providers. Moreover, we offer a number of information-services and the classic telegram. In 2005, Telekom Austria plans to extend its portfolio in the information-business with new automated voice-operated services.

     Directory publications & directory data selling. 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 which is the basis for the Austrian telephone directory published by Herold. This database is also offered to other directory assistance providers and telephone book publishers.

     In January 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, provided by Herold Business Data GmbH & Co. KG.

     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 Austrian population 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 convergent and combined products and services such as Triple Play (a combined service of voice, data and video).

     The Austrian data communications and mobile communications market is fully liberalized. The regulatory authority has determined that we have significant market power in certain retail and certain wholesale markets.

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This partially limits our pricing flexibility. As a result, most of our pricing has to remain cost-based and significant changes have been subject to prior approval by the regulatory authority. For more information, see “— 4.3. 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.

     We had interconnection agreements with 24 fixed line operators and 5 mobile network operators as of December 31, 2004.

     Our primary competitors in the provision of voice telephony through fixed lines are the recently merged Tele2UTA, tele.ring, eTel and UPC Telekabel (Priority). Several smaller competitors have left the market including Carrier One, European Telecom, TeraCom, KPNQwest, Red Telekom, Cybertron and Comquest. 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.

     The acquisition of UTA by TELE2 resulted in a new, strong competitor with approximately 1.4 million customers and its ability to offer the full range of fixed line telecommunications services. In addition Tele2UTA is offering mobile communications as a mobile virtual network operator as well.

     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, IBM, SBS (Siemens Business Services), Atos Origin, tele.ring and Tele2UTA. 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 Tele2UTA, UPC Telekabel (chello), 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 Tele2UTA.

     Providers who chose unbundling services grew considerably in the SOHO and SME market. In general we have an ongoing market consolidation. Two major ISP, Nextra and Eunet, have been taken over by the Air Call Group. UTA, the second largest Austrian full service provider joined the Tele2 Group through it’s merger with Tele2. Austria’s third largest provider took over a couple of small providers. T-Online decided to leave the Austrian ISP market due to the strong competition.

     Sales and marketing

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

     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.

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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 wholesale customer base comprises national and international mobile and fixed network operators and 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, 2004, 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 point of sales. Furthermore, customers are directly solicited personally or by phone 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 SME. Key account customers are targeted by our Business Solutions unit embarking on a customer-focused approach with a strong emphasis on all-in-one solutions.

     Our wholesale services are marketed and sold directly to national and international carriers by our carrier managers. In 2004, we served more than 110 national and 280 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 are convinced that a long lasting customer relationship is essential to outperform our competitors. Therefore, we continuously concentrate on service leadership.

     We handle about 13.9 million customer contacts at our front office, 1.2 million service and installation assignments and 5 million back office cases a year with a focus on improving customer satisfaction as well as increasing our performance.

     In an independent survey our directory services achieved best in class customer satisfaction values compared to national competitors while significantly improving efficiency by 16% in terms of automation and declining costs per billable minute by approximately 20% compared to the year 2003.

     Moreover, we have successfully implemented a nationwide workforce management tool connecting 1,300 technicians of our field force handling up to 7,000 service and installation cases a day. This system allows us to maintain satisfactory customer service in a mass market through the use of state of the art dispatching tools. Our internal process systems have benefited from increased automation.

     We are also in the process of complementing our efficiency by making our process flows more customer oriented with a special focus on our business customers and increased self service functions through the use of the internet and by raising automation levels in the back office.

     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.

     Switched network

     We operate a fully digital voice switching network serving 2.5 million PSTN access lines, about 443,600 ISDN basic access lines, and 7,600 ISDN multi access lines at December 31, 2004.

     Our network combines reliable technology with efficient network design. To assure network reliability our voice switching network operates on a double-tracked basis and we have an adequate administration, and maintenance system. Our call success rate and exchange availability for 2000 through 2004 was between 99%

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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, 2004, 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, also known as IN platform, we offer, among other services, toll-free, VAS and number portability. The demand for new IN services is driven by customer needs for communication within a predetermined user group and by 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 20,087 kilometers of optical fiber cables at December 31, 2004. In addition, we provide radio links in specific areas upon customer demand.

     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 903 ADSL relay stations covering more than 87% of Austrian households. We had about 383,600 ADSL lines installed at the end of December 2004, up from 261,100 at the end of the year 2003 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.

     International network

     Our international voice traffic is routed through two international gateways. We have connections to 244 destinations (including global satellite networks) and direct links to 136 international operators in 81 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, Ljubljana 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 AG & Co KG’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.

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     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 and the opportunity to offer new services like videoconferencing, multimedia messaging services, audio/video streaming applications or video mailboxes will generate additional business opportunities.

     We are still in the process of evaluating the details of the financial implications of different migration plans to NGN. We have began a technical review of concept projects in order to evaluate the technology and compare how the different existing technologies enable us to deploy new innovative services on new technologies with regard to optimizing network costs using existing infrastructure (see “Item 5.4. 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.

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Wireless

     Our Wireless segment is represented by mobilkom austria group which is comprised of mobilkom austria AG & Co KG and its subsidiaries. mobilkom austria group generated revenues of EUR 2,125.5 million in 2004, EUR 2,030.2 million in 2003 and EUR 1,909.4 million in 2002, 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 21.6% of our mobile communications revenues in 2004 compared to 20.9% and 20.3% in 2003 and 2002, respectively.

     We had more than 4.9 million mobile communications customers at the end of 2004 representing, a 4.5% increase compared to 2003. The Wireless segment covers a total population of about 15 million. Wireless market penetration ranges from 64.5% in Croatia and 79.1% in Slovenia to 98.0% in Austria.

     In January 2003, upon an exclusive partnership with Vodafone to co-operate in the Austrian, Croatian and Slovenian market was agreed. The cooperation 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. In 2004, numerous joint products were launched, especially in the area of data services and roaming. Among the launched services are:

     Competition has resulted in a reduction of tariffs and prices throughout the markets and we expect continued downward pressure on tariffs. We believe that market liberalization has contributed to market growth and intensified competition in the Wireless segment. We expect that the intrinsic growth in the Wireless segment will not be able to match the growth rates of prior years.

     Austria

     mobilkom austria AG & Co KG is the leading provider of mobile communications services in Austria with nearly 3.3 million customers at December 31, 2004, which represented a total market share of 41.0% of the Austrian mobile communications market, in comparison to 43.3% at the end of 2003. 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 98.0% at December 31, 2004. The penetration rate increased by 8.3 percentage points compared to 2003. 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 (GPRS). GPRS is a technology which is a data service enhancement for Global System for Mobile Communication (GSM). GSM is one of the leading standards for digital wireless communications.

     mobilkom austria AG & Co KG holds 100% of paybox CEE, which has a 100% subsidiary in Austria (paybox austria). This Company 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 AG & Co KG 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.

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     We were the first European operator to set up a nation wide UMTS network. We began commercial operation of our UMTS network in April 2003. In 2004, we began actively promoting UMTS by introducing a data package in combination with a data card, Vodafone Mobile Connect Card, to be used with laptops. Voice packages have not seen a big market reception so far due to the fact that there were only a few adequate UMTS handsets available. By the end of 2004, mobilkom austria AG & Co KG covered all major cities and altogether about 60% of the Austrian population with its UMTS network and thereby fulfilled our regulatory obligations concerning UMTS for the year 2005. Furthermore, the extension of the service abroad has been successfully initiated by launching UMTS roaming in 10 countries by year-end 2004. The further expansion of the network will focus on in-building coverage. This will prepare us for a shift in traffic from GSM to UMTS in urban areas.

     In January 2005, mobilkom austria AG & Co KG launched EDGE (Enhanced Data Rates for Global Evolution). EDGE is provided in addition to UMTS for those parts of Austria without UMTS-coverage so far. This will allow data transfer in broadband quality all over Austria, reaching 95% of the Austrian population by the end of the first half of 2005.

     Competition

     The Austrian mobile communications market currently has four GSM operators with UMTS licenses (mobilkom austria AG & Co KG, T-Mobile Austria, ONE, and tele.ring) and one additional UMTS license holder (Hutchison 3G Austria). Hutchison 3G Austria launched its UMTS operations shortly after mobilkom austria AG & Co KG in May 2003. In December 2003, mobilkom austria AG & Co KG acquired Telefonica-owned 3G Mobile, which also held a UMTS license, and thereby increased the available frequency spectrum. However, the purchase was subject to the regulatory obligation to sell 2x5 MHz of the acquired frequency spectrum by January 31, 2005. Therefore, mobilkom austria AG & Co KG agreed to sell this frequency spectrum to our competitor T-Mobile Austria in March 2004. This sale was completed in January 2005. Since the fourth quarter of 2004, TELE 2 which previously operated as a service provider now operates as a Mobile Virtual Network Operator (MVNO) with its own access number. In 2004, the fixed net operator eTel started as a service provider, reselling mobile communications services under its own brand name, focusing on business customers and using the network of ONE. By the end of 2004 all operators are commercially promoting UMTS services, whereas tele.ring has one UMTS handset in their portfolio but is not promoting UMTS actively. T-Mobile Austria just introduced data cards for business customers.

     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 7.99 million mobile customers in Austria in December 2004, representing a mobile penetration rate of 98.0% of the population, which is one of the highest penetration rates of mobile communications in Europe. 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 2004, our mobile customers represented approximately 41.0% of the mobile communications market in Austria, a 2.3 percentage point decrease compared with the end of 2003.

     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.

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     Our customer base increased to nearly 3.3 million customers in 2004, of which approximately 1.8 million were contract customers and approximately 1.5 million prepaid customers. Our focus on contract customers resulted in a stronger growth of our contract customer base in 2003 and 2004.

     The Austrian market experienced an increase in churn rate as a result of an aggressive price policy. Nevertheless, mobilkom austria AG & Co KG has the lowest churn rate among the more established Austrian providers, which is approximately 17.0%, compared 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 2004, our contract churn rate was 11.9% and our prepaid churn rate was 22.8%. 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 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 taking measures to balance our churn rate and maintaining our strong position in a highly competitive market. Our sales and marketing strategy includes:

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

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

     At December 31, 2004, we operated 38 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 1,450 electronics equipment outlets throughout Austria as of December 31, 2004. Our shop-in-shop concept comprises 179 branded information counters in large consumer electronics outlets. In addition, our mobile communications products and services are also offered in our Telekom Austria shops and in 1,639 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, tobacconists 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.

     Customer service

     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 Austria. In 2003, the ÖNORM Institute audited mobilkom austria AG & Co KG’s customer service quality and extended the certification for an additional two years.

     We seek to provide high quality customer service and to continuously strengthen the relationship with mobile customers starting from the first contact. Operating in two locations, customer services provides in and outbound call service including the active promotion of our product range, customer data management, activation and cancellation, customer correspondence via letter, fax and e-mail, complaint management as well as billing, accounting, fraud and debtor risk management.

     In 2004, the entire customer services division was reorganized in order to enhance customer value based service strategies. We introduced the A1 Service Center, a web based e-care platform, which provides a self service alternative for our customers.

     We are continuously upgrading our billing system in order to support the introduction of new products and services and to increase our ability to offer a more flexible tariff structure. Particularly for corporate customers, our billing system allows us to carry out customer segmentation and to offer multiple tariff rates and more customer tailored billing information.

     After introducing electronic online billing in 2003, we have promoted the increased usage of online billing among private customers. As a result, we successfully motivated customers to switch exclusively to this electronic based invoice, thus reducing costs for bill production and postal distribution in the future.

     We continuously adjust our customer retention activities according to market requirements. We try to retain our customers and 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 operate a points-based customer loyalty program for which more than one million customers were registered at December 31, 2004. The collected points entitle customers to purchase new subsidized handsets and accessories for mobile phones.

     We also provide the A1Auskunft 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.

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     Products and 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), and service allowing the use of up to three mobile phones under the same number, SMS and multimedia messaging services (MMS). Location-based services encompass all services where information about the location of the consumer is needed, such as 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 up to 300KB to and from MMS capable handsets. In addition, MMS can also be sent and received via special internet platforms, such as the mobilkom austria AG & Co KG portal A1.net. The portal A1.net uses the internet to promote, adapt and sell various products for our mobile phone services. We also added video telephony to our service portfolio for UMTS customers, enabling our customers to have multimedia person-to-person conversations.

     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. The A1 XTRACARD PRO enables customers to use up to three SIM-Cards (Security Identity Module-Card) with the same telephone number, allowing mobile data usage and voice calls at the same time. Furthermore, mobilkom austria AG & Co KG was the first operator in Austria to launch Push to Talk (PTT), a communications technology for mobile networks which is comparable to a walkie-talkie where users take turns speaking by pushing the PTT key, in a friendly user trial among the teenagers segment as well as our customers in the business segment.

     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. Since 2002, we observed a saturation of the prepaid-market.

     Call back service. mobilkom austria AG & Co KG’s service development in the voice segment focused on call completion services aimed at increasing voice usage of the total customer base. We successfully introduced missed call notification to our 3.3 million customers. Our customers now get an SMS notification with a list of all numbers that tried to call them while their handset was turned off or out of coverage and the caller did not leave a message. Additionally, we increased the usability of our voice mail system and our customers are now notified about the caller ID of people who left a voice mail to facilitate easy call back.

     M-commerce services. Due to our wide range of m-commerce (mobile commerce) services we managed to significantly broaden our customer base in the last year. The portfolio of services is large and ranges from event ticketing to short-term insurance contracts for major sports injuries and 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. Further services have been launched such as the public transport ticket in other cities than Vienna or a highway toll ticket. Furthermore, the most popular gambling service in Austria, the national lottery, offers its service via SMS. In 2004, mobilkom austria AG & Co KG cooperating with Vodafone Germany, launched a cross border ticketing solution, allowing customers to purchase train tickets from Austria to Germany.

     We broadened our product portfolio with A1 SIGNATURE — an e-government-compliant electronic signature. This service already ensures secure authentication for a range of activities including submission of tax forms and scholarship applications. Another new product is the A1 NAVI. The graphic and voice-enabled instructions of A1 NAVI provide full turn-by-turn, dynamic, graphic and voice-enabled navigation to GPRS/UMTS mobile phones within the home and roaming networks.

     Within the business service sector, mobilkom austria AG & Co KG achieved a major improvement in customer perception of mobile business applications by launching easy-to-use products such as MOBILE BROADBAND, which uses the Vodafone Mobile Connect Card as access to mobile office solutions. An attractive tariff, charged at a fixed rate, combined with the benefit of the high performance data rate makes MOBILE BROADBAND the first UMTS mobile business application for the mass market in Austria. In 2004,

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we also introduced Blackberry, enabling customers to send and receive all e-mails on a handheld device automatically.

     We are the market leader for m-commerce services in Austria and through ongoing innovations in this area we strengthened this position in Austria in 2004.

     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, 2004, we had international roaming agreements with 288 mobile network operators in 145 countries. Additionally, we offered to our prepaid customers roaming in 30 countries with 42 mobile operators without the necessity of prior registration. At December 31, 2004, we offered GPRS roaming in 64 countries with 86 operators. In 2004, we started to focus on offering 3G roaming to our customers. At year end 2004, we launched 3G roaming in 10 countries with 10 operators, significantly increasing the possibilities of data transmission abroad. In addition, we offered our customers additional convenient services (e.g. using the same short numbers for calling voice mail abroad), recharging the prepaid account abroad and special rates during summertime at primary tourist destinations.

     Tariffs

     We offer promotional packages intended to attract and retain customers, such as usage options, allowing cheaper prices per minute to other mobile and fixed networks by paying an additional monthly fixed fee, 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. In 2004 mobilkom austria AG & Co KG launched Vodafone World, an international roaming tariff which offers more transparency, convenience as well as better prices for customer calling within the Vodafone networks. In addition, we offered special discounts during the heavy traveling time in summer for our customers in Vodafone networks. Due to the increased importance of data services in 2004, mobilkom austria AG & Co KG offered special data roaming rates for e.g. Blackberry users and heavy data roaming users, with special rates on our Vodafone partner networks.

     Networks

     Our mobile networks in Austria are based on digital GSM, GPRS, EDGE, and UMTS technologies.

     mobilkom austria AG & Co KG continuously monitors the quality of its networks and those of its Austrian competitors in terms of blocking, set-up success and drop call rate and reports the results on a monthly basis. During 2004 the GSM “call success rate” was 98.2% on average, higher than all of our competitors. This is a result of a test carried out under the supervision of the Technical University of Vienna, Institute of Broadband Communications. In addition, the cooperation with Vodafone enables us to compare our results with those of various European companies. Therefore, we started benchmarking major performance-KPI ´s (Key Performance Indicators), particularly for end-to-end performance of GPRS and UMTS data transmission, in 2004, to be able to further compare and enhance performance.

     At December 31, 2004, mobilkom austria AG & Co KG’s GSM network consisted of 11 mobile switching centers, 4 home location registers and 5,363 base stations. An intelligent network platform is installed for GPRS and value-added services. We have expanded our GSM network in recent years, focusing on improvements of coverage and capacity upgrades, particularly in areas of high traffic such as Vienna. In 2004, 154 new base stations were brought on-line, of which 102 were macrocell stations, which assure coverage, and 52 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.

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     We provide dual band services to accommodate our expanding customer base with the necessary capacities and the best quality. At December 31, 2004, we held nationwide 2x17.0MHz (85 channels) spectrum in the 900MHz band and 2x15.0MHz (75 channels) spectrum in the 1800MHz band. This includes additional 2x6.6 MHz E-GSM (extended GSM) frequencies which have been auctioned for EUR 0.56 million in November 2004. E-GSM is an extension to the spectrum of GSM. Necessary for more total capacity for GSM systems, the ETSI-standard GSM 05.05 spectrum was extended several times. The first and most prominent extension was DCS-1800 or GSM-1800, the second was E-GSM. With E-GSM, the original P-GSM (primary GSM) spectrum was enlarged by 2x10 MHz. As was done in the past, we will expand dual band service to areas with significant amounts of mobile traffic such as 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, 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 PSTN interconnection points, in particular for high capacity and high availability transmission requirements.

     Wireless Application Protocol (WAP). In December 1999, mobilkom austria AG & Co KG 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 AG & Co KG has offered a personalized WAP-portal with an integrated search engine. In 2004 the popularity of WAP increased by launching Vodafone Live!, the common portal of Vodafone companies and partner networks.

     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 over the entire network. Maximum data rates are further 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 into account the customer’s view) we could further enhance our quality of service.

     Enhanced Data Rates for Global Evolution (EDGE). EDGE evolved through an enhancement of GSM providing faster data transmission. Because it is built upon the existing network, EDGE is used by mobilkom austria AG & Co KG to complement our 3G coverage. mobilkom austria AG & Co KG launched EDGE in Austria in January 2005.

     Universal Mobile Telecommunications System (UMTS). mobilkom austria AG & Co KG successfully bid for a UMTS license in Austria in November 2000. UMTS allows operators to transmit data significantly faster, significantly exceeding the speed 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 AG & Co KG’s UMTS network. As the first operator in Austria, mobilkom austria AG & Co KG commercially launched the service on April 25, 2003, covering about 50% of the Austrian population at the end of 2003. At the end of 2004 our UMTS-network covered about 60% of the Austrian population. The takeover of 3G Mobile in December 2003 increased the available frequency spectrum for mobilkom austria AG & Co KG 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 reach our goals with a smaller number of macrocell stations. Another 2x5 MHz frequency spectrum, that has been acquired in the takeover, had to be re-sold due to regulatory requirements by January 31, 2005. Licenses for spectrum in the TDD (Time Division Duplex) domain remained unchanged at 1x10 MHz.

     The following table shows the number of UMTS stations. The focus of the rollout is, after meeting regulatory requirements for population coverage, on enhanced indoor coverage and additional capacity for densely populated areas:

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     Synergies of our base station infrastructure are utilized by combining GSM and UMTS equipment.

     Wireless Local Area Network (WLAN). WLAN uses high-frequency radio waves to create a locally-limited, broadband connection to computer networks. A1 WLAN was launched in March 2004. Our main focus is to address business customers in high density areas, such as seminar hotels, conference centres, and public transport. By year end 2004, the actual rollout exists of 238 WLAN area access points. Key partners for A1 WLAN are major hotel groups including Hilton, Trend Hotel Austria, and Arcotel. Every premise of the restaurant chain McDonald’s Austria was covered throughout Austria.

     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 2004 were the enhancement of mobile number portability, Vodafone live!, the development of an interconnection billing system (to manage wholesale business of national/international traffic), the implementation of an m-payment platform with the ability to handle micro payments for m-commerce applications and the enhancement of mobile payment methods such as Paybox.

     Our main IT systems include our billing systems, customer relationship management (CRM) system, mobile data applications and internal/decision support 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 AG & Co KG since 1998. We increased our stake in VIPnet by 9% on January 30, 2003, by 19% on June 23, 2003, and further by 1% on December 31, 2004, bringing our total interest in VIPnet to 100%. VIPnet shares the Croatian mobile communications market with the incumbent operator T-Mobile, a subsidiary of T-HT (Hrvatske telekomunikacije d.d.), with Deutsche Telekom as its main shareholder. On December 22, 2004, the Swedish operator Tele2 received a combined GSM/UMTS license, which is valid for 20 years. The commercial launch of the third Croatian operator is not expected before the second half of 2005.

     In April 2004, VIPnet began the introduction of EDGE technology reaching population coverage of 90% by the end of June 2004. After placing the first UMTS test call in Croatia in May 2003, VIPnet has been granted a UMTS concession for 20 years in October 2004. The commercial launch of the UMTS services will be in the second quarter of the year 2005 making VIPnet one of the first operators in Europe offering a combined EDGE and UMTS technology, offering high volume data products in a cost efficient way to a broader customer base. Furthermore, VIPnet is considering entering the market for fixed-line services.

     VIPnet started operations on July 1, 1999, and by December 31, 2004 it served 1.3 million customers (85% of them use prepaid services), increasing its customer base in 2004 by 8.1% compared to December 31, 2003. VIPnet had a low annual churn rate of 15.4% in 2004. VIPnet has a 46.0% share in the Croatian mobile communications market. Croatia’s mobile communications penetration rate was 64.5% as of December 31, 2004.

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     VIPnet is the first company in Croatia to offer single comprehensive business solutions. PROFI PAKET enables the connection between mobile phones and fixed lines into a single network, constant access to the Internet and secure mobile access to the data stored on the company’s internal network.

     In 2004, our Croatian customers sent more than 1 billion SMSs. On average, customers send 72 SMSs monthly, which is one of the highest SMS usage rates in Europe. This is partly due to successful services such as VIPparking introduced in September 2001 — a service that enables GSM customers to pay their parking fees per SMS. This service can be used in 17 major towns in Croatia and almost 2.7 million SMSs were sent in 2004 in order to pay for parking fees.

     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. The strategic partnership with Vodafone resulted in a successful launch of Vodafone live!, Vodafone Mobile Connect card and Vodafone Mobile Connect EDGE card which both enable quick and easy internet access from laptops.

     In October 2004, VIPnet has introduced a new prepaid tariff to the market, offering the lowest call prices on the prepaid market in Croatia. Prices have been decreased by up to 43% compared to those applicable before.

     In 2004, VIPnet expanded its activities by offering different services for third parties such as call center services, offering consultant services concerning customer support and by offering Open Interface service which enables 3rd parties access to VIPnet’s infrastructure (e.g. SMS center) for their own purposes.

     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. The competitive environment is characterized by a dominant incumbent with a market share of around 70.0% and high market penetration at 79.1% at the end of 2004 . At December 31, 2004, Si.mobil had a market share of 23.3% making it the second largest mobile operator in Slovenia. Si.mobil‘s number of customers amounted to 363,300 by the end of 2004, which represents an increase of the customer base by 0.5% compared to the end of 2003. The contract customer base accounts for 42.9% of the total customer base.

     Si.mobil introduced EDGE commercially in December 2003 as one of the first European operators, with population coverage of 40%.

     In February 2004, Si.mobil launched Vodafone Mobile Connect Card. In 2003 Si.mobil offered, as first operator in Slovenia, flat tariffs for the Residential segment which was well accepted, hence we introduced flat tariffs for the Business segment in February 2004. For GPRS roaming we offered in February 2004 unified tariffs to ensure transparent roaming prices for our customers. In May 2004, Si.mobil launched a new tariff portfolio for residential customers, aiming to improve transparency for customers. In the beginning of June 2004, Si.mobil launched Vodafone live!. From August through October 2004 we launched ORTO SMART, targeting young people from the ages of 15 to 27 years.

     The Slovenian mobile communications market is near saturation. However the Slovenian regulatory authority has not yet taken any measures to increase competition. Therefore, Si.mobil took the initiative and signed a new agreement with Mobitel on asymmetrical mobile-to-mobile interconnection fees, providing Si.mobil with a favorable termination fee for calls from Mobitel customers. Due to Slovenia’s entry into the European Union in May 2004, a harmonization of local laws with European standards is taking place. The new legislation is mostly adopted, but still remains to be implemented.

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     Liechtenstein

     On November 16, 1999, the Principality of Liechtenstein granted a GSM license to mobilkom [liechtenstein], a wholly owned subsidiary of mobilkom austria AG & Co KG. 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 78.9% at December 31, 2004. The customer base of mobilkom [liechtenstein] amounts to more than 3,500 (all of them contract customers), thus accounting for a 13.1% share of the mobile communications market in Liechtenstein. mobilkom [liechtenstein] is the second largest mobile communications provider in this highly competitive market.

     Bulgaria

     In December 2004, we entered into call option agreements giving us the right to acquire 100% of the share capital of MobilTel AD for an enterprise value of approximately EUR 1,600 million. The call options are priced at up to EUR 80 million, which were paid on March 21, 2005, and exercisable at specified periods between July 12, 2005 and August 23, 2005. We do not know if we will exercise the call option, if we do not exercise the option the call option price of EUR 80 million will be forfeited according to the call option agreements.

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Properties

     Our consolidated financial statements show a net carrying value for property, land and equipment of EUR 3,888.7 million in 2004 and EUR 4,457.7 million in 2003. The acquisition costs were EUR 10,863.6 million in 2004, and EUR 10,682.3 million in 2003. The acquisition costs include, among others, communications network and other equipment totaling EUR 9,506.6 million, land totaling EUR 59.2 million and buildings totaling EUR 689.6 million at December 31, 2004. The item communications network and other equipment primarily include switching and transmission equipment 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 and antennas and, to a relatively small extent, administrative buildings. In addition to the buildings we own, we also lease space. At December 31, 2004, we used about 2,075 facilities, of which approximately 32% were leased. The land and buildings comprise by the majority the property owned by Post und Telekom Austria AG allocated between Österreichische Post and Telekom Austria as a result of the spin-offs described under “— 4.2. History and Development of the Company.”

     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 technology center (Arsenal), which occupies approximately 90,000 square meters in Vienna’s third district.

Research and development

     Research and development (R&D) in combination with our innovation strategy, product lifecycle management and technology strategy is an integral part of our innovation management. We believe that 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 a focus on 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, 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 and network driving initiatives. In 2004 Telekom Austria started the Austrian IPv6 Task Force. IPv6 is the new Internet protocol on which applications of the future will be based. This initiative is to support the IT industry with preparation for IPv6 migration and to develop an Austrian migration plan. We were supported by the Austrian regulatory authority and the University of Vienna together with Siemens, HP, Alcatel, Cisco, IBM, Kapsch, Microsoft and Juniper.

     The two operating segments, Wireline and Wireless coordinate their research activities.

     To assure technological leadership, we analyze changing user patterns and adapt the research and development activities accordingly. Thus, we intensified our studies in topics of cultural, media & communications. Whether television (with set top box for broadband access), PC, notebook, multimedia handset or personal digital assistant (PDA) — interaction and the access to content is available from any device. At the Alpbach Technology Forum for the first time in Austria, Telekom Austria presented a common platform for multimedia, television and interactions, the “Next Generation Media” (NGM).

     We continued to cooperate with industrial and academic partners in research projects partly funded by the European Commission, aiming to offer existing and next-generation customized and personalized IN (Intelligent Network) services in an IP based environment to meet the demands of multi-party, multi-connection and multimedia calls.

     Our Wireless unit continued to focus on application and service-oriented R&D programs. All activities have been in line with our strategic focus of improving quality, usability and user experience, many of them in cooperation with other companies, research institutes or universities. Our projects have focused on modular, flexible and scalable mobile data applications, access independent service delivery, advanced service platforms, multi-modal speech applications and concepts for prototyping new services for our multilayer networks for GSM, GPRS, EDGE, UMTS and WLAN and efficient use of resources.

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     We hold patents for enhanced localization methods and a Service Interaction Gateway. In line with the national main strategies for “Intelligent Infrastructure” sponsored by the Austrian Federal Ministry for Transportation, Innovation and Technology we continued our research activities in telematic services.

     During 2004, a growth in Spam (unsolicited commercial e-mail) in the internet was observed. In order to avoid the annoyance and cost of Spam that could possibly be delivered to mobile devices, we initiated a research project in cooperation with industrial partners and the ISPA (Internet Service Providers Austria) organization to find new ways of how to fight Spam more effectively, in particular avoiding attacks to mobile users.

     Our consolidated research and development expenses amounted to EUR 42.4 million, EUR 42.8 million and EUR 30.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.

Capital expenditures

     For information relating to our capital expenditures, see “Item 5.4. Liquidity and capital resources — Capital expenditures”.

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4.3. 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.

     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 (EC) had used its powers deriving from 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 adopted a number of directives and recommendations regarding open and efficient access to and use of public telecommunications networks and services, formerly known as “Open Network Provisions”. These requirements, replaced by a package of new directives adopted in 2002, were 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.

     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. For further details see “— Interconnection and specific network access — Access to local subscriber lines”. In February 2002 the European Union adopted a package of new directives, which was implemented in Austria by the Telecommunications Act in August 2003 and which is shortly described below: 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” (SMP) 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 which also comprises exchanges with the European Commission. 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 which might be subject to a review process already in the course of the next year 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 the processing of personal data and the protection of data 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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     Recent developments (2002-today)

     In August 2003, a newly amended Austrian Telecommunications Act (the “Telecommunications Act of 2003”) implemented European Union telecommunications directives adopted in 2002 into Austrian law aligning the Austrian communications market from sector specific regulation to the principles of competition law. The act was 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 became effective on August 20, 2003, allows unrestricted market access to all entrants who qualify under the act and replaced 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 intended 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 SMP and efficient and interference-free use of frequencies. Operators having SMP in particular communications markets are subject to a special regulatory regime. In general, sector specific regulatory measures are applicable only in the absence of effective competition. Regulatory measures should be kept technologically neutral and may not restrict the introduction of innovative products and services (generally referred to as “emerging markets”).

     Retail markets should only be subject 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 intends 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 is subject to a broader market concept and regulatory measures should 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 SMP.

     The mandate of the regulatory authority overseeing the Austrian communications markets is to ensure competition and the availability of high-quality communication 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 services. The regulatory authority is required to define and analyze markets in order to identify operators with SMP and to impose regulatory measures where it is deemed necessary. The regulatory 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 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.

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     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” (SMP) has been adjusted to 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:

     With the exception of the market for “broadcasting transmission services”, the remaining 17 of these markets are relevant for telecommunications. To date, the Austrian regulatory authority has defined 16 nationwide markets which may be subject to sector-specific regulation in the Austrian communications 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” where the regulatory authority still analyses the actual status, development and progress of competition on this market (for further details on the issue see “— Market analysis”). The absence of SMP implies effective competition.

     Under the new regime, an operator is considered to have SMP if:

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

     Where an operator is identified as having SMP, 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 SMP 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 appropriate and take into consideration existing capacities, investment risks, industrial or intellectual property rights, provision of European Union-wide services and long-term competition.

     Market Analysis

     In late 2003, the regulatory authority began its analyses of the markets pursuant to the Telecommunications Act of 2003. Accordingly, the regulatory authority may impose specific obligations, which are generally referred to as “remedies”, for operators with SMP in the relevant retail (or end user) market, if there is no effective competition in that retail (or end user) market and specific obligations such as carrier selection and carrier pre-selection can not achieve effective competition.

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     Once the regulatory authority has determined that we exercise SMP in one of the relevant markets, the regulatory authority may subject us to the requirement that we do not charge excessive prices, or provide unreasonable bundles. The regulatory authority still has the power to control individual tariffs and cost orientation (the prices of tariffs have to be based on the fully distributed costs) of these tariffs. The regulatory authority will approve our minimum offer of leased lines and the prices for those leased lines.

     Moreover, under the relevant provisions of the EU regulatory framework, national regulators are required to notify the Commission of all national measures that would affect trade between Member States and that are intended to impose or remove regulation on undertakings providing electronic communications networks or services. The Commission may comment on the draft measures, or, where it disagrees with the conclusion on market definition or the designation of SMP, may require the regulator to withdraw the draft measure (see below the discussion of wholesale market “transit services in the fixed public telephone network”).

     To date the majority of the markets has been analyzed. The main change for us is that the remedies the regulatory authority has imposed on us are more detailed than under the old regime. The overall scope of intervention however, has not materially changed. The market analyses have however resulted in the conclusion that we are no longer viewed as having SMP in the following markets:

     The absence of regulatory action in these markets leads to more freedom in pricing, selecting the product mix, as well as the ability to response quickly to costumer needs.

     For the remaining markets it has been determined that we have SMP. The following is a list of remedies imposed on us by the regulatory authority for the individual markets.

     Retail market

     Remedies have been imposed on us in the markets of “access to the public telephone network at a fixed location for residential customers” and “access to the public telephone network at a fixed location for non-residential customers”. In particular we are obliged to continue to offer:

     On the markets “publicly available local and/or national telephone services provided at a fixed location for residential customers” and “publicly available local and/or national telephone services provided at a fixed location for non-residential customers” the regulatory authority imposed similar remedies on us including the prior-approval of end-customers tariffs, tariffs within a VPN, calls from fixed networks to mobile networks and calls to special numbering ranges. We are also required to maintain separated accounts in these markets. Similar remedies for the market “publicly available international telephone services provided at a fixed location for non-residential customers” have also been imposed on us.

     In the market “minimum set of leased lines” (which comprises specified types of leased lines up to and including 2MB/sec listed in Article 18 and Annex VII of the Universal Service Directive) we are required:

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Wholesale level

     The market analyses did not result in any material changes in the scope of regulation at the wholesale level. We are deemed to have “SMP” status on the markets of “call termination on individual public telephone networks provided at a fixed location” and “call origination on the public telephone network provided at a fixed location”. The decision on the market for “transit services in the fixed public telephone network” is still pending due to the European Commissions veto.

     Upon request by a competitor we are obliged to provide an offer for wholesale services under the following conditions:

     For the wholesale markets of “wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services” the regulatory authority imposed the following remedies. We are required:

     On the market for “wholesale terminating segments of leased lines” the regulatory authority applied remedies that require us:

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     In the market for “access and call origination on public mobile telephone networks” the regulatory authority concluded that no operator has SMP. Each operator, however, has SMP on the “call termination market on its own network”. The regulatory authority applied the same remedies for all operators. In particular these remedies are non-discrimination regarding quality and price, cost-oriented termination fees on the basis of long range average incremental cost (LRAIC), and the publication of a reference interconnection offer. However, the specific definition of LRAIC in respect to mobile networks is still an open issue. mobilkom austria AG & Co KG has appealed appeal against the decision that states SMP.

     As a consequence of SMP findings on the markets for “voice call termination on individual mobile networks” Austrian regulatory authority recently announced its intention to decrease all mobile termination tariffs on the basis of LRAIC. In its consultation paper of March 9, 2005, the regulatory authority announced the following tariff reductions for 2005: mobilkom austria AG & Co KG, T-mobile, and One are supposed to lower their current termination rates from November 1, 2005, by approximately 0.5 Eurocent per minute, tele.ring lowers its termination rate from April 1, 2005, to EUR 0.1380, and Hutchison 3G stays on the same level in 2005. The long run perspective is to have reciprocal termination rates on the level of the most efficient mobile network provider in Austria at the latest by end 2011. The current rate for termination in the network of mobilkom austria AG & Co KG, which is a main source of our revenues, is EUR 0.1086.

     For the “wholesale national market for international roaming on public mobile networks”, the investigations of the regulatory authority are still ongoing.

     Ordinances under the Telecommunications Act of 2003

     Since the enactment of the Telecommunications Act of 2003, the minister and the regulatory authority have issued several important ordinances. Some of the ordinances enacted in 2003, became fully effective in 2004.

     The Telecommunications Acts of 1997 and 2003 contain provisions relating to the nationwide availability of certain basic telecommunication 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

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contribute to the funding of the regulatory authority became effective on March 8, 2004. According to this ordinance, in 2004, operators with revenues exceeding EUR 230,000 in the telecommunications sector are required to contribute to the financing of the regulatory authority (see also “— Universal service”).

     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 include 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 SMP 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; decision on the licensing and allocating of frequencies as well as change and revocation of frequency allocations; decision on the right to provide communications networks or services, including the right to revoke these rights; decisions on preliminary injunctions; identification and filing applications concerning unjust enrichment by providers through excessive pricing; 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 and 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 communication 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 yearly report about the activities of the regulatory authority and is also obliged to report annually in writing to the minister and to the Parliament on the implementation of the targets set by the 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 are empowered to 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.

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     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 Mobile Virtual Network Operator (MVNO), Tele2, and a service provider, e-Tel, use the network of One GmbH.

     UMTS

     On November 3, 2000, six mobile operators, including mobilkom austria AG & Co KG, the three other GSM-operators in Austria and two new entrants (Hutchison 3G Austria and 3G Mobile), successfully bid for UMTS licenses. mobilkom austria AG & Co KG 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 AG & Co KG is required to cover 25% of the Austrian population by the end of 2003 and 50% by the end of 2005. At the end of 2004 mobilkom austria AG & Co KG’s UMTS network already covered about 60% of the Austrian population.

     By the end of 2003, one of the new entrants, Telefonica, suspended its operations in Austria. mobilkom austria AG & Co KG bought the Telefonica-owned Austrian company 3G Mobile, thereby acquiring additional paired 9.8 MHz frequency spectrum. However, prior to its approval, the regulatory authority imposed the obligation on mobilkom austria AG & Co KG to sell 2x5 MHz frequency spectrum by January 31, 2005. Therefore, mobilkom austria AG & Co KG agreed to sell 2x5 MHz to the competitor T-Mobile Austria in March 2004. The transaction was completed in January 2005.

     The Telecommunications Act of 2003 requires that UMTS licensees, like mobilkom austria AG & Co KG, 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, thereby enhancing competition. UMTS providers that have a geographic coverage of 20% of Austria with their UMTS network are entitled to receive 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 AG & Co KG 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. National roaming among UMTS operators is also permitted, although there is no legal obligation to provide this service.

     Major regulatory decisions affecting Telekom Austria

     Wholesale line rental

     In November 2004, the regulatory authority approved an offer from Telekom Austria for our competitors (monthly fee for the line rental EUR 12.70 per line (POTS — plain old telephone system); one-off investment

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payment of EUR 750,000 and EUR 11.32 per line) after lengthy proceedings. In January 2005, one of our competitors appealed to the Supreme Administrative Court. The regulatory authority decided that due to our SMP in the access market, Telekom Austria is now formally obliged to provide a standard offer for wholesale line rental.

     In March 2005, one operator initiated a regulatory proceeding against us requiring wholesale billing services to enable him to bill his customers the monthly line rental as well as the traffic volume.

     Current tariffs: voice telephony services and leased lines

     In anticipation of a decision to be rendered by the Austrian Supreme Court we introduced a new tariff plan and frequent user reward program which was approved by the regulatory authority in May 2004. It allows customers to benefit from the now wider choice of tariffs for calls to mobile phones, different regions and friends (see “Item 8.2. Other information — Litigation”). In November 2004 Telekom Austria introduced additional tariff packages completing customers’ choice for calls to mobile phones.

     “Minimum set of leased lines and access to terminating segments of leased lines” (see also “— New markets and regulation of operators with significant market power — Market analysis”)

     Our minimum set of leased lines is still subject to approval.

     In October 2004, the regulatory authority attested Telekom Austria SMP on the market for “terminating segments of leased lines” und obligated us to release a non-discriminatory wholesale offer for these network elements on January 31, 2005. This may result in higher competition on the market of “leased lines” in the next years.

     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, 2004 we served 249,830 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 new 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 and special network access is to be carried out. The reissued 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

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authority is also entitled to determine fees for interconnection if providers with SMP 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 SMP 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 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 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 SMP 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 SMP 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 SMP 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.

     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, 2004, we had entered into interconnection agreements with 24 fixed-line and 5 mobile (GSM, UMTS) registered operators in Austria. Separate fixed and mobile agreements were entered into with all five 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:

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     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.

     Number portability (see also “— Ordinances and the Telecommunication Act of 2003”)

     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. 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”) became effective in November 2003 (see also “— Ordinances under the Telecommunication Act of 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 were pending with the regulatory authority since October 2003 to determine the details of the Number Portability Ordinance. Following a decision of the regulatory authority issued in August 2004 the service was launched on October 16, 2004, while there are ongoing discussions on the amount of porting fees paid by the customers and the new provider. The administrative court has repealed this decision in February 2005. However, it is unlikely that this has immediate effects on the provision of the service.

     Access to local subscriber lines

     As described above, a network operator with SMP in a particular market must allow other providers access to 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,

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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.

     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 with 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 sub-loop 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. Some of our competitors initiated proceedings in 2004 to determine new fees to be applicable after the expiration of the fees for unbundled lines on December 31, 2004. The proceedings are still ongoing.

     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 that the penalties for not following the procedures are excessive.

     At December 31, 2004, we had entered into agreements with about 34 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, 2004, about 73,000 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.

     In light of the European Union Regulation on Unbundling of the Local Loop which came into force at the beginning of 2001, the regulatory authority requires us to offer shared use. 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 and we have appealed against this decision.

     Regulation of interconnection and access fees

     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 (See “— Interconnection and specific network access” above). 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 (traffic with unforeseeable volume) by giving incentives to alternative network operators to expand their networks into a larger number of points of interconnection locations. The regulatory authority took this decision to avoid inefficient market entry from companies with few switches or small networks.

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     The following table shows the applicable interconnection fees, valid until the result of market analysis.

     A group of operators initiated a proceeding with the regulatory authority regarding future fees. The regulatory authority decided in September 2004 to cap the interconnection fees in fixed line networks on an average of 3.3%, retroactively for the aforementioned providers as of October 1, 2003. The interconnection fees will again be subject to new proceedings, at the latest, when we fulfill the obligation to renew our reference interconnection offer in April 2005 according to the final findings of the regulatory authority on market power in the relevant interconnection markets. One of our competitors appealed against this decision at the Supreme Administrative Court.

     These interconnection fees apply to voice telephony services and other services, including access to value-added services in the fixed network. For all other operators with whom we have bilateral agreements the new interconnection fees had to be adjusted as of the dates set in these bilateral agreements.

     Interconnection fees for accessing on-line services are EUR 0.0082 per minute (peak) and EUR 0.0048 per minute (off-peak) for the local level, and EUR 0.0128 per minute and EUR 0.0071 per minute for single tandem. Local transit is not permitted. Although the principle of reciprocity is approved the regulatory authority already decided in previous rulings 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.

     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 call.

     According to the decisions of the regulatory authority (see “— New markets and regulation of operators with significant market power — Market analysis”) the current obligations in terms of interconnection will be kept. Moreover, we are obliged to have our future reference interconnection offer approved by the regulatory authority.

     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 to which mobile network the call is actually terminated.

     Commercial agreements on interconnection tariffs have been reached with all mobile operators beginning October 1, 2003. Some of these agreements have expired or have been terminated by December 2004, mainly because of the determination of SMP in the market for “termination on each individual mobile network”, and the possibility of regulation as a consequence of that.

     Currently, negotiations are ongoing between mobile operators on the future development of termination rates. mobilkom austria AG & Co KG’s position is that the asymmetry of interconnection rates should be replaced with symmetrical rates between all operators as soon as possible. However, our negotiations with tele.ring have already failed, and tele.ring has started regulatory proceedings against mobilkom austria AG & Co KG to ensure that the significant variance between tele.ring’s and mobilkom austria AG & Co KG’s termination rates will be prolonged. A possible reduction may adversely affect our revenues.

     Frequency spectrum

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

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     In October 2004, mobilkom austria AG & Co KG purchased by auction a GSM-900-frequency spectrum of 2 x 6.6 MHz. On October 4, 2004 TKK completed an auction of 17 spectrum packets at 3.5 GHz for WLL, in five of which Telekom Austria is among the successful bidders. The spectrum assignments are valid for 15 years.

     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, which has been replaced by the Ordinance for Numbering, Tariffs and Value-added Services (see also “— Ordinances under the Telecommunication Act of 2003”).

     In general, the numbering environment and the requirements for allocation of numbers changed only slightly (see “— Ordinances under the Telecommunication Act of 2003” and “— Interconnection and specific network access”).

     According to this ordinance operators are required to ensure interoperability to all customers, independent of the operator they use. Moreover, pre-selection of a carrier and call-by-call selection must be offered by operators with SMP and in addition, 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.

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

     Pursuant to the Telecommunications Act 2003 we have been the only provider that was required to provide universal service until December 31, 2004. 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. The Federal Minister of Transport, Innovation and Technology has determined that the general conditions for a tender procedure exist for the comprehensive directory services and the provision of comprehensive enquiry services. Regarding the other elements of universal services, Telekom Austria remains the universal service provider until the next review which will be scheduled within the next five years.

     In case the provision of a universal service should result in 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.

     Regarding the net costs of the universal service in the past, a bilateral agreement between Telekom Austria and alternative network operators has been reached. This agreement covers the period of the last six years and

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comprises a refund of EUR 14.9 million. Austria is one of the first countries of the European Union where the implementation of such a refund has been accomplished.

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 receive 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 allow a harmonized European-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 cooperation 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 with the Austrian Supreme Court in the function of a Cartel Appellate 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

     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 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 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 was 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 customer

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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 after 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.

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Item 5. Operating and Financial Review and Prospects

5.1. 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).

     We report our business in three segments:

     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.

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 3.4. Risk factors”, “Item 4.3. Regulation and legal framework”, “— Critical accounting policies” and “— Recent developments”.

Certain factors and trends affecting our financial results

     In recent years our business has been affected 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.

     Telekom Austria has identified the following key trends that have, and will continue to have, an impact on our business, some of them described more detailed below:

     Wireline

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     Wireless

     Open competition

     Since the full liberalization of the Austrian market several additional licenses have been granted in the Wireless segment 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 and acquired 100% of the competitor in the wireline business, UTA, in autumn 2004. Since October 2004 TELE 2 offers its services as a Mobile Virtual Network Operator (MVNO) with its own access number. In May 2003, Hutchison 3G Austria entered the Austrian mobile communications market as the first provider of UMTS only services. mobilkom austria AG & Co KG 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. 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.

     Technological change

     Rapid technological changes in telecommunications and information technology (IT) 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, IT, 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 services, 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 based on UMTS. For further information see “Item 4.2. Business overview”. On the other hand, we intend to reduce our capital expenditures in mature business areas such as fixed line voice telephony, achieving an overall net decrease in our capital expenditures.

     Regulatory environment

     The regulatory authorities that oversee the Austrian telecommunications industry consider Telekom Austria to have SMP in certain retail and wholesale markets. Once the regulatory authority has determined that we exercise SMP 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 still has the power to control individual tariffs and cost orientation of these tariffs. The regulatory authority must approve our

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minimum offer of leased lines and the prices for those leased lines (see “Item 4.3. Regulation and legal framework — Regulation — New markets and regulation of operators with significant market power — Market analysis”).

     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 (see “Item 4.3. Regulation and legal framework”).

     At December 31, 2004, we had entered into interconnection agreements with 24 fixed-line and 5 mobile (GSM, UMTS) registered operators in Austria.

     In August 2003, the directives of the European Union were implemented into Austrian domestic law under the amended Telecommunication Act (See “Item 4.3. Regulation and legal framework — Legal framework — The European Union”). According to the amended Telecommunications Act of 2003, a more differentiated regulatory approach should be 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 3.4. Risk factors”.

     According to the new framework, mobilkom austria AG & Co KG and all other mobile operators have been considered to have SMP for voice call termination on their individual mobile networks. The regulatory authority prescribed the same remedies for all operators. In particular these remedies require non-discrimination regarding quality and price, cost-oriented termination fees on the basis of long range average incremental cost (LRAIC), and the preparation of a reference interconnection offer. However the specific definition on LRAIC in respect to mobile network is still an open issue. mobilkom austria AG & Co KG has appealed against this decision. For the "wholesale national market for international roaming on public mobile networks”, investigations of the regulatory authority are still ongoing.

     Tariff reductions and reforms

     We adapt our tariffs according to market conditions, last in 2004, in order to meet increasing competitiveness In anticipation of a decision to be rendered by the Austrian Supreme Court we introduced a new tariff plan and frequent user reward program which was approved by the regulatory authority in May 2004. It allows customers to benefit from the now wider choice of tariffs for calls to mobile phones, different regions and friends. Within these packages we introduced e.g. the flat rate tariff for residential customers in off-peak time or free national calls during the weekend.

     We expect competition to lead to continued pressure on tariffs. However, the Austrian regulatory authority recently expressed its intention to decrease reciprocal mobile interconnection tariffs in several steps until December 31, 2011. Customer tariffs are assumed to fall as a result.

     Transformation program

     In order to prepare Telekom Austria for operating in a fully competitive environment, we began a transformation program that aimed to reduce operating expenses, implement new technologies, change our corporate culture and stabilize fixed line voice revenues in June 2000.

     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 2003 and 2004, 120 and 118 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 over the age of 55 which are covered by a governmental retirement plan with the effect of reducing our obligation under the VRIPs. Following the enactment of that law we reversed EUR 1.4 million, EUR 26.8 million and EUR 57.4 million of these accruals in 2004, 2003 and 2002 respectively.

     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 rate of the offer by our civil service employees. Due to this measure we were able to reduce our workforce by 470 and 650 civil servants in 2004 and 2003, respectively. We incurred a contractual obligation to civil servants taking advantage of this opportunity

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and recorded expenses of EUR 19.3 million in 2004 and EUR 47.3 million in 2003. We do not expect to incur any additional liabilities related to this offer beyond the amount of 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 Federal 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 still seeking a settlement with the Federal Ministry of Finance. Due to the uncertainties involved we have not recorded the claim in our financial statements.

     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. The figures for 2003 are presented including the effect of the VASP until October 1, 2003, therefore not directly comparable to the 2004 figures. Had the ruling been in effect for the full year of 2003 and 2002, revenues and expenses in the accompanying consolidated statements of operations would have been lower by EUR 45.9 million and EUR 51.2 million, respectively. This reduction in revenue has no impact on consolidated operating income.

     Seasonality

     In general, the financial results of Telekom Austria are affected by the following seasonal variations, however there is no assurance that these trends will continue in the future.

     Traditionally, the year-end holiday season experiences higher revenues from equipment sales as well as flat-rate packages which is partly offset by higher acquisition costs from equipment provided to customers and sales commissions in the fourth quarter of the year. The Wireless segment benefits from higher roaming revenues in the vacation period during the summer season, especially in Croatia. As a result, Telekom Austria’s performance during the second half of the financial year can have a significant influence on its performance for the full year.

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 5,152.6 million, EUR 5,767.3 million and EUR 6,317.3 million at December 31, 2004, 2003 and 2002 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

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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 depreciation and amortization expense by approximately EUR 359 million or decrease depreciation and amortization expense by approximately EUR 166 million, respectively. Depreciation and amortization expenses amounted to EUR 1,114.8 for the period ended December 31, 2004.

     Total impairment charges were EUR 1.3 million, EUR 6.8 million and EUR 41.9 million for the periods ended December 31, 2004, 2003 and 2002, respectively.

     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. Under the terms of these programs employees that accept voluntary retirement are eligible to receive payments until the day of 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 1.4 million and EUR 26.8 million of these accruals in 2004 and 2003, respectively. As of December 31, 2004, the remaining accrual of EUR 19.4 million for the VRIPs relate to 118 employees. A change in the elected discount rate by 1% would either increase or decrease the accrual for contractual termination benefits by about EUR 0.2 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 employees starting to work for us after January 1, 2003 are covered by a defined contribution plan and we paid EUR 0.3 million in 2004 and EUR 0.1 million in 2003 to this defined contribution plan (BAWAG Allianz Mitarbeitervorsorgekasse AG). Civil servants do not qualify for legal severance payments. 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 expenses totaling EUR 19.3 million for 470 civil servants who accepted this offer in 2004. 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 (18) 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 90.6 million, EUR 124.1 million and EUR 100.2 million as of December 31, 2004, 2003 and 2002, respectively. A change of the selected discount rate of 5.0% by one percentage point would increase the obligation by approximately EUR 14.6 million or decrease the obligation for these benefits by approximately EUR 11.7 million in 2004. For further information see note (18) of the accompanying financial statements.

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     Valuation of tax assets

     At December 31, 2004, we had approximately EUR 398.8 million of operating loss carry-forwards. Thereof, EUR 99.4 million relate to foreign subsidiaries with EUR 98.9 million expiring between 2005 and 2008. 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, 2004 we recognized a net deferred tax asset of EUR 60.5 million related to the operations in Austria. 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 322.5 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 tax reform act has been enacted in Austria, stipulating a reduction of the corporate income tax rate from 34% to 25% and an expansion of the taxable base. The tax reform became effective in January 2005. The changes led to an overall tax expense of EUR 21.8 million from revaluation of the deferred tax assets and liabilities as of December 31, 2004.

New accounting pronouncements

     EU regulations regarding IFRS

     In compliance with the European Parliament and Council Regulation on the application of International Financial Reporting Standards (IFRS) adopted in July 2002, all listed European Union companies are required to prepare their consolidated financial statements in accordance with IFRS for fiscal years commencing on or after January 1, 2005. However, Member States may defer mandatory application of IFRS until 2007, for companies that either have listed debt securities only or already use other internationally accepted Standards for purpose of a listing outside the European Union. The latter particularly applies to companies, such as us, listed on the New York Stock Exchange (NYSE) and currently prepare their consolidated financial statements in accordance with U.S. GAAP. In Austria the option to defer IFRS-adoption was implemented in December 2004, via the Rechnungslegungsänderungsgesetz 2004. Accordingly, Telekom Austria will not be required to prepare consolidated financial statements in accordance with IFRS until the fiscal year commencing on January 1, 2007.

     In 2003, we established a project team consisting of various members of the Telekom Austria organization under the responsibility of the CEO (Chief Executive Officer), which is responsible for the conversion of the financial statements from U.S. GAAP to IFRS. By the summer of 2004, the project team had conducted an analysis of the key differences between IFRS and U.S.GAAP and performed an impact analysis of the effect of the new reporting requirements on previously reported figures, accounting and other systems and procedures and our day-to-day business.

     After completing the first impact analysis, we identified the core set of accounting standards to be applied by us under IFRS, including decisions with regard to the first time application of IFRS. In this analysis, we reviewed all relevant IFRS and transition provisions (as laid down in IFRS 1, First-time adoption) and considered:

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     We are currently in the process of performing the actual IFRS conversion and implementation. The conversion and implementation consist of the issuance of an IFRS accounting manual, adjusting existing reporting and accounting systems or implementing new systems, adapting procedures and business policies where applicable, converting our financial statements, preparing an IFRS compliant budgeting process and training and educating all relevant Telekom Austria employees.

     We believe, based on the analyses performed so far, that the following IFRS standards (and exposure drafts) may result in material differences between U.S.GAAP and IFRS financial statements:

     Convergence of IFRS and US GAAP

     We expect the adoption of IFRS to have an impact on the comparability and consistency of its financial reporting. Based on current U.S. GAAP and IFRS standards, we consider differences with a significant impact on our Consolidated Financial Statements to be primarily related to:

     Pension Accounting — fresh start — General divergences between U.S. GAAP and IFRS, are for example, pertaining to the measurement date of plan assets and obligations or the recognition of an additional minimum liability and are accompanied by differences due to the application of IFRS 1, “First-time adoption of International Financial Reporting standard”. The Standard provides, among other exemptions from calculating the net cumulative unrecognized actuarial gains and losses under IFRS, which would generally be required at the date of transition by applying IAS 19 retrospectively for each year since inception of the respective pension plan. According to this exemption, cumulative unrecognized actuarial gains and losses that had previously not been recognized through application of the corridor approach under U.S. GAAP could be recognized by adjusting retained earnings. Therefore, the corridor might be set to zero in the IFRS opening balance sheet, thus resulting in a difference between U.S. GAAP and IFRS. The corridor approach is an accounting concept that permits companies to amortize unrecognized net actuarial gains or losses over the remaining service period of the employees when it exceeds 10% of the larger of the beginning balance of the projected benefit obligation or the market related value of the plan assets.

     Deferred Tax — Differences in accounting for income tax standards — On June 28, 2002 we acquired the remaining 25.001% of mobilkom austria AG & Co KG from Telecom Italia Mobile SpA. The allocation of the purchase price to the net assets acquired resulted in the recognition of goodwill attributable to the limited partnership mobilkom austria AG & Co KG. mobilkom austria KG also had recognized taxable goodwill resulting from its organization in 1996. This taxable goodwill was not recognized for U.S GAAP purposes, because the organization of mobilkom austria AG & Co KG was deemed a transaction under common control. U.S. GAAP requires recording a deferred tax liability for the difference of taxable goodwill of mobilkom austria KG resulting from its organization in 1996 and the goodwill arising from the acquisition of the remaining 25.001% in June 2002. The deferred tax liability will increase over time with the amortization of the taxable goodwill and will be recognized as a tax expense. Based on IFRS 1, the Company will elect not to apply IAS 22 “Business Combinations” retrospectively to past business combinations. Before the transition date IFRS did not require any assets or liabilities to be recognized on the balance sheet because they did not meet the asset or liability definition under IFRS but we adjusted retained earnings instead. Therefore, the deferred tax liability arising from the goodwill of the acquisition of the remaining 25.001% in June 2002 was derecognized, increasing retained earnings under IFRS.

     Cross border lease transactions — recognition of assets and liabilities — In 2001, 1999 and 1998, the Company entered into various cross border lease transactions, whereby certain equipment items, mainly switches, transceiver stations, base station controllers and location registers were sold or leased to a U.S.-based trust and leased back over certain terms. Concurrent with the inception, the Company entered into Payment Undertaking Agreements (“PUA”) with several counter-parties whereby the counterparties agreed to make lease payments on behalf of the Company in exchange for a deposit or the lease payments received under the head lease. The counterparties in the PUAs received upfront payments for a portion of the debt assumed in 2001, 1999 and 1998, respectively. In addition to the PUAs, the Company provided a loan to the U.S.-based trust in connection with the 2001 transaction. Interest accrued on the PUAs and the loan match interest on the debt portion.

     In accordance with U.S. GAAP the cash deposits, the securities purchased in connection with the PUAs and the upfront payments received for the head lease and the lease obligations are recorded separately on the balance sheets as the Company has not been released from their obligation under the lease and a legal right to offset does not exist. Accordingly, interest income and expenses in an equal amount have been recognized in 2004, 2003 and 2002, respectively.

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     In accordance with IFRS, SIC 27 “Evaluating the substance of Transactions Involving the Legal Form of a Lease” and the Framework for the 1998 and 1999 cross border lease transactions no assets or liabilities will be recorded for the separate investment account and the lease payment obligations. The cash deposits and the securities purchased in connection with the PUAs and the upfront payments received for the head lease and the lease obligations will not be recorded in the balance sheet but disclosed as contingent liabilities only.

     However, for the 2001 transactions the major part of the investment accounts and the lease payment obligations will have to be recorded as assets and liabilities because the Company is able to control the investment account and withhold payments. The cash deposits in connection with the PUAs and the upfront payments received for the head lease and the lease obligations will be recorded separately on the balance sheets. Accordingly, interest income and expenses in an equal amount will have to be recognized for 2003.

     Asset Backed Securitization Program — In January 2002, the Company entered into a revolving period securitization program and sold trade receivables to a Trust unrelated to the Company. The Company retains servicing responsibilities relating to the sold receivables. Solely for the purpose of credit enhancement from the perspective of the Trust, the Company retains interests in the sold receivables (retained interests).

     Under U.S. GAAP, the Company determined that the transaction met the three sales criteria, that (a) the transferred assets have been isolated from the transferor, beyond the reach of the transferor and its creditor, even in the event of bankruptcy or receivership, (b) the transferee obtains the right, free of any conditions that constrain, to pledge or exchange the assets and (c) the transferor does not maintain effective control in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. Additionally, the limited liability corporation whose shares are owned by a charitable trust under the terms of a trust fulfilled all conditions required to be a qualifying special purpose entity (QSPE) under SFAS No. 140.

     In accordance with SFAS No. 140 the Company has not recorded a servicing asset as management has determined, that it is not practicable to fair value the servicing asset, as the benefits of servicing assets are adequate to compensate the Company for its servicing responsibility and no servicing assets or servicing liability was recorded.

     Under IFRS, the Company will not derecognize the sold receivables as the assets transferred are not readily obtainable in the market and the Company has retained substantially all of the risk of ownership through a total return swap. Therefore, the Company will record the asset backed securitization transaction as a secured borrowing.

     Other — The Company expects that the adoption of IFRS will result in additional differences in measuring and classification of assets and liabilities that will affect comparability, but these differences are not expected to have a material impact on the performance of the Company, whereby this assessment is based on IFRS-standards currently available. However, the IASB (International Accounting Standards Board) may release certain pronouncements until our reporting date that might have an impact on our results and would have to be applied consistently to our results from the opening balance.

Recent developments

     In January 2005, under the EMTN program Telekom Austria (through Telekom Finanzmanagement GmbH) issued two bonds with a nominal value of EUR 500 million, one with a 5 year maturity and a coupon of 3.375%, and one with a 12 year maturity and a coupon of 4.25%.

     The exercise hurdle (on the basis of earnings per share for the year 2004) for the first tranche of stock options issued in 2004 was met and therefore the options of the first tranche 2004 can be exercised from April 20, 2005 until May 30, 2008. On March 15, 2005, the management board decided to settle all stock options of the first tranche issued in 2004 in cash only. This would have the effect as of December 31, 2004, that the stockholder’s equity decreases by EUR 4.5 million and the liabilities increase by EUR 5.5 million together with a rise of employee costs by EUR 1.0 million. The decision of the Management Board of March 23, 2004, to increase the share capital by up to EUR 6.5 million to service the stock options of the first tranche issued in 2004 will therefore not be realized. For further information see also “Item 6 — Stock option plans”.

     On January 19, 2005, the second tranche of 3,398,000 options were offered to the eligible employees under the Stock Option Plan approved in 2004. 2,858,460 options of these offered options were granted. The exercise price of Euro 13.98 was based on the average quoted closing price of Telekom Austria stock during a

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period of twenty trading days ending two days before the granting of options. The options can be settled either in cash or in shares at the Company’s choice. Vesting of the stock options awarded is based on the performance of basic earnings per share adjusted for certain effects. The options have a vesting period of about 14 months from the grant day and an exercise period of approximately three years after becoming exercisable. See also “— Item 6 — Stock option plans”.

     On March 21, 2005, we paid EUR 80.0 million as option price under the call option agreement concluded in December 2004 to purchase MobilTel AD, the leading Bulgarian wireless operator. The call option gives us the unilateral and irrevocable right to purchase 100% of the share capital of MobilTel AD for a total enterprise value of around EUR 1,600 million in 2005.

     On April 1, 2005, one of our competitors launched a no thrill operator. As a service provider this operator will offer a lean product range for mobile phones at low prices. We can not foresee the impact on our business.

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5.2. RESULTS OF OPERATIONS

2004 compared to 2003

OVERVIEW

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 86.5 million or 2.2% to EUR 4,056.3 million in 2004. If the change in revenue recognition for certain VAS 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. With this adjustment, operating revenues in 2004 would have increased by 3.4% over 2003. For further information see “— 5.1. Overview — Court ruling on value added services”. This change has no impact on consolidated operating income. The increase in 2004 is due to the growth in our Wireline segment — mainly due to the growth of terminal calls to the mobile network and the refund for costs of universal services — and due to the growth in our Wireless segment — an increase in the mobile customer base, higher interconnection traffic through our mobile network and a growth in interconnection fees for SMS.

     Operating expenses

     Our consolidated operating expenses increased by EUR 3.6 million or 0.1% to EUR 3,603.6 million in 2004. A more detailed analysis of the individual expense items is presented below.

     Material costs

     Our consolidated material costs increased by EUR 27.4 million or 9.2% to EUR 324.5 million in 2004. The increase in material expenses of EUR 5.7 million in the Wireline segment was mainly due to higher costs for network equipment. The material costs in the Wireless segment increased due to the higher costs of high quality handsets and higher costs for spare parts for mobile transmission infrastructure.

     Employee costs, including benefits and taxes

     Our consolidated employee costs including benefits and taxes decreased by EUR 25.6 million or 3.7% to EUR 673.7 million in 2004. In the Wireline segment the employee costs were lower by EUR 37.0 million, due to less severance costs and staff reduction. This has been offset partially by the stock option program 2000 and

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2004 which generated costs in the amount of EUR 10.2 million for the Wireline segment. Other factors concerning the development of personnel costs in the Wireline segment are described in “— 5.2. Results of operations — Segment results — Wireline”. In the Wireless segment the headcount decreased but the lower current employee costs were more than offset by the stock option programs generating costs of EUR 3.1 million, higher severance payments and the impact of a new bonus system.

     Depreciation and amortization

     Our consolidated depreciation and amortization expenses decreased by EUR 18.4 million or 1.6% to EUR 1,114.8 million in 2004.

     The decrease in depreciation and amortization results primarily from a strong decline in depreciation and amortization expenses amounting to EUR 56.3 million in the Wireline segment mainly due to our efforts to cut capital expenditures relating to our fixed line network. For further information concerning our capital expenditures see “5.4. Liquidity and capital resources — Capital expenditures”. The growth of amortization and depreciation expense in the Wireless segment partially offset this decline as a result of the amortization of the Austrian UMTS license as well as related network equipment which started as of May 1, 2003, as well as depreciation of infrastructure in connection with the UMTS license.

     Impairment charges

     Our consolidated impairment charges decreased by EUR 5.5 million or 80.9% to EUR 1.3 million in 2004. The impairment charges in 2004 as well as in 2003 primarily relate to long-lived assets.

     Other operating expenses

     Our consolidated other operating expenses increased by EUR 25.7 million or 1.8% to EUR 1,489.3 million in 2004 which is mainly due to a rise in interconnection costs and services received in the Wireless segment. In the Wireline segment other operating expenses decreased, particularly by lower expenses from bad debt, losses on disposals of assets, advertising expenses and compensation payments. This decrease in the Wireline segment was partially offset by a rise in interconnection costs. If the change in revenue recognition for certain VAS 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 the first three quarters of 2003. This change had no impact on consolidated operating income.

     Operating income

     Consolidated operating income increased by EUR 82.9 million or 22.4% to EUR 452.7 million in 2004. The factors described above contributed to the increase in operating income. Both business segments contributed to this positive development in operating income. The operating income of the Wireless segment increased by EUR 6.0 million to EUR 407.4 million in 2004 from EUR 401.4 million in 2003 and the Wireline segment increased its operating income by EUR 90.1 million to EUR 55.8 million in 2004 from an operating loss of EUR 34.3 million in 2003. For an analysis of the segmental operating revenues and expenses see “— Segment Results”.

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