As filed with the Securities and Exchange Commission on March 30, 2007

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

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

TELEKOM AUSTRIA AG

(Exact name of Registrant as specified in its charter)

AUSTRIA
(Jurisdiction of incorporation or organization)

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

	Title of each class		Name of each exchange on which registered
	American Depositary Shares,		New York Stock Exchange
	representing Common Stock
	Common Stock, no par value		Vienna Stock Exchange
			New York Stock Exchange*

 

 

 

TABLE OF CONTENTS

PART I
Item 1.		Identity of Directors, Senior Management and Advisors			3
Item 2.		Offer Statistics and Expected Timetable			3
Item 3.		Key Information			3
		3.1. Selected Financial and Other Data			3
		3.2. Dividends			7
		3.3. Exchange Rate Information			8
		3.4. Risk Factors			9
Item 4.		Information on the Company			15
		4.1. History and Development of the company			15
		4.2. Business Overview			17
		Strategy			17
		Wireline			19
		Wireless			32
		Property and Equipment			44
		Research and Development			44
		4.3. Regulation and Legal Framework			46
Item 5.		Operating and Financial Review and Prospects			62
		5.1. Overview			62
		5.2. Results of Operations			69
		5.3. Results of Operations			84
		5.4. Liquidity and Capital Resources			99
Item 6.		Directors, Senior Management and Employees			108
Item 7.		Major Shareholders and Related Party Transactions			115
Item 8.		Financial Information			117
Item 9.		The Offer and Listing			120
Item 10.		Additional Information			121
		10.1. Memorandum and Articles of Association			121
		10.2. Taxation			134
		10.3. Documents on Display			140
Item 11.		Quantitative and Qualitative Disclosures about Market Risk			141
Item 12.		Description of Securities Other than Equity Securities			143
PART II
Item 13.		Defaults, Dividend Arrearages and Delinquencies			143
Item 14.		Material Modifications to the Rights of Security Holders and Use of Proceeds			143
Item 15.		Controls and Procedures			143
Item 16A.		Audit Committee Financial Expert			145
Item 16B.		Code of Ethics			145
Item 16C.		Principal Accountant Fees and Services			146
Item 16D.		Exemptions from the Listing Standards for Audit Committees			147
Item 16E.		Purchases of Equity Securities by the Issuer and Affiliated Purchasers			148
PART III
Item 17.		Financial Statements			149
Item 18.		Financial Statements			149
Item 19.		Exhibits			149
Exhibit 1.1
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1

REFERENCES

     In this annual report “Telekom Austria” or “we” refers to Telekom Austria AG and its consolidated subsidiaries, of which mobilkom austria is a part of. “mobilkom austria” refers to mobilkom austria AG (formerly mobilkom austria AG & Co KG, for further details see ”Item 4. Information on the Company — 4.1. History and Development of the Company”, and its subsidiaries. “Mobiltel” refers to Mobiltel EAD and its subsidiaries. If any other company is being referred to its full name is used. “Wireline segment” comprises Telekom Austria AG and its subsidiaries with the exception of mobilkom austria and its subsidiaries. “Wireless segment” comprises mobilkom austria AG 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:

	•		the level of demand for telecommunications services or equipment, particularly with regard to access lines and subscribers, traffic, bandwidth and new products;
	•		competitive forces in liberalized markets, including pricing pressures, technological developments, alternative routing developments and new access technologies, and our ability to retain market share in the face of competition from existing and new market entrants;
	•		the effects of our tariff reduction initiatives or other marketing initiatives;
	•		the impact of insolvencies of our major customers or suppliers;
	•		the regulatory developments and changes, including the levels of tariffs, the terms of interconnection, unbundling of access lines and international settlement arrangements;
	•		our ability to achieve cost savings and realize productivity improvements;
	•		the success of new businesses, operating and financial initiatives, many of which involve start-up costs, and new systems and applications;
	•		the successful integration of acquired subsidiaries;
	•		our ability to secure the licenses we need to offer services and the cost of these licenses and related network infrastructure expansions;
	•		the progress and success of our domestic and international investments, joint ventures and alliances;
	•		the impact of our new business strategies and transformation processes including the restructuring of operations;
	•		the availability, terms and deployment of capital and the impact of regulatory and competitive developments on capital expenditures;
	•		the outcome of current and future litigation in which we are or will be involved;
	•		the level of demand for our shares which can affect our business strategies;
	•		our ability to further reduce our existing workforce;
	•		changes in the law including regulatory, civil servants and social security, pensions and tax law;
	•		concerns over health risks associated with the use of wireless handsets or radio frequency emissions from transmission masts; and

•

general economic conditions, government and regulatory policies, new legislation and business conditions in the markets we serve.

     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.

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 information appearing below under the headings consolidated statements of operations, consolidated cash flow data and consolidated balance sheet data is derived from our consolidated financial statements.

     For the years 2003, 2004, 2005 and 2006 we have prepared our consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union, which differ in certain material respects from U.S. GAAP. For a reconciliation and discussion of the principal differences between IFRS and U.S. GAAP as they relate to Telekom Austria, see notes (36) and (37) of the accompanying consolidated financial statements. Our consolidated financial statements for 2004, 2005 and 2006 presented in accordance with IFRS are included elsewhere in this annual report.

     Prior to our adoption of IFRS in 2006, with a transition effective date of January 1, 2003, we presented our financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The selected financial data according to U.S. GAAP presented in the table below for the years 2002 through 2005 is derived from our U.S. GAAP financial statements, which are not included herein.

     You should read our selected financial and other data together with our consolidated financial statements, Risk Factors and Operating and Financial Review and Prospects appearing elsewhere herein.

     Our discussion and analysis of our financial conditions and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with IFRS and which, as described in note (36) reconciliation of the accompanying consolidated financial statements included elsewhere herein, differ in certain material respects from U.S. GAAP.

Selected Financial Data according to IFRS		Year ended December 31,
		2006				2005				2004				2003
		(in EUR millions, except per share information)
Consolidated statements of operations (3):
Operating revenues (1)			4,759.6				4,365.2				4,042.9				3,959.8
Other operating income			59.2				54.8				50.5				46.7
Operating expenses:
Materials			(385.2	)			(350.1	)			(327.5	)			(299.6	)
Employee costs, including benefits and taxes			(768.3	)			(698.5	)			(692.0	)			(719.3	)
Depreciation and amortization			(1,123.9	)			(1,121.4	)			(1,114.8	)			(1,133.1	)
Impairment charges			(10.5	)			(17.4	)			(1.3	)			(6.8	)
Other operating expenses			(1,758.5	)			(1,612.9	)			(1,488.3	)			(1,472.7	)
Total operating expenses			(4,046.4	)			(3,800.3	)			(3,623.9	)			(3,631.5	)
Operating income			772.4				619.7				469.5				375.0
Other income (expense):
Interest income			20.0				32.7				17.5				17.8
Interest expense			(133.5	)			(144.9	)			(142.1	)			(175.0	)
Foreign exchange differences			(0.3	)			1.3				0.0				(0.1	)
(Loss) income from investments			(0.7	)			3.8				10.5				(4.8	)
Equity in earnings of affiliates			0.0				0.6				0.5				19.1
Income before income taxes			657.9				513.2				355.9				232.0
Income tax expense			(96.1	)			(104.3	)			(135.5	)			(80.8	)
Net income			561.8				408.9				220.4				151.2
Attributable to:
Equity holders of the parent			561.8				408.9				219.8				147.2
Minority interests			0.0				0.0				0.6				3.9
Basic and fully diluted earnings per share			1.19				0.84				0.44				0.30

		Year ended December 31,
		2006				2005				2004				2003
		(in EUR millions)
Consolidated cash flow data:
Cash generated from operations			1,589.9				1,637.7				1,319.2				1,325.6
Cash used in investing activities			(971.6	)			(1,780.9	)			(509.3	)			(643.9	)
Cash used in financing activities			(608.8	)			(28.1	)			(719.5	)			(512.5	)
Effect of exchange rate differences			(1.2	)			(0.1	)			(4.1	)			5.4
Net increase (decrease) in cash and cash equivalents			8.3				(171.4	)			86.3				174.6

Selected Financial Data according to IFRS		At December 31,
		2006				2005				2004				2003
		(in EUR millions)
Consolidated balance sheet data:
Assets:
Current assets			1,160.2				1,096.5				1,275.7				1,143.7
Property, plant and equipment, net			3,216.0				3,583.0				3,746.7				4,277.3
Goodwill and Intangible assets, net			3,043.7				2,852.4				1,439.1				1,489.2
Investments and long-term financial assets			81.5				90.5				83.8				114.7
Other assets and deferred tax assets			58.2				74.3				135.8				233.3
Due from related parties (long-term)			0.1				—				—				—
Total assets			7,559.7				7,696.7				6,681.1				7,258.2
Liabilities:
Current liabilities			1,657.3				1,855.5				1,942.3				1,853.1
Long-term debt, net of current portion			2,750.1				2,557.7				1,647.2				2,342.3
Lease obligations, net of current portion			57.4				68.7				63.5				72.0
Employee benefit obligations			111.6				109.5				107.9				164.4
Other liabilities and deferred income taxes			159.8				186.6				121.8				113.0
Total liabilities			4,736.2				4,778.0				3,882.7				4,544.8
Stockholders’ equity			2,823.5				2,918.7				2,798.4				2,713.4
Total liabilities and stockholders’ equity			7,559.7				7,696.7				6,681.1				7,258.2

Data according to IFRS for the year 2002 are not available without undue effort and cost and are therefore not presented here.

Selected Financial Data according to U.S. GAAP		Year ended December 31,
		2006				2005				2004				2003				2002
		(in EUR millions, except per share information)
Consolidated statements of operations (3):
Operating revenues (1) (2)			4,771.3				4,377.3				4,056.3				3,969.8				3,118.1
Operating income			764.8				620.0				452.7				369.8				57.4
Net income (loss) before income taxes and minority interests			669.4				523.5				350.1				232.6				43.8
Minority interests			0.0				(0.0	)			(0.6	)			(3.4	)			(4.9	)
Net income			620.8				417.1				227.3				134.2				12.8
Basic and fully diluted earnings (loss) per share			1.31				0.85				0.46				0.27				0.03
Basic and fully diluted earnings (loss) per share excluding extraordinary items			1.31				0.85				0.46				0.27				0.03
Basic and fully diluted earnings (loss) per share excluding cumulative effect of change in accounting principle			1.31				0.85				0.46				0.29				0.03

Selected Financial Data according to U.S. GAAP		At December 31,
		2006				2005				2004				2003				2002
		(in EUR millions)
Consolidated balance sheet data:
Assets:
Total current assets			1,160.0				1,204.6				1,273.9				1,124.8				865.2
Total assets			8,132.6				8,411.9				7,242.5				7,896.3				8,534.3
Liabilities:
Total current liabilities			1,632.2				1,929.6				1,887.4				1,794.9				2,614.2
Total long-term liabilities			3,681.6				3,612.8				2,613.5				3,462.0				3,410.6
Total stockholders’ equity			2,818.8				2,869.5				2,741.6				2,639.4				2,509.5
Total liabilities and stockholders’ equity			8,132.6				8,411.9				7,242.5				7,896.3				8,534.3
Share capital			1,090.5				1,090.5				1,090.5				1,090.5				1,090.5

		At December 31,
Other data		2006				2005				2004				2003				2002
Wireline (in thousands)
Fixed access lines			2,642.6				2,801.9				2,906.7				3,010.8				3,097.3
Fixed access channels			3,240.7				3,433.7				3,570.7				3,684.2				3,762.3
Internet customers in Austria			1,505.9				1,424.2				1,187.0				1,026.6				846.5
thereof ADSL customers			571.4				468.5				298.4				207.6				143.1
Customers Czech On Line			148.2				187.9				247.1				279.4				275.3
Wireless customers (in thousands)
Austria			3,630.5				3,392.2				3,273.6				3,163.2				3,001.4
Bulgaria			4,267.9				3,594.2				n.a.				n.a.				n.a.
Croatia			1,912.3				1,612.9				1,308.6				1,210.5				1,097.8
Slovenia			420.9				359.6				363.3				361.5				350.0
Liechtenstein			4.8				4.2				3.5				2.5				2.0
Total			10,236.4				8,963.1				4,949.0				4,737.7				4,451.2
Full-time equivalent employees			15,428				15,595				13,307				13,890				14,951

3.2. DIVIDENDS

     The following table sets forth the annual dividends declared and paid. Dividend amounts have been converted into U.S. dollars based at the noon buying rate on the respective dividend payment dates.

														Shares outstanding
										Total dividends				as of date of
For the fiscal year		Dividends declared and paid per share								declared and paid				declaration
		EUR				USD				EUR				number
2001			—				—				—				—
2002			—				—				—				—
2003			0.13				0.16			64.6 million				496.8 million
2004			0.24				0.29			117.9 million				491.1 million
2005			0.55				0.71			261.2 million				474.9 million

     We did not pay dividends for 2001 and 2002. Under Austrian law, we may pay dividends only from net income as shown in the annual financial statements of Telekom Austria AG prepared under Austrian GAAP. The Management Board and Supervisory Board plan to propose to the shareholders at the annual general meeting on May 30, 2007 a distribution from unappropriated earnings of EUR 0.75 per no par value share for the fiscal year 2006.

     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. Additional Information — 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 30, 2007 – as paying agent, in euro for disbursement to shareholders. Cash dividends payable to holders of American Depository Shares (ADS) 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. For further information regarding dividends see “Item 8. Financial Information — 8.2. Other Information – Dividends”.

3.3. EXCHANGE RATE INFORMATION

     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 the 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 March 28, 2007, the noon buying rate translated to EUR 1.00 = USD 1.3331.

Year or Month		End of period				High				Low				Average
		USD per EUR 1.00 (1)
2002			1.0485				1.0485				0.8594				0.9495
2003			1.2597				1.2597				1.0361				1.1411
2004			1.3538				1.3625				1.1801				1.2478
2005			1.1842				1.3476				1.1667				1.2400
2006			1.3197				1.3327				1.1860				1.2661
October 2006			1.2773				1.2773				1.2502
November 2006			1.3261				1.3261				1.2705
December 2006			1.3197				1.3327				1.3073
2007
January 2007			1.2998				1.3286				1.2904
February 2007			1.3230				1.3246				1.2933
March 2007 (through March 28)		1.3331				1.3359				1.3094

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 business with minimal or modest investments in network infrastructure and with prices that undercut our tariffs.

     As a result thereof we have reduced our tariffs in response to increasing downward pressure on tariffs. Competition from existing and new operators may result in further tariff reductions.

     Other factors that may increase competition include movement from fixed line to mobile communications and the liberalization of the market. Competition from existing and new operators may result in losses of market share and further tariff reductions. Other factors that may increase competition include new forms of telecommunication that circumvent conventional tariff structures as well as licensing schemes and alternative technologies such as wireless access. Voice over IP and WIMAX are technologies, that have the potential to partially substitute existing technologies and services and reduce our market share and revenues. For further information, see “Item 4. Information on the Company — 4.2. Business overview.

     Consolidation among our competitors in the markets in which we operate may also affect our market position. In April 2006, the merger of two of our competitors in the Austrian mobile communication market, T-Mobile Austria and tele.ring, was approved by the European Commission and the Austrian regulatory authority. The conditions imposed on T-Mobile with the approval include an obligation to offer for sale redundant infrastructure as well as UMTS frequencies to smaller operators, which may result in a strengthening of the market positions of such purchasers. The takeover significantly raised the market share of T-Mobile and may improve its market position in relation to mobilkom austria AG, which is currently the market leader. A further increase in the competition in the fixed line and mobile communications markets may have a negative impact on our revenues and profitability.

     In Austria, we also compete with mobile virtual network operators (MVNO) and service providers that offer wireless communications services without maintaining their own networks. Many of these operators offer low-cost services targeted at a specific market. Examples include offering inexpensive prepaid and contract tariffs or focusing on the immigrant population. The ability of these low-cost providers to attract customers away from traditional service providers such as ourselves may have a negative impact on our market share. The emergence of new MVNO’s and service providers might have a negative impact on market share and perpetuate downward pressure on tariffs.

     There are legal actions of consumer interest groups regarding per second billing. In Austria all mobile service providers have tariff models with 30, 60 or 90 seconds billing. In 2006, mobilkom austria AG, T-Mobile, tele.ring and ONE launched special tariffs with per second billing. For further information see “Item 8.2. Other Information — Litigation — Wireless”. If any consumer rights regulation were to be enacted in Austria regarding this practice, it could have a negative impact on our revenues.

     At year-end, approximately 68% of our revenues were generated in 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.

     Austria has one of the highest penetration rates of mobile communications in Europe, reaching 114.2% as of December 31, 2006. This figure reflects the fact that customers use more than one SIM-card (Subscriber Identification Module). 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 in total due to an ever increasing number of customers. Competition among the various service providers is based on handset subsidies as well as extremely low tariffs. Our competitors compete increasingly through lower tariffs and by offering free calls in defined destinations with a low level of monthly fixed fees. As customer retention costs increase, a continuation of the low tariffs offered by our competitors would have a material adverse effect on our profitability. We generate about 59% of our revenues of the Wireless segment in Austria, therefore our success is still dependent on the Austrian market with the markets outside of Austria continuously gaining on importance. 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 newly established products or services will not only complement, but also substitute each other.

     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, High Speed Downlink Packet Access (HSDPA) or other technologies) and in the fixed line communications area (e.g. Asymmetric Digital Subscriber Line (ADSL). Furthermore additional competition may arise 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, Enhanced Data rates for Global Evolution (EDGE ) or HSDPA mobile communications systems with high transmission rates conceived for data, video- or Internet-telephony use could have a negative impact on our revenues and results of operations including the possibility that we will not be able to recover our investments in 3G technology.

     We may be adversely affected if we fail to successfully implement our Internet and broadband strategy in Austria.

     The introduction of Internet and broadband services is an important element of our growth strategy and provides an opportunity to increase the use of our networks in Austria. Our strategy is to replace the mature, traditional voice services with value added content and services for individual consumers and small and medium-sized companies. Our ability to successfully implement this strategy may be affected if:

	•		Internet usage in Austria grows more slowly than anticipated, for reasons such as changes in Internet users’ preferences;
	•		broadband penetration in Austria does not grow as we expect;
	•		competition increases, for reasons such as the entry of new competitors, consolidation in the industry or technological developments introducing new platforms for Internet access and/or Internet distribution or other operators having the ability to provide broadband connections superior to those that we can offer; and
	•		we experience any network interruptions or related problems with network infrastructure.

     Any of the above factors may adversely affect the successful implementation of our strategy, our business and results of operations.

     As a result of our high number of civil servants, 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, 44% 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, however, changes in Austrian law no longer allow this. 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.

     Regulatory decisions and changes in the regulatory environment could adversely affect our business

     Most of our fixed and mobile telecommunications operations, as well as our broadband services businesses, are subject to extensive regulatory requirements in Austria and our international operations and investments are subject to regulation in their host countries.

     We are unable to predict the impact of any proposed or potential changes in the regulatory environment in which we operate both in Austria and internationally. Changes in laws, regulations or government policy or adverse court decisions could adversely affect our business and competitiveness. In particular, our ability to compete effectively in our existing or new markets could be adversely affected if regulators decide to expand the restrictions and obligations to which we are subject or extend them to new services and markets. Finally, decisions by regulators regarding the granting, amendment or renewal of licenses, to us or to third parties, could adversely affect our future operations in Austria and in other countries where we operate.

     In July 2006, the European Commission proposed roaming regulations pursuant to which mobile telephone operators throughout the European Union are required to reduce their visitor roaming fees close to the costs of the services provided, and not to allow customer roaming fees to be above a certain threshold (visitor roaming costs plus regulated retail mark-up). Although the exact degree and timing of roaming regulation remains unclear, there is a high probability that roaming tariffs will be regulated. Since mobilkom austria group operates in countries with net roaming traffic inflow and because of today’s margin level for customer roaming, the EU-regulation is likely to have an adverse effect on our net income.

     Our interconnection rates in the mobile network have been decreased by the regulatory authorities repeatedly in the past, most recently in July 2006. The latest regulatory decision was valid through December 31, 2006. It required a gradual reduction of mobile termination rates (“glide path”) of all operators to a reciprocal level of 6.79 eurocent by the end of 2008. As new regulatory proceedings have already started, it is unclear if the result will be the same. It may be that the length of the glide path will be extended, as well as that our mobile termination rate will finally be deceased to a lower level than 6.79 eurocent.

     Please see “Item 4. Information on the Company—4.3. Regulation and Legal Framework” in this report for more information on the regulatory requirements to which we are subject.

     To the extent we need to enter into “mobile radio agreements” with various Austrian federal provinces we may incur additional costs for relocation of existing installations and may be limited in our locations in Austria.

     In order to avoid the base station tax several Austrian mobile operators reached an agreement with the provincial government of Lower Austria (“mobile radio agreement”) to share the use of the base station masts. Pursuant to the mobile radio agreement no tax is levied as long as the Austrian mobile operators comply with the mobile radio agreement. Similar agreements have been concluded with the federal provinces of Carinthia and Burgenland.

     Other Austrian federal provinces may be pursuing the same policy which may result in additional costs for the relocation of existing base stations and may limit our choice of locations.

     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 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 have made 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 have started a multiyear program aiming at a smooth migration to next generation networks (NGN) allowing for the development of innovative services while optimizing network costs by using existing infrastructure. The costs relating to the expansion of NGN and its implications on our business are expected to be substantial. Telekom Austria’s ability to provide and roll out NGN depends particularly on the availability of standardized next generation network components by our system and equipment manufacturers. This may result in delays to the delivery of expected benefits. Margins may decline if fixed costs can not be reduced in line with declining revenues.

     From Lake Constance to the Black Sea — our acquisition of the 3rd License in Serbia is an important step forward and closes a geographical gap. Nevertheless this acquisition presents us with significant challenges.

     In November 2006 we were the Winning Bidder for the GSM 900/1800 and UMTS license for the territory of the Republic of Serbia, offered in a tender.

     We aim to start developing the new mobile license in Serbia without delay and with the utmost efficiency in order to take advantage of the window of opportunity provided by ongoing market dynamics. Furthermore, we intend to make use of all the preparatory work done earlier this year when mobilkom austria planned to enter the Serbian market via the acquisition of the second operator, and to fully exploit synergies from our existing operations in Croatia and Bulgaria.

     Although we have grown through acquisitions as well as through successful greenfield operations like Vipnet in Croatia, there are some significant risks involved: In addition to the risk involved in realizing expectations in terms of market share and revenues, we face commercial risks in the areas of establishing agreements for setting up the network in the first phase of operation (e.g. Site Sharing), in regulatory decisions, especially regarding Interconnection as well as in any other obstacles causing delay of commercial launch.

     In recent years, the growth of Telekom Austria’s business was marked by a rapid expansion in various markets in Southern and South-Eastern Europe. However, further expansion and further growth in the individual markets in Southern and South-Eastern Europe will be affected by a number of factors over which Telekom Austria has no influence. Such factors include:

Organic growth. Further organic growth in the individual countries of Southern and South-Eastern Europe

also depends on the growth of the respective individual telecommunication markets. The growth in the EU member countries of Southern and South-Eastern Europe may slow down because of, among other things, the new regulatory environment after the accession to the EU.

New competitors. It is not possible to rule out the market entry of new competitors and an intensification of

competition, in particular in the event that subsidiaries of globally active telecommunication companies
with greater financial resources than those available to Telekom Austria enter the market with the intent to gain market share via an aggressive pricing policy.

Suitable acquisition targets. Due to the growing number of interested potential purchasers of

telecommunication companies in Eastern, Southern and South-Eastern Europe, there can be no assurance that Telekom Austria will be able to identify suitable acquisition targets and acquire the targets at reasonable prices.

Greenfield operations. In addition to the risk involved in realizing expectations in terms of market share and

revenues, we face commercial risks in the areas of establishing agreements for setting up the network in the first phase of operation (e.g. Site Sharing), in regulatory decisions, especially regarding Interconnection as well as in any other obstacles causing delay of commercial launch.

Changes in law. The legal framework for the various lines of business may change at any time as a result of

rapid change in regulation in the countries in which Telekom Austria is active.

     The first two factors can lead to pressure on margins, varying among markets, which always represents new challenges for Telekom Austria. The third factor can lead to a considerable slowing of the growth of Telekom Austria. Telekom Austria can therefore give no assurance that the growth rates achieved in the past will also be achieved in future. Regarding the fourth factor we cannot assure that the expected revenues will be realized. The fifth factor can adversely affect our future operations in the countries in which Telekom Austria is active.

     The Group’s business may be adversely affected by exchange rate fluctuations.

     Telekom Austria’s strategy in the Wireless segment is to grow through acquisitions in Eastern and South-Eastern Europe. Telekom Austria’s operating results are still affected by changes in currency exchange rates because a substantial portion of its revenues and costs are denominated in currencies other than the euro, most notably the Bulgarian Lev, the Croatian Kuna and the Serbian Dinar. Slovenia has adopted the euro as its single currency effective January 1, 2007. In 2006 Mobiltel contributed about 20 % and Vipnet approximately 16% of the revenues of the Wireless segment.

     Telekom Austria is also exposed to translation risks. The translation risk results from the necessity to convert non-euro based balance sheet and income statement line items of Telekom Austria’s foreign subsidiaries into euro.

     Any weakening in relevant currencies compared to the euro exchange rate could have adverse consequences for Telekom Austria’s reported earnings. If the relevant currencies should weaken compared to the euro, such development could have a material adverse effect on our net assets, financial condition and results of operation.

     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 have significant influence holding 25.2% of 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, 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 the event that 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 shares up to the 47.2% it held through ÖIAG. So far the stake has been reduced to approximately 25.2% as of January 31, 2007. Austria’s new government has not yet decided if it wants to reduce this stake further. A further reduction could lead to a change of control (see “Item 7 — Relationship with the Republic of Austria and ÖIAG”).

     A change of control as presently defined in the Austrian Takeover Act could 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 might 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.

     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.

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 providing a wide range of advanced wireline and wireless communications services.

     The corporate headquarters and the principal executive offices of Telekom Austria are at Lassallestrasse 9, 1020 Vienna, Austria. 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 AG. In April 1997, Post und Telekom Austria AG sold 25% plus one share of mobilkom austria AG 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 and 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 (IPO) 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%. In 2003, the Austria Government issued a privatization mandate to ÖIAG according to which the Austrian Government intended to privatize up to 100% of its shareholding in us by 2006. As a result ÖIAG issued in July 2003 an exchangeable bond of EUR 325 million which was payable in August 2006 and exchangeable into 25 million of our shares, corresponding to 5% of our share capital. This led to a decrease in ÖIAG’s stake in Telekom Austria to approximately 25.2% as of December 31, 2006. Austria’s new Government started its legislative period in October 2006 and has not yet decided if it wants to reduce ÖIAG’s stake further.

     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 2006, ÖIAG’s stake in Telekom Austria dropped from 30.2% of shares as of the end of December 2005 to approximately 25.2% of shares due to delivery of shares to investors holding exchangeable notes and sales of shares at the Vienna Stock Exchange.

     In 2002, we decided to reintegrate some of our main subsidiaries into Telekom Austria and 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.

     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%.

     In July 2005, we acquired 100% of the share capital of MobilTel AD (now Mobiltel EAD), the leading Bulgarian wireless operator, and started to consolidate it on July 12, 2005. In order to concentrate the wireless segment in mobilkom austria and to align the legal structure with operative responsibility and segment reporting we transferred the indirect shareholding in Mobiltel EAD from Telekom Austria AG to mobilkom austria AG in October 2006. In November 2006 we were successful with our bid for an UMTS/GSM license in Serbia. Therefore we founded a new subsidiary, TopNet d.o.o., in Serbia. For further information concerning the structure of Telekom Austria see “Item 19. Exhibits — Structure of Telekom Austria ”.

     In its meeting of December 13, 2005 the Supervisory Board of Telekom Austria confirmed the corporate structure proposed by the Management Board of Telekom Austria under the condition that two strong operating units shall be developed under a lean management structure. The implementation of the new corporate structure shall be presented for the Annual General Meeting (AGM) 2007.

     In August 2006, mobilkom austria AG & Co KG was, under the terms of § 142 HGB (Austria Commercial Code), converted to a stock corporation — mobilkom austria AG (“Aktiengesellschaft”), whereby mobilkom austria AG & Co KG was merged without liquidation.

     On December 20, 2006 Telekom Austria agreed to acquire 100% of the share capital of the operating companies of eTel, subject to prior merger control approval, for a purchase price of approximately EUR 90 million. eTel provides voice, Internet and data services and operates a virtual mobile network in Austria and a wholesale business in Central-Eastern Europe.

4.2. BUSINESS OVERVIEW

     We report our business in the following three segments:

	•		Wireline,
	•		Wireless and
	•		Other activities (financing and other activities of the company).

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

     The two business segments also conduct business with each other which is eliminated in the consolidation process. 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.

Strategy

     Our overall goal is to substantially strengthen our corporate value. In order to reach this goal, the company’s strategy is structured around two segments — the Wireline segment and the Wireless segment. In the Wireline segment, our goal is to generate stable cash flows, whereas in the Wireless segment we strive to achieve moderate growth in our existing Wireless markets and additional growth through acquisitions. We aim to increase cooperation between the Wireline and the Wireless segments in order to realize synergies in respect to markets and costs, which will help us to achieve our overall goal of substantially strengthening corporate value. Strategic issues between the two business segments are coordinated by our Management Board.

     In the Wireline segment, we seek to generate stable cash flows via a strategy that combines existing strengths with new growth potential. In 2006, the number of broadband subscribers in the Wireline segment increased by 20.8% and the broadband market share rose slightly. With the introduction of bonus packages in the voice market we were able to transfer variable revenues into fixed revenues and at the same time improve the price perception of our customers. With strong branding, new broadband services like aonDigital TV, access line retention and Average Revenue Per User (ARPU) management we intend to further improve our position in the retail market.

     In 2006, the Wireline segment successfully continued its Triple-Play-Strategy – a combined service of data, voice and TV- with the purpose of securing access to the customer. The Austrian telecommunications market is one of the most competitive markets in Europe, characterized by a substantial migration of fixed lines towards mobile networks. By developing new Internet- as well as TV-broadband-products (such as aonDigital TV, Voice over IP (VOIP) and Video on Demand) Telekom Austria puts substantial effort in effectively counteracting this trend and positioning itself as the leading operator for technology and innovation on the Austrian market. At the same time, further service developments are being implemented in order to provide better service to the customers.

     Looking forward, Telekom Austria is on the track to develop its All-IP Multimedia-Network as well as key technologies such as Radio Frequency Identification (RFID). A step-by-step migration of the existing infrastructure for voice, data and Internet towards a convergent network will enable convergence of services and applications. It will also lead to a substantial reduction of network complexity and in the long-term will aid in optimizing cost development and increasing profitability.

     In order to strengthen the Wireline segment with a focus on safeguarding access lines, Telekom Austria announced the acquisition of the operating activities of the integrated operator eTel in the fourth quarter of 2006. Once approved by the Austrian merger control authorities, the acquisition of eTel in Austria, Germany, Hungary, Czech Republic, Slovakia and Poland would compliment the Central and Eastern European footprint of the Wireline segment with its existing operation, Czech On Line, and its strong wholesale business in the Central and Southern-European region. Approval by the Austrian merger control authorities is still pending.

     The strategy for the Wireless segment is focused on continuing the expansion in Eastern and South-Eastern Europe and continuing the strong data-business performance. Going forward the mobile segment will be present in six markets, namely mobilkom austria AG in Austria, Mobiltel EAD in Bulgaria, Vipnet in Croatia, Si.mobil in Slovenia, mobilkom liechtenstein in Liechtenstein and TopNet being established in Serbia. Our goal in each

market is to adapt our strategy to the local needs of each respective country of operation. Other than in Serbia, all of the aforementioned companies are the leading or second strongest provider in their markets. In 2006, we increased the level of cooperation between our foreign subsidiaries in order to enable a smooth implementation of products for our Vodafone partnership (see “Item 4.2. Business overview — Wireless”).

     In Austria, Bulgaria and Croatia we focus on quality, service and innovation to strengthen our customer retention and maintain a strong market position through innovative voice and data products. In addition we will further integrate Mobiltel EAD in Bulgaria and thus extend the technical and innovative leadership throughout Telekom Austria. In Slovenia we are positioned as the price leader in the residential segment and the price and service leader in the business segment. This is due to selected innovative products and services from the Vodafone portfolio as well as international Virtual Private Network (iVPN ) services.

     To support its prosperous data-business strategy, the Wireless segment introduced High Speed Downlink Packet Access (HSDPA )-technology in the three main markets. In Austria the Wireless segment is preparing to commercially launch High Speed Uplink Packet Access (HSUPA ) in 2007.

     To enable further growth the Company will continue to investigate possible acquisitions in the national fixed-line as well as mobile markets, with the mobile segment focusing particularly on South-Eastern Europe.

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, Internet services and revenues from subsidiaries outside of Austria has more than offset the decline in switched voice telephony. The following table shows our operating revenues for each of our reporting segments for the years 2004 to 2006.

		2006				2005				2004
		(in EUR millions)
Operating revenues:
Wireline			2,119.5				2,123.9				2,170.5
Wireless			2,902.6				2,484.8				2,121.4
Other activities & intercompany eliminations			(262.5	)			(243.5	)			(249.0	)
Consolidated operating revenues			4,759.6				4,365.2				4,042.9

     For a discussion of our operating revenues and more details, see also “Item 5.2 — Results of operations”.

Wireline

     In 2006, our Wireline segment generated revenues of EUR 2,119.5 million before intersegmental eliminations. Switched voice telephony services in particular continue to be our most significant revenue contributor, representing approximately 41.6% of total Wireline revenues in 2006.

     Market position

     We are the leading provider of Wireline telecommunications services in Austria. In 2006, we were able to retain our market position in the Wireline segment. At December 31, 2006 we had a voice telephony market share of 56.9%, based on traffic volume excluding Internet dial-up traffic, compared to 55.4% at the end of 2005. Our market share in voice telephony including Internet dial-up increased to 56.8% in 2006 compared to 55.7% in 2005, although there was a decrease in dial-up minutes. We serviced 2.6 million access lines in Austria, 398,400 of which operate on our Integrated Services Digital Networks (ISDN). ISDN allows simultaneous, fully digital transmission of voice and data at higher speeds than via normal access lines. Our network infrastructure covers all of Austria.

     We are the overall market leader in data communications and corporate networks-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. 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.

     With approximately 1,505,900 Internet customers we are the largest Internet service provider in Austria in terms of customers. At December 31, 2006 our Internet customers included approximately 571,400 Asymmetrical Digital Subscriber Lines (ADSL ) customers compared to 468,500 in 2005 which constitutes an increase of 22%. ADSL is one of the XDSL technologies which include 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. At the end of 2006 our market share in the residential Internet market had increased to 43% (including 4% contributed by mobilkom austria AG’s mobile Internet customers) compared to 40% at the end of 2005. According to the Austrian Internet Monitor (AIM) survey, Austria had an Internet user penetration rate of 60% up from 59% at the end of 2005 based on a population of 6.8 million people aged 14 and older which means that approximately 4.1 million Austrians aged 14 and older use the Internet.

     Primary services

     The Wireline segment includes:

	•		Switched voice telephony;
	•		Payphones and value-added services (VAS);
	•		Business data and IT-solutions including wholesale;
	•		Internet access & media;
	•		Wholesale voice & Internet and
	•		Other (customer premises equipment and directory services).

     Switched voice telephony

     Services

     We provide traditional telephone line access, also called Public Switched Telephone Network (PSTN) access, and ISDN basic and multi access. Unlike a PSTN telephone line, which offers a single access channel, an ISDN basic line provides two channels and an ISDN multi-line provides 30 channels which can be used for

simultaneous voice and data transmission at higher speeds. We are required by law to grant other operators access to our subscriber lines, also called the local loop. Under the Telecommunications Act 2003 we are required to act as Universal Service Provider. Telekom Austria is obliged to provide Universal Service until the end of 2009 (see “Item 4.3. Regulation and Legal Framework”).

     We offer a variety of calling services to residential and business customers throughout Austria. These services include local, long distance, fixed-to-mobile calls 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 241,900 lines for qualifying low-income persons as of December 31, 2006. We receive partial reimbursement from the government for each of these lines. For further information see “Item 4.3. Regulation and Legal Framework — Regulation — Major regulatory decisions affecting Telekom Austria”.

		At December 31,
		2006				2005				2004
		(in thousands)
Number of fixed lines:
PSTN access lines			2,244.2				2,374.5				2,455.5
Basic ISDN access lines			391.3				420.1				443.6
Multi ISDN access lines			7.1				7.3				7.6
Total access lines			2,642.6				2,801.9				2,906.7
Total access channels			3,240.7				3,433.7				3,570.7

     To date, the major portion of the demand for our ISDN lines has come from business customers. The number of our ISDN lines decreased from approximately 427,400 on December 31, 2005, to approximately 398,400 on December 31, 2006, representing a decrease of 6.8%. 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.

		Year ended December 31,
		2006				2005				2004
		(in millions of minutes) (1)
Traffic minutes:
National (local + national long distance)			3,491				3,866				4,174
Fixed-to-mobile			793				839				854
International			412				442				467
Total voice minutes			4,696				5,147				5,495

(1)		All amounts exclude traffic minutes that were not generated from our customers such as interconnection traffic that originated in networks of other providers or payphone traffic.

     The decrease of our voice traffic by 8.8% in 2006 reflects the competitive environment and the further migration to mobile communication and unbundling. The overall mix of our voice traffic in 2006 slightly changed when compared with 2005.

     In 2006, our customers generated 412 million minutes of outgoing international traffic through our fixed line network, compared to 442 million minutes in 2005 and 467 million minutes in 2004. This equals a decrease of 6.6% in 2006 compared to a decrease of 5.3% in 2005. Our principal outgoing international traffic routes are to Germany, Switzerland and Italy and accounted for approximately 61.2% of our total outgoing international traffic during 2006.

     Tariffs

     We currently have two tariff schemes. One of the tariff schemes is based on “pulses” and the other one is based on “pay-per-second”. With regards to the tariff scheme based on pulses, 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, 2006 we had about 1.0 million customers using tariff schemes based on pulses.

     We managed to increase our voice market share (excluding Internet dial-up) to 56.9% at December 31, 2006, up from 55.4% at December 31, 2005. At the end of 2006, the TikTak tariff scheme accounted for 78.7% of our traffic volume. At December 31, 2006, almost 1.6 million customers had opted for one of the TikTak tariffs.

     The table below shows the trend of our average tariffs. The fixed-to-mobile tariff decreased due to necessary price reductions following the decisions by the regulatory authorities. Due to strong competition the average international tariff decreased by 1.1% in 2006. The total average tariff for voice services decreased by 1.3% 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.

		Year ended December 31,
		2006				2005				2004
		(in EUR)
Average tariffs:
National (local + national long distance)			0.042				0.040				0.040
Fixed-to-mobile			0.172				0.189				0.187
International			0.179				0.181				0.185
Average voice tariff			0.076				0.077				0.075

     We offer TikTak Privat for the residential segment. 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.

     Starting April 1, 2006, we introduced the new tariffs TikTak Business Plus and TikTak Business Top for new customers in order to substitute TikTak Office and TikTak Business. These new tariffs comprise reductions of fixed-to-mobile prices as well as the ISDN monthly rental and changes in the pay-per-second plan.

     The 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 20,046 public payphones including about 831 public multimedia terminals across Austria. Multimedia terminals provide access to Internet, e-mail, video telephony and various other multimedia services. Generally, charged minutes have declined and have been replaced by calling card services. Since November 2006, Telekom Austria has been entitled by law to charge a Payphone Access Charge from operators that offer calling card services.

     Value-added services (VAS)

     Our current portfolio of VAS includes:

	•		Toll-free services, which enable users to call a telephone number free of charge;
	•		Shared cost service, which allows callers and call recipients to share call charges;
	•		Premium rate services, which charge the callers a higher than standard telephone rate in exchange for services provided, a portion of which is passed on to the service provider called;
	•		Event-based premium rate services, where each call is charged regardless of the duration. A portion of the charge is passed on to the service provider;
	•		Interactive Voice Response (IVR ) Solutions usually used as a completion of value added services in order to automatize the interaction between caller and service provider;
	•		Voice Virtual Private Network (VPN ); VPNs are network services that form a virtual network designed for the exclusive use of a corporate or governmental entity using the infrastructure of one or more carriers; and
	•		Calling cards.

     We are subject 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 from about 40 countries to Austria at various prepaid price models.

     Business data and IT-solutions

     We offer customers a full range of integrated services, bundling data, Internet and IT-services into customized solutions and a wide range of national and international data communications and IT-solutions, including:

	•		Leased lines and related services;
	•		Business data services;
	•		Corporate network services;
	•		Electronic payment solutions;
	•		Safety and security solutions;
	•		IT-solution services; and
	•		Business applications.

     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 related 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 as a permanent connection between two geographically separate points or between one point and several other points, those being within Austria and abroad. We offer our leased lines in combination with a service package such as security and network management. Our leased line customers pay an initial installation charge and a recurring fee based on the type, length and capacity of the leased line.

     Business data services

     We offer a range of data services on our network, including asynchronous transfer mode (ATM ), Media Broadcast and multi-protocol label switching technology based on the Internet protocol standard (IP-MPLS) services.

     ATM service: We provide a high-performance, cell-oriented and multiplexing technology that utilizes fixed-length packets to carry different types of traffic. We have developed products which help to counteract system failure and increase resilience.

     Media Broadcast services: Our focus includes the terrestrial transmission of high-quality video and audio signals, as well as satellite communication. Our portfolio ranges from stationary networks through public access points to professional event solutions.

     IP-MPLS services: These services are based on a stand alone business IP-MPLS backbone, with different classes of service, enhanced security and performance features. This business IP backbone is the basis network for our business IP products and solutions. It offers substantial growth opportunity 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

     These services include corporate network Wide-Area Networks (WAN ) solutions, corporate network LAN solutions, network management solutions, international corporate network services and IP-Voice services. Planning, installation, network management and maintenance of corporate-wide communications networks is also offered. Corporate network customers pay a flat rate for services, depending on the level of service selected in the service level agreement.

     We provide corporate network services together with IT-solution and business applications and additionally utilize synergies.

     Electronic payment solutions

     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. In 2006, we significantly widened our customer base in this market in Slovenia.

     Safety and Security Solutions

     Telekom Austria offers a range of solutions to install and improve safety and security for its business customers including consulting, installation, maintenance and the operation of alarm systems as well as video management, access control and building automation control. These services hold a high potential for cross selling and protecting revenues from current customers.

     IT-solution services

     IT-solution services generate additional value for our customers beyond traditional data services and range from consulting to design and implementation of IT-solutions according to customers’ needs. Several IT-service modules can be combined to a homogenous IT outsourcing solution with defined service level agreements.

     The leading products are Housing (providing accommodation of IT equipment) and Hosting Services (providing managed hardware and software), Desktop Services (providing local services at the customer site), Application services, e-mail services, dedicated central messaging and collaborating services, dedicated web space, IT Security Services (including firewall, VPN, anti-virus and spam services) and intrusion prevention services securing online transactions.

     Business applications

     These applications mainly consist of our well established “eBusiness” services and “Branch applications” where we focus on vertical products, directly customized for important branches, such as health care, public authorities (communities, schools), legal and notary businesses. Our Data Network for Medical Services (DAME) product contributed to the successful performance of Business applications. DAME is a high secure and encrypted network solution for transferring personal medical records between medical doctors, hospitals and

laboratories, and includes secure Internet and medical database access. In the Austrian health care market we have over 8,700 access lines.

     We also offer products, which aid in customer relationship such as “dataweb”, an Online-Information-Service (platform), which offers official, authentic content from public authorities e.g. Ministry of Justice or Ministry of Economics, such as the Austrian business register (“Firmenbuch”) or the land/cadastral register (“Grundbuch“).

     Internet access & media

     We provide Internet services in Austria and in the Czech Republic, via our 100% owned subsidiary Czech On Line.

     Austria

     Internet access & media includes access services (dial-up access, broadband DSL access) and portal business — paid services and multimedia services.

     Access services

     We offer fixed network Internet access through dial-up service and high speed broadband Internet access service, mainly ADSL (and to a negligible extent SDSL) technology.

		At December 31,
		2006				2005				2004
Dial-up retail customers			934,500				955,700				888,600
ADSL retail customers			571,400				468,500				298,400
Total customers			1,505,900				1,424,200				1,187,000
Internet dial-up traffic (in millions of minutes)			1,425				2,287				3,376
Average Internet dial-up tariff (in EUR/min.)			0.018				0.017				0.016

     At December 31, 2006, we had about 571,400 ADSL retail customers, of which 78,200 were business Internet customers and 493,200 residential customers. In addition, we have approximately 122,300 ADSL subscriptions that were sold to our wholesale customers. We derive revenues for our access services primarily from subscriber fees paid by customers for our dial-up and ADSL services.

     Dial-up access

     aonFlash is our dial-up product family with five different service packages. For our product aonFlash Easy, as for its predecessor aonPuls, we do not charge a monthly rental fee, but a special dial-up Internet tariff for the connection via fixed line.

     Broadband Residential ADSL access

     In 2006, the entire aonSpeed Portfolio was re-launched. Four different ADSL product versions have been designed to specifically accommodate light users, average users and heavy users. Customers can choose between three bandwidth alternatives and different data transfer volume. One product (aonSpeed Flat) without data-limitation was also introduced.

     aonSpamfilter enables residential customers to protect themselves from unsolicited commercial e-mail. aonVirenchecker includes a local desktop virus protection software as well as a tool scanning incoming e-mails and attachments for viruses.

     For all products (except ISDN), residential customers can choose between self-installation or installation by our technical customer service. Customers can also choose an additional package offering wireless connectivity in connection with several of our ADSL products.

     aonDigital TV

     In March 2006, Telekom Austria launched its IPTV Service in Vienna. aonDigital TV broadcasts 46 channels as well as 13 special interest Premium TV Channels. It also offers a Transactional Video on Demand service with a wide range of feature films, TV series and programs for children as well as a Subscriber Video on Demand Package.

     aon.tv

     Telekom Austria offers a PC-based broadband television service and signed several contracts with international partners. The service offers 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.

     Business Internet Access

     In the last quarter of 2006 we started to offer Business Internet Access together with web-based Internet applications like a homepage generating tool and a e-shop/newsletter tool called Business Web Assistant and Business Marketing Assistant. Our primary goal is to encourage the business customer to access the Internet using these web-based tools in order to increase the customer’s awareness of the benefit of broadband Internet access.

     aonAlarmServices

     On April 1, 2006 Telekom Austria launched the new product aonAlarmServices which offers non-IT-security services for residential and small offices/home offices and small and medium enterprises (SOHO/SME) customers. aonAlarmServices is an individually and modularly expandable alarm system which is connected via Telekom Austria’s wireline network to a security center which informs the police in case of an alarm at the customer’s premises.

     Portal business with paid services and multimedia services

     Our main portal, www.aon.at, offers a wide range of services from communication, information, entertainment, online shopping and download platforms. Revenues are generated from business-to-consumer services, multimedia services, online shopping and paid services. Our access customers have the opportunity to use our portal www.A1.net at a lower user rate.

     The Telekom Austria portals, including mobilkom austria AG’s portal www.A1.net, were the number one Austrian portal market of Internet service providers with approximately 820 million page impressions and on average 2 million visitors in 2006. 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), an alternative provider of Internet services and the first provider to introduce free dial-up Internet access in the Czech Republic. In 2006, COL generated revenues of EUR 24.3 million compared to EUR 23.0 million in 2005, respectively. At December 31, 2006, COL had approximately 148,200 active customer accounts, down from approximately 187,900 at the end of 2005. The decrease in the number of customers resulted from a decrease of low-end dial up customers due to a decline of the dial-up market in general, which could not be compensated by the increase in the more valuable ADSL and voice customers.

     COL offers the following services:

	•		Free dial-up Internet access through PSTN and ISDN;
	•		Broadband Internet Access based on wholesale and local loop unbundling for access for customers via frame relay, leased lines, and wireless point-to-point and point-to-multipoint access services;
	•		PSTN voice services for business customers for local, national and international calls based on direct access and carrier pre-selection, and for residential customers based on carrier pre-selection;
	•		VoIP (Voice over Internet Protocol) services for business and residential customers;

	•		VAS (value added services) such as global Internet roaming, web hosting, domain registration, virtual mailboxes, anti-Spam and anti-virus software;
	•		Content services, including a news aggregator and a customized search engine for Czech content; and
	•		Free customer support 24 hours a day, seven days a week.

     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. In 2006, COL kept its position in broadband market as one of the largest alternative ADSL providers. Based on its own access, COL managed to rollout unbundled lines from Cesky Telekom in 43 new locations in Prague and other cities. In 2006, COL developed an IPTV solution which will be launched in 2007.

     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:

	•		Call origination and termination;
	•		Transit and access to other services;
	•		Toll-free and premium rate services;
	•		Unbundling of local loop and collocation;
	•		Signaling services for mobile applications (roaming, SMS);
	•		Wholesale terminating segments of leased lines;
	•		Broadband solutions for ISP and other telecommunications providers; and
	•		Emergency and directory inquiry services.

     At December 31, 2006, we had entered into interconnection agreements with 25 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 2006, we had installed about 122,300 ADSL connections for our wholesale customers.

     International wholesale services include:

	•		Call termination — We deliver international incoming calls to Telekom Austria customers or subscribers of other network operators;
	•		Voice transit service — Consisting of routing traffic via our international network. We also act as account intermediary;
	•		Signaling for international roaming;
	•		Bandwidth transit services — Due to Austria’s geographic location, we are in a position to offer transit capacity on our international network among the eight countries that border Austria;
	•		International Internet access — We provide connections to the networks of other European countries, the United States and worldwide;
	•		Satellite services — We provide bandwidth to our national and international customers through our own teleport. A teleport is a satellite antenna station that provides connectivity to various international satellites;

	•		International VPNs — We provide VPNs for national retail business customers through our international partners throughout the world; and
	•		TAJetstream — In 2006 our European backbone network was extended to Zagreb and Bucharest. We implement backbone capacities pursuant to actual demand. Telekom Austria is evaluating further options for extending the international network to other Eastern and South-Eastern European countries.

     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 approximately 3.0 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 bilateral settlement rates negotiated with other international carriers or generic price lists, with prices that may change on a daily 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 and were not changed in 2006 for termination into our fixed network. Following a decision of the Austrian Regulatory Authority in December 2005, mobile termination charges of all operators should gradually decrease to a level of 6.79 eurocent by the end of 2008 (see “Item 4.3. Regulation and Legal Framework — Regulation — Major regulatory decisions affecting Telekom Austria”).

     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. The market in Austria for such equipment and systems 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. Our range of customer premises equipment includes ISDN and IP (Internet Protocol) based telephone systems (PABX (private automatic branch exchange) and IP PABX), enhancements and supplements to PABX, LAN and networks based on standardized ISDN-telephony or based on VoIP telephony, voice communication based on ISDN and VoIP telephony, PC software applications, telephones and accessories, fax machines and mobile products. We also provide installation and maintenance services for these products.

     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 2006 due to the availability of electronic inquiry devices via the Internet, which are mostly free of charge, as well as electronic devices such as PDAs (Personal Digital Assistants) and mobile phones that include applications for directory management.

     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 expect 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 demand for fixed-line voice telephony will decrease.

     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. 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 TV).

     Austria has experienced one of the highest levels of migration from fixed to mobile services in Western Europe. At the end of 2006 more than 60% of all calls originated from mobile networks. The price premium for mobile is comparatively low in Austria with aggressive prices both for voice and data services. All of the mobile network operators introduced flat rate voice tariffs in 2006. Mobile broadband penetration has increased significantly and prices are likely to fall.

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

     Given the extensive saturation of the markets in Austria there is no indication that the fierce competition which prevails in the two business segments will ease. The merger of tele2 and UTA in 2004 resulted in a strong competitor which had approximately 1.2 million customers in 2006 and an 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 Wireline segment’s fixed line business, Inode has been taken over by UPC Telekabel. UPC-Inode holds a market share of approximately 29% of the Austrian broadband market compared to our market share of approximately 42% (as of December 2006). We expect that competitive pressure in the broadband market will further intensify.

     In the market for data communications and IT solutions 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.

     Sales and marketing

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

	•		Residential retail sales: in this marketing segment we serve about 1.9 million residential customers. The customer base is segmented according to customer needs in telecommunications services;
	•		Small offices/home offices (SOHOs) and small and medium-sized enterprises (SMEs); and
	•		Top SMEs and key accounts.

     In all three retail customer groups, marketing activities are based on integrated marketing analysis. In accordance with their telecommunications preferences, we create individual customer target groups and provide them with special products and solutions. We target our customers by direct mailings, online advertising and sales promotions. Customers can order products and services by fax or mail and online at shop.telekom.at or obtain information through our call center hotline.

     At December 31, 2006, we had a network of 51 Telekom Austria Shops and 38 A1 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 and more than 600 specialist dealers and VIP dealers with specific Telekom Austria co-branding as points of sale. Furthermore, customers are solicited personally or by phone by professionals and our employees.

     We target business customers in the segment SOHO and SME 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 and Top SMEs are targeted by our Business Solutions unit embarking on a customer-focused approach with a strong emphasis on all-in-one solutions.

     Our wholesale customer base comprises national and international mobile and fixed network operators and ISPs. Our marketing activities are customized to the individual needs of our customers focusing on the provision of integrated solutions and quality of service.

     Our wholesale services are marketed and sold directly to national and international carriers by our carrier managers. In 2006, we served more than 100 national and 300 international wholesale customers. We plan to further push our sales activities through indirect Partner Sales in those countries which are covered by our fiber optic ring (TA Jetstream).

     Customer service

     We believe that a long lasting customer relationship is essential to outperform our competitors. Therefore, we continuously concentrate on service leadership. We handle about 17.7 million customer contacts per year with a focus on improving customer satisfaction.

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

     The customer service center was re-organized from a technology-based organization to a customer process-oriented organization. Our technical structure and functional organization facilitate but do not determine our customer service processes. We improved interfaces between operational support systems, billing and other customer service systems to achieve more efficient customer service management. As a result, we increased our performance and achieved significant cost savings. Our technical customer service realized increased efficiency in terms of daily order processing per employee. We increased our customer self-care options to be more efficient while satisfying additional customer needs.

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

     Networks

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

     Switched network

     We operate a fully digital voice switching network serving 2.2 million PSTN access lines, about 391,300 ISDN basic access lines, and 7,100 ISDN multi access lines at December 31, 2006. 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 2006 was 99.99%. The call success rate is the percentage of originating calls resulting in successful connections (ringing tone) with the intended destinations.

     At December 31, 2006, more than 96% of the voice switches and remote units were connected to our transmission network by optical fiber cables, the highest capacity medium available.

     We have continued the process of optimizing the switching network. This program reduces operational costs, lowers capital expenditures and accelerates service rollouts.

     Through our network we offer, among other services, toll-free value added services (VAS) and number portability. The demand for new network services is driven by customer needs for communication within a predetermined user group and by regulatory requirements, such as number portability. We have started to adopt new network technologies that will facilitate the offer of 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 20,600 kilometers of optical fiber cables at December 31, 2006. 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 network 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.

     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 1,394 ADSL relay stations covering more than 96% of Austrian households. We had 693,600 ADSL lines installed at the end of December 2006, up from 574,300 at the end of the year 2005 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 (VDSL2) applications on existing copper lines. Trial runs in selected locations in Vienna are planned for 2007.

     Advanced services. These services are driven partly by the technological developments and partly by the demand of 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 249 destinations (including global satellite networks) and direct links to 148 international operators in 74 countries. We partially own or control irrevocable rights of use (IRU’s ) for undersea cables in addition to satellite capacities, provided by Intelsat and Eutelsat. Through the installation of Telekom Austria’s JetStream, we expanded our broadband activities abroad. This fiber-optics network, which can be expanded up to n*2.5 Gbit/s, currently covers Prague, Frankfurt, Munich, Bratislava, Budapest, Milan and Ljubljana, thus allowing us to expand the capacity and required locations step-by-step to meet the growing demand. The expansion of Telekom Austria’s Jetstream does not only enable us to connect members of Telekom Austria as well as our wholesale and retail customers to our network, but also to act as major and reliable provider for voice and data services in Eastern and South-Eastern Europe.

     Next generation network

     Similar to the way in which the entire telecommunications network had to be completely renewed through digitalization at the beginning of the 1980’s, new technology is still 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 have started a multiyear program aimed at a smooth migration to NGN allowing for the development of innovative services (e.g. aon-Digital TV) while optimizing network costs by using existing infrastructure. In 2006 we optimized our operations support systems/business support systems (OSS/BSS) strategy regarding our platform architecture with scope to the automation of processes, replacement of legacy systems and implementation of end2end modules. In 2006 we began to establish Switched Ethernet as a universal aggregation network, which is used, for example, for the aggregation of the traffic of next generation of DSL systems. This constitutes an important step towards a simple but powerful “all-IP” network (see “Item 5.4. Liquidity and capital resources — Capital expenditures”).

     Information technology/Operations support systems

     The quality of our operations support systems is critical for 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.

Wireless

     Our Wireless segment consists of mobilkom austria, Mobiltel in Bulgaria, Vipnet in Croatia, Si.mobil in Slovenia, mobilkom liechtenstein in Liechtenstein and TopNet in Serbia (see also “Item 19. Exhibits — Structure of Telekom Austria Group”). In November 2006, mobilkom austria AG won the bid for the GSM 900/1800 and UMTS license for the territory of the Republic of Serbia, offered in a tender and, according to the license conditions, has to start operation within 6 months following the license grant date.

     The Wireless segment generated revenues of EUR 2,902.6 million in 2006, EUR 2,484.8 million in 2005 and EUR 2,121.4 million in 2004 before intersegmental eliminations.

     We had approximately 10.2 million mobile communication customers at the end of 2006, representing a 14.2% increase compared to 2005 with Mobiltel EAD contributing more than 4.27 million customers. Wireless market penetration ranges from 105.9% in Bulgaria, 85.4% in Slovenia, 101.0% in Croatia to 114.2% in Austria.

     In January 2003, an exclusive partnership agreement with Vodafone to co-operate in the Austrian, Croatian and Slovenian market was entered into and it was extended in 2006. Mobiltel EAD signed a partnership agreement with Vodafone as well in February 2006. Starting in 2004, numerous joint products were launched, especially in the area of data services and roaming. The cooperation has extended the range of existing products and services of the wireless segment and improved the product portfolio. The companies cooperate in the field of roaming, purchasing, development of new products and services, technical platforms, global account management and joint marketing initiatives. Successfully introduced products in all countries have included Vodafone Live!, Vodafone Mobile Connect Card and Blackberry.

     We believe that market liberalization has contributed to market growth and intensified competition in the Wireless segment. We expect that the organic growth in the Wireless segment will not be able to match the growth rates of prior years.

     Austria

     mobilkom austria AG is the leading provider of mobile communications services in Austria with more than 3.6 million customers at December 31, 2006, which represented a market share of 38.7% of the Austrian mobile communications market, in comparison to 39.1% at the end of 2005. 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 114.2% at December 31, 2006. A penetration rate of above 100% shows the trend for individuals to own a second SIM-card. The penetration rate increased by 8.2 percentage points compared to 2005. As a result of the market saturation, we have especially focused on retaining customers to protect our market share and have increased our total customer base by 7%. We expect growth in the medium-term, which will be driven by new data services as well as the expansion of mobile technology to new products and services, which thus will support our position as market leader. We believe that we have a strong market position as a result of our customer-focused services, three well recognized brands in Austria with “A1” and “bob” as the product brands and “mobilkom austria” as the company brand and its customer service.

     mobilkom austria AG’s market leadership is partially built on technology, innovation and service leadership, marked by the first worldwide GPRS launch in August 2000, one of Europe’s first commercial UMTS network launches in Austria in April 2003 and the HSDPA launch in January 2006. With the introduction of “mobile TV”, mobilkom austria AG was the first operator in Austria to offer this service. Through the intelligent combination of the carrier technologies GSM/GPRS, EDGE, UMTS and HSDPA, mobilkom austria AG offers its customers a full-coverage, nationwide, high-speed, multimedia network in Austria, which is the basis for intensive use of data services. The service leadership is marked by increasing customer satisfaction in all segments and by service offers such as special VIP treatments, dedicated sales persons or emergency assistance.

     Competition

     The Austrian mobile communications market currently has three GSM operators with UMTS licenses (mobilkom austria AG, T-Mobile Austria and ONE) and one UMTS license holder (Hutchison 3G Austria). In

August 2005, T-Mobile Austria signed a share purchase agreement in order to buy the fourth GSM operator, tele.ring. The transaction was approved by the European Commission and the Austrian regulatory authority in April 2006. The approval included obligations to offer redundant infrastructure as well as UMTS frequencies to Hutchison 3G Austria and ONE, the two smaller operators in Austria. The new situation on the Austrian mobile market may have the effect of strengthening the position of T-Mobile Austria as a result of economies of scale. Despite this development in the market, there seem to be no plans to abandon the tele.ring brand in the foreseeable future. In December 2003, mobilkom austria AG acquired Telefonica-owned 3G Mobile, which also held a UMTS license, and thereby increased the available frequency spectrum.

     Since the fourth quarter of 2004, tele2UTA, which previously operated as a service provider, has operated 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 communication services under its own brand name, focusing on business customers and using the ONE network. In 2005, Yesss!, a 100% subsidiary of ONE, launched a no-frills prepaid service, using the network of ONE. Yesss! launched their own access number in early 2006. Yesss! offers only voice and SMS services, and gained approximately 494.700 customers by December 2006. In 2006, our competitor tele2UTA also launched a cheap prepaid service. “eety” is another service provider, which entered the market in 2006, focusing on cheap international tariffs.

     Our competitors in Austria 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, quality and network coverage.

     Customers and traffic

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

	•		Business customers: individual business solutions are offered to this group of sole proprietorships and larger corporations and organizations;
	•		Residential contract customers: residential contract customers , having typically medium to high usage of mobile communications services, are included in this group; and
	•		Prepaid customers: customers, having typically low usage of mobile communications services, without fixed contract are served in this group.

     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 total market numbers reflect our best estimate of the size of the market.

		At December 31,
		2006				2005				2004
		(in thousands)
Customers at end of period
Contract			2,207.0				1,929.5				1,778.8
Prepaid			1,423.5				1,462.7				1,494.8
Total customers			3,630.5				3,392.2				3,273.6
Net additions			238.2				118.6				110.4
Market Information
Total market for mobile services			9,374.2				8,670.5				7,993.0
Our total market share			38.7	%			39.1	%			41.0	%

     Our customer base increased to more than 3.6 million customers in 2006, of which approximately 2.2 million were contract customers and approximately 1.4 million were prepaid customers. Our focus on contract customers resulted in a stronger growth of our contract customer base.

     The Austrian market experienced an increase in churn rate as a result of aggressive pricing policies. Nevertheless, mobilkom austria AG has the lowest average churn rate among the established Austrian providers, which is approximately 16.8%, compared to 17.2 % in 2005. In 2006, our contract churn rate was 9.9% and our prepaid churn rate was 26.5% compared to 10.9% and 25.2% in 2005. The introduction of mobile number portability in October 2004 has not significantly affected the churn rate of mobilkom austria AG.

     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.

		Year ended December 31,
		2006				2005				2004
Traffic (in millions of minutes)			6,512				5,332				4,751
Average number of customers (in thousands)			3,482.8				3,302.9				3,184.4
Minutes per customer per month			156				135				124

     Tariffs

     For each customer segment we offer a variety of tariffs. We are applying a segmented marketing approach tailoring tariffs to selected target groups, thereby addressing, for example, the special needs of young, residential or business customers. We offer promotional packages intended to attract and retain customers. These promotions include reduced monthly fees for a fixed period of the customer’s contract. In addition, we intend to continue to focus on attracting and retaining high-volume corporate customers by offering flexible corporate tariff structures, additional services, volume discounts and handset replacements.

     In the fourth quarter of 2006, we offered a new tariff called “ZERO”– this new tariff includes destinations where phone calls or SMS messages can be made free-of-charge up to a certain limit of minutes or messages. The higher the fixed monthly fee, the more free-of-charge destinations are included. Due to the increased importance of data service in 2006, mobilkom austria AG offered clear and easy volume prices for mobile broadband or Blackberry services. mobilkom austria AG launched a mobile broadband starter package for basic users in the fourth quarter of 2006 in addition to its existing broadband packages.

     Prepaid products and services are offered primarily for less frequent mobile phone users, who focus on cost control. Therefore in 2006, we launched a new tariff, B-FREE 5, offering calls within our own network at prices far below prepaid level. The advantages to the company of prepaid services are decreased credit risk, lower costs of sales and reduced administrative costs.

     In July 2006, mobilkom austria AG launched its new no-frills brand “bob” to increase market leadership. bob customers can be reached using the prefix 0680, do not pay a monthly fee, do not need to top up credit and they have a contract but no obligation.

     Products and Services

     We offer a wide range of mobile communications products and services including VAS 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), services allowing the use of up to three mobile phones under the same number, SMS and multimedia messaging services (MMS and video telephony). 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. An overview of our A1 products and services is offered on our portal www.A1.net.

     Our large corporate customers additionally benefit from a wide range of virtual private network functionalities such as user profiling, short code dialing, call transfer, an integrated network attendant or uniform voice mail greetings. In addition customers have the possibility to administer their own voice and data tariffs in real time via the Internet. Furthermore they can choose from a large portfolio of data tariffs.

     Vodafone live! is a product portfolio, which is predominantly used by our residential customers and which offers a variety of services such as ring-tones, wallpapers, games, mobile TV, videos, news and other

information via the mobile phone. Parts of Vodafone live! were continuously re-launched in order to achieve the best user experience and technical performance. Since the fourth quarter of 2005, Vodafone live! users have been able to choose TV programs from national broadcast channels where mobilkom austria AG acts as a cable network operator and re-transmits original TV broadcast signals as of a live TV offering. Since the first quarter of 2006 Vodafone live! users can additionally choose from commercial broadcast channels.

     M-commerce services. mobilkom austria AG is Europe’s leading provider in the m-commerce segment. The portfolio of services ranges from event ticketing to m-parking, from payment at vending machines to betting and gambling via mobile phone, as well as paying public transport tickets or highway toll. With our service m-parking, about 400,000 parking fares are sold every month in Vienna. Further services have been launched in 2006, such as the m-payment platform in cooperation with the mobile operator ONE as well as m-payment for online shopping.

     In order to handle transactions for m-commerce and establish a universal standard for mobile payment transactions with Austrian banks, mobilkom austria AG was the first mobile communications service provider worldwide who was assigned a bank license in January 2002. This license allowed us to establish our 100% subsidiary A1 Bank, enabling us to install mobile payment functions via mobile phone. In March 2006, mobilkom austria AG sold one sixth of paybox to ONE GmbH which creates one of the first inter-operator m-payment standards worldwide. In addition, the e-Vouchers from paybox can be used through all mobile operators in Austria.

     A1 NAVI. The graphic and voice-enabled instructions of A1 NAVI provide full turn-by-turn, dynamic, graphic and voice-enabled navigation for GPRS/UMTS mobile phones within the home and roaming networks. An important innovation in the mobile navigation market is the introduction of GPS over IP as part of A1 NAVI service. Using this technology, precise Location Services are available. The NMS-NAVI Message Service, also introduced in 2006, is an interactive message service which allows drivers to report specific situations such as traffic jams or accidents.

     A1 over IP. With the introduction of A1 over IP, mobilkom austria AG became the first mobile operator in Austria to offer voice over IP technology combined with the mobile phone. The goal of A1 over IP is the seamless integration of mobile phone and Internet using the regular mobile phone number. The test-run for A1 over IP started in October 2006. The product will continue to be fine-tuned with the active participation of A1’s customers.

     Call completion service. mobilkom austria AG’s development of services in the voice segment focused on call completion services aimed at increasing voice usage by the total customer base. We successfully introduced missed call notification to our 3.6 million customers. Our customers get a SMS notification with a list of all missed call numbers while their handsets were 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.

     Business customers. Within the business service sector, mobilkom austria AG achieved a major improvement in customer perception of mobile business applications by launching easy-to-use products such as mobile broadband. The Vodafone Mobile Connect Card, a data card for notebooks and USB-modems, for desktops, in combination with different mobile broadband packages, enables fast wireless access to Internet and corporate networks, and therefore offers full mobility for our customers. This service has been enriched by the EDGE, UMTS and HSDPA technologies. We are the only company in Austria which introduced UMTS+EDGE providing the first country-wide mobile broadband coverage. With roughly 140,000 data cards and USB modems sold by the end of 2006 mobilkom austria AG remains Austria’s leader in mobile broadband.

     Push mail services. In 2004, we also introduced Blackberry services, enabling customers to send and receive all e-mails on a handheld device automatically. In 2005, we enlarged the product offering by giving business customers the possibility to connect the handheld device to their own enterprise resource planning (ERP) system as well as to office programs such as e-mail or calendar. In 2006 we introduced special data tariffs for Windows Mobile to enable business customers to use Microsoft Direct Push technology. Furthermore, penetration was increased significantly particularly in the business segment and new devices were introduced in 2006. In the residential customer segment a starter product without a monthly fee was launched.

     International roaming services. International roaming enables our customers to make and receive calls in other countries with their mobile phones using the networks of operators with whom we have entered into international roaming agreements. At December 31, 2006, we had international roaming agreements with 362 mobile network operators in 162 countries. Additionally, we offered our prepaid customers roaming in 46 countries with 81 mobile operators without the requirement of prior registration. At December 31, 2006, we

offered GPRS roaming in 99 countries with 188 operators. In 2004, we started to focus on offering 3G roaming to our customers. At the end of 2006, we had launched UMTS roaming in 38 countries with 65 operators, significantly increasing the possibilities of data transmission abroad. As an extension of our roaming data services, EDGE was enabled in 41 countries with 45 operators and HSPDA in 20 countries with 22 operators. In addition, we offered our customers additional convenience services, such as using the same short numbers for calling voice mail abroad, recharging the prepaid account abroad and special rates during summertime at primary tourist destinations.

     Furthermore, we offer special data roaming rates on our partner networks for Blackberry users and Vodafone Mobile Connect Card users, with special rates on partner networks and special roaming data bundles with preferred rates in partner networks introduced in Austria, Slovenia and Croatia. The roaming services have been developed using a more segmented approach, whereby the individual bundles reflect identified customer needs and increased speed of data transmissions with HSDPA also abroad.

     Vodafone World Options, offering additional discounts for our business customers in specified countries, was launched in Austria. These options enable us to meet the specific needs of our business customers with tailor made prices.

     In addition, we offered roaming promotions during the high travel season in summer and winter for our customers abroad as well as for visitors (offering special rates or other benefits at tourist sites) in Austria, Croatia and Slovenia.

     Sales and Distribution

     Our mobile sales 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 strategy includes:

	•		Increasing sales through direct channels and developing them into service points for our customers, e.g. for hardware replacement and handset rental in case of handset damages;
	•		Strengthening the focus on valuable business customers; and
	•		Improving the usage and number of data products, such as mobile broadband, Vodafone live! or Blackberry.

     We distribute contract, prepaid and data mobile communication services through various channels, including our own A1 shops, franchise shops, shops-in-shops, post offices, retail agents, tobaccoists, Internet and a dedicated key account sales force.

     At December 31, 2006, we operated 38 A1 shops in major metropolitan areas in Austria and five A1 shops are operated by franchise partners, without any noticeable differentiation from company owned A1 shops.

     A1 shops offer mobile communication products, services and accessories, technical information and advice, and test of mobile communication products. We have also entered into distribution agreements with 1786 electronics equipment outlets throughout Austria as of December 31, 2006. Our shop-in-shop concept comprises approximately 190 branded information counters in large consumer electronics outlets. In addition, our mobile communication products and services are also offered in our 51 Telekom Austria shops and in 1337 post offices throughout Austria, which provide high visibility for our products and services.

     We also sell our prepaid vouchers through other retail agents, such as supermarkets, tobaccoists and gas stations throughout Austria.

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

     Customer services

     In 2001, our call center and inbound and outbound services were certified by the ÖNORM Institute, the Austrian Standards Institute, and became the first certified call center in Austria. In 2005, the ÖNORM Institute audited mobilkom austria AG’s customer service quality and extended the certification for another two years.

     We seek to provide high quality customer service and to continuously strengthen the relationship with mobile customers along the entire customer lifetime cycle. Operating in two locations, customer services provides inbound and outbound call services including the active promotion of our product range, customer data management, account activation and cancellation, customer correspondence via letter, fax and e-mail, complaint management as well as billing, accounting, fraud and debtor risk management. We strategically concentrate on supporting promising data products and services – such as mobile Internet access or mobile office solutions.

     Customer services are an essential driver for customers’ loyalty. We sought to increase customers’ satisfaction by offering an integrated service with single customer contact and enhanced our employee’s identification with our brand values. Our efforts lead to further increased customer satisfaction over all touch-points which is measured by the market research institute Tri-Consult twice a year.

     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, 2006. The collected points entitle customers to purchase new subsidized handsets and accessories for mobile phones.

     We continuously upgrade our systems and optimize our processes in order to enhance efficiency and to deliver optimal support for our employees regarding customer contact. Further automation of case handling as well as the shifting of requests to automated channels (IVR, Internet self service) lead to a lowered effort on manual handle times and increased efficiency. In addition we are focusing on cross- and upselling activities as well as acquisition of new customers, especially in the segment of small business customers.

     A1 Online Bill. After introducing electronic online billing in 2003, we continuously promote the increased usage of online billing among private and business customers. In 2005 we introduced paperless billing and thereby we successfully managed to reduce costs for bill production and postal distribution.

     Networks

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

     Global System for Mobile Communications (GSM). In our GSM network we provide dual band services (GSM900 and GSM1800) to accommodate our expanding customer base with necessary capacities at the best quality.

     Wireless Application Protocol (WAP). In December 1999, mobilkom austria AG introduced WAP. Since March 2000, mobilkom austria AG has offered a personalized WAP-portal with an integrated search engine. In 2004, the popularity of WAP was increased by launching Vodafone live!, the common portal of Vodafone companies and partner networks.

     General Packet Radio Service (GPRS). In August 2000, we became 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 data service enhancement for Global System for Mobile Communication (GSM). 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.

     Enhanced Data Rates for Global Evolution (EDGE). Implemented upon the existing network, EDGE was launched by mobilkom austria AG in January 2005 to complement our 3G coverage, reaching 98% of the Austrian population with mobile broadband (UMTS+EDGE).

     Universal Mobile Telecommunications System (UMTS). mobilkom austria AG successfully bid for a UMTS license in Austria in November 2000. As the first operator in Austria, mobilkom austria AG commercially launched the service on April 25, 2003, covering about 50% of the Austrian population by year-end 2003. At the end of 2006 our UMTS-network covered about 70% of the Austrian population. The takeover of 3G Mobile in December 2003 increased the available frequency spectrum for mobilkom austria AG from 2x10 MHz to

2x14.8 MHz, which gives us ample capacity to efficiently handle potential growth of mobile services in the future.

     High Speed Downlink Packet Access (HSDPA). As the first operator in Austria and one of the first in Europe, mobilkom austria AG commercially launched HSDPA in January 2006. HSDPA is now available over mobilkom austria AG’s entire UMTS network with downlink data-rates up to 3.6Mbit/s.

     High Speed Uplink Packet Access (HSUPA). Within our HSUPA-Trial in December 2006 we enhanced the uplink data-rates from 384kbit/s up to 1.4Mbit/s. Commercialization of HSUPA in the mobilkom austria AG UMTS network is planned for the first half of 2007.

     The following table shows the number of GSM and UMTS stations in Austria that were operational at the end of the indicated periods.

		At December 31,
		2006				2005				2004
GSM stations			5,497				5,407				5,363
UMTS stations			2,688				2,110				1,721
Total			8,185				7,517				7,084

     Our digital transmission network includes the standard components of a mobile telecommunications network, such as digital cross-connects, radio links, and other transmission devices. 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.

     UMTS rollout focused on enhanced population coverage and additional capacity for densely populated areas. Synergies of our base station infrastructure are utilized by combining GSM and UMTS equipment on site.

     mobilkom austria AG continuously monitors the quality of its networks and those of its Austrian competitors on a monthly basis. By benchmarking the major key performance indicators (KPI) of the networks within the Vodafone cooperation we are able to further compare and enhance network performance. Based on recurring tests carried out under the supervision of the Technical University of Vienna, Institute of Broadband Communications, the voice connection quality of our networks were found to be consistently higher than those of our competitors. As in 2005, in 2006 our network was rated by the Technical University of Vienna, Institute of Broadband Communications, as having the highest data throughput in Austria.

     Information technology/Operations support systems

     Information technology’s main focus is to support all lines of businesses locally in mobilkom austria AG and, where needed, internationally in the Wireless segment. The main tasks of IT are consultancy, implementation and operation of systems and architectures.

     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 2006 consist of the enhancement of our billing systems for Si.mobil and the no-frills brand bob, implementation of voice-over-IP technology in combination with mobile telephony and the establishment of a general control framework for all technical departments.

     Our main IT systems include our billing systems, customer relationship management (CRM) system, mobile data applications, internal/decision support applications and ERP systems. Our billing systems collect and rate 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 an enterprise resource management system (which is used 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.

     Bulgaria

     Following the acquisition of the purchase option for the complete takeover of the Bulgarian mobile operator in December 2004, Mobiltel EAD was acquired in its entirety by Telekom Austria in July 2005.

     Mobiltel EAD is the leading local brand and provider of mobile communication services in Bulgaria. The company provides its products and services to over 4.3 million subscribers at December 31, 2006 compared to 3.6 million at the end of 2005. Due to the continuous mobile business growth the penetration increased from 79.5% in 2005 up to 105.9% at the end of 2006. Due to the increasing customer base the company had a market share of 52.5% in 2006 compared to 57.6% as of December 2005 and held its position as the largest mobile telecommunications operator in Bulgaria. Mobiltel’s customer base is comprised of 36.8% postpaid and 63.2% prepaid subscribers.

     Competition

     Mobiltel EAD competes on the Bulgarian mobile communications market with Globul (100% owned by Cosmote, a Greek mobile operator), the third GSM operator Vivatel (owned by the Bulgarian Telecommunications Company — BTC), which officially launched its services in November 2005 and Mobikom — the only analogous mobile operator holding 0.1% market share and which is expected to leave the mobile market.

     Products and Services

     In 2006 Mobiltel EAD focused on expanding the variety of services offered on the Bulgarian market. A long term partnership agreement was signed with Vodafone, by which international Vodafone products and services were introduced successfully. Vodafone Mobile Connect Card was the first Vodafone product introduced in Bulgaria in April 2006. Competitive roaming tariffs such as Vodafone World and Vodafone EUROCALL and Blackberry service were also introduced to Mobiltel’s customers. The Blackberry allows secure, permanent and instantaneous mobile access to E-Mail account directly from the customer’s handheld. In October 2006 Vodafone live!, mobile Internet portal and branded low cost handsets were launched. Vodafone live! offers a variety of services such as ring-tones, wallpapers, games, mobile TV, videos, news and other information via mobile phone.

     Mobiltel EAD offers retention programs such as a loyalty program, which is a point-based program. Points are awarded on the basis of fees paid. Customers can exchange these points for various benefits such as free minutes, discounts on handsets and accessories. Regular contract binding campaigns offer discounts on monthly fees for migration to new tariff plans and long-term agreements. In terms of handset subsidies, during 2006, all three mobile operators were subsidizing handsets, mainly focusing on low-end handsets. Subsidies are expected to remain on a low level compared to other European mobile markets.

     Postpaid Business. Mobiltel EAD launched a new segmentation for business customers according to monthly revenue and the company’s location. In order to increase attraction and maintain quality services for business customers, Mobiltel’s key accounts re-signed contracts and sold new services directly to the clients’ offices. Mobiltel’s key accounts staff serves more than 25,000 business customers. In March 2006, Mobiltel EAD launched a special offer named “Judgment day” for acquisition of new business customers from the competition. The offer includes free closed-user-group minutes, free on-net minutes, lower tariff plans, gateway solutions and free handsets. Furthermore, a new service was introduced to business customers — Green Line 0800 where Mobiltel provides business customers with a toll-free special number from the 0800 range and allows them to receive calls at no cost for their customers, suppliers and business partners. The service has been available for business customers since August 2006 and is already accessible from all major telecom operators in Bulgaria.

     Postpaid Residential. In 2006 Mobiltel continued to attract the mobile market. A further step into that direction was the establishment of a new brand, “LOOP!”. Loop targets the youth segment allowing anyone between the ages of 14 and 26 to talk at the lowest price ever offered in Bulgaria.

     Mobiltel EAD introduced new tariff plans for the residential segment such as “Mtel Light” (launched in February 2006 and offers a lower monthly fee to encourage the subscribers to migrate from prepaid to postpaid),

“Mtel Relax” (launched in March 2006 and offers free-on-net minutes and the lowest minute prices for calls to all national networks by flat rate), and “Mtel Time” (launched in December 2006, with lower fixed fees and 10 minutes package for the price of one).

     Prepaid. In the Prepaid segment Mobiltel EAD introduced numerous successful prepaid promotions combined with gifts and airtime offers. The gift promotions mainly boosted the “gross adds” development, whereas telecommunication promotions were targeted to be the main driver of promotions.

     Distribution

     In 2006, Mobiltel EAD continued the expansion of their own shop network. New shops were opened during the year reaching a total of 157 in December 2006, compared to 150 in December 2005. Mobiltel EAD distributes its services through indirect sales channels as well. It has signed agreements with two exclusive dealers who own well developed shop networks. During 2006 they added 26 new points of sales.

     Network and Technology

     Mobiltel EAD operates a high quality dual band network which covers over 99% of the Bulgarian population and more than 98% of the territory of Bulgaria.

     After launching GPRS in the beginning of 2004 and EDGE technology in the first quarter of 2005, in the first quarter of 2006 Mobiltel EAD started to provide 3G services after a UMTS license was acquired in 2005. In March 2006, Mobiltel EAD commercially launched it’s UMTS-HSDPA network and was the first in its country to offer 3G services such as Video call, Mobile TV and faster data transfers. The new HSDPA network supports speeds of up to 1.8 Mbps and puts Mobiltel EAD fifth in the world to launch such a technology to serve end customers. This technology currently covers more than 20% of the population and is available in 10 cities, in all of the major Black Sea holiday resorts, and in the skiing areas.

      In December 2005, Mobiltel EAD acquired a Point-to-Multipoint (WIMAX) License for EUR 3.1 million. Broadband customers in 3 cities can use services based on WIMAX technology and therewith be provided with broadband Internet access, VoIP and fast data transfers. 24 locations are planned to be covered until the end of 2007. The end users will benefit from a speed of up to 5 Mbps when exchanging data in a highly encrypted and secured wireless surrounding even in places without fixed line dependence.

     For broadband transmission purposes, Mobiltel EAD owns a Fiber Optic Network, consisting of almost 2000 kilometers and connecting 30 large cities within the country. Based on its double-ring topology, all Switches and Base Station Controllers are linked via a protected Fiber Optic connection, which allows automatic transfer to a back-up route in case of failure and guarantees high reliability and transmission security. The network reduces dependency on the leased lines and related costs. The unique architecture allows automatic transfer to a back-up route in case of failure and guarantees high reliability and transmission security. This enables Mobiltel EAD to offer its clients new quality services related to the transfer of large amounts of secured data such as high speed Internet and VPNs which are currently connecting Mobiltel’s branches in different cities within the country. Additionally the Fiber Optic connections have been deployed towards the international border crossings of Serbia, Macedonia, Greece, Turkey and Romania which support Telekom Austria “Jet Stream” business opportunities. Being operational from the beginning of 2006, the fiber optic network was presented to the public in December 2006.

     Croatia

     In September 1998, Croatia awarded its second GSM license to Vipnet, a consortium in which mobilkom austria AG held an interest. We increased our stake in Vipnet through December 31, 2004, bringing our total interest in Vipnet to 100%.

     As of December 31, 2006 Vipnet served over 1.9 million customers and increased its customer base in 2006 by 18.6% compared to December 31, 2005. Vipnet’s annual churn rate in 2006 was 14.4%. Vipnet has a 42.9% share in the Croatian mobile communications market. Croatia’s mobile communications penetration rate was 101.0% as of December 31, 2006.

     In order to re-position itself on the Croatian telecommunications market, in January 2006 Vipnet took another innovative step by presenting a new visual identity.

     In 2005, Vipnet established a subsidiary, Vipnet services, which began commercial activities in May 2006, to support Vipnet’s business activities and to provide hosting services to members of mobilkom austria.

     Competition

     Vipnet competes in 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 and, since October 2005, also with tele2.

     In 2004, the Swedish operator tele2 received a combined GSM/UMTS license, which is valid for 20 years. Vipnet and tele2 signed a contract on national roaming in June 2005 and Annex 1 in April 2006 allowing tele2 customers to connect to the Vipnet network throughout Croatia except for the Zagreb area. Under the agreement Vipnet offered tele2 national roaming services for voice, data and billing services. The contract is valid until June 1, 2008.

     Products and Services

     In 2006, Vipnet offered promotional tariffs and packages in order to retain current and attract new customers. Vipnet offered different usage options for all segments allowing benefits such as flat rates for all destinations, free on-net calls for “friends” numbers, discounts on calls to national fixed lines and reduced monthly fees. The launch of new tariffs was followed by special handset promotions. Furthermore, Vipnet’s customer base migrated partly from prepaid to contract.

     As a major tourist destination, Croatia has a high number of visitor roamers in the summer season. Visitors generated 12% of Vipnet’s total revenues.

     The strategic partnership with Vodafone resulted in a successful launch of Vodafone live! 3G mobile portal which enabled the first video streaming service in Croatia, Vodafone World Roaming tariff and Mobile Connect card, which enables quick and easy Internet access with laptops.

     During 2006, Blackberry and Business e-mail services were introduced for primarily small and medium-sized companies. These products offer a complete solution which is accessible from different devices and places without any additional investment. In order to enable customers to use their data products abroad like at home, Vipnet developed data roaming products such as the Blackberry roaming bundle and Mobile Connect card roaming bundles, which were introduced in the last quarter of 2006.

     In February 2006, Vipnet became the first company in Croatia to launch Integrated Telecommunications Solutions (ITS) which makes Vipnet the first “one-stop-shop” provider for mobile, fixed and ISP services. This new package includes the following services for large businesses: fixed and mobile VPN, Internet and IP VPN, as well as the Voice&Internet bundles.

     In June 2006 Vipnet launched a prepaid no-frills brand called ‘tomato’ comprising only voice and SMS services with the lowest flat rate to all destinations in the Croatian market.

     In September 2006, Vipnet launched Vodafone Homebox service to private customers and to small and medium-sized companies as a substitution for the fixed telephone line for calls and access to the Internet. Users can keep their existing fixed line telephone number under this service.

     Networks

     In April 2004, Vipnet began the introduction of EDGE technology, covering 90% of Croatia’s population by the end of 2006. After placing the first UMTS test call in Croatia in May 2003, Vipnet was granted a UMTS license for 20 years in October 2004. Vipnet launched its commercial UMTS services in January 2005 making Vipnet one of the first operators in Europe to operate a combined EDGE and UMTS technology, offering high volume data products to a broader customer base. Vipnet obtained a fixed-net license in July 2005 and in

November 2005 the Croatian Agency for telecommunication decided to grant Vipnet the concession for WIMAX for the city of Zagreb.

     Furthermore, in April 2006, Vipnet was the first operator in Croatia to launch a High Speed Downlink Packet Access (HSDPA) network. In October 2006, Vipnet began offering Mobile Number Portability, the start of WIMAX was in December 2006.

     Slovenia

     In February 2001, mobilkom austria AG acquired the majority ownership of Si.mobil, which began operating in March 1999 as Slovenia’s first private mobile service provider. In May 2006, mobilkom austria AG became the 100% owner of Si.mobil.

     With a penetration rate of 85.4% in Slovenia and a market share of 24.9%, Si.mobil is the second-largest mobile communications provider in the country, serving 420,877 subscribers as of the end of 2006, which represents an increase of the customer base by 17.1% compared to the end of 2005. The contract customer base accounts for 57.5% of the total customer base.

     Competition

     In Slovenia, there are currently three competing mobile operators and one MVNO. Mobitel is the incumbent with a market share of 67.9%, Si.mobil second in place with a market share of 24.9% and Debitel third with a market share of 5.8%. In 2006 an additional MVNO provider, Volja Mobil, offered prepaid services under the brand name izi mobil, using Mobitel infrastructure.

     Western Wireless International (“WWI”), the owner of Vega, decided to exit the Slovenian market in May 2006. Si.mobil reached an agreement with WWI to acquire selected base stations and related sites. These sites and equipment will be used to enhance the existing network of Si.mobil in capacity and quality. In May 2006, Tusmobil, a new operator, formed by the large Slovenian retailer Tuš, bought the DCS 1800 frequencies and core network of Vega, but has not yet commenced operations.

     Products and Service

     Si.mobil was able to position itself as the price leader on the Slovenian market with Smart tariffs, offering to its customers an innovative product portfolio with competitive and transparent pricing. In addition, Si.mobil customers may benefit from the advantages of a global mobile communications company via our Vodafone products. In the beginning of 2006, Si.mobil lowered prices of some contents on Vodafone live!.

     Si.mobil offers Blackberry services on a wide range of devices to its customers. New products and services were offered to business customers including a Business Smart package and Vodafone Mobile Connect Card. Si.mobil attempted to attract former Vega users with special offers including free connection fees and a 50% discount on the monthly fixed fee for a period of one year. In July 2006, Si.mobil introduced an updated Si.Navigator (a GPS navigation system for mobile phones) with modernized high quality maps, enabling more precise directions in Slovenia and in more than 30 countries throughout the world. In October 2006, Si.mobil and iTIVI (a company that operates DVD rental, and TV channels) introduced the first mobile DVD’s rental services via Vodafone.

     Networks

     In September 2006, a UMTS license was granted after a public tender to Si.mobil for EUR 6.5 million. In December 2003, Si.mobil entered the third generation of mobile communications with the implementation of EDGE and covers more than 80% of the population up to date.

     Liechtenstein

     In 1999, the Principality of Liechtenstein granted a GSM license to mobilkom liechtenstein, a wholly owned subsidiary of mobilkom austria AG. 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 premium-rate services were outsourced in 2006.

     The penetration rate in Liechtenstein reached 82.1% as of December 31, 2006. The customer base of mobilkom liechtenstein amounts to more than 4,700 (all of them contract customers), thus accounting for a 16.8% share of the mobile communications market in Liechtenstein. mobilkom liechtenstein extended its position of the largest local mobile operator in this highly competitive market.

     Serbia

     In November 2006, we won a tender for the 3rd UMTS and GSM license in Serbia for EUR 320 million. The license was granted in December 2006 for a period of 10 years and with an additional 10 — year automatic renewal. Operations shall be launched within 6 months with a coverage of 20% of the population, as well as of three major highways reached within 12 months after the grant. 50% of the population and all highways have to be covered within 24 months and 80% of the population and 90% of the territory of the Republic of Serbia have to be covered within 48 months.

Property and Equipment

     Our consolidated financial statements show a net carrying value for property, plant and equipment of EUR 3,216.0 million in 2006 and EUR 3,583.0 million in 2005. The total acquisition costs were EUR 11,053.3 million in 2006, and EUR 10,962.0 million in 2005. The acquisition costs include, among others, communications network and other equipment totaling EUR 10,091.5 million, land totaling EUR 55.5 million and buildings totaling EUR 743.9 million on December 31, 2006. The items 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, 2006, we used about 2,372 facilities, of which approximately 40% were leased. The major part of land and buildings comprise the property formerly owned by Post und Telekom Austria AG and allocated between Österreichische Post and Telekom Austria as a result of the spin-offs described under “— 4.2. History and Development of the Company.”

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 for retaining our technological innovation leadership in the market. We hold a variety of patents and licenses, however no single self-developed 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 and convergence of services. We focus our research activities on trend-setting and usability — proved 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. Telekom Austria sees itself as a driving force in the interplay between the Austrian ICT (Austrian Information and Communications Technology) research landscape and system manufacturers.

     During 2006 we continued our cooperative research efforts with industry and academic partners in various projects partly funded by the European Commission or national funding schemes. Our projects focus on the development of advanced, personalized harmonized services for users by taking advantage of heterogeneous service infrastructures, new generation network (NGN) architecture and convergence of circuit and packet switched services.

     The NGN architecture is based on a packet-based network able to provide telecommunication services and able to make use of multiple broadband, QoS(Quality of service)-enabled transport technologies, in which service-related functions are independent from underlying transport-related technologies. It enables unlimited access for users to networks. It supports total mobility which will allow for a consistent and universal provision of services.

     Research activities are coordinated between the two operating segments, Wireline and Wireless on a regular basis.

     Our consolidated research and development expenses amounted to EUR 41.3 million, EUR 43.0 million and EUR 42.4 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Wireline

     Our innovation strategy for our Wireline segment focuses on customers and their current and future requirements which we expect will be most relevant for the segment in the coming years. In 2006, the Wireline segment continued its application — and service — oriented research program.

     We believe that peering with other technology innovation leaders will result in an increased ability to leverage and improve our R&D efforts. Thus innovation partnerships with other companies, research institutes, universities and other relevant stake holders form an integral part of our innovation strategy.

     In 2006, our efforts focused on developing new broadband multimedia services and enriching the experience of our interactive multimedia platform. This included developing systems to support user generated content and personalized interactive services, telematics, e-Living (broadband connections combined with services creating comfort and convenience in everyday life) services, New Generation Network architecture and convergence of circuit and packet switched networks.

     In further support of Wireline’s multimedia strategy we focused our research on high speed transmission technologies, OSS/BSS (operational support systems/business support systems) platform architecture for the automation of processes, replacement of legacy systems and implementation of end2end modules. To enable us to provide the best quality and high capacity products we continued our research in advanced networking technologies like FTTx (Fiber to the x, where x stands for home, cabinet, curb, etc.), XDSL, Carrier Ethernet and SAN (Storage Area Networks).

     Our work on innovative applications and services for supporting community content and identifying technologies such as RFID (radio frequency identification), lead to a successful prototype of personalized community television, where information, entertainment and appropriate films are made available automatically according to language and age. This effort was recently rewarded when we received the innovation prize of the Multimedia and E-Business State Prize 2006.

Wireless

     In 2006 our Wireless segment continued to focus on application — and service-oriented R&D programs based on user centered approaches. All of our R&D activities have been conducted in line with our strategic focus of improving quality, usability and user experience, and much of our R&D activities have been pursued in cooperation with other companies, research institutes or academic partners. Our projects have primarily focused on developing personal mobile broadband services and bearer agnostic service delivery as well as continuing our Quality of Service initiatives.

     We filed international patent applications pursuant to the Patent Cooperation Treaty for Mobile Video Streaming and for improved resolution on small screens for mobile handsets. We have implemented the concept of a Service Interaction Gateway (SIG) in the Next Generation Intelligent Network (NGIN) platform for more efficient service delivery and reduced time to market for new products developed.

     To maintain our service quality, we continued our research program in enhanced network monitoring and analyses of user behavior. Keeping track with technology trends in mobile communication we focused our research scope on radio access technologies, real time multimedia applications, Telematics, three — dimensional localization, user interface research and Near Field Communication for innovative access and payment solutions. In a pilot conducted under guidance of the National Regulatory Authority, we also successfully tried and demonstrated Digital Video Broadcast for Handhelds (DVB-H). Most noteworthy, however, was our research in the context of the IP Multimedia Subsystem (IMS). Our IMS-related projects enabled the successful launch of the friendly user trial of “A1-over-IP”. Equally important were activities to improve the quality of mobile video services. A solution for monitoring the live network has been extended further through application-oriented research and allows more detailed monitoring and data analysis.

     As in the previous years, we have also continued our research activities focusing on avoiding the annoyance and cost of spam.

Capital expenditures

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

4.3. REGULATION AND LEGAL FRAMEWORK

Regulation

Austria

     Liberalization

     The development of Austrian law coincides with 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.

     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) used powers derived from the EC-Treaty to open telecommunications markets in the European Union member states by issuing directives providing for liberalization and abolishing monopoly rights of the state-owned telecommunications operators. In the following years, the European Union adopted a number of directives and recommendations regarding open and efficient access to and use of public telecommunications networks and services, which were formerly known as “Open Network Provisions”.

     In February 2002 the European Union adopted a package of new directives, which was implemented in Austria by the Telecommunications Act in August 2003. The European Union is currently reviewing the directives adopted in February 2002.

     The framework-directive adopted in 2002 by the European Union defines new rules for the market definition procedure, which are more in line with general competition law. Under this directive the national regulatory authorities will seek to harmonize their decisions on an EU-wide scale. The 2002 requirements 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. The 2002 directive also foreshadowed the first detailed regulatory measures such as Carrier Pre-selection or Number Portability and universal services like directory services, public payphones or non-discriminatory access to the network. Furthermore, the national regulatory authorities are required to consider more factors in determining whether a company has a dominant position in that market.

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

     In 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. The directive on competition in the markets for electronic communications networks and services, also adopted in September 2002, replaced the former directive on full competition (90/388/EC) as of July 25, 2003.

Development of Regulation in Austria

     In August 2003, the newly amended Austrian Telecommunications Act (the “Act” ) implemented the European Union telecommunications directives adopted in 2002, thereby moving regulation of 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 Act empowers the Austrian Federal Minister for Transportation, Innovation and Technology (“the Minister”) and the national Regulatory Authority (as defined in the section below “the Regulatory Authority”) to issue ordinances containing detailed provisions relating to the Austrian telecommunications market.

     The Act allows unrestricted market access to all entrants who qualify under the Act and replaced the former licensing regime with a general notification requirement. One of the principal objectives of the Act 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. Additional objectives include the provision of universal services throughout Austria, the protection of customers and operators against the distortion of competition, access to information regarding prices and general terms of service, data protection, avoidance of significant market power (“SMP”) and efficient and interference-free use of frequencies. Operators having SMP in 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 are to be kept technologically neutral and may not restrict the introduction of innovative products and services (generally referred to as “emerging markets”).

     Under the Act, 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.

     As a further result of the 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 Act, 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 includes 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 Act also generally deals with protection of data, technical infrastructure, numbering, rights of way and consumer protection.

     Results of the regulation of operators with significant market power/ Review of the regulatory framework for electronic communications

     Under the 2002 EU directives, the former sector-specific concept of market dominance, now called “significant market power” 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 18 markets which may be subject to sector-specific regulation. In late 2005, the European Commission announced a timetable for the review process of the 2002 regulatory package which has been subject to EU-wide consultation in 2006. The main proposals of the European Commission concern the following issues:

	•		Implementation of harmonized and liberalized frequency & spectrum management;
	•		Development of “better regulation”;
	•		Further harmonization of the internal market;

	•		Strengthening consumer protection and user rights; and
	•		Implementation of obligatory security measures.

     The European Commission reviewed this list of 18 markets and published a new draft recommendation for the list of markets in July 2006 for public consultation. The new draft recommendation suggests deleting all retail-voice markets from the list, which would be a first step in deregulating retail markets in Europe. The final recommendation with the new list of markets is expected to be published before the summer of 2007 and will need to be implemented into national law.

     To date, the Austrian Regulatory Authority has also reviewed its first market ordinance based on the EC’s original list of markets and has made some amendments. The revised ordinance for 2006 contains 13 markets to be analyzed by the national Regulatory Authority which started the new market analysis process immediately. We do not expect the revised ordinance including the missing markets to enter into force before the end of 2007.

     Market Analysis

     In 2006, the Regulatory Authority began its second round of market analyses on the grounds of the newly amended market ordinance. The Act stipulates that market analysis processes have to be carried out by the Regulatory Authority at the national level at least every two years.

     If the Regulatory Authority has determined that we exercise SMP in one of the relevant markets, the Regulatory Authority may regulate the services we provide and the prices we charge for those services. The Regulatory Authority has the power to control individual tariffs and cost orientation of these tariffs which requires that the prices of tariffs have to be based on the fully distributed costs and approves 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.

     The Regulatory Authority has analyzed most of the markets in the second round and has published the results of its analysis for the certain markets. Please see “— Major regulatory decisions affecting Telekom Austria” for further information.

     The remedies the Regulatory Authority has so far imposed on us as a fixed line operator are more detailed than under the old regime, but in certain markets where competition has intensified we have seen the first steps toward deregulation. The market analyses have confirmed the previous conclusion that we are no longer viewed as having SMP in the following markets relevant for our fixed line business :

	•		In the retail market of “publicly available international telephone services provided at a fixed location for residential customers”; and
	•		In the wholesale market of “wholesale trunk segments of leased lines”;

     The absence of regulatory action in these markets leads to more freedom in pricing, selecting the product mix, and the ability to respond quickly to customers’ needs.

     For the remaining markets it has been determined that we have SMP. The following is an overview of remedies imposed on Telekom Austria in these markets.

Retail market

     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” we are still deemed to have SMP and the Regulatory Authority has suggested certain remedies. In January 2007, new draft decisions were published for public consultation. As a result, the regulatory obligations will slightly change in comparison to the previous decisions from 2004. In particular, we will be obliged to continue to offer our services on a non-

discriminatory and cost-oriented basis, to provide separated accounts and to offer “Carrier Selection and Carrier Preselection” and a “Resale-Standard also offered on a retail-minus basis”. Our end-customer tariffs are still subject to ex-ante-approval. The new decisions also concern short-term advertising campaigns and product bundles.

     In the markets “publicly available local and/or national telephone services provided at a fixed location for residential customers”, “publicly available local and/or national telephone services provided at a fixed location for non-residential customers” and “publicly available international telephone services provided at a fixed location for non-residential customers” the draft decisions of the Regulatory Authority, on the one hand, asserts Telekom Austria as operator with SMP, but on the other hand, acknowledges the heavy competition from mobile businesses. This leads to the suggestion of a deregulatory approach in these markets as we no longer need to receive prior approval of end-customer tariffs, which leads to faster time-to-market for tariffs.

     In the market “minimum set of leased lines” we are required to provide a minimum set of leased lines to retail customers under non-discriminatory, cost-oriented and transparent conditions. Telekom Austria’s tariffs are subject to ex-ante approval and detailed information must be published, including technical specifications, tariffs and conditions. An exception has been made for the so-called n*64 kbit/s leased lines — for which we no longer need ex-ante approval of those tariffs.

Wholesale market

     The market analyses did not result in material changes in the scope of regulation at the wholesale level except for the wholesale leased line market of terminating segments. We are deemed to have SMP status in 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 first decision on the market for “transit services in the fixed public telephone network” has been vetoed by the European Commission. The market definition has been reviewed and a new market analysis for transit services was carried out by the Regulatory Authority. In March 2007, the final decision has been published and as a result all regulatory obligations for Telekom Austria on the transit market will be lifted by mid 2007.

     Telekom Austria amended and published its four reference offers according to the obligations set by the Regulatory Authority. For the wholesale 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 public consultation about the draft decision is finished but the final decisions are pending issuance. The final decision for the market of “wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services” has been released as the regulatory obligations have not been changed compared to the first decision of 2004.

     In the case of the market “wholesale terminating segments of leased lines” Telekom Austria still has SMP, however, competition increased in high bandwidth categories and in major cities. This leads to a partial deregulation in this market. Telekom Austria is still obliged to fulfill the regulatory requirements deriving from the first decision of 2004, however, leased lines above 155 megabits per second are in general no longer subject to regulation and most of the obligations for leased line terminating segments within the nine major cities in Austria of 34 megabits per second and above have been lifted.

     The wholesale broadband access market (e.g. bit-stream access services) has not been analyzed so far. We expect a review of this market within the year 2007.

Mobile markets

     In the market for “access and call origination on public mobile telephone networks” the Austrian Regulatory Authority concluded that no operator has SMP.

     In December 2006, the Regulatory Authority filed decisions adjudicating that each operator has SMP on the market for “voice call termination on individual mobile networks”. 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 run average incremental cost (L-RAIC), and publication of a reference interconnection offer. mobilkom austria AG has appealed this SMP decision. This appeal is still pending.

     As a consequence of SMP findings on the markets for “voice call termination on individual mobile networks”, the Regulatory Authority decided on significant reductions for mobile operators’ termination rates in

December 2005. In the long term, reciprocal termination rates should be equivalent to those of the most efficient mobile network provider in Austria. This decision requires mobilkom austria AG to reach the 6.79 eurocent level in mid 2007, T-Mobile Austria in mid 2008, and ONE and Hutchison 3G as the last operators at the end of 2008. tele.ring was set to the same level as T-mobile from May 2006, after approval of the takeover. mobilkom austria AG appealed this decision. As this decision was only valid until the end of 2006, new regulatory proceedings have already started, and the result may vary from the decision in December 2005 (see also “— Regulation of interconnection and access fees” below).

International Roaming

     For the “wholesale national market for international roaming on public mobile networks”, the market analysis procedure was formally started at the end of 2005. In September 2006, the Regulatory Authority found that no mobile operator had SMP in the national market for international roaming. Nevertheless, we may still become subject to European regulation in setting our roaming charges, which may limit our flexibility in pricing and may adversely affect our revenues, profitability and net income.

Regulation in other markets

     On December 21, 2005, the Bulgarian Communications Regulation Commission (CRC) finalized the annual SMP designation procedure for mobile markets and designated Mobiltel as having SMP. The obligations imposed on Mobiltel as SMP operator are non-discrimination, transparency and the obligation to interconnect with other operators.

     In September 2006, the Bulgarian Parliament adopted a draft Electronic Communications Act (the Bulgarian Act) aiming at implementing the 2003 EU regulatory framework. The Bulgarian Act is expected to enter into force in 2007 and is expected to give more powers to the national regulator and to provide grounds for a significant increase of the regulatory pressure over Mobiltel as dominant SMP operator. The Bulgarian Regulator shall make a market analyses and propose regulatory measures. Such measures could include:

	•		a decrease of Mobiltel’s termination rates to cost oriented levels;
	•		imposition of wholesale access to Mobiltel’s network on cost oriented levels;
	•		imposition of national roaming obligations;
	•		imposition of accounting separation and development of cost accounting system; and
	•		imposition of number portability on cost oriented levels.

     In September 2006, Vipnet launched the Vodafone Homebox service on the Croatian market. This service was under investigation by the Croatian regulator based on the complaints by fixed line providers. The investigation required that this service be provided with additional conditions (which include, in existing GSM and UMTS licenses, the possibility to use those frequencies for fixed network services and to harmonize use of numbers with changes in Numbering Plan that should be done by the regulator), which should be fulfilled within 2007. As Croatian Regulator did not set up legal premises, this issue is still pending.

     In Slovenia the incumbent Mobitel and Si.mobil have been required to begin rebalancing interconnection rates. Rates from fixed networks will decrease and those from mobile networks will increase in order to come to a single termination rate for each operator. In June 2006, Mobitel cancelled its interconnection contract with Si.mobil and as a result the Slovenian Regulatory Authority (APEK) must solve the dispute over interconnection rates and asymmetry.

     In December 2006, the Slovenian government published the final version of the Electronic Communications Act. The main changes refer to 24 month data archiving obligations, as operators can be held responsible for damages in case of end-user abuse.

     Ordinances under the Telecommunications Act of 2003

     Since the enactment of the Act, the Minister and the Regulatory Authority have issued several important ordinances.

	•		The Telecommunications Market Ordinance (“Märkteverordnung”) , which became effective on October 17, 2003, defines the markets that may be subject to regulation (see also “— Results of the regulation of operators with significant market power — Market analysis”). The review of the ordinance was published in February 2006 and for the first time included voice over broadband (VOB-services) in certain markets.
	•		The Mobile Number Portability Ordinance (“Nummernübertragungsverordnung”), established the legal and regulatory framework for the portability of mobile subscriber numbers and stipulated the requirements and the timeframe of a porting, customer protection and transparency of costs (see also “— Interconnection and specific network access” below).
	•		The Numbering, Tariffs and Value-added Services Ordinance (“Kommunikationsparameter-, Entgelte und Mehrwertdiensteverordnung“) was released on May 15, 2004 and revised on October 18, 2006. In the first release the numbering parameters and the requirements for allocation of numbers changed only slightly (some number-ranges were removed and some new ones were added, such as a number-range for convergent services), the main ambition was to optimize consumer protection in cases of value-added-services, resulting from an ever increasing number of objections against these services (especially dialer-abuse). Maximum prices for shared cost services and premium rate services, several complex and detailed transparency rules as well as prohibitions for misuse were added.
	•		The Ordinance of Legal Interception Cost (“Überwachungskostenverordnung”) was adopted on August 12, 2004 and introduces the fees to be paid by courts and governmental authorities for the interception of voice communications.
	•		The Ordinance of Legal Interception (“Überwachungsverordnung”) was adopted on November 2001. Telekom Austria implemented the European Telecommunications Standards Institute - Standards (the ETSI) which is an independent, non-profit organization, whose mission is to produce telecommunications standards for today and for the future. Refunding of the implementation cost by the Republic of Austria is still under negotiation.
	•		The Ordinance of Collecting Data for Statistics (“Kommunikations-Erhebungs-Verordnung”) was adopted on September 20, 2004 and sets out the frequency and details of information a telecommunications service provider is required to provide to the Regulatory Authority for statistical purposes.
	•		The Ordinance on Itemized Billing (“Einzelentgeltnachweisverordnung”), which was enacted on May 1, 2004, sets forth the standards for itemized billing.
	•		The Ordinance of Universal Services (“Universaldiensteverordnung”) was amended on October 24, 2006 to enable the implementation of a Payphone Access Charge for calls to free of charge numbers.

     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 contribute to the funding of the Regulatory Authority became effective on March 8, 2004 (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; issuing decisions in proceedings concerning data of subscriber directories; determining financial compensation to be paid from the universal service fund; determining the amount to be paid to the universal service fund; determining whether in a respective relevant market one or more operators have SMP and imposing specific obligations; issuing 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); approving conditions of business and charges and exercising the right to object; issuing decisions on the licensing and allocation of frequencies as well as the change and revocation of frequency allocations; issuing decisions on the right to provide communications networks or services, including the right to revoke these rights; issuing decisions on preliminary injunctions; identifying 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 certain disputes (“alternative dispute resolution”) concerning the Telekom-Control-Kommission. Amendments in the Telecommunications Act in 2005 laid the basis for changes in the funding of the Regulatory Authority. Therefore, the Republic of Austria is obliged to contribute to 25% of the financing, whereas the remaining 75% must be contributed by the service operators. The amendment became effective January 1, 2005. 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 may at least be 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. The Advisory Board will advise the Minister and the Regulatory Authority regarding telecommunications matters. Decisions of the Regulatory Authority may be appealed to the Supreme Administrative Court and in limited circumstances to the Constitutional Court.

     Regulation of market entry

     The Telecommunications Act of 2003 abolished the former licensing regime for entry into the market by new participants. Entry into the market by a new participant now requires only notification with the Regulatory Authority and the payment of a processing fee.

     GSM

     The 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 the frequency spectrum. Therefore, the number of GSM-network operators has remained the same as under the former Telecommunications Act. There are currently three GSM network operators, which are:

•		mobilkom austria AG;
•		T-Mobile Austria GmbH, (formerly max.mobil Gesellschaft für Telekommunikation GmbH, took over tele.ring Telekom Service GmbH & Co KG in 2006); and
•		ONE GmbH (formerly Connect Austria Gesellschaft für Telekommunikation GmbH).

     One Mobile Virtual Network Operator (MVNO), tele2UTA, and three service providers — Yesss!, eety and eTel — use the network of ONE GmbH.

     UMTS

      On November 3, 2000, six mobile operators, including mobilkom austria AG, successfully bid for UMTS licenses, mobilkom austria AG bid for paired 10MHz and unpaired 10MHz frequency spectra in an auction held by the Austrian Regulatory Authority. Under the terms of the license, mobilkom austria AG was required to cover 25% of the Austrian population by the end of 2003 and 50% by the end of 2005. At the end of 2005 mobilkom Austria AG’s UMTS network already covered approximately 60% of the Austrian population.

      At the end of 2003, mobilkom austria AG bought the Telefonica-owned Austrian company 3G Mobile, thereby acquiring additional paired 9.8 MHz frequency spectra. However, prior to its approval, the Regulatory Authority imposed an obligation on mobilkom austria AG to sell 2x5 MHz frequency spectra by January 31, 2005. Therefore, mobilkom austria AG agreed to sell 2x5 MHz to the competitor T-Mobile Austria in March 2004. The transaction was completed in January 2005.

      The UMTS licenses granted in Austria in November 2000 require that UMTS licensees like mobilkom austria AG, who also hold digital GSM licenses, grant national roaming services to any UMTS licensee who does not operate a GSM network, provided that it is technically feasible. National roaming means that the customers of an 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. UMTS providers that have a minimum of 20 per cent population coverage in 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 in a regulatory proceeding. In 2002, mobilkom austria AG entered into an agreement with Hutchison 3G Austria for GSM and GPRS roaming services as Hutchison 3G Austria only provided its customers a UMTS network in congested areas. However, Hutchison 3G has recently announced its intention to roll out a nationwide UMTS network, as it acquires a large number of former tele.ring sites after the takeover of tele.ring by T-mobile. 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, after lengthy proceedings, the Regulatory Authority approved an offer from Telekom Austria to our competitors for wholesale line rental for a monthly fee of euro 12.70 per line or a one-off investment payment of EUR 750,000 and then payments of EUR 11.32 per line. In January 2005, one of our competitors appealed to the Supreme Administrative Court. This appeal is still pending. The Regulatory Authority initially 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 it to bill its customers the monthly line rental as well as the traffic volume. The Austrian Regulatory Authority decided that the wholesale billing service is included in the already existing standard offer for wholesale line rental.

     Current tariffs: voice telephony services and leased lines

     In May 2004, we introduced a new tariff plan and frequent user reward program. It allows customers to benefit from the now wider choice of tariffs for calls to mobile phones, different regions and to 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. In March 2006, the Regulatory Authority approved our new tariff scheme containing new tariffs for business customers and new additional tariff packages

for calls to mobile networks and to company locations. On February 5, 2007, the Regulatory Authority approved additional new tariff packages.

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

     In October 2004, the Regulatory Authority decided that Telekom Austria has SMP in the market for “terminating segments of leased lines” and required us to release a non-discriminatory wholesale offer for these network elements on January 31, 2005.

     Fixed-to-mobile tariffs

     Following the tariff approval of the Regulatory Authority, our tariffs for end-users must reflect the terminating fees to mobile networks accordingly. Differences between the tariffs to mobile networks must derive from different termination fees. We are obliged to disclose the calculation of the fixed to mobile tariffs to the Regulatory Authority.

     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 providing communications services 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 the administration and payment concerning of this subsidy through February 2010. At December 31, 2006, we served approximately 241,900 entitled customers.

     Interconnection and specific network access

     In various decisions since March 1998, the Regulatory Authority has set out additional principles for interconnection. With these decisions, the Regulatory Authority sets the tariffs for interconnection from fixed line and mobile-to-fixed line and also from fixed line to mobile networks.

     General principles

     All operators of public telecommunications networks are by law obligated upon request to offer network interconnection to other operators. If the parties fail to reach an agreement within six weeks, each party can refer the matter to the Regulatory Authority, who will then decide on the conditions for interconnection. The Regulatory Authority is also entitled to determine fees for interconnection if providers with SMP are involved. The interconnection agreement must contain certain terms required by the Interconnection Ordinance discussed below (see also “— Major Regulatory decisions affecting Telekom Austria).

     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.

     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 and applies to access to and interconnection of electronic communication networks and associated facilities. These provisions were implemented in Austria 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.

     Interconnection in Austria

     At December 31, 2006, Telekom Austria as a fixed line operator had entered into interconnection agreements with 25 fixed-line and 5 mobile (GSM, UMTS) registered operators in Austria. Separate fixed line 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

     Fixed line call termination is the service which transports a telephone call from the point of physical connection between two or more networks to the called party on 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:

•		Local exchange interconnection allows access to all customers within a local area;
•		Single transit interconnection is interconnection via a single transit switch. In technical terms, this is known as single transit or single tandem call termination. We offer seven long distance exchanges for single transit interconnection; and
•		Double transit interconnection is interconnection via two transit switches. In technical terms, this is known as double transit or double tandem call termination.

     For mobile call termination there is no differentiation in respect to the point of interconnection or the time of day (peak/off-peak).

     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”). 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.

     The following table shows the applicable interconnection fees.

								Single tandem				Double tandem
		Rates		Local				(One main switch)				(Two main switches)
				(EUR per minute)				(EUR per minute)				(EUR per minute)
Origination		Peak			0.0082				0.0128				0.0290
		Off-peak			0.0048				0.0071				0.0110
Termination		Peak			0.0082				0.0128				0.0225
		Off-peak			0.0048				0.0071				0.0087
Transit		Peak			n.a.				0.0028				0.0060
		Off-peak			n.a.				0.0014				0.0031

     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 at an average of 3.3% retroactively for the aforementioned providers as of October 1, 2003. There was no change in 2006.

     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 to one operator which is connected at the local level instead of a local termination fee.

     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 “— Results of the 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 offers 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 on which mobile network the call is actually terminated.

      The Regulatory Authority required tariff reductions in December 2005 — mobilkom austria AG, T-Mobile Austria and ONE had to lower their current termination rates from November 1, 2005 by 0.52 eurocent per minute. mobilkom austria AG, T-Mobile Austria, ONE, and tele.ring then were required to lower their termination rates from January 1, 2006 by 1 eurocent every six months. Hutchison 3G had to lower its termination rate from January 1, 2006 by 1.83 eurocent every six months. Each provider has to follow these steps until each one of them reaches the L-RAIC level of 6.79 eurocent, according to the decision of December 2005. The goal is to have reciprocal termination rates on the level of the most efficient mobile network provider in Austria (L-RAIC-level). According to that decision, mobilkom austria AG will reach this level in mid 2007, T-mobile in mid 2008, and ONE and Hutchison 3G as the last operators at the end of 2008. tele.ring was set to the same level as T-mobile from May 2006 after approval of the takeover. mobilkom austria AG appealed against this decision. However, as this decision was only valid until the end of 2006, new regulatory proceedings regarding the mobile termination rates in 2007 and 2008 – involving all mobile operators — have already started, and the result may vary from the decision in December 2005. Variations may include the final L-RAIC-level as well as the point in time when this level shall be reached by all operators.

     Before the decision in December 2005, the regulated rate for termination in the mobilkom austria AG network was EUR 0.1086.

     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:

•		Pre-selection. The customer chooses the network operator for all local, long distance, international, fixed-to-mobile calls, and calls to special service numbers on a permanent basis with the opportunity for call by call override; and
•		Call-by-call selection. The customer dials a prefix number or Carrier Access Code and a network operator code, or Carrier Identification Code, each time prior to dialing the called party’s number to identify the network operator to be used to route the call.

     As a fixed line operator we are required under the Numbering Ordinance to offer pre-selection and call-by-call selection. We have no such requirement as a mobile operator.

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

     According to European Union directives, the Austrian Telecommunications Act of 2003, 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.

     The former Numbering Ordinance required 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 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”). Following a decision of the Regulatory Authority issued in August 2004, the service was launched on October 16, 2004. Upon voidance of this decision by the administrative court, the Regulatory Authority decided in March 2006 to set the costs per porting to a maximum amount of EUR 8.21. mobilkom austria AG has appealed this decision.

     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. Agreements on network access must be based on objective criteria, must be comprehensible and must provide non-discriminatory unbundled access with equal opportunity to the telecommunications networks of an operator.

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

     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. Generally, these findings were approved by the Supreme Administrative Court. In January 2006, the Regulatory Authority ordered us to define these rates at a certain range of market rates. We have filed an appeal with the Constitutional Court on the basis that these prices do not cover our costs. In January 2006, the Regulatory Authority decided on a reduction of the monthly charges for unbundling the local loop between Telekom Austria and one competitor tele2UTA, (from EUR 10.90 to EUR 10.70 per fully unbundled line and from EUR 8.43 to EUR 8.29 for subloop unbundling) and adjustments of the pricing for collocation sites.

     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. In 2005, the Supreme Administrative Court approved these rulings.

     On December 31, 2006, we had entered into agreements with 36 competitors concerning unbundling the local loop. Due to advancing investments by our competitors in unbundling activities, the number of unbundled subscriber lines is increasing. By December 31, 2006, about 198.100 subscriber lines were fully unbundled.

     Wholesale bitstream Services

     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. According to the market analysis of the Regulatory Authority, Telekom Austria has SMP on the wholesale broadband market. The existing ISPA agreement will be transformed into the standard offer for wholesale bitstream services.

     Due to our obligation of retail-minus price-control the Regulatory Authority is currently screening our wholesale bitstream tariffs to prevent price squeezing between retail and wholesale (including unbundled local loop prices). The decision is expected in April 2007.

     Payphone Access Charge

     Due to the rising number of calls to 0800* via Calling Cards we introduced in 2005 a payphone access charge (PAC) based on a decision by the Regulatory Authority, where calling card providers are obliged to pay an access charge, whenever public telephone cells are used for calling card calls. Due to the cancellation of this decision by the Supreme Administrative Court in January 2006, any paid payphone access charges have been claimed back by the other network operators and already been paid back to them. The modified Austrian Universal Service Ordinance from October 2006 (UDV) states that Telekom Austria as universal service provider is no longer obliged to grant access to 0800, 0810 and 0820 numbers via payphones free of charge. We are currently negotiating with the other network operators a possible compensation for the costs of our public payphones (see “Item 8.2. Other Information — Litigation — Regulatory matters regarding Telekom Austria and mobilkom austria AG ”).

     International Roaming

     The Regulatory Authority conducted a market analysis of the national market for international (“visitor”) roaming. A decision was filed in September 2006 and no mobile operator was found to have SMP in the national market for international roaming, therefore no national regulation was imposed. Nevertheless we may become subject to additional regulation from the European Union.

     In July 2006, the European Commission proposed roaming regulations pursuant to which mobile telephone operators throughout the European Union are required to reduce their visitor roaming fees close to the costs of the service provided, and not to allow customer roaming fees within the European Community to be above a certain threshold (visitor roaming costs plus regulated retail mark-up).

     While it is still not entirely clear when and how the regulation will be applied, it is expected that some form of regulation will be introduced in 2007 or early 2008, which is likely to adversely affect our revenues, profitability and net income but cannot be estimated at present.

     Frequency spectrum

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

     In October 2004, mobilkom austria AG purchased by auction a GSM-900-frequency spectrum of 2 x 6.6 MHz. On October 4, 2004 the Regulatory Authority completed an auction of 17 spectrum packets at 3.5 GHz for WLL (Wireless Local Loop), for five of which Telekom Austria was among the successful bidders. The spectrum assignments are valid for 15 years.

     In November 2006, a call for tender for 21 spectrum packets at 26 GHz was initiated. Telekom Austria participated in the tender procedure. The award of the frequency spectrum took place end of March 2007.

     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. Telekom Austria no longer has to provide directory inquiry services.

     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 use 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.

     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. The amount of the contribution will be fixed by the Regulatory Authority.

      As Telekom Austria was no longer in a position to provide universal services without making a loss, Telekom Austria applied for the creation of a Universal Service Fund in November 2006.

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 has 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 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 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 Austrian Federal Competition Authority must be notified of any mergers, acquisitions and joint ventures if the turnover of the parties involved reaches certain thresholds. The threshold applicable to mergers must remain below the ones which must be notified to the European Commission. These mergers are prohibited if they create or strengthen a dominant market position (Austrian Antitrust Act) or would significantly impede effective competition (European competition law). We expect there to be further inquiries and other measures of the Austrian Federal Competition Authority and the European Commission aimed at promoting competition in the European telecommunications sector.

     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 Numbering, Tariffs and Value-added Services, recently amended in 2006, 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. An amendment to the Ordinance on Itemized Billing, which was enacted on July 1, 2006, clarified that also prepaid customers are entitled to receive an itemized call list free of charge.

     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 – 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 an instance, the customer must be given an opportunity to object to the use of his contact details free of charge.

     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 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.

     The Data Protection Act was amended in 2005. Use of data in case of catastrophes was facilitated.

     By March 2006, the European Parliament and the Council adopted the Directive 2006/24/EC on the retention of data generated or processed in connection with the provision of publicly available electronic communication services or of public communications networks and amending Directive 2002/58/EC, stating mandatory data retention. The Directive has to be transposed into Austrian laws, regulations and administrative provisions by no later than September 15, 2007, concerning the retention of communications data relating to Internet access, Internet telephony and Internet e-mail by no later than March 15, 2009.

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 International Financial Reporting Standards as endorsed by the European Union (IFRS), which differ in certain material respects from U.S. GAAP. For a discussion of the principal differences between IFRS and U.S. GAAP as they relate to Telekom Austria, see notes (36) and (37) of the accompanying consolidated financial statements.

     We report our business in three segments:

	•		Wireline;
	•		Wireless and
	•		Other activities (covering internal financial services).

     Wireline, Wireless and other activities segment also conduct business with each other, which is 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.

     The Wireline segment comprises Telekom Austria AG and its subsidiaries less mobilkom austria AG and its respective subsidiaries, the Wireless segment comprises mobilkom austria AG and its subsidiaries (see “Item 19 Exhibits — Structure of Telekom Austria Group”).

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, 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 are described in more detail below:

     Wireline

•

Decreasing voice traffic volumes, mainly due to fixed-to-mobile substitution;

	•		Continued pricing pressure due to strong competition and regulatory constraints;
	•		Introduction of new VAS, including services combining voice, data and video (Triple Play), to partly offset declining voice revenues;
	•		Migration of Internet users from dial-up to broadband, supported by our new ADSL tariffs;
	•		Growth in revenues from content and services for business customers provided on the Internet; and
	•		Reduction in operating expenses due to cost-cutting measures and reduction of staff as well as decreasing depreciation and amortization costs due to lower capital expenditures.

     Wireless

	•		Increasing competition based on ongoing reduction of tariffs and saturated markets;
	•		Penetration of mobile services continues to grow due to:
			- mobile voice traffic growth, driven by fixed to mobile substitution;
			- value added services growth (such as short messages, multimedia messages, browsing, contents and interactive services) enabled by the increasing penetration of UMTS and innovative handsets and the development of the mobile broadband;
	•		Emerging growth in VAS driven by the introduction of new technologies as well as new and improved handsets leading to increased customer demand;
	•		New products and services due to significant growth in the use of broadband wireless technologies such as EDGE/UMTS, HSDPA and HSUPA; and
	•		Expansion of Telekom Austria in targeted international markets, particularly in south-eastern European countries.

     Open competition

      For the most part we operate in increasingly competitive markets. See “Item 3.4. Risk Factors”. At year-end, approximately 68% of our revenues were generated in 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 various subsidiaries compete with a large number of international mobile operators and smaller competitors. We expect competition to further intensify, particularly in Austria, in the foreseeable future as our current competitors expand their operations. However, competition has also stimulated the 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.

     Regulatory environment

     For details please see “Item 4.3 Regulation and Legal Framework”.

     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 (NGN) 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.

     Tariff reductions and reforms

     We operate in both the Austrian and international markets. Our pricing policy is established in accordance with existing regulations for regulated services, and in accordance with market and competitive factors.

     In order to meet increasing competition we last adjusted our tariffs in the Wireline segment in mid 2006. In the Wireless segment we introduced unlimited tariffs in September 2005, which allow for unlimited calls and SMS resulting in an increase of average minutes of use charged per subscriber. The number of SMS sent increased strongly in 2006. In the Wireline Segment we introduced a flat rate product with unlimited data volume.

     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.

     In 2000, mobilkom austria AG and five mobile operators successfully bid for UMTS licenses. mobilkom austria AG was awarded a license. It was not made clear whether the amount paid was a net amount or one which included value added tax (VAT). Therefore, mobilkom austria AG together with the other mobile operators who had received a license believed they had paid a gross amount, including VAT. In order to be able to claim a VAT refund from the Republic of Austria mobilkom austria AG and other mobile operators asked for an invoice for the license. The Republic of Austria refused to issue an invoice, therefore mobilkom austria and each of the other mobile operators filed a claim for a refund at the court which has jurisdiction over each of the mobile operators. For further details see “Item 8.2. Other Information”.

     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 during the vacation period during the summer season, especially in Croatia and Bulgaria and during the winter season in particular in Austria. 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. We expect seasonality of the roaming revenues to still have an impact on our performance.

Critical accounting policies

     Our discussion and analysis of our financial conditions and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with IFRS and which, as described in notes (36) and (37) of the accompanying consolidated financial statements included elsewhere herein, differ in certain material respects from U.S. GAAP.

     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 “— 5.2. 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 property, plant and equipment and finite-lived intangible assets. 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. We perform these impairment tests by estimating the fair value. The growth rate in the business plan reflects the weighted average growth rates based on market estimates. Estimated cash flow projections beyond the period covered by the business plan are based on steady growth rates for subsequent years and do not exceed the long-term average growth rate for the industries and the country in which the cash generating unit operates. The following parameters are applied: growth rates: Wireline -1% to 2%; Wireless 2.0% to 3.0%, interest rates: Wireline 8.5% to 10.8%, Wireless 8.5% to 12.1%.

     Total fixed assets, intangible assets and goodwill were EUR 6,259.7 million, EUR 6,435.4 million and EUR 5,185.8 million at December 31, 2006, 2005 and 2004, respectively.

     Depreciable fixed assets are depreciated over estimated useful lives between 2 and 50 years and amortizable intangible assets are amortized over useful lives between 2 and 30 years. Although we have substantial historical evidence about estimated useful lives of these assets, there is the inherent risk of a change in useful lives. For example, a one-year increase or decrease in the useful lives of all depreciable or amortizable assets would increase depreciation and amortization expense by approximately EUR 362 million or decrease depreciation and amortization expense by approximately EUR 202 million, respectively. Depreciation and amortization expenses amounted to EUR 1,123.9 for the period ended December 31, 2006. Lives assigned to individual assets could change in the future due to technical development.

     Total impairment charges were EUR 10.5 million, EUR 17.4 million and EUR 1.3 million for the periods ended December 31, 2006, 2005 and 2004, respectively.

     Valuation of employee benefit obligations

     Employee benefit obligations are established for (i) contractual termination benefits available for eligible employees, (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.

     We calculate the projected benefit obligation using the following assumptions: discount rate: 4.5%, rate of compensation increase – civil servants: 5.0%, rate of compensation increase – other employees: 4.0%, rate of increase of pensions: 1.6%, employee turnover rate: 4.0%.

     For the discount rate the market interest rate for investments with a maturity equal to the remaining average service period was applied. The rates of increase in compensation and pensions are based on our long-term expectations. The employee turnover rate was determined based on company-specific service periods of former employees and general data on termination of service, mortality and invalidity

     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. As of December 31, 2006, the remaining accrual of EUR 5.0 million for the VRIPs relates to 103 employees.

     In December 2006, management offered a voluntary termination incentive program to civil servants who cannot be terminated involuntarily, a voluntary termination incentive program to regular employees who meet certain criteria and a voluntary option incentive program for civil servants who are younger than 40 years of age to change their contractual relationship from civil servant to regular employee. Telekom Austria AG and Telekom Austria Personalmanagement GmbH have communicated these programs and obligated themselves to render the benefits unconditionally to these employees and civil servants applying within a certain time period. If the employees and civil servants accept the offer, management does not need to approve nor can it reject the application. For these programs we recognized provisions of EUR 16.4 million. For further information see note (16) of the accompanying financial statements.

     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. Telekom Austria uses the projected unit credit method to determine benefit cost and amortize actuarial gains and losses using the corridor method. 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 0.6 million in 2006 and EUR 0.5 million in 2005 to this defined contribution plan (BAWAG Allianz Mitarbeitervorsorgekasse AG). Civil servants do not qualify for legal severance payments. Telekom Austria had a remaining obligation for voluntary severance payments of EUR 0.3 million as of December 31, 2006.

     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 (21) of the accompanying consolidated 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, rate of increase of pensions and rate of employee turnover. The total provision for these benefits amounted to EUR 116.6 million, EUR 118.5 million and EUR 123.2 million as of December 31, 2006, 2005 and 2004, respectively. A change of the selected discount rate of 4.5% by one percentage point would increase the obligation by approximately EUR 18.4 million or decrease the obligation for these benefits by approximately EUR 15.0 million in 2006. Changes of actuarial assumptions are amortized according to the corridor method and therefore not recognized immediately in the period realized. For further information see note (21) of the accompanying consolidated financial statements.

     Valuation of tax assets

     At December 31, 2006, we had approximately EUR 171.3 million of operating loss carryforwards. Thereof, EUR 102.1 million relate to foreign subsidiaries with EUR 15.4 million expiring between 2008 and 2012. The remaining amount relates mainly to companies located in Austria and Slovenia and does not expire under current regulation. The annual usage is limited to 75.0% of the taxable income in Austria for a respective 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, 2006, the total net deferred tax asset amounted to EUR 9.1 million. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of the recognized deductible differences. The amount of deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.

     Business Combinations

     In accordance with IFRS 3, assets and liabilities acquired are recorded at the respective fair values at the date of acquisition. The application of the purchase method requires management to make certain estimates and judgments. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset useful lives, can materially impact our results of operations. One of the most significant estimates relates to the determination of the fair value of assets and liabilities acquired. For other than intangible assets acquired, management determines the fair value and useful life based on the nature of the asset. For example, marketable securities and other investments are valued at the market rate on the date of acquisition, while an independent appraisal is often obtained for land, buildings and equipment. Management also assesses whether any significant intangible assets arise from contractual or other legal rights of the acquired entity or are separable from the acquired entity. If any separable intangible assets are identified, management must determine the value of these intangibles. Valuations are based on the best information available near the acquisition date and are based on expectations and assumptions that have been deemed reasonable by management. Depending on the type of intangible asset and the complexity of determining its fair value, management often consults with independent external valuation experts. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. For example, the useful life of the rights associated with a patent will be finite and will result in amortization expense being recorded in our results of operations over a determinable period. However, the useful life associated with a brand that has, and is expected to retain, a distinct market identity is considered to be indefinite and, accordingly, is not amortized. Any residual amount remaining after allocation of the purchase price to the fair value of all assets and liabilities acquired is recorded as goodwill. As discussed under valuation of long lived assets, intangible assets and goodwill with an indefinite life are not amortized but tested for impairment at least annually.

     In accordance with IFRS 3, Telekom Austria finalized its purchase price allocation of the acquisition of Mobiltel in the third quarter 2006. This resulted in an increase in goodwill, deferred tax liabilities and income taxes payable. Accordingly, 2005 comparative financial statements were adjusted. Total goodwill was increased by EUR 39,450 and amounted to EUR 605,413 as of the acquisition date July 12, 2005 (see note (2) of the accompanying consolidated financial statements).

New accounting pronouncements

     Telekom Austria prepared the accompanying consolidated financial statements in compliance with the IFRS/IAS, issued by the International Accounting Standards Board (IASB) and the interpretations of the International Financial Reporting Interpretation Committee (IFRIC) and the interpretations of the Standards Interpretation Committee (SIC), effective as of December 31, 2006 and as endorsed by the European Union. In December 2004, an amendment regarding “Actuarial Gains and Losses, Group Plans and Disclosures” to IAS 19, “Employee Benefits” was issued. The amendment provides options for the recognition of actuarial gains and

losses directly in equity. Telekom Austria has not adopted the provided option to recognize actuarial gains and losses outside profit or loss under this amendment, but rather continues to apply the corridor approach in accordance with IAS 19.

     Standards and Interpretations not effective for years ended on December 31, 2006, nor endorsed by the European Union, were not applied.

     Further information regarding new accounting pronouncements according to U.S. GAAP can be retrieved in note (37) of the accompanying consolidated financial statements.

Recent developments

     The performance condition (on basis of earnings per share for the year 2006) for the third tranche of employee stock options issued in 2006 representing the right to acquire an aggregate of 3,908,468 shares was met and therefore the options for the third tranche 2006 can be exercised from March 8, 2007 until March 31, 2010 at an exercise price of EUR 18.91 per share. On February 8, 2007, the Management Board decided to settle all stock options of the third tranche issued in 2006 in cash only at an aggregate cost of EUR 9.2 million as of December 31, 2006. For further information see also “Item 6. Directors, Senior Management and Employees — Stock option plans”.

     On January 8, 2007, the fourth (or ESOP 2007+) tranche of 4,047,472 options was granted to the eligible employees under the Stock Option Plan 2004 Extension for another three tranches in the years 2007, 2008 and 2009 authorized in 2006. The exercise price of the fourth tranche of EUR 20.34 was based on the average quoted closing price of Telekom Austria’s stock during a 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 achievement of basic earnings per share adjusted for certain effects. The options have a vesting period of 12 months from the grant day and an exercise period of three years after becoming exercisable. See also “Item 6. Directors, Senior Management and Employees — Stock option plans”.

     In February 2007 mobilkom austria AG won the tender for the GSM 900/1800 license for the territory of the Republic of Macedonia. The cost of the license amounts to EUR 10 million. The license was granted for a period of 10 years, renewable for another 10 years. The acquisition of the license in the Republic of Macedonia represents a further opportunity after the successful acquisition of the license in Serbia, to establish a mobile business in a growing market.

     On December 20, 2006, Telekom Austria agreed to acquire 100 % of the share capital of the operating companies of eTel for a purchase price of approximately EUR 90 million. The transaction includes all operating activities of eTel in Austria, Hungary, Czech Republic, Slovakia, Germany and Poland. eTel is a European integrated operator owned by a consortium of international investors with operations in Austria and Central-Eastern Europe. In 2005 eTel had revenues of approximately EUR 100 million. Merger control approval for this acquisition is currently pending.

     The Management Board decided on March 19, 2007 to cancel 40,000,000 treasury shares held by the Company. Accordingly our share capital was reduced by 8% from EUR 1,090,500,000 to EUR 1,003,260,000 and now consists of 460,000,000 shares issued. Our articles of association were amended accordingly to reflect the new share capital and number of shares issued.

5.2. RESULTS OF OPERATIONS

2006 compared to 2005

     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 International Financial Reporting Standards as endorsed by the European Union (IFRS), which differ in certain material respects from U.S. GAAP. For a discussion of the principal differences between IFRS and U.S. GAAP as they relate to Telekom Austria, see notes (36) and (37) of the accompanying consolidated financial statements.

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.

Consolidated operating results

		2006				2005				2006/2005
		(in EUR millions)								(% change)
Operating revenues			4,759.6				4,365.2				9.0
Other operating income			59.2				54.8				8.0
Operating expenses:
Materials			(385.2	)			(350.1	)			(10.0	)
Employee costs, including benefits and taxes			(768.3	)			(698.5	)			(10.0	)
Depreciation and amortization			(1,123.9	)			(1,121.4	)			(0.2	)
Impairment charges			(10.5	)			(17.4	)			39.7
Other operating expenses			(1,758.5	)			(1,612.9	)			(9.0	)
Total operating expenses			(4,046.4	)			(3,800.3	)			(6.5	)
Consolidated operating income			772.4				619.7				24.6

     As of June 1, 2005, Telekom Austria exercised an option and acquired 100% of Mobiltel on July 12, 2005. Consequently, Telekom Austria includes the results of operations of Mobiltel in the consolidated financial statements starting from July 12, 2005. The aggregate purchase price amounted to EUR 1,214.3 million included acquisition costs of EUR 7.2 million, an option price of EUR 80.0 million and a deferred consideration of EUR 181.9 million that was paid in December 2005. As a result of the acquisition Telekom Austria gained a strong strategic and operating position in the Bulgarian telecommunication market. The results of Mobiltel are reported in the Wireless segment.

     Consolidated 2006 financial statements of Telekom Austria include figures for Mobiltel. Results for 2005 include contributions from Mobiltel for the period from July 12, 2005 through December 31, 2005. Therefore the years 2006 and 2005 are not fully comparable.

     Operating revenues

     Our consolidated operating revenues increased by EUR 394.4 million or 9.0% to EUR 4,759.6 million in 2006. The increase in 2006 is due to the growth in our Wireless segment and due to the consolidation of Mobiltel for the full year 2006 which more than offset the decrease in our Wireline segment, mainly caused by an

increasing substitution from fixed line to mobile. A more detailed analysis of operating revenues is presented in the segment results below.

     Other operating income

     Other operating income increased by EUR 4.4 million or 8.0% from EUR 54.8 million in 2005 to EUR 59.2 million in 2006. In the Wireline segment it decreased by EUR 2.7 million from EUR 50.7 million in 2005 to EUR 48.0 million in 2006 due to a decrease in own work capitalized. In the Wireless Segment other operating income increased by 41.4% from 10.5 million in 2005 to 14.9 million in 2006, mainly due to increased rental income and by increased public subsidies for research and development at mobilkom austria AG.

     Operating expenses

     Our consolidated operating expenses increased by EUR 246.1 million or 6.5% to EUR 4,046.4 million in 2006. The analysis of the individual expense items is presented below.

     Material costs

     Our consolidated material costs increased by EUR 35.1 million or 10.0% to EUR 385.2 million in 2006. The increase in material expenses of EUR 8.1 million in the Wireline segment was mainly caused by higher costs of sales due to higher equipment revenues. The material costs in the Wireless segment increased by EUR 29.2 million mainly due to an increased customer base and the resulting higher expenses for handsets throughout the markets.

     Employee costs, including benefits and taxes

     Our consolidated employee costs including benefits and taxes increased by EUR 69.8 million or 10.0% to EUR 768.3 million in 2006. In the Wireline segment the employee costs increased by EUR 48.9 million, due to higher costs for a new voluntary retirement incentive program, a voluntary option incentive program, which together contributed EUR 16.4 million, higher salaries and the employee participation program (distributing free shares to employees, see “Item 6. Directors, Senior Management and Employees —Employees”) in the amount of EUR 10.1 million. Other factors concerning the development of personnel costs in the Wireline segment are described in “— 5.2. Results of operations — Segment results — Wireline. The employee costs in the Wireless segment increased by EUR 19.3 million or 9.7% due to the employee participation program, the stock option programs and the higher average headcount resulting from the consolidation of Mobiltel for the full year 2006.

     Depreciation and amortization

     Our consolidated depreciation and amortization expenses remained fairly stable at EUR 1,123.9 million in 2006 compared to EUR 1,121.4 million in 2005. The slight increase results from an increase in the Wireless segment — without Mobiltel depreciation and amortization decreased in the Wireless segment slightly by 0.1% in 2006. This increase in the Wireless segment was more than compensated by a decrease in the Wireline segment of EUR 84.7 million due to a lower level of investments.

     For further information concerning our capital expenditures see “Item 5.4. Liquidity and capital resources — Capital expenditures”.

     Impairment charges

     Our consolidated impairment charges decreased by EUR 6.9 million to EUR 10.5 million in 2006. The impairment charges primarily relate to long-lived assets in 2006 and goodwill in 2005 in the Wireline segment (see note (12) of the accompanying consolidated financial statements).

     Other operating expenses

     Our consolidated other operating expenses increased by EUR 145.6 million or 9.0% to EUR 1,758.5 million in 2006. In the Wireless segment interconnection cost increased in line with increased interconnection traffic minutes. In addition, higher expenses for commissions, bad debts and rental expenses also contributed to the increase in other operating revenues. In the Wireline segment other operating expenses decreased due to a decline in the provisions for bad debts and lower losses on disposals of assets.

     Operating income

     Consolidated operating income increased by EUR 152.7 million or 24.6% to EUR 772.4 million in 2006. The factors described above contributed to the increase in operating income. Both business segments contributed to this positive development. The operating income of the Wireless segment increased by EUR 127.3 million to EUR 677.1 million in 2006 from EUR 549.8 million in 2005 and the Wireline segment increased its operating income by EUR 24.7 million to EUR 92.8 million in 2006 from an operating income of EUR 68.1 million in 2005. For an analysis of the segmental operating revenues and expenses see “— Segment Results”.

Other income, taxation and net income

		2006				2005				2006/2005
		(in EUR millions)								(% change)
Consolidated operating income			772.4				619.7				24.6
Other income (expense)
Net interest			(113.5	)			(112.2	)			(1.2	)
Foreign exchange differences			(0.3	)			1.3				n.a.
(Loss) Income from investments			(0.7	)			3.8				n.a.
Equity in earnings of affiliates			0.0				0.6				(100.0	)
Income tax expense			(96.1	)			(104.3	)			7.9
Consolidated net income			561.8				408.9				37.4
Interest income			20.0				32.7				(38.8	)
Interest expense			(133.5	)			(144.9	)			7.9
			(113.5	)			(112.2	)			(1.2	)