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TABLE OF CONTENTS
DEUTSCHE TELEKOM AG INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As filed with the Securities and Exchange Commission on March 14, 2006



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION



Form 20-F

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

 

For the fiscal year ended December 31, 2005

Commission file number 1-14540


Deutsche Telekom AG
(Exact Name of Registrant as Specified in its Charter)

Federal Republic of Germany
(Jurisdiction of Incorporation or Organization)

Friedrich-Ebert-Allee 140, 53113 Bonn, Germany
(Address of Registrant's Principal Executive Offices)

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

Title of each class
  Name of each exchange on which registered
American Depositary Shares, each representing
one Ordinary Share
  New York Stock Exchange

Ordinary Shares, no par value

 

New York Stock Exchange*

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

NONE
(Title of Class)

Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:

NONE
(Title of Class)

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

        Ordinary Shares, no par value: 4,198,077,903 (as of December 31, 2005)

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

        Yes    ý    No    o

        If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

        Yes    o    No    ý

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    ý    No    o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer    ý                            Accelerated filer    o                            Non-accelerated filer    o

        Indicate by check mark which financial statement item the registrant has elected to follow.

        Item 17    o    Item 18    ý

        If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

        Yes    o    No    ý

*Not for trading, but only in connection with the registration of American Depositary Shares.





TABLE OF CONTENTS

 
   
  Page
PART I

Item 1.

 

Identity of Directors, Senior Management and Advisors

 

4
Item 2.   Offer Statistics and Expected Timetable   4
Item 3.   Key Information   4
    Selected Financial Data   4
    Risk Factors   7
Item 4.   Information on the Company   16
    Introduction   16
    Historical Background   16
    Strategy   18
    Significant Subsidiaries   20
    Segment Revenue Breakdown   21
    Description of Business   22
    Broadband/Fixed Network   22
    Mobile Communications   39
    Business Customers   51
    Group Headquarters and Shared Services   62
    Innovation Management (Research and Development)   65
    Acquisitions and Divestitures   67
    Regulation   68
    Regulation in Germany   68
    The E.U. Regulatory Framework   79
    International Regulation   85
    International Mobile Regulation   92
    Description of Property, Plant and Equipment   103
Item 4A.   Unresolved Staff Comments   105
Item 5.   Operating and Financial Review and Prospects   106
    Management Overview   106
    Critical Accounting Estimates   113
    Differences between IFRS and German GAAP   116
    Consolidated Results of Operations   117
    Segment Analysis   124
    Broadband/Fixed Network   124
    Mobile Communications   139
    Business Customers   154
    Group Headquarters and Shared Services   159
    Liquidity and Capital Resources   161
    Reconciling Differences between IFRS and U.S. GAAP   172
    Recently Issued IASB Pronouncements   177
    New U.S. GAAP Accounting Pronouncements   179
Item 6.   Directors, Senior Management and Employees   182
    General   182
    Supervisory Board   183
    Management Board   189
    Compensation   191
    Share Ownership   198
    Employees and Labor Relations   200
Item 7.   Major Shareholders and Related Party Transactions   204
    Major Shareholders   204
    Related Party Transactions   206
         

i


Item 8.   Financial Information   209
    Consolidated Financial Statements   209
    Export Sales   209
    Legal Proceedings   209
    Dividend Policy   221
    Significant Changes   221
Item 9.   The Offer and Listing   222
    Trading Markets   222
Item 10.   Additional Information   225
    Articles of Incorporation   225
    Significant Differences in Corporate Governance Practices   232
    Other Matters   235
    Exchange Controls   235
    Taxation   235
    German Taxation   236
    U.S. Taxation and U.S.-German Double Taxation Agreement of August 29, 1989   238
    Documents on Display   241
Item 11.   Quantitative and Qualitative Disclosures about Market Risk   242
    Risk Identification and Analysis   242
    Foreign Exchange Rate Risk   242
    Interest Rate Risk   243
    Changes in Market Risk Exposure in 2005 Compared to 2004   244
Item 12.   Description of Securities Other than Equity Securities   244

PART II

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

 

245
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds   245
Item 15.   Controls and Procedures   245
Item 16A.   Audit Committee Financial Expert   245
Item 16B.   Code of Ethics   245
Item 16C.   Principal Accountant Fees and Services   246
Item 16D.   Exemptions from the Listing Standards for Audit Committees   248
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers   248

PART III

Item 17.

 

Financial Statements

 

249
Item 18.   Financial Statements   249
    Report of Independent Registered Public Accounting Firms as of December 31, 2005, 2004 and 2003 and for the three years ended December 31, 2005   F-2
    Consolidated Income Statement for the three years ended December 31, 2005   F-3
    Consolidated Balance Sheet as of December 31, 2005, 2004 and 2003   F-4
    Consolidated Cash Flow Statement for the three years ended December 31, 2005   F-5
    Consolidated Statement of Changes in Shareholders' Equity for the three years ended December 31, 2005   F-6
    Notes to the Consolidated Financial Statements   F-8
Item 19.   Exhibits   249

ii



DEFINED TERMS

        Deutsche Telekom AG is a private stock corporation organized under the laws of the Federal Republic of Germany. As used in this annual report on Form 20-F ("Annual Report"), unless the context otherwise requires, the term "Deutsche Telekom" refers to Deutsche Telekom AG and the terms "we," "us," "our" and "group" refer to Deutsche Telekom and, as applicable, Deutsche Telekom and its direct and indirect subsidiaries as a group.


INTERNATIONAL FINANCIAL REPORTING STANDARDS

        Unless otherwise indicated, the financial information contained in this Annual Report has been prepared in accordance with the requirements of the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), and as adopted by the European Union as of the date of the financial statements included in this Annual Report, as well as with the regulations under commercial law set forth in Section 315a (1) HGB (Handelsgesetzbuch, the "German Commercial Code"). In July 2002, the E.U. Parliament and Council adopted a regulation on the application of IFRS, according to which, with certain exceptions, publicly traded E.U. companies are required to prepare their consolidated financial statements in accordance with IFRS for fiscal years commencing on or after January 1, 2005. IFRS differs in certain significant respects from U.S. generally accepted accounting principles ("U.S. GAAP"). For a discussion of the principal differences between IFRS and U.S. GAAP, as they relate to us and our consolidated subsidiaries, and a reconciliation of net profit and total shareholders' equity to U.S. GAAP, see "Item 5. Operating and Financial Review and Prospects—Reconciling Differences between IFRS and U.S. GAAP" and notes (48) and (49) to our consolidated financial statements for the years ended December 31, 2005, 2004 and 2003, included in this Annual Report.

        Our previous annual reports had been prepared in accordance with the German Commercial Code, the accounting standards issued by the German Accounting Standards Board and the German Stock Corporation Act (Aktiengesetz, the "Stock Corporation Act"), collectively known as "German GAAP." For a discussion of the principal differences between IFRS and German GAAP, as they related to us and our consolidated subsidiaries, see "Item 5. Operating and Financial Review and Prospects—Differences between IFRS and German GAAP," and in the notes to the consolidated financial statements, under "Reconciliation of consolidated shareholders' equity" and "Reconciliation of profit after income taxes," and the notes contained therein, for the years ended December 31, 2005, 2004 and 2003, included in this Annual Report.


FORWARD-LOOKING STATEMENTS

        This Annual Report contains forward-looking statements. Forward-looking statements are statements that are not historical facts. Examples of forward-looking statements include:

    plans, objectives and expectations relating to future operations, products and services;

    our prospective share of new and existing markets;

    plans, objectives and expectations for our cost savings and workforce reduction programs and the impact of other significant strategic or business initiatives, including acquisitions, dispositions and business combinations, such as our planned merger with T-Online International AG;

    the potential impact of regulatory actions on our financial condition and operations;

    the possible effects of adverse determinations in litigation, investigations, contested regulatory proceedings and other disputes;

    future general industry and macroeconomic growth rates and our prospective performance relative to them; and

    our future performance.

1


        Forward-looking statements generally are identified by the words "expect," "anticipate," "believe," "intend," "estimate," "aim," "plan," "will," "will continue," "seek," "outlook" and similar expressions. The "Risk Factors" discussion in Item 3, the "Strategy" discussion in Item 4, the "Management Overview" discussion in Item 5 and the "Quantitative and Qualitative Disclosures About Market Risk" discussion in Item 11, in particular, contain numerous forward-looking statements, although such statements also appear elsewhere in this Annual Report.

        Forward-looking statements are based on current plans, estimates and projections. You should consider them with caution. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement in light of new information or future events, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws (such as our obligations to file annual reports on Form 20-F and reports on Form 6-K) and under other applicable laws. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond our control. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. These factors include, among other factors:

    risks and uncertainties relating to the benefits anticipated from our international expansion, including in the United States;

    risks and costs associated with integrating our acquired businesses and with selling or combining businesses or other assets;

    the progress of our domestic and international investments, joint ventures and alliances;

    the level of demand for telecommunications services, particularly for wireless telecommunications services, access lines, traffic and new higher-value products and services;

    competitive forces, including pricing pressures, technological developments and alternative routing developments;

    our ability to gain or retain market share in the face of competition from existing and new market entrants;

    our ability to secure and retain the licenses needed to offer new and existing services and the cost of these licenses and related network infrastructure build-outs, particularly with respect to our Universal Mobile Telecommunications System (UMTS or "3G") and other advanced services;

    the effects of price reduction measures and our customer acquisition and retention initiatives, particularly in the fixed-line voice telephony business, the mobile telecommunications business and our other interconnection businesses;

    regulatory developments and changes, including with respect to the levels of tariffs, terms of interconnection, customer access and international settlement arrangements;

    the outcome of litigation, disputes and investigations in which we are involved or may become involved;

    the success of new business, operating and financial initiatives, many of which involve substantial start-up costs and are untested, and of new systems and applications, particularly with regard to the integration of service offerings;

    concerns over health risks associated with the use of wireless mobile devices and other health and safety risks related to radio frequency emissions;

2


    the effects of industry consolidation on the markets in which we operate, particularly with respect to our mobile and leased lines businesses;

    the availability, terms and deployment of capital, particularly in view of our debt refinancing needs, actions of the rating agencies and the impact of regulatory and competitive developments on our capital outlays;

    the level of demand in the market for our debt obligations, and for the debt obligations of our subsidiaries and associated companies, and our shares, as well as for assets that we may decide to sell, which may affect our financing and acquisition strategies;

    our ability to achieve cost savings and realize productivity improvements, particularly with respect to our workforce-reduction initiative;

    our ability to attract and retain qualified personnel, particularly in light of our cost reduction efforts;

    risks of infrastructure failures or damage due to external factors, including natural disasters, intentional wrongdoing, sabotage, acts of terrorism or similar events;

    the effects of foreign exchange rate fluctuations, particularly in connection with subsidiaries operating outside the euro zone; and

    changes in general economic conditions, government and regulatory policies, new legislation and business conditions in the markets in which we and our subsidiaries and associated companies operate.

        Certain of these factors are discussed in more detail elsewhere in this Annual Report, including, without limitation, in Item 3, Item 4 and Item 5. We caution investors that the foregoing list of important factors is not exhaustive. When reviewing forward-looking statements contained in this document, investors and others should carefully consider the foregoing factors as well as other uncertainties and events and their potential impact on our operations and businesses.

        Certain information in this Annual Report has been provided by external sources. Due to the rapid changes in our industry, it is possible that some of this information is no longer accurate. Assessments of market share in particular involve the use of information released or estimated by regulatory authorities, our competitors, third parties or us.

        World Wide Web addresses contained in this Annual Report are for explanatory purposes only and they (and the content contained therein) do not form a part of, and are not incorporated by reference into, this Annual Report.

3



PART I

ITEM 1. Identity of Directors, Senior Management and Advisors

        Not applicable.

ITEM 2. Offer Statistics and Expected Timetable

        Not applicable.

ITEM 3. Key Information


SELECTED FINANCIAL DATA

        The following table presents selected consolidated financial and operating information. This selected consolidated financial and operating information should be read together with "Item 5. Operating and Financial Review and Prospects" and our consolidated financial statements and the notes thereto that are included elsewhere in this Annual Report. Unless otherwise indicated, all amounts are provided in accordance with IFRS as endorsed by the European Union.

        The selected consolidated financial information as of and for each of the three years ended December 31, 2003, through 2005, are extracted or derived from our consolidated financial statements and the notes thereto, which have been audited by Ernst & Young AG Wirtschaftsprüfungsgesellschaft and PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, for the periods ended and at December 31, 2005, 2004 and 2003. Periods prior to 2003 (except required U.S. GAAP information) have not been presented as such financial information was prepared in accordance with German GAAP and, pursuant to SEC Release 33-8567, "First-Time Application of International Financial Reporting Standards," is not required to be included because it is not comparable to the IFRS information provided below. For more information relating to the conversion from German GAAP to IFRS, see the notes to the consolidated financial statements, under "Explanation of transition to IFRS," "Reconciliation of consolidated shareholders' equity" and "Reconciliation of profit after income taxes," and the notes contained therein.

4


Selected Consolidated Financial Data of the Deutsche Telekom Group

 
  % Change
2005/2004(1)(2)

  2005
  2004
  2003
  2002
  2001
 
   
  (billions of €, except as
otherwise indicated)

   
   
Income Statement Data                        
Net revenues   3.9   59.6   57.3   55.6   n.a.   n.a.
  Domestic   (1.6 ) 34.2   34.7   34.4   n.a.   n.a.
  International   12.4   25.4   22.6   21.2   n.a.   n.a.
Profit from operations   21.7   7.6   6.3   8.3   n.a.   n.a.
Net profit   n.m.   5.6   1.6   2.1   n.a.   n.a.

Balance Sheet Data

 

 

 

 

 

 

 

 

 

 

 

 
Total assets   2.1   127.9   125.3   136.1   n.a.   n.a.
Total financial liabilities (in accordance with the consolidated balance sheet)   (8.6 ) 46.7   51.1   64.1   n.a.   n.a.
Shareholders' equity   8.3   49.6   45.8   43.7   n.a.   n.a.

Cash Flow Data(3)

 

 

 

 

 

 

 

 

 

 

 

 
Net cash from operating activities   (10.3 ) 15.0   16.7   15.1   n.a.   n.a.
Net cash used in investing activities   n.m.   (10.1 ) (4.5 ) (2.3 ) n.a.   n.a.
Net cash used in financing activities   37.6   (8.0 ) (12.9 ) (5.8 ) n.a.   n.a.

U.S. GAAP Data

 

 

 

 

 

 

 

 

 

 

 

 
Net profit   n.m.   5.3   2.3   2.9   (22.0 ) 0.5
Shareholders' equity   8.4   51.5   47.5   45.0   45.4   73.7
Total assets   (2.9 ) 133.2   137.2   145.9   149.4   180.7

Ratios and Selected Data

 

 

 

 

 

 

 

 

 

 

 

 
Additions to intangible assets (including goodwill) and property, plant and equipment   68.7   11.1   6.6   7.6   n.a.   n.a.
Capital expenditures(3)   44.6   9.3   6.4   6.4   n.a.   n.a.
Equity ratio (%)(4)   1.9   36.4   34.5   32.1   n.a.   n.a.
Number of employees averaged over the year (full-time employees excluding trainees) (thousands)   (1.4 ) 244   248   251   n.a.   n.a.
Revenues per employee (thousands of euro)(5)   5.4   244.3   231.7   221.3   n.a.   n.a.
Earnings per share/ADS in accordance with IFRS—basic and diluted (euro)(6)   n.m.   1.31   0.39   0.50   n.a.   n.a.
Earnings per share/ADS in accordance with U.S. GAAP—basic (euro)(6)   n.m.   1.28   0.56   0.70   (5.31 ) 0.14
Earnings per share/ADS in accordance with U.S. GAAP—diluted (euro)(6)   n.m.   1.26   0.55   0.70   (5.31 ) 0.14
Dividend per share/ADS (euro)(6)(7)   16.1   0.72   0.62     n.a.   n.a.
Dividend per share/ADS (U.S. dollar)(6)(7)(8)   0.0   0.85   0.80     n.a.   n.a.

n.a.—not applicable

n.m.—not meaningful

(1)
Change from 2004 to 2005 on the basis of figures expressed in millions.
(2)
In this Annual Report, increases in the size of negative numbers are expressed in percentage terms with negative percentage amounts, and decreases in the size of negative numbers are expressed with positive percentage amounts.
(3)
In accordance with the statement of cash flows.
(4)
The ratio equals total stockholders' equity divided by total assets. Amounts proposed as dividends are treated as short-term debt rather than as equity for purposes of the calculation of this ratio.
(5)
Calculated on the basis of the average number of employees for the year, excluding trainees, apprentices and student interns.
(6)
"ADS" refers to the Deutsche Telekom American Depositary Shares traded on the New York Stock Exchange (NYSE). One ADS corresponds in economic terms to one ordinary share of Deutsche Telekom AG.
(7)
Dividends per share are presented on the basis of the year in respect of which they are declared, not the year in which they are paid. The proposed 2005 dividend per share amounts are subject to approval by the shareholders at the annual shareholders' meeting.
(8)
Dividend amounts have been translated into U.S. dollars (using Moneyline Telerate) for the relevant dividend payment date, which occurred during the second quarter of the following year, except for the 2005 amount, which has been translated using the applicable rate on December 30, 2005. As a result, the actual U.S. dollar amount at the time of payment may vary from the amount shown here.

5


Exchange Rates

        Unless otherwise indicated, all amounts in this Annual Report are expressed in euros.

        As used in this document, "euro," "EUR" or "€" means the single unified currency that was introduced in the Federal Republic of Germany (the "Federal Republic") and ten other participating Member States of the European Union on January 1, 1999. "U.S. dollar," "USD" or "$" means the lawful currency of the United States. As used in this document, the term "noon buying rate" refers to the rate of exchange for euros, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes, as required by Section 522 of the U.S. Tariff Act of 1930, as amended. Unless otherwise stated, conversions of euros into U.S. dollars have been made at the rate of EUR 1.00 to USD 1.1842, which was the noon buying rate on December 30, 2005.

        Amounts appearing in this report that have been translated into euros from other currencies have been translated in accordance with the principles described in the notes to the consolidated financial statements, under "Summary of Accounting policies—Currency translation."

        So that you may ascertain how the trends in our financial results might have appeared had they been expressed in U.S. dollars, the following table shows, for the periods indicated, the average, high, low and period-end, noon buying rates for euros, expressed in U.S. dollars per EUR 1.00:

Year or Month

  Average(1)
  High
  Low
  Period-End
 
  (in $ per €)

2001   0.8909   0.9535   0.8370   0.8901
2002   0.9495   1.0485   0.8594   1.0485
2003   1.1411   1.2597   1.0361   1.2597
2004   1.2478   1.3625   1.1801   1.3538
2005   1.2400   1.3476   1.1667   1.1842
2005                
  September     1.2538   1.2011   1.2058
  October     1.2148   1.1914   1.1995
  November     1.2067   1.1667   1.1790
  December     1.2041   1.1699   1.1842
2006                
  January     1.2287   1.1980   1.2158
  February     1.2100   1.1860   1.1925
  March (through March 13, 2006)     1.2028   1.1886   1.1942

(1)
The average of the noon buying rates on the last business day of each month during the relevant period.

        On March 13, 2006, the noon buying rate was USD 1.1942 per EUR 1.00.

        Since January 4, 1999, our shares have traded on the German stock exchanges, including the Frankfurt Stock Exchange, in euros. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro price of the shares on the German stock exchanges and, as a result, are likely to affect the market price of our ADSs on the New York Stock Exchange. When we declare cash dividends, they are declared in euros, and exchange rate fluctuations affect the U.S. dollar amounts you would receive if you are a holder of American Depositary Receipts (ADRs) evidencing ADSs upon conversion of cash dividends on the shares represented by your ADSs.

6



RISK FACTORS

        In addition to the other information contained in this Annual Report, investors in our securities should carefully consider the risks described below. Our financial condition or results of operations, or the trading prices of our securities, could be materially adversely affected by any of these risks.

        The following discussion contains a number of forward-looking statements. Please refer to the "Forward-Looking Statements" discussion at the front of this Annual Report for cautionary information.

An economic downturn, a substantial slowdown in economic growth or a deterioration in consumer spending could adversely affect our customers' purchases of our products and services in each of our strategic business areas, which could have a negative impact on our operating results and financial condition.

        Our business depends to a large degree on general economic conditions in Germany, other European countries in which we do business and the United States. The prospects for the development of the German economy in 2007 might deteriorate if the value added tax (VAT) in Germany is increased according to plans of the new German government. An increase in VAT may have a negative effect on private consumption in Germany, as well as on our margins, since we may not be able to pass through the additional VAT to our customers. If economic growth in our markets proves to be low or non-existent, because of current or anticipated circumstances, this could have an adverse effect on the level of demand by our individual customers and the willingness of our key business customers to invest in information and communications technology (ICT). This could, in turn, jeopardize our growth targets—for example, those relating to multimedia services in mobile telecommunications, or those relating to broadband products and services based on DSL (digital subscriber line) technology.

Because we operate in heavily regulated business environments, decisions that regulatory authorities impose on us restrict flexibility in managing our business and may force us to offer services to competitors, or reduce the prices we charge for our products and services, either of which could have a material negative impact on our revenues, profits and market shares.

        Unlike many of our competitors, we are subject to strict regulation in many market segments in Germany, particularly in many areas of the fixed-line network business of our Broadband/Fixed Network strategic business area. Government agencies regularly intervene in the offerings of our products and services and in the pricing of our products and services. Such regulation places enormous pricing and competitive pressures on us and on our ability to generate revenues and profits.

        On June 26, 2004, amendments to the German Telecommunications Act (Telekommunikationsgesetz, the "Telecommunications Act") became effective. Although the precise effects of the amendments to the Telecommunications Act are still not definite in all segments of the German telecommunications market, it is already clear that regulatory intervention will continue in certain market sectors of our business. The Bundesnetzagentur (the "Federal Network Agency," formerly, the Regulierungsbehörde für Telekommunikation und Post) is required to decide which telecommunications products and services are to be regulated in a particular market segment. The Telecommunications Act requires the regulation of telecommunications services that are considered by the Federal Network Agency to involve a provider with "significant market power." So far, we have been exempted from regulation on the basis of a loss of significant market power in markets of minor importance only, such as the market for foreign long-distance calls in fixed-line networks. It is possible that services not previously regulated will be subject to future regulation, such as international roaming or voice over Internet protocol (VoIP) services.

        Further, we expect that the Federal Network Agency will publish various regulatory ordinances interpreting the provisions of the Telecommunications Act, which may negatively affect the prices we charge for certain of our products and services. The recently elected German government may be expected to take up earlier plans to amend the Telecommunications Act. If adopted in the form

7



previously considered, these amendments would intensify existing customer protection rules, which could have an adverse effect on our future revenues and entail additional operating costs.

        The European Union is establishing an E.U.-wide regime of data retention requirements for law enforcement purposes. These requirements establish minimum standards for both the types of data to be retained and the term of their retention. After adoption of the relevant E.U. directive (planned for the spring of 2006), the E.U. requirements will have to be implemented into national law of the E.U. Member States within 18 months. Depending on the requirements of the final national rules, compliance with the new data retention requirements could entail considerable initial investment and recurring annual operating costs for us. At this time, it is unclear whether and how we might be compensated for these costs.

    Broadband/Fixed Network

        The Federal Network Agency considers us, through our T-Com business unit, to be an "entity with significant market power" in several defined markets for telecommunications services in Germany, particularly the fixed-line market. Many decisions of the Federal Network Agency in 2005, taken under the premise of increasing competition in the German market for fixed-line telecommunications, were unfavorable to T-Com (for example decisions on charges for line sharing and monthly line rental). These regulatory decisions have had a significant effect on our fixed-line network pricing and service offerings, and future regulatory decisions are expected to continue to have a negative impact on T-Com's market shares, revenues and margins.

        In addition, the Federal Network Agency intends to address other markets that are currently not subject to regulation (for example virtual private networks and VoIP). VoIP is an emerging market for nomadic voice telephony services that are based on the Internet and are not dependent on specific customer telephone lines. Nevertheless, the Federal Network Agency has included VoIP in the same market as conventional voice telephony services. Therefore these services may be treated in the same way as conventional telephone services for the purpose of regulation and may also be subject to price regulation.

        Additional market regulation is expected to intensify competition in Germany and will, therefore, put pressure on our revenues and the cost structure of our fixed-line network business. In particular, if regulatory measures allow broadband access lines to be "unbundled" (separated) from telephone lines, this could substantially increase the price pressure on, and competition faced by, our fixed-line network business. Even new infrastructure investments, such as our planned new high-speed fiber-optic network as a platform for "triple-play" services (i.e., high-speed Internet access, communications services and entertainment offerings), are in danger of becoming subject to strict regulation by the Federal Network Agency.

        Although the new E.U. regulatory framework for electronic communications does not provide for an extension of sector-specific regulation to the online communications market, there are some indications that the Federal Network Agency may change its legal approach to the regulation of prices for access to online services in the future. We cannot yet determine what effect, if any, such regulation may have on our broadband services offerings. Additionally, Internet subscribers are indirectly affected by the regulation of access tariffs, as wholesale costs include charges for telecommunications services that are regulated by the Telecommunications Act.

        We are also subject to the laws and regulations of other countries where our affiliates or we have fixed-line network operations, primarily in Central and Eastern Europe. The business impact of increased regulation on our subsidiaries in Central and Eastern Europe will depend on the way in which national regulatory authorities use their acquired powers, and the extent to which our competitors take advantage of regulatory decisions designed to foster increased competition.

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        Further market analysis procedures under the E.U. regulatory framework will be carried out in Hungary and Slovakia in 2006, which could eventually lead to reductions in the prices we may charge to customers, both for wholesale and for retail services. Such developments could also contribute to a loss of our market share in these countries. Our Central and Eastern European subsidiaries might also be required to adjust their product offerings on the wholesale and retail levels in furtherance of competition in the fixed-line network. This would add to the downward pressure on prices in the countries in which they operate.

    Mobile Communications

        Our mobile telecommunications operations are supervised by regulatory authorities in the countries in which we operate. We expect tightening of regulatory control in the area of mobile telecommunications, with a probable negative effect on pricing and revenues, as a result of a reduction in international roaming charges, call termination charges and also possible access regulation in some markets. The E.U. regulatory framework defines international wholesale roaming, call termination and access, and origination as separate "markets." On this basis, national regulatory authorities in the European Union are required to carry out market investigations and, if necessary, define regulatory remedies in those markets in accordance with E.U. directives.

        On February 10, 2005, the E.U. Commission opened formal proceedings against, among others, T-Mobile Deutschland. In the proceedings, the E.U. Commission alleged that T-Mobile Deutschland had been charging excessive wholesale roaming tariffs for calls of foreign visitors in its network during the period from 1997 to 2003. Should the E.U. Commission decide to uphold its preliminary findings, it may impose significant fines on T-Mobile Deutschland.

        Our telecommunications systems and operations in the United States are regulated primarily by the U.S. Federal Communications Commission (FCC) and by various other federal, state and local governmental bodies. These and other governmental agencies may also exercise jurisdiction over mobile telecommunications operators. Some U.S. states have taken actions to regulate various aspects of wireless operations including, for example, customer billing, termination of service arrangements, and advertising. Any of those agencies could adopt regulations or take other actions that could adversely affect our business. If we fail to comply with applicable regulations, we may be subject to sanctions, which may have an adverse effect on our mobile telecommunications business in the United States.

        For further information regarding the matters discussed above and other aspects of the regulatory environments to which our businesses are subject, see "Item 4. Information on the Company—Regulation" and "Item 8. Financial Information—Legal Proceedings."

We face intense competition in all areas of our business, which could lead to reduced prices for our products and services and a decrease in market share in certain service areas, thereby having an adverse effect on our revenues and net profit.

    Broadband/Fixed Network

        In our domestic market, fixed-line network voice telephony service revenues and prices have been declining in recent years, primarily due to intense competition and adverse decisions imposed by the Federal Network Agency, and also due to customers' substitution of mobile telecommunications for fixed-line usage.

        Competition became even more intense in 2005, resulting in our continued loss of market share. The increase in competition from mobile operators, other fixed-line carriers and cable operators entering the telecommunications market is expected to continue for the foreseeable future. We expect further increases in competitive pressure, due to the offering of attractive product bundles for telephone and broadband access lines, which include a flat rate for Internet service, and other factors, including the increasing quality and acceptance of VoIP services (which, among other things, allow

9



customers to conduct voice communications through their personal computers at low or no calling charges) and regulatory actions by the Federal Network Agency.

        Additional local and regional network operators are expanding their presence to include other major cities and regions. In the future, we could face even fiercer competition and lose further market share if our competitors were to combine their businesses. Furthermore, alternative carriers are aggressively pursuing a strategy of reduced prices for call pre-selection and call-by-call services.

        Existing mobile substitution effects are intensified as a result of the proliferation of mobile virtual network operators (MVNO), which continue to have an adverse effect on our fixed-line network revenues. Reduced prices for mobile telecommunications services (e.g., on the basis of lower flat rates without call-based charges) could increase pricing pressure on our fixed-line services.

        The German and European markets for Internet access and portal services—especially within the broadband market—have been, and will continue to be, highly competitive. Prices for broadband flat rates have been steadily declining. T-Online's future competitive position will be affected by pricing, network speed and reliability, services offered, customer support and its ability to be technologically adept and innovative. The regulatory environment can also exert a significant influence on the level of competition. We expect that T-Online's competitors will continue to pursue new broadband customers aggressively. In the market for portal services and content, competition is also intense, due to low barriers to entry.

        Each of these developments is expected to continue to erode our market shares and to decrease our revenues and profit margins. For more information, see "Item 4. Information on the Company—Description of Business—Broadband/Fixed Network" and "Item 4. Information on the Company—Regulation."

    Mobile Communications

        During 2004 and 2005, consolidation in the wireless telecommunications sector in the United States has dramatically changed the competitive landscape. Each of T-Mobile USA's three remaining national competitors—Verizon Communications, Inc. ("Verizon"), Cingular Wireless LLC ("Cingular") and Sprint/Nextel Corporation ("Sprint/Nextel")—are significantly larger than T-Mobile USA, with larger spectrum holdings and more than double the customer base. Their scale could afford them significant structural and competitive advantages. Thus, this situation presents a long-term challenge to T-Mobile USA to effectively compete in pricing, products, coverage and the introduction of new technologies and services. Intense competition from various regional operators also exists. Since T-Mobile USA is a significant contributor to our overall revenue and customer growth, a slowdown or decline in the business of T-Mobile USA could have a material adverse effect on the attainment of the growth targets of our group as a whole.

        Competition in the European mobile telecommunications markets has increased and can be expected to increase in the future. Increasing competition results, in part, from the entry into the market of low-cost carriers, such as MVNOs, which use the networks of other operators at volume discounts, and from market consolidation (e.g., the recent acquisition of O2 plc ("O2") by Telefónica S.A. ("Telefónica"). If prices for mobile telecommunications services continue to decline, T-Mobile may not achieve its growth objectives.

        As European markets have become increasingly saturated, the focus of competition has been shifting from customer acquisition to customer retention, and increasing the quality and value of existing customers. Accordingly, if we are unable to offer increased quality and better value to our customers, our market share and revenues may not grow as we have anticipated in our growth plans.

        For more information, see "Item 4. Information on the Company—Description of Business—Mobile Communications."

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    Business Customers

        Our Business Customers strategic business area, operated through T-Systems Business Services GmbH and T-Systems Enterprise Services GmbH (collectively, "T-Systems"), is a provider of solutions covering the entire value chain of information and communications technology. It is subject to risks associated with the general and regional economies of its customers and the willingness and ability of its customers to invest in information and communications technology services and products. The information and communications technology market is shaped by long sales cycles, severe competition and declining prices. The result is downward pressure on revenues and margins and lower predictability of revenue growth.

        The international growth potential of T-Systems may be constrained by its limited brand recognition in some national markets, at least compared to that of competitors who may be more established there, particularly as this relates to maintaining and increasing business with multinational companies outside of Germany. For more information, see "Item 4. Information on the Company—Description of Business—Business Customers."

Spectrum capacity may become a limiting factor to T-Mobile USA's growth in the United States.

        T-Mobile USA's capacity and coverage expansion is dependent on its ability to acquire additional spectrum licenses, which are granted by the FCC or otherwise regulated by the FCC if acquired from third-party operators. The failure to obtain sufficient capacity and spectrum coverage would have a material adverse impact on the quality of T-Mobile USA's services in the United States, and on T-Mobile USA's ability to provide future services in some markets. T-Mobile USA could experience negative operational effects, such as reduced growth of customers and revenues, due to a lack of capacity in specific markets. One opportunity to acquire additional sizable units of spectrum is the Advanced Wireless Services (AWS) auction (1700/2100 MHz), expected to take place in mid-2006. Failure to obtain sufficient spectrum in this auction could inhibit our ability to introduce advanced wireless services and keep pace with our competitors. Prices in spectrum auctions can become high, posing challenges to the attainment of an attractive return on investment.

        For more information, see "Item 4. Information on the Company—Regulation" and "Item 4. Information on the Company—Description of Business—Mobile Communications."

We may realize neither 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, technological change or delays from suppliers, which could adversely affect our cash flows.

        As a result of rapid technological progress, and the trend towards technological convergence, there is a danger that new and established information and telecommunications technologies or products may not only fail to complement one another, but in some cases may even substitute for one another. An example of this is VoIP, a technology that is already established in the business customer market. VoIP has now reached the consumer market as well and, as a technology that competes directly with traditional fixed-line telephony services, has the potential to reduce our market share and revenues in our fixed-line business. The introduction of mobile handsets with VoIP functionality may also adversely affect our pricing structures and market share in our mobile voice telephony business, particularly in countries where we have a large market share. If we do not appropriately anticipate the demand for new technologies, and adapt our strategies and cost structures accordingly, we may be unable to compete effectively, with the result that our business activities, financial condition and results may suffer.

        In addition, there is a risk that we will not succeed in making customers sufficiently aware of existing and future value-added services or in creating customer acceptance of these services at the prices we would want to charge. There is a risk that we will not identify trends correctly, or that we will not be able to bring new services to market as quickly or price-competitively as our competitors. These

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risks exist, in particular, with respect to our anticipated future growth drivers in the mobile telecommunications area (e.g., mobile data services provided via UMTS or other technologies) and in the fixed-line telecommunications area (e.g., triple-play services). Accordingly, there is risk that the return on our investments, in particular in UMTS licenses and network infrastructure, may be negatively affected, which could result in significant write-downs of the value of our UMTS or other licenses or other network-related investments.

        The business model of our Business Customers strategic business area is focused on implementing major projects in the telecommunications, media & utilities, manufacturing, services, finance and public industry sectors. Because of their scale and complexity, and because of the nature of the contractual agreements that govern them, these projects could give rise to extensive customer claims with respect to warranties, damages or contractual penalties where the service provided by T-Systems is deemed to be unsatisfactory. For more information, see "Item 4. Information on the Company—Description of Business—Business Customers."

Lawsuits filed by some T-Online shareholders may further delay our planned merger with T-Online International AG, which could have a negative effect on our results.

        On April 29, 2005, the annual general shareholders' meeting of T-Online International AG ("T-Online") approved the agreement concluded with Deutsche Telekom on March 8, 2005, on the merger of T-Online into Deutsche Telekom. Some T-Online shareholders have filed lawsuits challenging the validity of the resolution of the shareholders' meeting approving the merger. The entry of the merger in the commercial registers of the two companies may only take place, and therefore the merger will only become effective, once the competent court rules finally and conclusively in an accelerated proceeding that the lawsuits do not prevent the entry of the merger in the commercial registers (a "release decision"), or if the court finally and conclusively rejects the lawsuits, or if such lawsuits are withdrawn. The Court of Appeals in Frankfurt am Main, as the court of second instance, issued a release decision in February 2006. This decision however is not yet final and binding; appeals have been filed by some of the opposing parties in the release proceedings, such opposing parties being shareholders who have filed lawsuits challenging the validity of the resolution approving the merger.

        A delay in the completion of this merger means that planned synergies may not be realized. For example, until the merger it will not be possible to effectively meet the growing demand for a portfolio with fully integrated products, consisting in particular of fixed network telephony and Internet, potentially supplemented by media content. This situation, coupled with the multiple service provider relationships and contacts, makes it more difficult to attract and retain customers.

        After the merger of T-Online into Deutsche Telekom has become effective, T-Online shareholders who received Deutsche Telekom shares in return for their T-Online shares in the course of the merger can file a legal challenge to have the exchange ratio set forth in the merger agreement reviewed. During the course of this valuation proceeding, the court might, for a variety of reasons, come to the conclusion that the exchange ratio set forth in the merger agreement is too low, from the perspective of the T-Online shareholders, and that the T-Online shareholders should, therefore, be granted a supplementary cash payment.

        Investors wishing to hold T-Online shares, but not Deutsche Telekom shares, may sell the Deutsche Telekom shares they receive or expect to receive in the course of the merger. This could put pressure on the market price of our shares.

        For more information, see "Item 5. Operating and Financial Review and Prospects—Management Overview" and "Item 8. Financial Information—Legal Proceedings."

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Failures to achieve our planned reduction and restructuring of personnel could negatively affect our financial objectives and profitability.

        We announced an extensive personnel-restructuring program for our operations in Germany in October 2005, under which approximately 19,000 employees will leave the group by 2008. When making these reductions, we will adhere to the agreement with the trade unions not to enforce any compulsory redundancies until the end of 2008, and to the moratorium on redundancies agreed under the 2004 employment alliance.

        We plan targeted, group-specific measures to implement the personnel-restructuring program. Part of this reduction is to be realized through partial retirement arrangements for salaried employees subject to collective bargaining agreements (non-civil servants.) These plans could be put at risk by possible changes in the law. There are also plans to encourage employees to leave the group, using severance programs based on voluntary arrangements. The implementation of these plans will depend on general developments in the labor market and on the details of the voluntary redundancy program.

        A critical factor for the overall success of the personnel-restructuring program will be the availability of competitive, flexible and performance-oriented terms and conditions of employment with our civil servants. We expect that a new law providing for this increased flexibility will be adopted in 2006.

        The successful realization of the staff reduction program depends on a range of factors that are beyond our control, such as the successful deconsolidation of our Vivento operating businesses (call-center and technology maintenance businesses), the market for our retrained labor force and the factors mentioned above. If the planned staff-reduction targets are not achieved, our financial and business objectives may not be achieved, which would have a negative effect on our operating expenses and profitability.

        For more information, see "Item 4. Information on the Company—Description of Business—Group Headquarters and Shared Services" and "Item 6. Directors, Senior Management and Employees—Employees and Labor Relations—Other Employees."

Alleged health risks of wireless communications devices have led to litigation affecting T-Mobile, and could lead to decreased wireless communications usage or increased difficulty in obtaining sites for base stations and, thus, adversely affect the financial condition and results of operations of our mobile telecommunications services business.

        Media reports have suggested that radio frequency emissions from wireless mobile devices and cell sites may raise various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. Research and studies are ongoing. The World Health Organization (WHO) has declared that, on the basis of current scientific knowledge, there are no known adverse effects on health below the international threshold standards, nor is it expecting any serious dangers to arise in the future—although it does recommend continued research due to the ongoing scientific uncertainty. We cannot be certain that medical research in the future will dismiss any and all links between radio-frequency emissions and health risks.

        Whether or not such research or studies conclude there is a link between radio-frequency emissions and health, popular concerns about radio-frequency emissions may discourage the use of wireless mobile devices and may result in significant restrictions on both the location and operation of cell sites, either or both of which could have a material adverse effect on our or T-Mobile's results of operations.

        T-Mobile USA is subject to current, and potential, litigation relating to these health concerns. Several amended class action lawsuits have been filed in the United States against T-Mobile USA and several other wireless-service operators and wireless-telephone manufacturers, asserting products liability, breach of warranty and other claims relating to radio- frequency transmissions to and from

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wireless mobile devices. The complaints seek substantial monetary damages as well as injunctive relief. The defense of these lawsuits may divert management's attention, and T-Mobile USA may be required to pay significant awards or settlements and incur significant expenses in defending these lawsuits.

        We do not know whether legislators, regulators or private litigants will refrain from taking other actions adverse to us, based on the purported health-related risks associated with radio-frequency emissions. Any such litigation, legislation or adverse actions may result in additional costs and loss of revenues in our Mobile Communications strategic business area.

        For more information, see "Item 8. Financial Information—Legal Proceedings."

System failures due to natural or man-made disruptions could result in reduced user traffic and reduced revenues and could harm our reputation and results.

        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 and other calamities, technology failures, human error, terrorist attacks, hacker attacks and malicious actions, and other similar events. We attempt to mitigate these risks by employing a large number of measures, including backup systems and protective systems such as firewalls, virus scanners, and building security. We cannot, however, be certain that these measures will be effective under all circumstances and that disruptions or damage will not occur. Damage or disruption to our infrastructure may result in reduced user traffic and revenues, increased costs, and damage to our reputation.

Shortcomings in our supply and procurement process could negatively affect our product portfolio, revenues and profits.

        As a fully integrated ICT service provider, we cooperate with a wide range of different suppliers for technical components and assemblies, as well as for software and other goods and information important to the conduct of our business. Although we do not believe that we are materially dependent on any single supplier, disruptions in our chain of supply could negatively affect our product portfolio, cost structure, revenues and profits. We take a variety of measures to shelter ourselves from these risks, but we cannot be sure that these measures will be effective under all circumstances.

We are continuously involved in disputes and litigation with regulators, competitors and other parties. The ultimate outcome of such legal proceedings is generally uncertain. When finally concluded, they may have a material adverse effect on our results of operations and financial condition.

        We are subject to numerous risks relating to legal and regulatory proceedings, in which we are currently a party or which could develop in the future. Litigation and regulatory proceedings are inherently unpredictable. Legal or regulatory proceedings in which we are or come to be involved (or settlements thereof) may 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, including with respect to the Toll Collect consortium, see "Item 8. Financial Information—Legal Proceedings." For information concerning our regulatory environment, see "Item 4. Information on the Company—Regulation."

Future sales of our shares by the Federal Republic or KfW (Kreditanstalt für Wiederaufbau) may adversely affect the trading prices of our shares and ADSs.

        Continuing its privatization policy, the Federal Republic (which owns, together with the KfW, approximately 37.5% of our outstanding shares) has announced that it intends to further reduce its holdings of equity interests in the future, including shares in Deutsche Telekom AG. The reduction in

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the Federal Republic's direct or indirect holdings may involve KfW. For shareholders, there is a danger that the sale of a significant volume of our shares by either the Federal Republic or KfW, or speculation to this effect on the markets, could have a negative impact on the price of our shares and ADSs.

Exchange-rate and interest-rate risks have had, and may continue to have, an adverse effect on our revenue development.

        We are exposed to currency risks related to our international business activities. Generally, our Central Treasury hedges currency risks that may have a negative impact on our cash flows, although there can be no guarantee that our hedging strategies will succeed. Currency risks may have a negative impact on our results of operations when amounts in local currencies are translated into euros, particularly in connection with U.S. dollar- and British pound sterling-denominated results.

        For more information with respect to the impact of exchange rates and currency translation, see "Item 5. Operating and Financial Review and Prospects—Consolidated Results of Operations."

        We are also exposed to interest-rate risks, primarily in the euro, U.S. dollar and British pound sterling currencies. Interest-rate risks arise as a result of fluctuations in interest rates affecting the level of interest payments due on indebtedness at variable rates in each of these currencies. Once per year, our Management Board (Vorstand) specifies ratios of fixed and variable debt in these three currencies. Our Central Treasury then takes measures, using derivative instruments and other measures, to implement the interest-risk management decisions of the Management Board.

        For more information about our hedging activities and interest-rate and market risks, see "Item 11. Quantitative and Qualitative Disclosures about Market Risk."

Developments in the telecommunications sector have resulted, and may in the future result, in substantial write-downs of the carrying value of certain of our assets.

        We review on a regular basis the value of each of our subsidiaries and their assets. In addition to our regular annual valuations, whenever indications exist (due to changes in the economic, regulatory, business or political environment) that goodwill, intangible assets or fixed assets may be impaired, we consider the necessity of performing certain valuation tests, which may result in impairment charges. The recognition of impairments of tangible, intangible and financial assets could cause us to take large, non-cash charges against net profit, which could lead to a reduction in the trading price of our shares and ADSs.

        For more information, see "Item 5. Operating and Financial Review and Prospects—Critical Accounting Estimates."

Identification of significant deficiencies or material weaknesses as a result of our implementation of procedures designed to comply with Section 404 of the Sarbanes-Oxley Act of 2002 relating to evaluation of our internal control over financial reporting may have an adverse impact on our financial condition and results of operations and the trading price of our securities.

        Commencing with our annual report on Form 20-F for the year ending December 31, 2006, we will include a report from our management relating to its evaluation of our internal control over financial reporting as required under Section 404 of the U.S. Sarbanes-Oxley Act of 2002. As a consequence of systems and procedures currently being reviewed and implemented to comply with these requirements, we may uncover circumstances that may be determined to be significant deficiencies or material weaknesses, or that may otherwise result in disclosable conditions. Although we intend to take prompt measures to remediate any such identified significant deficiencies or material weaknesses in our internal control structure, measures of this kind may involve significant effort and expense, and any disclosure of such significant deficiencies, material weakness or other disclosable conditions may result in a negative market reaction.

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ITEM 4. Information on the Company

INTRODUCTION

        The legal and commercial name of our company is Deutsche Telekom AG. We are a private stock corporation organized under German law. Our registered office is located at Friedrich-Ebert-Allee 140, 53113 Bonn, Germany, and its telephone number is +49 (228) 181-0. Our agent for service of process in the United States is Deutsche Telekom, Inc., 600 Lexington Avenue, New York, NY 10022.


HISTORICAL BACKGROUND

        The provision of public telecommunications services in Germany was long a state monopoly, as formerly provided in the constitution of the Federal Republic. In 1989, the Federal Republic began to transform the postal, telephone and telegraph services administered by the former monopoly provider of such services into market-oriented businesses, and divided the former monopoly into three distinct entities along their lines of business, one of which was our predecessor, Deutsche Bundespost Telekom. At the same time, the Federal Republic also began the liberalization of the German telecommunications market. We were transformed into a private stock corporation at the beginning of 1995.

        The operation of networks (including cable networks) for all telecommunications services, other than public fixed-line voice telephony, was opened to competition in Germany on August 1, 1996, when the new legal framework for the regulation of the telecommunications sector in Germany—the Telecommunications Act—became effective. As required by the Telecommunications Act, and mandated by the directives of the E.U. Commission, the telecommunications sector in Germany was further liberalized on January 1, 1998, through the opening of the public fixed-line voice telephony services to competition.

        Since then, we have faced intense competition and have been required, among other things, to offer competitors access to our fixed-line network at regulated interconnection rates. For more information on the regulatory effects on competition in our fixed-line business, see "—Regulation."

        Other important events in the development of our business have included:

    the expansion and modernization of the telecommunications infrastructure in the former East Germany in the 1990s;

    the complete digitalization of our German telecommunications network in 1997;

    the expansion of our business into Central and Eastern Europe through the acquisition of a substantial interest in Magyar Tavkoezlesi Rt. in 1993 (renamed "Magyar Telekom" in 2005), the Hungarian national telecommunications company, and the acquisition of telecommunications subsidiaries in Slovakia, Macedonia, the Czech Republic and Croatia during 2000 and 2001;

    a joint venture with France Télécom and Sprint from 1996 through 2000, and a cooperation agreement with France Télécom from 1998 through 2000;

    the acquisition of One 2 One (now "T-Mobile Holdings Ltd.") in 1999;

    the disengagement from our former strategic alliance with France Télécom and Sprint, commencing in 1999;

    the acquisition of debis Systemhaus (now integrated into the Business Customers strategic business area) in 2000 and 2002;

    the initial public offering of T-Online International AG in 2000;

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    the purchase of licenses in 2000 allowing T-Mobile to operate UMTS wireless networks in Germany, the United Kingdom, Austria and the Netherlands, and, in 2001, a UMTS license in the Czech Republic;

    the divestment of our cable television businesses in 2001 and 2003;

    the acquisition of VoiceStream Wireless Corporation ("VoiceStream") and Powertel, Inc. ("Powertel") in 2001 (now "T-Mobile USA, Inc.");

    the acquisition of Ben Nederland Holding B.V. in 2000 and 2002 (now "T-Mobile Netherlands B.V.");

    the refocusing of our business on our core strategic business areas and on debt reduction in 2002, 2003 and 2004;

    the acquisition of the remaining 49% of EuroTel Bratislava, a.s. (now "T-Mobile Slovensko, a.s."), through Slovak Telekom a.s. in 2004;

    the full-divestment of shareholdings in European satellite operator SES Global in 2004;

    the conclusion of a merger agreement with T-Online International AG on the merger of T-Online International AG into Deutsche Telekom AG in 2005. The merger is not yet effective. For more information, see "Item 8. Financial Information—Legal Proceedings—Securities and Corporate Law-Related Proceedings—Release Proceedings Relating to the T-Online Merger";

    the formation of the new strategic business areas, Broadband/Fixed Network, Business Customers and Mobile Communications as of January 1, 2005, as an evolution from our previous structure, to better serve evolving customer needs;

    the 2005 acquisition of GSM (Global System for Mobile Communications) networks in California and Nevada in the United States from Cingular for USD 2.5 billion, and the related dissolution of our network-sharing joint venture with Cingular;

    the full divestment of shareholdings in the Russian mobile telecommunications operator, Mobile TeleSystems OJSC ("MTS"), in 2005 following reductions of our shareholdings in 2003 and 2004;

    the acquisition of a 76.5% majority interest in the Telekom Montenegro group (Telekom Crne Gore a.d.) through our Hungarian subsidiary, Magyar Telekom, in 2005;

    the pending acquisition of the Austrian mobile telecommunications operator, tele.ring Telekom Service GmbH ("tele.ring"), for an agreed purchase price of EUR 1.3 billion (the transaction is subject to approval by the Austrian telecommunications regulator, as well as by the E.U. Commission); and

    the pending acquisition of gedas AG (a subsidiary of Volkswagen AG), an IT service provider primarily focused on the automotive and manufacturing industries, for a purchase price of EUR 0.4 billion. We expect to complete this transaction in the first half of 2006.

        For more information regarding our new strategic business areas, see "—Strategy—Strategic Realignment." Additional information regarding the foregoing events and developments is contained throughout this Item 4.

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STRATEGY

General Overview

        Our key strategic goal is to shape the information and communications industry as Europe's leading integrated telecommunications operator and most highly regarded service company. We intend to build on our position as one of the world's leading service providers for fixed network, broadband and mobile telecommunications, as well for as IT services.

        Having concluded our debt reduction and business realignment phase, we are now refocused on growth and value creation.

        In 2005, we initiated a far-reaching transformation program, going beyond our "Agenda 2004." One aspect of our new "Excellence Program" consists of growth initiatives in respect of each of the three strategic business areas ("SBAs") of Deutsche Telekom:

    Mobile Communications — "Save for Growth": savings of approximately EUR 1 billion per year are planned in the medium term, a significant proportion of which will be reinvested in measures to safeguard T-Mobile's market position and achieve growth targets.

    Broadband/Fixed Network — "Re-Invent": the cornerstones of this program are activities to foster innovation and growth, measures aimed at increasing efficiency and quality, as well as a major change in culture, putting the customer even more in the center of our thinking. As part of "Re-Invent" we are currently engaged in the rollout of a new high-speed network with bandwidth rates of up to 50 Mbit/s in order to enable triple-play services (i.e., communication services, high-speed Internet access and entertainment offerings) to better meet the needs of our customers.

    Business Customers — "Focus on Growth": this program primarily focuses on improving sales efficiency, enhancing T-Systems' portfolio of products and services, enhancing operational excellence by improving internal processes, increasing efficiency through cost management, and mobilizing employees through hands-on value management. Through this program, T-Systems has been able to win back customers and defend market share.

        The three growth initiatives are complemented by six group-wide initiatives: "Customer & Brand," "Product & Innovation," "Operational Excellence," "Profitability," "Human Resources" and "Corporate Culture." These initiatives are aimed at leveraging the benefits of an intelligently integrated telecommunications provider where possible across strategic business areas in the field of customer relationships and innovation capabilities, scale efficiencies, human capital management and development. The initiatives also aim to strengthen a customer-oriented corporate culture embracing all strategic business areas.

        These objectives will be pursued primarily through ten strategic measures by the companies of the Deutsche Telekom group:

    Defense of the fixed-line network core business through strategic pricing measures, in the form of bundled products and segment-specific customer retention campaigns.

    Conquer the home in the broadband business, through mass-market penetration with ADSL, and also VDSL in combination with fiber-optic networks. We aim to launch customer-oriented double and triple-play offerings (i.e., combinations of voice, broadband Internet access and TV-based entertainment services).

    Expansion of the wireless communications core business as a leading service provider, by offering customer-oriented solutions with attractive and simple calling plans.

    Expansion of mobile data services, by becoming the leader in mobile broadband and introducing the mobile Internet, for example, with the introduction of "web'n'walk."

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    Convergence, by developing integrated fixed-line network/mobile telecommunications packages, such as T-Mobile@home and the DualPhone solution, as well as IP-based services and services that can be used with different technologies ("multi-access IP"), such as VoD and VoIP.

    Reinforcement of the telecommunications core business with both SMEs and multinational corporations, through strategic pricing measures, cross-selling and up-selling, mobile business solutions, and operational excellence.

    Growth with ICT solutions, through growth in the IT-outsourcing core business, by increasing our share of our existing customers' budget and by winning additional large-scale contracts.

    Customer relationship management on the basis of a customer database for all of T-Com's and T-Mobile's customers.

    Operational excellence for leveraging cost efficiencies. Our purchasing volume for goods and services in 2005, for example, amounted to around EUR 19.9 billion. Significant additional synergy potential can be achieved by harmonizing and standardizing products and services and bundling demands throughout the group.

    Culture change and human resources development, in particular at the customer interface, to improve quality of service.

        The Excellence Program, which will extend through 2007, will support our renewed focus on growth and value creation. For more information, see "Item 5. Operating and Financial Review and Prospects—Management Overview—Group Strategy."

Strategic Realignment

        As an evolutionary development of our strategy, as of January 1, 2005, we created three new strategic business areas: "Broadband/Fixed Network," "Mobile Communications" and "Business Customers." This reorganization has been implemented as a result of technological developments, a changing industry landscape (including competition) and evolving customer needs.

        Our formation of these three SBAs has resulted in certain internal reorganizations, including, among others:

    Broadband/Fixed Network: Certain former T-Systems units—specifically, wholesale (International Carrier Sales and Solutions, or "ICSS") and related platforms—have been transferred to the new Broadband/Fixed Network strategic business area, which now includes both T-Com and T-Online. Further, the proposed merger of T-Online International AG into Deutsche Telekom AG is intended to accelerate our broadband strategy. We believe that the "double-play" (communications services and Internet access) and triple-play (communications services, Internet access and entertainment services) approaches are essential to reinforce broadband growth in Germany, particularly in the retail market, and that the integration of our T-Com and T-Online business units will contribute to the successful growth of this market.

    Mobile Communications: There have been no significant changes in the Mobile Telecommunications strategic business area, except that the activities of our Central and Eastern European mobile operations are now reported under this strategic business area.

    Business Customers: Our business customer-related activities, and certain units of T-Com, have been combined within T-Systems. These units, which deliver services to small-, medium- and large-sized business customers, have been transferred to the Business Customers strategic business area to better serve these customers' continued demands for integrated solutions. T-Systems is responsible for our Business Customers strategic business area and has been reorganized into two business units:

    (i)
    "T-Systems Enterprise Services" for global business accounts; and

    (ii)
    "T-Systems Business Services" for small-, medium-, and large-sized entities.

        As mentioned above, the ICSS unit, formerly reported under T-Systems, has been transferred to the Broadband/Fixed Network strategic business area. Several other smaller units have also been transferred between T-Com and T-Systems.

        We believe that this reorganization will support our renewed focus on growth, and enable us to respond more flexibly to constantly changing market conditions.

19



SIGNIFICANT SUBSIDIARIES

        The following table shows significant subsidiaries we owned, directly or indirectly, as of December 31, 2005. The revenues of these companies, together with Deutsche Telekom AG, account for more than 90% of the group's revenues.

Name of Company

  Percent Held
T-Mobile Deutschland GmbH ("T-Mobile Deutschland")(1), Germany   100.00
T-Mobile USA, Inc. ("T-Mobile USA")(1), United States   100.00
T-Mobile Holdings Ltd. ("T-Mobile UK")(2), United Kingdom   100.00
T-Mobile Austria GmbH ("T-Mobile Austria")(3), Austria   100.00
T-Mobile Netherlands B.V. ("T-Mobile Netherlands")(2), Netherlands   100.00
T-Mobile Czech Republic a.s. ("T-Mobile Czech Republic")(4), Czech Republic   60.77
T-Systems Enterprise Services GmbH ("Enterprise Services"), Germany   100.00
T-Systems Business Services GmbH ("Business Services"), Germany   100.00
T-Online International AG ("T-Online")(5), Germany   90.14
Magyar Telekom Telecommunications Public Limited Company ("Magyar Telekom")(6), Hungary   59.21
Slovak Telekom, a.s. ("Slovak Telekom"), Slovakia   51.00
HT-Hrvatske telekomunikacije d.d. ("T-Hrvatski Telekom"), Croatia   51.00

(1)
Indirect shareholding via T-Mobile International AG & Co. KG ("T-Mobile International") (Deutsche Telekom share: 100%).
(2)
Indirect shareholding via T-Mobile Global Holding GmbH (Deutsche Telekom indirect share via T-Mobile International: 100%).
(3)
Indirect shareholding via T-Mobile Global Holding Nr. 2 GmbH (Deutsche Telekom indirect share via T-Mobile International: 100%).
(4)
Indirect shareholding via CMobil B.V. (Deutsche Telekom indirect share in CMobil B.V. via T-Mobile International and via T-Mobile Global Holding Nr. 2: 100%). CMobil B.V. direct share in T-Mobile Czech Republic: 60.77%.
(5)
We and T-Online are currently seeking to merge T-Online into Deutsche Telekom. As of December 31, 2005, we held approximately 90.14% of the outstanding shares of T-Online. For more information, see "Item 8. Financial Information—Legal Proceedings—Securities and Corporate Law-Related Proceedings—Release Proceedings Relating to the T-Online Merger."
(6)
Indirect shareholding via MagyarCom Holding GmbH (Deutsche Telekom share in MagyarCom: 100%).

        Please refer to our consolidated financial statements for a list of our principal subsidiaries. A list of our subsidiaries as of December 31, 2005, is filed as Exhibit 8.1 to this Annual Report.

20



SEGMENT REVENUE BREAKDOWN

        The following table presents total revenues (the sum of external (net) revenues and intersegment revenues), net revenues and intersegment revenues of our segments for the years indicated. For more information regarding our revenues on a segment basis, see "Item 5. Operating and Financial Review and Prospects—Segment Analysis."

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
 
 
  Net
Revenues

  %
  Inter-
Segment
Revenues

  Total
Revenues

  Net
Revenues

  %
  Inter-
Segment
Revenues

  Total
Revenues

  Net
Revenues

  %
  Inter-
Segment
Revenues

  Total
Revenues

 
 
  (millions of € except percentages)

 
Broadband/Fixed Network   21,731   36.5   4,304   26,035   22,397   39.1   4,615   27,012   23,161   41.7   5,098   28,259  
Mobile Communications   28,531   47.9   921   29,452   25,450   44.4   1,077   26,527   22,933   41.2   1,394   24,327  
Business Customers   9,058   15.2   3,792   12,850   9,246   16.1   3,716   12,962   9,267   16.7   3,670   12,937  
Group Headquarters and Shared Services   284   0.4   3,221   3,505   260   0.4   3,266   3,526   235   0.4   3,036   3,271  
Reconciliation       (12,238 ) (12,238 )     (12,674 ) (12,674 )     (13,198 ) (13,198 )
   
 
 
 
 
 
 
 
 
 
 
 
 
Group   59,604   100.0     59,604   57,353   100.0     57,353   55,596   100.0     55,596  

21



DESCRIPTION OF BUSINESS

Broadband/Fixed Network

        Our Broadband/Fixed Network strategic business area is responsible for providing telecommunications and Internet-related products and services to individual and very small business customers of the Deutsche Telekom group, as well as to the wholesale services market, through our T-Com and T-Online business units. In connection with the realignment of our divisions in order to respond better to changes in the telecommunications markets, in October 2004, we announced the proposed merger of T-Online International AG into Deutsche Telekom AG, which is still pending. For more information relating to this merger, see "Item 5. Operating and Financial Review and Prospects—Management Overview" and "Item 8. Financial Information—Legal Proceedings."

        T-Com is responsible for Deutsche Telekom's national and international network infrastructure, as well as for business with international network operators (through ICSS), and for providing wholesale services to third-parties as well as the other Deutsche Telekom strategic business areas and Group Headquarters and Shared Services. T-Online is responsible for providing Internet-related products and services for customers in Germany and other countries in Western Europe.

        The following table reflects the numbers of broadband and narrowband access lines in operation supported by our Broadband/Fixed Network strategic business area through the T-Com business unit:

 
  As of
December 31, 2005

  As of
December 31, 2004

  2005-2004
% Change

  As of December 31, 2003
  2004-2003
% Change

 
 
  (millions, except percentages)(1)

 
Broadband                      
  Broadband lines (total)(2)   8.5   6.1   39.8   4.1   47.7  
    of which: Germany   7.9   5.8   36.9   4.0   46.1  
      of which: resale(3)   1.6   0.2   n.m.   n.a.   n.a.  
    of which: Central and Eastern Europe(4)   0.5   0.3   104.5   0.1   140.6  

Narrowband

 

 

 

 

 

 

 

 

 

 

 
  Narrowband lines (total)(5)   41.2   42.8   (3.7 ) 43.7   (2.1 )
    of which: Germany(6)   35.2   36.8   (4.1 ) 37.5   (1.9 )
      of which: Standard analog   25.5   26.4   (3.3 ) 27.2   (2.9 )
      of which: ISDN   9.8   10.4   (6.1 ) 10.3   1.0  
    of which: Central and Eastern Europe(4)   6.0   6.1   (1.0 ) 6.1   0.0  
      of which: Magyar Telekom(7)   3.2   3.2   (0.4 ) 3.2   0.0  
      of which: Slovak Telekom   1.2   1.2   (3.9 ) 1.3   (7.7 )
      of which: T-Hrvatski Telekom   1.7   1.7   (0.1 ) 1.7   0.0  

n.a.—not applicable

n.m.—not meaningful

(1)
Totals have been calculated on the basis of precise figures and rounded to millions. Percentages have been calculated on the basis of precise figures.
(2)
Since January 31, 2005, broadband access lines (defined below) based on DSL technology for individual customers have been primarily marketed by T-Online. Numbers of lines exclude those used within the group.
(3)
Definition of resale: broadband access lines sold to alternative providers outside the Deutsche Telekom group ("Resale DSL").
(4)
Central and Eastern Europe includes the fixed-line network businesses of Magyar Telekom (including MakTel), Slovak Telekom and T-Hrvatski Telekom. Since 2005, Central and Eastern Europe figures have included the fixed-line network business of Telekom Montenegro. The rebranding of Matáv as Magyar Telekom took place at the beginning of May 2005. Figures exclude those lines used within the group.
(5)
Since March 31, 2005, T-Com has reported numbers of narrowband access lines (defined below or defined in "—Network Access Products—Narrowband Access" below), rather than channels. Prior-year figures have been adjusted to reflect numbers of access lines.
(6)
Numbers of telephone lines exclude those used within the group, and public payphones, but include wholesale services.
(7)
Subscriber-line figures include Magyar Telekom's subsidiary, MakTel, and Telekom Montenegro.

22


        The following table presents the numbers of Internet customers supported by our Broadband/Fixed Network strategic business area through the T-Online business unit:

 
  As of
December 31, 2005

  As of
December 31, 2004

  2005-2004
% Change

  As of December 31, 2003
  2004-2003
% Change

 
 
  (millions, except percentages)(1)

 

Registered

 

 

 

 

 

 

 

 

 

 

 
Customers(2)   14.03   13.50   3.9   13.13   2.8  

Germany

 

11.81

 

11.43

 

3.3

 

10.79

 

5.9

 
  of whom with DSL tariffs   4.45   3.23   37.8   2.16   49.5  
  of whom with narrowband tariffs   4.06   4.95   (18.0 ) 5.56   (11.0 )
  of whom PAYG (usage ‹ 30 days)(3)   0.55   0.74   (25.7 ) 0.81   (8.6 )
  of whom PAYG (usage › 30 days)(3)   2.75   2.51   9.6   2.26   11.1  

Rest of Europe(4)

 

2.22

 

2.07

 

7.2

 

2.35

 

(11.9

)
  of whom with DSL tariffs   0.64   0.36   77.8   0.26   38.5  
  of whom with narrowband tariffs   0.12   0.21   (42.9 ) 0.29   (27.6 )
  of whom PAYG (usage ‹ 30 days)(3)   0.07   0.12   (41.7 ) 0.17   (29.4 )
  of whom PAYG (usage › 30 days)(3)   1.39   1.38   0.7   1.63   (15.3 )

(1)
Totals have been calculated on the basis of precise figures and rounded to millions. Percentages have been calculated on the basis of the figures shown.
(2)
Customers with access tariffs.
(3)
PAYG (Pay as you go) customers are defined as those customers who have not ordered a tariff plan with a basic monthly charge.
(4)
Includes the businesses of Ya.com and T-Online France.

        The concentration of our domestic and Central and Eastern European fixed-line network businesses, together with infrastructure management, into the Broadband/Fixed Network SBA is designed to promote an increase in the number of broadband access lines in the mass market. In this context, our integrated broadband strategy will include new offerings for voice, Internet and entertainment services (the "triple-play strategy"). In addition, in order to create an integrated wholesale unit covering both our domestic and international business, the former T-Systems' International Carrier Sales and Solutions business (ICSS), and some other smaller businesses, were transferred to Broadband/Fixed Network's T-Com business unit on January 1, 2005. For further information regarding our strategic realignment, see "—Strategy—Strategic Realignment" and "Item 5. Operating and Financial Review and Prospects—Management Overview."

        The broadband market continued to grow during 2005. Falling Internet service provider (ISP) market prices, as well as competitive, bundled broadband access, voice and ISP product offerings by alternative providers, were factors in the continued growth of the broadband market. In addition, T-Com introduced new, innovative and improved offers, such as increased bandwidth broadband access lines with transmission rates of up to six megabits per second ("Mbit/s") in 2005.

    T-Com

        The total number of broadband lines in operation provided by Broadband/Fixed Network's T-Com business unit in Germany increased by 2.1 million, or 36.9%, from 5.8 million at December 31, 2004, to 7.9 million at December 31, 2005. This increase was primarily due to an increase in the number of Resale DSL lines sold to alternative providers from 200,000 at December 31, 2004, to 1.6 million at December 31, 2005. We expect the number of Resale DSL lines in operation provided by Broadband/Fixed Network's T-Com business unit to continue to increase in conjunction with the overall market for broadband connections in Germany. Since January 31, 2005, the focus of marketing of broadband

23


access lines within the Broadband/Fixed Network strategic business area has been on T-Online's broadband packages, which include broadband access lines and ISP Services. As a result, the number of existing T-DSL access lines provided by T-Com decreased in 2005 and we expect this decrease to continue.

    T-Online

        T-Online supplies private customers and small- to medium-sized businesses with high-quality Internet access at competitive prices. Broadband access products account for an increasing share of this business. In addition to Internet access, T-Online offers a full suite of non-access services, such as e-mail, online banking, DSL telephony, calendar/address book, and digital entertainment services, such as music downloads and video-on-demand (VoD).

        T-Online uses T-Com's IP platform to provide its customers with access to the Internet.

        In February 2004, T-Online acquired the Internet portal operator Scout24 AG ("Scout24") and its portfolio of group companies for a total purchase price of EUR 180 million, including a shareholder loan of EUR 36.8 million plus acquisition related costs of EUR 2.3 million. Through Scout24, T-Online supplemented its brand and product portfolio and its involvement in non-access businesses within the online-classifieds sector. Scout24 is a European network of "online marketplaces", which provide online automotive, finance, real estate, employment, dating and travel marketplaces.

        In June 2005, T-Online acquired the Spanish network infrastructure provider Red Eléctrica Telecomunicaciones, operating under the brand name "Albura," from Red Eléctrica de España for a total purchase price of EUR 35 million. Through Albura, T-Online complemented its existing operations in Spain with a telecommunications infrastructure. This acquisition will increase the quality of the product offering that T-Online will be able to provide throughout Spain.

    Principal Markets—T-Com

        Through T-Com, Broadband/Fixed Network operates one of the largest fixed-line networks in Europe in terms of the number of lines provided. T-Com's principal activities include:

    Network communications services, consisting of network access products and calling services;

    Value-added services (special-purpose telephony services);

    Data communications services and solutions provided (through the Business Customers strategic business area) to small- and medium-sized enterprises, including products based on the Internet protocol (IP), which include intranet and extranet solutions, Telecom Design Network (TDN) and "CompanyConnect," as well as leased lines. As from January 1, 2005, T-Com only provides services to individuals, very small business customers and other carriers. Small-, medium- and large-sized business customers are now serviced by Business Customers strategic business area;

    Terminal equipment for telecommunications, including the distribution of T-Com's own-brand as well as leading IT manufacturers' products;

    Other fixed-line network services, including installation and maintenance services;

    Wholesale services, including Resale DSL and unbundled local loop, interconnection with other domestic network carriers and service providers, and regional IP access for broadband IP providers;

    Other domestic services, including publishing services, customer retention programs and sales channels; and

24


    Fixed-line network services, wholesale services and online services in certain countries in Central and Eastern Europe, through its subsidiaries: Magyar Telekom (Hungary), Slovak Telekom (Slovakia) and T-Hrvatski Telekom (Croatia).

        Most of Broadband/Fixed Network's revenues in 2005 were derived from T-Com's fixed-line network communications services (in the form of access and calling services revenues) provided within Germany. For more information, see "Item 5. Operating and Financial Review and Prospects—Segment Analysis—Broadband/Fixed Network."

    Principal Markets—T-Online

        The T-Online business is divided geographically into two parts: "Germany" and "Rest of Europe." As of December 31, 2005, T-Online's operations in Germany represented over 85% of T-Online's total revenues.

        Broadband services allow customers to access the Internet and Internet-related services at significantly higher speeds than traditional dial-up services are capable of supporting. T-Online uses the term "broadband" to refer to ADSL technology, for which the downstream data rate is greater than 128 Kbit/s. Broadband access is generally fast enough to support new applications, such as high-quality streaming video. "Narrowband" usually refers to a dial-up connection that offers a transmission rate of up to 128 Kbit/s (e.g., ISDN with channel bundling).

        With more than 14 million customers as of December 31, 2005, T-Online is one of the largest European ISPs, based on both revenues and numbers of customers. Compared to 2004, T-Online's customers increased by approximately 0.53 million. The total number of customers with broadband tariffs increased by 1.5 million, or 41.9%, from 3.59 million as of December 31, 2004, to 5.09 million at the end of the 2005 financial year. In Germany, the number of customers with broadband tariffs grew 38.0%, from 3.23 million as of December 31, 2004, to 4.45 million as of December 31, 2005. Rest of Europe posted an increase of 77%.

        T-Online believes that the increase in Germany was basically the result of the new "DSL-Komplettpakete" (DSL Complete Package) marketing campaign, and a realigned broadband tariff portfolio. Since February 1, 2005, T-Online has been positioned as a full-service broadband provider in Germany, offering the DSL-Komplettpakete, which are comprised of a broadband connection, a broadband tariff and hardware components.

        Outside of Germany, T-Online's broadband business also continued to grow, due to attractive products and tariff offerings in both France and Spain, such as VoIP in France and public switched telephone network ("PSTN") voice telephony in Spain.

        However, during 2005, the number of narrowband T-Online customers declined in all markets, partly as a consequence of T-Online's promotional efforts in the broadband market, which offered more attractive access rates and services, as well as the natural migration of customers to faster connection speeds.

    Operations in Germany—T-Com

    Network Infrastructure

      Access Network

        T-Com offers ICT access for individual customers and very small business customers. Typically, a customer has access to T-Com's network by means of a copper cable that runs from its transmission network to the customer's home or office. T-Com's network is capable of higher bit rates, and thus, increased broadband capacity. The portion of the access network that connects the transmission network to the customer is commonly referred to as the "last mile" or "local loop."

25


      Transmission Network

        T-Com's transmission network consists of fiber-optic cables enhanced with Wavelength Digital Multiplexing (WDM) and Synchronous Digital Hierarchy (SDH) technologies, as well as other network components. WDM uses wavelengths of light to increase the capacity of fiber-optic cables, thereby allowing multiple communication channels. This allows T-Com to increase the capacity of its transmission network without having to use additional fiber-optic cable. SDH is an international high-speed transmission standard, which improves network management and increases the reliability of fiber-optic networks.

        During 2005, T-Com continued to expand its use of SDH technology. T-Com plans to extend further its use of WDM, SDH and similar technologies in-line with the demands of its customers, and in conjunction with our ongoing broadband strategy. Accordingly, T-Com has commenced a new phase of broadband development in Germany with the construction of a new, high-speed network. This large-scale capital investment program, scheduled to be built-out from 2005 to 2007, which has the goal of providing high-speed broadband access in 50 large cities, will form the basis for innovative multimedia offerings, including new services and applications. Although T-Com has begun to rollout this new, high-speed network, its completion is dependent on its future economic viability within the regulatory environment. For more information regarding network-access regulation, see "—Regulation—Regulation in Germany—Network Access—Broadband Products."

        T-Com is committed to increasing broadband penetration and upgrading, expanding and developing broadband services in Germany. Accordingly, T-Com intends to rollout an extensive network enhancement that will enable the high-speed broadband access that we announced at the "Internationalen Funkausstellung" (IFA) trade show in October 2005. This network enhancement is based on VDSL (very high-speed digital subscriber line) technology, which will enable customers to realize access speeds of up to 50 Mbit/s. The VDSL-based network enhancements will initially be available in larger cities and densely populated areas in Germany. T-Com also intends to upgrade its broadband-access network by expanding the use of ADSL2+ (an enhanced asymmetric digital subscriber line, or ADSL) technology, which will enable customers to realize access speeds of up to 20 Mbit/s. The ADSL2+ technology will be provided to approximately 700 smaller cities and less densely populated urban areas in Germany.

      Service Platforms

        T-Com's service platforms enable the provision of voice, data and other value-added services to its customers. IP-based platforms have recently evolved as important delivery platforms, because they allow T-Com to enable the offering of multiple and varied products and services to individual customers (e.g., browser access to the World Wide Web) and business customers (e.g., virtual private networks (VPNs) and server connections to the World Wide Web). The use of asynchronous transfer mode (ATM) technology, which permits the high-quality transmission of large amounts of data (e.g., VoIP, text, audio and video), is also employed in T-Com's service platforms.

      Network Communication Services

            Network Access Products

        T-Com offers network access to its individual and business customers through a variety of access-line packages, which generally include a fixed monthly payment and a variable component based on traffic volume. These access-line packages may contain standard analog-line access or digital-line access, the latter of which are also known as Integrated Services Digital Network (ISDN) access lines. In addition, both types of access lines, which are a prerequisite for broadband access, can be enhanced by increasing their bandwidth capacity through the use of DSL technology (described below).

26


        Narrowband Access

        "Narrowband" access customarily signifies a dial-up connection with a transmission speed of up to 128 kilobits per second ("Kbit/s"). ISDN and ISDN channels are described below under "T-ISDN Access."

              T-Net Access

        T-Com's standard access voice products are marketed under the brand name, "T-Net," and permit the customer to use a single telecommunications channel for voice, data or facsimile transmission at speeds of up to 56 Kbit/s. The following table shows the number of T-Net access lines in operation, excluding public payphones, as of December 31 for each of the periods presented:

Year

  T-Net Access
Lines

2003   27.2 million
2004   26.4 million
2005   25.5 million

        The number of T-Net access lines in operation has continued to decrease from 2003 to 2005. T-Com expects this trend to continue in the future, primarily due to increased competition from access lines in the unbundled local loop provided by T-Com to alternative carriers and mobile substitution.

              T-ISDN Access

        T-Com's ISDN-access products are marketed under the brand name, "T-ISDN," and permit a single customer access line to be used simultaneously to provide multiple products and services, including voice, data and facsimile transmission at 64 Kbit/s, which can be increased to 128 Kbit/s using channel bundling. Compared to regular voice telephone lines, ISDN technology provides connections with faster transmission speeds and increases T-Com's network usage rates.

        T-Com offers two types of T-ISDN access lines: basic and primary. Basic T-ISDN access lines provide two telecommunications channels per access line and are offered to individual as well as business customers. Primary T-ISDN access lines provide 30 telecommunications channels per access line and are offered mainly to business customers. The following table shows the number of ISDN access lines and channels in operation as of December 31 for each of the periods presented:

 
  ISDN Access Lines
   
Year

  Total ISDN
Channels(1)

  Basic
  Primary
2003   10.3 million   98,000   23.6 million
2004   10.4 million   97,000   23.9 million
2005   9.8 million   93,000   22.5 million

(1)
Calculations based on actual figures.

        The number of basic T-ISDN access lines decreased in 2005, compared to 2004. This decrease was primarily the result of increased competition, especially by new integrated voice and Internet products, and saturation of the ISDN market. Another factor in the decrease in the number of T-ISDN access lines was the migration of T-DSL customers, who had been using T-ISDN access lines in conjunction with broadband service, to T-Net access lines, which occurred after April 1, 2004 (when T-Com increased the price of T-DSL when purchased in combination with T-ISDN, and reduced the price of T-DSL when purchased in combination with T-Net). T-Com expects this trend to continue.

27



        Broadband Access

        "Broadband" access refers to connections with transmission speeds in excess of 128 Kbit/s, which is generally the upper limit of what can be achieved using only narrowband access. Currently T-Com offers broadband transmission speeds of up to six Mbit/s. For more information about T-Com's transmission networks, see "—Description of Property, Plant and Equipment—Network Infrastructure."

        T-Com provides T-Net and T-ISDN access lines, enhanced by means of DSL technology, to its individual and business customers at a fixed monthly fee. However, since January 31, 2005, T-Com has offered its broadband access lines primarily to its wholesale customers, as Resale DSL, and to the T-Online business unit. T-Online, in turn, markets these broadband access lines to its retail customers. For more information regarding Resale DSL, see "—Regulation—Regulation in Germany—Network Access—Broadband Products."

        T-Com typically offers ADSL technology, which combines a high-speed data download transmission speed with a lower upload transmission speed. T-Com also offers synchronous DSL (SDSL) technology to its business customers, which permits high-speed data transmission speeds in both directions. Since 2003, SDSL has been available throughout Germany under the "T-DSL Business" brand name. The following table provides information on the number of T-Com broadband access lines in operation, by customer, as of December 31 for each of the periods presented:

Year

  Total
Broadband
Access Lines

  thereof,
T-Com T-DSL

  thereof,
T-Online DSL

  thereof,
Resale DSL

2003   4.0 million   4.0 million   n.a.   n.a.
2004   5.8 million (1) 5.5 million   n.a.   0.2 million
2005   7.9 million (1) 5.1 million   1.2 million   1.6 million

n.a.—not applicable

(1)
Differences due to rounding.

        The number of broadband access lines provided by T-Com continued to increase in 2005, and T-Com expects that demand for high-bandwidth services will result in continued growth in the number of broadband access lines in operation in the future. In 2005, the number of broadband access lines in operation provided by T-Com, excluding Resale DSL, increased for lines with transmission speeds of one Mbit/s, two Mbit/s, three Mbit/s and six Mbit/s. The number of Resale DSL lines in operation also increased in 2005, and Resale DSL has been the main contributor to T-Com's broadband growth. Revenues from Resale DSL are reported under wholesale services revenues. Since January 31, 2005, broadband access lines based on DSL technology for individual customers have been primarily marketed by T-Online. As a result, the number of existing T-DSL access lines provided by T-Com decreased in 2005, and we expect this decrease to continue. Resale DSL transmission speeds are determined by the respective service provider.

        In order to access the Internet, however, in addition to obtaining a broadband access line, individual customers also require a contract with an Internet Service Provider (ISP), such as T-Online, for the provision of Internet access.

            Calling Services

        Through its network-access product offerings, T-Com provides comprehensive local and regional calling services, as well as national and international long-distance calling services, and dial-up Internet access, for customers who have access to T-Com's fixed-line network. With the exception of the no-longer-offered "Standard" T-Net tariff, T-Net and T-ISDN offer customers many of the same services, such as three-way calling, call-waiting and caller ID. T-ISDN also offers several features not available to T-Net customers, including a second connection channel, which allows the customer to have

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three separate telephone numbers and to use the telephone, send or receive faxes and use the Internet all at the same time.

        Since 1998, T-Com's customers in Germany have been able to choose alternative providers for long-distance and international calls through "carrier pre-selection" (designating one carrier) and "call-by-call" (selecting a carrier each time a call is made by dialing the carrier's numeric prefix before dialing the telephone number). T-Com's competitors have made considerable inroads into the calling services market, which was a main focus of the regulatory decisions relating to increased competition in the fixed-line area. Initially, competitors that did not have their own infrastructure benefited from T-Com's infrastructure investments. Since the introduction of element-based pricing, which began in 2002, those of T-Com's competitors that have invested in networks and interconnection points in conjunction with T-Com have been able to benefit from more favorable pricing conditions. T-Com has approximately 100 interconnection agreements with carriers in the long-distance and international markets. More recently, in 2003, carrier pre-selection and call-by-call selection were introduced for the German local-calling services market, which has led to a corresponding continued reduction of T-Com's market share in this market. For more information regarding carrier selection regulations, see "—Regulation—Regulation in Germany—Network Access—Carrier Selection."

        To counter some of these competitive challenges, T-Com has introduced several different rate plans, which are designed to provide customers with reduced per-call rates for an additional monthly fee. These new rate plans are designed to better meet the demands of specific customer segments, compared to T-Com's existing rate plans. T-Com believes that there is a trend towards including and increasing flat-rate components in rate plans.

        The decrease in the number of T-Com's call minutes in Germany continued in 2005, due to loss of market share to competitors, as a result of the increasing number of access lines lost to competitors using the unbundled local loop, and continued high usage of competitors' call-by-call and pre-selection offers.

        On March 1, 2005, T-Com introduced its "Wünsch Dir was" (Make a Wish) program, which provides lower prices, higher service levels and simple cost transparency, as part of its new, customer-focused marketing strategy. By the end of 2005, 12.1 million customers were using the Wünsch Dir was program and were able to choose from four calling plans with flat-rate components: "Call Plus" for infrequent callers, "Call Time" for the average caller, "XXL" for frequent callers and "XXL Freetime" for extra-frequent callers. In combination with the CountrySelect option, international calls can be charged per minute. Many extra services, such as "call waiting" and "number suppression" are also available at no extra charge. In addition, on October 5, 2005, T-Com introduced "XXL Fulltime," a new flat-rate calling plan that gives customers unlimited minutes for calls in the fixed-line network in Germany for a fixed monthly fee. This simplification of its rate-plan system was the first step towards the streamlining of T-Com's product portfolio in the consumer market. On December 1, 2005, T-Com lowered its monthly charge for XXL Fulltime, and the charge for XXL Fulltime with T-ISDN was also reduced. The mandatory price decrease for fixed-to-mobile termination fees led to a decrease in the price of T-Com's fixed-to-mobile calling charges.

      Value-Added Services

        T-Com offers a range of value-added telephone services for individual and business customers. These services include: toll-free numbers (e.g., "freecall 0800") and shared-cost numbers for customer-relationship management, directory-assistance numbers, the provision and administration of directory databases, and public payphones. T-Com also provides contact-routing solutions, primarily to large call-center operators and media-broadcasting companies.

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        In the entertainment sector, T-Com's premium-rate services (which use the 0190 and 0900 exchanges) enable information and entertainment packages to be sold and billed automatically by telephone or via the Internet.

        Furthermore, T-Com provides contact-routing solutions, primarily to large call center operators and media broadcasting companies. Through its product, "T-VoteCall," T-Com provides media broadcasting companies (largely television and radio stations) the ability to catalogue and switch customer calls to pre-defined locations. This service enables media broadcasters to increase customer participation in their program offerings as well as to measure audience loyalty.

        T-Com's new products in the directory-assistance sector include a telephone number search service via Short Message Service (SMS) text, and a directory-search service based on telephone numbers.

      Data Communications

        T-Com's full portfolio of data communications solutions, which is also offered by the Business Customers strategic business area, includes the following products and services:

    Leased lines, which are trunk lines offering high levels of security and pre-defined bandwidths, for the construction and operation of corporate networks. T-Com offers leased lines under the brand names "SFV" (Standardfestverbindung) and "DDV" (Datendirektverbindung);

    Telekom Design Networks, which combine data and voice communications products to meet the specific needs of business customers and other carriers. A wide range of additional services (e.g., consulting, project management, design and re-design of customer networks) are integrated into TDN contracts. These components form the basis for a customized system solution, which can then be adjusted, based on changing client requirements and new technologies;

    Virtual Private Network products, which connect customer sites within a closed network, and include standard solutions as well as individually tailored services for ATM- or IP-based networks. VPN products provide high-speed transmission rates and increased security standards. VoIP solutions have been offered as part of T-Com's data communication products (e.g., as part of an IP network) to business customers since 2003;

    Ethernet products, primarily under the brand names "DDV-M Ethernet 100" and "High-Speed Ethernet," which provide T-Com's business customers with innovative, low-priced "plug-and-play" solutions, and which interconnect customer sites using worldwide Ethernet standards and feature high transmission speeds (up to one gigabit per second ("Gbit/s"));

    Internet solutions and IP-related services, primarily provided through the CompanyConnect and "IP-Transit" products:

    (
    )      CompanyConnect includes a broadband Internet connection and is mainly targeted at medium- and large-sized companies. This product includes guaranteed bandwidths, from 256 Kbit/s to 155 Mbit/s, and fixed IP addresses; and

    (
    )      IP-Transit offers bandwidths from two Mbit/s to 2.5 Gbit/s and provides worldwide Internet connectivity using multiple connections to different providers simultaneously. Based on this technology, customers can achieve very high system stability and independence from a single ISP. IP-Transit is mainly marketed by T-Com, in cooperation with T-Systems, to wholesale services customers and large-sized companies;

    Dedicated customer lines: T-Com's dedicated customer line product offers business customers connections between two customer networks (located up to 50 kilometers apart) with transmission speeds of up to one Gbit/s.

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      Terminal Equipment

        Through its terminal equipment business, T-Com distributes, for purchase or lease, an extensive range of third-party and T-Com's own-brand telecommunications equipment. Products range from individual telephone sets and facsimile machines, targeted at individual customers, to more complex telephones, private branch exchanges (PBXs) and complex network systems (including broadband-access devices), targeted at business customers.

      Other Fixed-Line Network Services

        T-Com also provides installation, maintenance, hotline, customer consulting, education and software installation services. These services are provided on a standardized basis and, for business customers, on a customized basis. T-Com had previously included cable television services in "Other Fixed-Line Network Services." However, in 2003, T-Com sold its entire remaining interest in its regional cable businesses.

      Wholesale Services

        Through its wholesale services business, T-Com provides products and services to third-party domestic carriers and service providers, as well as to other members of the Deutsche Telekom group (intersegment services) in compliance with the regulatory guidelines stipulated by the Federal Network Agency. Since the transfer of the ICSS business from T-Systems to T-Com, T-Com has also been responsible for our international wholesale business.

        Wholesale products and services provided to third-party and Deutsche Telekom group customers include:

    Access services: Access to the local loop enables third-party providers to supply their customers with services, such as telephone and broadband access services, using T-Com's network infrastructure. These operators lease from T-Com the access lines running to their retail customers' premises.

    Resale DSL: T-Com has offered Resale DSL, i.e., the sale of broadband access lines to alternative providers outside of the group, since July 2004. T-Com has entered into comprehensive reseller agreements with third-party operators, which provide an integrated service combining access- and IP-services for their retail customers. The current maximum transmission speed offered to Resale DSL customers is six Mbit/s.

    IP services: T-Com provides Internet transport services for broadband and narrowband service providers ("virtual ISP services") as well as transport services for carrier interconnection. In addition, T-Com offers nationwide access (through its IP backbone) and regional IP access to broadband IP providers with its "ZISP" (Zugang zur ISP) product. T-Com also provides scalable narrowband and broadband Internet transport services to ISPs ("OnlineConnect"), which allow ISPs to expand their Internet platforms in-line with customer demand.

    Interconnection services: T-Com's interconnection services primarily consist of call origination and the transit and termination of switched voice traffic. The terms under which T-Com interconnects its telephone network with the networks of other domestic carriers and service providers are either bilaterally negotiated or imposed by the Federal Network Agency. At December 31, 2005, T-Com had 117 interconnection carriers. Bilateral interconnection agreements existed with 70 of these carriers, while the remaining carrier interconnections were implemented on the basis of an interconnection order from the Federal Network Agency. The most recent mandated price reductions on interconnection prices occurred during the fourth quarter of 2003, and are valid until May 31, 2006.

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    Network Services: T-Com offers leased lines with transmission speeds ranging from 64 Kbit/s to 2.5 Gbit/s, which are tailored to fit the specific needs of carriers and mobile network operators. These leased lines can be used for both the transmission of data as well as voice traffic. During 2005, the trend towards transmission speeds higher than two Mbit/s continued. T-Com also offers Carrier Services Networks, which combine leased lines (with transmission speeds between two Mbit/s and 2.5 Gbit/s) with network management services.

    ICSS provides international wholesale customers—typically other fixed-line carriers and mobile operators, as well as ISPs, application service providers (ASPs) and content providers —with worldwide direct access to our highly advanced fiber-optic global telecommunications network. ICSS' main focus is the transfer of our outgoing international traffic from Germany to carriers in other countries for termination in their networks, and the provision of carrier termination and transit services for calls that originate outside of Germany and are routed through our network for termination in Germany or a third country. During 2005, ICSS managed total worldwide voice traffic of more than 13 billion minutes, providing connections to more than 190 countries worldwide. In addition, ICSS also manages the exchange of international IP traffic between carriers, which is necessary in order to allow carriers to offer Internet access and content to their retail customers. Other services provide by ICSS include "Carrier Managed Network Solutions," which are IP-based VPNs for carriers serving the corporate market and "WiFi Roaming Solution," which serves the growing demand for best-in-class mobile solutions.

    In 2005, Global Networks was transferred from T-Systems to T-Com, along with ICSS, as part of our strategic realignment, in order to better combine our national and global network infrastructure. T-Com's Global Networks manages the development, construction and operation of T-Com's global networks outside Germany, including its own SDH network connecting major cities around the globe. These international networks are predominantly based upon T-Com's own fiber-optic and WDM systems.

      Other Domestic Services

            Sales Channels

        T-Com offers its products and services through a broad range of sales partners, as well as direct and indirect sales channels. T-Com's direct distribution channel includes its "T-Punkt" retail outlets, direct sales forces dedicated to either business or retail customers, and online ordering via the Internet. In addition, T-Com provides toll-free numbers that allow customers to obtain information about, and place orders for, its various products and services. T-Com maintains separate sales units for direct sales to individuals and businesses, domestic carrier services and services offered to network operators and service providers.

        Most of T-Com's terminal equipment sales occur through its T-Punkt outlets, which offer an extensive product portfolio, including T-ISDN and T-DSL business products, and products and services from T-Online, T-Mobile and third-party vendors. T-Com receives commissions on its sales of products and services provided by other Deutsche Telekom business units. At December 31, 2005, T-Com had 443 T-Punkt outlets in Germany, of which 104 were business outlets. T-Punkt business outlets offer more products and services targeted to businesses (e.g., tailored telecommunications solutions for combined voice and data usage).

            Publishing Services

        T-Com's activities with respect to publishing services include the sale of marketing and advertising services to small-and medium-sized companies via T-Com's telephone directories, as well as sales of products from the other SBAs. The telephone directories (e.g., DasTelefonbuch, GelbeSeiten, Das Örtliche) are edited and published in a variety of formats (including print, CD-ROM, online and mobile

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device), in cooperation with local publishers. T-Com receives most of its publishing revenues from advertisements contained in these directories. In recent years, this business has been subject to increasing pressure from competitors and weakness in the German economy. For information regarding legal proceedings relating to directory services, see "Item 8. Financial Information—Legal Proceedings."

    Operations in Germany—T-Online

        Since February 1, 2005, T-Online has been marketing the DSL-Komplettpakete in Germany.

        In addition, T-Online has realigned its DSL tariff portfolio in Germany, according to customer needs. Since the beginning of November 2005, T-Online has also been offering a new DSL flat-rate tariff ("T-Online dsl flat") for all available T-DSL bandwidths (T-DSL 1000 through T-DSL 6000) at the basic monthly fee of EUR 9.95.

        T-Online's objective is to position itself as the long-term innovation leader, with a series of initiatives, such as the DSL-Komplettpakete marketing campaign, the launch of a VoIP product and broadband services such as VoD, in the rapidly growing market for broadband and IP-related services.

        Consequently, in March 2005, T-Online launched its VoIP broadband telephony service. VoIP technology offers Internet users an affordable option of telephoning via the Internet. Since the beginning of November 2005, T-Online has been offering a flat-rate VoIP tariff.

        T-Online is promoting the distribution of "T-Online Vision" (introduced in 2003), which allows broadband services to be accessed through a television set. In addition to its existing partnerships with hardware suppliers, such as Fujitsu Siemens and Samsung, T-Online presented the S100 media receiver at the 2005 IFA consumer electronics exhibition. The S100 Media Receiver is T-Online's first device that combines Internet access, DSL telephony (VoIP) and entertainment services like VoD.

        In its growing VoD area, T-Online now has agreements with six of the eight major Hollywood film studios, with the latest additions being Warner Brothers International Television Distribution Studios and Paramount in 2005. T-Online's VoD service now comprises over 1,200 titles across all genres, including documentaries and in-house productions from the ProSiebenSat1 broadcasting family. T-Online's VoD service has been well-received by customers, with 100,000 viewings per month.

        T-Online's "Musicload" is one of the leading German online-music download portals based on the number of downloads. In 2005, more than 15.5 million titles were downloaded from Musicload. In addition, "Mobile Jukebox," is a cooperative project between Musicload and T-Mobile, introduced in September 2005, which allows customers to download music to their mobile phones.

        With the introduction of its "Gamesload" portal in August 2005, T-Online established another digital distribution platform for entertainment on the Internet. In the growing Internet PC games market, T-Online was one of the first major German providers to unveil a proprietary digital-purchase platform for full versions of PC-based games.

        In mid-September 2005, T-Online announced the launch of a new online marketplace, "ElectronicScout24." The focus of this new trading platform is on consumer electronics and telecommunications products, as well as computers and household devices. With ElectronicScout24, T-Online is attracting additional business potential in the e-commerce sector.

    Operations in Europe (excluding Germany)

    Central and Eastern Europe—T-Com

        The majority of the business activities, except for mobile telecommunications, of our Central and Eastern European subsidiaries are included in the results of operations of the Broadband/Fixed

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Network strategic business area, through the T-Com business unit. Beginning January 1, 2005, the mobile telecommunications operations of these Central and Eastern European subsidiaries have been reported in the results of operations of the Mobile Communications SBA.

      Magyar Telekom

        We hold a 59.2% equity interest in Magyar Telekom, the leading full-service telecommunications service provider (in terms of customers) in the Republic of Hungary. Magyar Telekom (formerly, "Matáv," prior to its re-branding in May 2005) offers telecommunications services, such as fixed-line services, value-added services, wholesale services, online services and cable television, to individual and business customers throughout most of Hungary. Magyar Telekom holds a 51.1% stake in A.D. Makedonski Telekomunikacii ("MakTel"), the incumbent fixed-line carrier in the Republic of Macedonia. In addition, Magyar Telekom has a majority stake of 76.5% in Telekom Crne Gore A.D. ("Telekom Montenegro"), which provides fixed-line and Internet services in Montenegro.

        Magyar Telekom offers a broad range of fixed-line services, including narrowband access products, broadband access products and calling services. Magyar Telekom's fixed-line network penetration, and its total number of access lines, decreased slightly in 2005, compared to 2004.

        During 2005, competitors Tele2 (using Magyar Telekom's fixed-line network) and UPC Magyarország Kft (using portions of its own cable television network) further strengthened their positions in the Hungarian fixed-line market. In response to these competitive pressures, and to mobile substitution, Magyar Telekom promoted several flat-rate tariff packages.

        Magyar Telekom, under the brand name, "T-Online Hungary," maintained its leading position among ISPs in the Hungarian market, with market shares of approximately 42% in 2005, and 42% in 2004, in the local dial-up market, which represents a decrease of 2% from 2003, based on numbers of customers. There were 329,000 T-Online Hungary customers as of December 31, 2005, an increase of 23.7%, compared to 266,000 customers as of December 31, 2004, an increase of 26%, compared to 211,000 customers in 2003.

        Magyar Telekom's multimedia and broadcasting services business primarily consists of its cable television business. The number of Magyar Telekom's cable television customers increased from 384,000 in 2004 to 406,000 in 2005.

        Magyar Telekom's strategy is to provide international network and carrier services in southeastern Europe by expanding its presence in the region. Accordingly, Magyar Telekom entered the Romanian market in July 2004, the Bulgarian market in September 2004, and the Ukrainian market in August 2005, offering wholesale services. Capitalizing on its experience in these markets, Magyar Telekom intends to enter into relevant retail market segments in southeastern Europe with a comprehensive service portfolio as soon as liberalization and the regulatory environment fully support such opportunities.

        Magyar Telekom controls MakTel, currently the sole fixed-line operator in Macedonia. MakTel's exclusive right to offer fixed-line telecommunications services in Macedonia expired at the end of 2004. Since then, competition has intensified in the international telecommunications and Internet services segments.

        Effective March 31, 2005, Magyar Telekom acquired from the government of Montenegro's 51.1% share of Telekom Montenegro. Magyar Telekom also acquired an additional 21.9% of Telekom Montenegro's shares from minority shareholders. And on May 24, 2005, through a public tender, Magyar Telekom acquired an additional 3.5% stake in Telekom Montenegro, thus increasing Magyar Telekom's total stake to 76.5%, resulting in a total purchase price of EUR 140.5 million.

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      T-Hrvatski Telekom

        T-Com owns a 51% equity interest in T-Hrvatski Telekom, the leading full-service telecommunications service provider in the Republic of Croatia in terms of revenues. T-Hrvatski Telekom offers local, long-distance and international fixed-line telephone services, data communications services, online services and wholesale services.

        T-Hrvatski Telekom operates a digitalized fixed-line telecommunications network. In 2003 and 2004, T-Hrvatski Telekom pursued restructuring and market-repositioning projects, to increase its efficiency and customer focus, continue the outsourcing of its non-core business activities, and implement other strategies designed to counter the possible future erosion of its market share by competitors. Since mid-2005, particularly in the fixed-line voice telephony business, T-Hrvatski Telekom has been confronted by increasing competition.

        In 2005, the number of T-Hrvatski Telekom's narrowband access lines in operation remained stable, compared to 2004 and 2003. However, the number of its broadband access lines in operation increased in 2005 to 101,000, from 22,000 in 2004. In 2004, T-Hrvatski Telekom's broadband access line customer base increased to 22,000, from 2,000 in 2003.

        T-Hrvatski Telekom's online business is the largest Croatian ISP in terms of revenues, and its market share at the end of 2005, based on usage, was approximately 71%. The number of T-Hrvatski Telekom's online customers increased by 20% to 701,000 in 2005, compared to 2004. T-Com expects that T-Hrvatski Telekom's online business will be positively affected by customers' substitution of broadband access services for standard dial-up access, which trend is expected to increase in the future.

      Slovak Telekom

        In 2000, T-Com acquired a 51% equity interest in the then state-owned Slovenské telekomunikácie a.s., the leading full-service telecommunications provider in the Slovak Republic (based on revenues). On January 15, 2004, Slovenské telekomunikácie a.s. changed its name to "Slovak Telecom a.s.," and on March 8, 2006, was rebranded "Slovak Telekom."

        Slovak Telekom offers local, long-distance and international fixed-line telephone services, online services, data communications services, wholesale services and distribution and broadcast of radio and television signals.

        Slovak Telekom's fixed-line network penetration, and its total number of access lines, declined in 2005 and 2004, mainly due to increased mobile substitution. However, the number of broadband access lines in operation in Slovak Telekom's network increased to 104,000 in 2005, from 38,000 in 2004, and 4,000 in 2003.

        T-Com believes that the growing broadband and data communications services markets will present an opportunity for Slovak Telekom. As a result, the broadband and data services markets will form a key part of its strategy, which is designed to counter continuing pressure on the traditional voice segment, the erosion of Slovak Telekom's market share by competitors and mobile substitution.

        As of December 31, 2005, Slovak Telekom's online Internet services customer base (i.e., dial-up and broadband customers) had increased by 33%, to approximately 166,000 customers, compared to 2004. The number of Slovak Telekom's Internet services customers using broadband more than tripled, to 81,000 customers at December 31, 2005.

        In August 2005, Slovak Telekom acquired a 90% stake in Zoznam s.r.o. ("Zoznam"), which operates a Slovakian Internetportal, as well as 100% of Zoznam Mobile (a content provider). Through the acquisition of these businesses, Slovak Telekom believes that it has achieved a good market position in the rapidly growing Internet market in Slovakia.

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    Rest of Europe—T-Online

        Through its subsidiaries and associated companies, T-Online also conducts operations outside of Germany, primarily in France and Spain. T-Online France, operating under the name "Club Internet," has continued to develop its Internet business beyond simple Internet access. After the introduction of a "double-play" offer (i.e., Internet and VoIP) in 2004, in June 2005, Club Internet introduced higher-speed broadband offers (up to 20 Mbit/s) at competitive prices. Club Internet's VoIP offering has shown continued success, with more than 50% of its broadband customer base having opted for such service as of December 31, 2005. Since November 2005, Club Internet has operated as an alternative provider and offered a fully unbundled product, whereby the complete customer relationship for fixed telephony and Internet access products has been taken over by Club Internet.

        In 2005, Club Internet also increased the number of television and movie channels available on its "Club Internet TV" broadband portal from 22 to 28 channels. T-Online intends to further strengthen Club Internet's competitive position with the build-out of a fully IP-based network, which is currently underway. A contract for the use of a third-party backbone has been signed, and as of December 31, 2005, more than 280 colocation sites had already been unbundled. Through operating its own network, Club Internet will be able to achieve greater degrees of freedom in product design (e.g., innovation and quality of services) and product pricing.

        In October 2000, T-Online acquired Ya.com, one of the three leading broadband ISPs in Spain. Similar to Club Internet, Ya.com has begun to offer services beyond simple Internet access. In January 2005, Ya.com launched voice telephony services on a PSTN basis. In addition, in December 2005, Ya.com increased the bandwidth offering up to 20 Mbit/s on its broadband tariffs. As in France, T-Online intends to increase its competitiveness in Spain through the rollout of our own IP-based network. The recent acquisition of Albura will form the basis for this network, which is currently being expanded and upgraded.

        During 2005, T-Online's European (excluding Germany) broadband customer base increased, from approximately 359,000 customers at the end of 2004, to approximately 635,000 at December 31, 2005. Club Internet and Ya.com both capitalized on the expansion of the broadband markets in their respective countries to increase their customer bases.

        T-Online plans to increase substantially T-Online's broadband market share in both France and Spain. Both markets are currently dominated by intense competition and rapid growth in the broadband market. To achieve its goal, capital expenditure of up to EUR 1 billion is planned in France and Spain from 2005 to 2007, primarily relating to the expansion of network infrastructure and efforts to attract new customers.

    Seasonality

        The businesses of the T-Com and T-Online business units are not materially affected by seasonal variations.

    Suppliers

        The principal types of equipment purchased by the T-Com business unit are: network components, such as switching systems; transmission systems; access network components; and customer premises equipment, such as telephones, fax machines, broadband modems and similar items. Although we do not believe T-Com is dependent on any single supplier (due to its multiple-supplier strategy), there may be occasions when a particular product from a particular supplier is delayed or back-ordered. T-Com's major suppliers are Alcatel SEL AG, Cisco Systems International B.V., Corning Cable Systems GmbH & Co. KG, ECI Telecom GmbH, Lucent Technologies Network Systems GmbH and Siemens AG.

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    Dependence on Patents, Licenses, Customers, Industrial, Commercial or Financial Contracts

        We do not believe that T-Com is dependent on any patent or other intellectual property rights. For a description of patent infringement litigation that is relevant to T-Com's business, relating to ATM technology, see "Item 8. Financial Information—Legal Proceedings—Other Proceedings and Matters." We also do not believe that T-Com is dependent on any individual third-party customer, or on any industrial, commercial or financial contract.

        Similar to other fixed-line operators, T-Com is dependent on telecommunications licenses from the governments of the countries in which it operates. For more information, see "—Regulation."

    Competition—T-Com

        Since the full liberalization of the German telecommunications market in January 1998, T-Com has faced intense competition (based primarily on price) in the market for fixed-line network voice telephony from other fixed-line carriers and mobile operators. During the last three years, this competition has intensified, particularly in the narrowband and broadband access markets. We expect that competition from cable operators and VoIP will also continue to increase.

        A number of competitors in Germany have indicated that they are either considering or intend to invest in their own VDSL networks in order to pursue their own triple-play strategies. To date, only one competitor has confirmed this intention. Given the significant competitive advantage that such high-speed networks offer in the broadband access market, T-Com expects that other competitors will eventually follow suit and invest in their own networks in order to compete with T-Com. In addition to increasing competition—on the basis of leased lines or the companies' own infrastructure—from local network operators, some of which, like Hansenet (a subsidiary of Telecom Italia), are owned by large European telecommunications companies, the impact of mobile substitution on T-Com will grow, in part because of the increased market entry of MVNOs, i.e., companies with aggressive pricing policies that buy network services and market them independently to third parties.

        Competition in the fixed-line network segment in Central and Eastern Europe also increased. The growing number of competitors offering call-by-call and, more recently, carrier pre-selection services to consumers has led to increased competition, especially in Hungary, in which mobile substitution was also a significant factor. Increased mobile substitution also affected the Slovakian market. Competition in Croatia is expected to increase following the award of additional fixed-line network licenses.

        In 2005, VoIP services were offered in the market for the first time. In principle, VoIP services can compete with traditional voice telephony, both in the network access services business and in the various calling services markets. There are currently few VoIP network access services offerings, but VoIP services have greater competitive potential in the calling services markets.

        Prices for voice communications in the fixed-line network fell significantly in Germany in recent years due to increased competition and technological progress. Fixed-line network telephony is also being substituted by mobile telecommunications. There is a likelihood that this trend will continue. The possible reasons for the price decline include:

    extended market coverage by local-loop operators;

    the continuing trend towards bundled products (e.g., combined telephone and broadband flat rates);

    technical innovations;

    a decline in wholesale prices for competitive products; and

    further substitution driven by price declines, flat rates in mobile telecommunications and convergence products.

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Another possibility is that cable operators may corner a larger share of the market if they offer attractive triple-play services. Despite our previous losses of market share, we believe that we are exposed to the risk of further market share losses and falling margins.

    Effect of Regulatory Decisions

        In the markets for international, long-distance and local calling services in Germany, the level of competition we face is influenced by the fact that we are required to permit other telecommunications companies to interconnect with our fixed-line network at rates determined by the Federal Network Agency. As a result, decisions of the Federal Network Agency regarding the rates that we are permitted to charge for interconnection and for access to the unbundled local loop have had, and will continue to have, a significant impact on the strength of T-Com's competition in the market for fixed-line network voice telephony as well as on T-Com's revenues and profit.

        T-Com's estimated fixed-line network market share, measured by call time in minutes, declined to approximately 47.2% in 2005, from 49.7% in 2004, and 54.8% in 2003. For a more detailed discussion of regulatory decisions and other competitive factors affecting T-Com's business, see "—Regulation" and "Item 8. Financial Information—Legal Proceedings."

    Effect of Investments by Other Companies

        T-Com also faces significant competition in the markets for regional, international and long-distance calling services, and access services, from competitors that have made investments in their own infrastructure, such as Arcor AG & Co. KG, Hansenet, Versatel, Netcologne, COLT Telecom Group plc., MCI Inc. and BT Group plc. In addition, national network operators, such as Arcor AG & Co. KG, and local network operators, such as HanseNet Telekommunikation GmbH, Versatel AG and NetCologne Gesellschaft für Telekommunikation mbH, have made substantial investments in local network infrastructure and compete with T-Com in major urban centers throughout Germany. Furthermore, as prices for mobile telephony decline, local and other calling services, as well as access services, face increasing competition from mobile telephone operators, due to mobile substitution. Additionally, depending on the degree to which alternative technologies, such as VoIP, cable broadband and the Internet, gain market acceptance, the usage of T-Com's fixed-line network telephone may be adversely affected.

    Other Fields of Business Activity

        Although T-Com does not manufacture its own equipment, it does re-sell telecommunications equipment provided by other companies under its own brand. The terminal equipment sector has been open to full competition since 1990 and is characterized by falling prices, low margins, rapid technological innovation and intense competition. The basis for competition in this field is primarily price. T-Com's most significant competitors in this area are Siemens AG, Alcatel, Koninklijke Philips Electronics N.V. and Tenovis GmbH & Co. KG. Most of these competitors are also suppliers to T-Com.

        Apart from broadband-related developments, T-Com believes that future innovations will be increasingly focused on the convergence between fixed-line and mobile telecommunications networks. In addition to its launch of the T-Box (single answering service for calls to the fixed-line number and the mobile number) in October 2005, T-Com has announced the upcoming introduction, in the second quarter of 2006, of a convergent product known as the "DualPhone." T-Com believes that these and other such products could play an important role in the process of converging multimedia, telecommunications and related products and services.

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    Competition—T-Online

        The German and European markets for Internet access—especially within the broadband market—have been, and will continue to be, highly competitive. In addition to other ISPs, alternative network operators with their own network infrastructure and, increasingly, cable network operators and mobile operators, are or are becoming competitors within the broadband market.

Mobile Communications

    Principal Activities

        The principal services offered by our Mobile Communications strategic business area, through T-Mobile, are digital mobile telephony services based on the mobile telecommunications technology known as GSM, and non-voice services such as SMS, MMS (multimedia messaging services) and other data services to residential and business customers based on CSD (circuit switched data), GPRS (general packet radio service) and UMTS technologies. T-Mobile also operates numerous W-LAN HotSpots. T-Mobile offers international roaming services for GSM, GPRS, UMTS and W-LAN to its customers through a large number of international roaming agreements with third-party operators, which allow customers to access mobile services while outside their home network service area. T-Mobile also sells mobile devices to customers in conjunction with its service offerings.

        Mobile voice and data services are offered both on a prepay basis and on a contract basis. Customers purchase contract services on the basis of fixed monthly fees, and pay time-based airtime and per-message fees. Some contract service offerings include a limited amount of airtime, data volume or messages in the monthly fee. Prepay services are purchased on the basis of monetary increments that are recorded on the customers' SIM (subscriber identity module) card and then deducted, based on airtime or messaging usage fees, as the cards are used. W-LAN services are sold on both a monthly subscription basis and through various usage-based plans.

        Usage fees can vary according to the tariff plan selected by the customer, the day and time when a call is made, the destination of the call, the location where the call originates and, in some cases, other provisions applicable to the tariff plan, and whether the called party is also a customer of the same network.

    Global Branding and Alliances

        Following the re-branding in 2004 of our mobile businesses in Hungary and Croatia, in 2005 we re-branded EuroTel Bratislava, our mobile business in the Slovak Republic, as "T-Mobile Slovensko."

        T-Mobile was a founding member of the "FreeMove" alliance, together with Telefónica in Spain, TIM Italia S.p.A. in Italy and Orange S.A. in France. The alliance aims to make mobile services more widely available and seamless in all countries in which alliance members operate, by cooperating in several key areas, including the development of joint services related to roaming, voice and data, and the development and purchasing of mobile devices. Following the November 2005 notification to the E.U. Commission by Telefónica of its intent to acquire the mobile network operator, O2 plc, Telefónica announced that it will leave the FreeMove alliance shortly after the completion of the acquisition.

    New Services

        T-Mobile offers services based on a fully integrated network. As an international mobile network operator, T-Mobile has various technologies in place that support the evolution of the network towards the integrated provision of GPRS, UMTS and W-LAN mobile-access services. Based on our GSM/GPRS network, which guarantees wide-area coverage, we are adding UMTS in our European markets and W-LAN services in Europe and in the U.S. W-LAN is available today in many major urban and

39


suburban centers in Europe and the U.S. The expansion and increased capabilities of our network will enhance existing services and permit the deployment of new services, such as mobile broadband access.

        After having successfully conducted live trials in Germany, Austria, the Netherlands and the United Kingdom in 2005, T-Mobile will officially launch its HSDPA (high speed downlink packet access) services in these markets throughout 2006. With the introduction of HSDPA, T-Mobile will be able to offer its customers a truly wideband and mobile network. Data transmission rates of up to 1.8 Mbit/s are supported in the first phase of implementation.

        In 2005, T-Mobile Czech Republic introduced its UMTS service, which is based on UMTS TDD (time division duplex) technology, which provides mobile broadband data services with data rates of up to 2.5 Mbit/s. This service introduction is initially targeted to substitute fixed line broadband connection availability.

        T-Mobile believes that it has created one of the world's largest high-speed, trans-Atlantic mobile networks, which enables its customers to use its integrated voice and data services with the highest available access speeds. To offer its customers easy, single-SIM card access to these services, T-Mobile offers multi-band mobile devices in combination with all-network tariffs, which permit a pricing structure that is independent of the particular network used by the customer.

        T-Mobile has made substantial investments in the "next generation" mobile telecommunications standard, UMTS. Through 2005, T-Mobile has invested approximately EUR 500 million in UMTS networks. To date, T-Mobile has met or exceeded all regulatory obligations with respect to its UMTS licenses in the United Kingdom, Germany, Austria, the Netherlands, Czech Republic, Hungary, Croatia and Slovakia. For more information regarding regulatory obligations, and for further details with respect to rollout requirements and network sharing, see "—Regulation."

    Efficiency Program

        In January 2005, T-Mobile launched its efficiency program, "Save for Growth," for its operations in Germany, the United Kingdom, Austria, the Czech Republic and the Netherlands. The goal of this program is to allow T-Mobile to save approximately EUR 1 billion in annual operating costs. The program achieved its targeted objectives for 2005. Approximately half of the expected savings are to be redeployed into strategic-growth initiatives. Among the main drivers of the efficiency program are more effective purchasing and reductions in subsidies related to mobile devices. Additional elements of this program include further group synergies and a workforce reduction in Europe.

    Principal Markets

        T-Mobile's principal markets include Germany, the United States, the United Kingdom, Austria, the Czech Republic, the Netherlands and Poland. Our mobile segment under IFRS includes the operations and results of the mobile operations in Central and Eastern Europe, including T-Mobile Hungary, T-Mobile Croatia, T-Mobile Slovensko, MobiMak in Macedonia and Monet in Montenegro.

        T-Mobile counts its customers by the number of SIM cards activated and not churned. T-Mobile's mobile telecommunications subsidiaries count contract customers as customers for the length of their contracts, and count prepay customers as customers as long as they continue to use our services, and then for a prescribed period thereafter, which differs according to the particular market. Generally, at the end of this period, or in the case of payment default or voluntary disconnection, the customers are canceled or "churned." The churn rate for any given period represents the number of customers whose service was discontinued during that period, expressed as a percentage of the average number of customers during the period, based on beginning and period-end figures. Our competitors may calculate their churn rates using methods different from ours. In addition, because we use different

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calculation methodologies in different jurisdictions, our own churn figures are not comparable across all of our national operations.

    United States

        T-Mobile USA represents the U.S. wireless business that we acquired in May 2001. Through T-Mobile USA, T-Mobile offers mobile telecommunications services to individual and business customers in the United States. At December 31, 2005, T-Mobile USA had approximately 21.7 million customers, compared to approximately 17.3 million at December 31, 2004. Of the total customers at December 31, 2005, approximately 18.4 million, or 85%, were contract customers, compared to approximately 15.3 million, or 89%, at December 31, 2004, and approximately 3.3 million were prepay customers, compared to approximately 2.0 million at December 31, 2004.

        T-Mobile USA's average monthly churn rate for 2005 was 2.9% per month, down slightly from 3.0% per month in 2004. This improvement reflects a decrease in the contract customer churn rate to 2.3% in 2005, from 2.6% in 2004, although the average churn rate for prepay customers actually increased slightly to 6.6% in 2005, from 6.3% in 2004. The improvement in contract customer churn during 2005 is attributable to a number of factors, including improvements in quality of service, such as coverage and call quality, a highly competitive rate-plan mix, including data services, improvements in terminal equipment offerings and general industry conditions. Competitive differences, differences in features and services due to the use of multiple wireless technologies, and general differences in consumer behavior between the United States and Europe, factor into the higher industry churn rate seen in the United States compared to Europe. However, the churn rate of our U.S. operations is higher than the U.S. industry average, due in part to the higher proportion of prepay customers in T-Mobile USA's customer base relative to its U.S. competitors. Prepay customers in the United States typically churn at substantially higher rates than contract customers.

        On January 5, 2005, T-Mobile USA and Cingular terminated their network-sharing joint venture (GSM Facilities LLC, "GSM Facilities"), and T-Mobile USA acquired 100% ownership of the shared-network assets in California, Nevada and New York City, plus additional wireless spectrum in California and Nevada. The following are key elements of the transaction:

    Upon the dissolution of GSM Facilities, the New York City wireless network was distributed to T-Mobile USA, and the California and Nevada network to Cingular;

    T-Mobile USA acquired 100% ownership of the California and Nevada wireless network immediately after the dissolution of GSM Facilities;

    T-Mobile USA acquired 10 MHz of spectrum from Cingular in each of the San Francisco, Sacramento and Las Vegas Basic Trading Areas (BTAs) for USD 180 million. T-Mobile USA also acquired an option to purchase from Cingular an additional 10 MHz of spectrum in each of the Los Angeles and San Diego BTAs, under certain circumstances, effective two years after the initial closing of the transaction;

    T-Mobile USA agreed to provide network services to Cingular in parts of California, Nevada and the New York City metropolitan area under a wholesale arrangement during a four-year transition period following the dissolution of GSM Facilities. Cingular is obligated to pay a minimum of USD 1.2 billion over the four-year period for these services, based on network usage;

    T-Mobile USA and Cingular agreed to exchange spectrum previously used in the operation of GSM Facilities, such that each party retains 50% of such spectrum in each market;

    T-Mobile USA will give up 10 MHz of spectrum in the New York City BTA to Cingular, and T-Mobile USA will receive 5 MHz of spectrum from Cingular in each of the nine BTAs in the

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      California/Nevada market. The actual exchanges will occur after Cingular migrates its customers off the network in the respective areas, but no earlier than January 2007; and

    Amendment of the existing roaming agreement between the parties provides for a nationwide agreement.

        T-Mobile USA has an ownership interest in Cook Inlet/VS GSM VII PCS Holdings, LLC, a joint venture that is managed and controlled by Cook Inlet Voice and Data Services, Inc. ("Cook Inlet"), which in turn is the sole member of Cook Inlet/VS GSM VII PCS, LLC ("CIVS VII"). CIVS VII participated in the 2005 spectrum auction ("Auction 58") conducted by the FCC for certain Personal Communications Service (PCS) 1900 MHz licenses. Bidding for approximately one-half of the auctioned licenses was restricted to entities with revenues and assets below certain established thresholds ("Designated Entities"), while the remaining licenses were open to all bidders. Although T-Mobile USA did not qualify as a Designated Entity, CIVS VII did, and it bid on both restricted and non-restricted licenses in Auction 58. At the conclusion of Auction 58, CIVS VII was high bidder for 36 licenses in various markets across the United States (including Minneapolis-St. Paul, Minnesota; Seattle-Tacoma, Washington; and Cleveland-Akron, Ohio), for a total of USD 255 million (subject to a reduction of up to approximately USD 20 million in bidding credits, which bidding credits may be lost in whole or in part if control of such licenses is transferred before certain predetermined minimum holding periods to a non-Designated Entity). These licenses were granted by the FCC to CIVS VII in June 2005. At the end of 2005, T-Mobile USA held an approximately 66% equity interest in CIVS VII. Although Cook Inlet manages CIVS VII, T-Mobile USA must consent to certain actions undertaken by the joint venture.

    Germany

        Through T-Mobile Deutschland, T-Mobile offers mobile telecommunications services to individual and business customers in Germany. At December 31, 2005, T-Mobile Deutschland had approximately 29.5 million customers, compared to approximately 27.5 million customers at December 31, 2004. Of the total customers at December 31, 2005, approximately 14.3 million were contract customers, compared to approximately 13.5 million at December 31, 2004. T-Mobile Deutschland had approximately 15.2 million prepay customers at December 31, 2005, compared to approximately 14.0 million at December 31, 2004.

        T-Mobile Deutschland's total average churn rate for 2005 was 1.5% per month, which remained unchanged, compared to 2004. Increased competition in the German mobile market resulted in an increase in both the contract and prepay churn rates. The blended churn rate remained stable, due to a higher proportion of contract customers in the average customer base in 2005, compared to 2004. The average contract customer churn rate was 1.2% per month in 2005, compared to 1.1% per month in 2004. T-Mobile Deutschland's prepay churn policy generally states that in the 12 months following activation, a customer can originate calls/data traffic and receive data or voice communication ("phone time"). In the following three months, the customer can only receive data and voice communication ("message time"). After these 15 months, the prepay customer is churned—unless the prepay account was topped-up during the 15-month period. In that case, if EUR 15 credit is added to the account, the customer gets 215 days of phone time and three months of message time. With EUR 30 and EUR 50 top-up credits, the churn period is again 12 months plus three months.

    United Kingdom

        In October 1999, T-Mobile purchased T-Mobile UK. Through T-Mobile UK, T-Mobile offers mobile telecommunications services to individual and business customers in the United Kingdom. At December 31, 2005, T-Mobile UK had approximately 17.2 million customers, compared to approximately 15.7 million at December 31, 2004. Of the total customers at December 31, 2005,

42


approximately 3.4 million were contract customers, compared to approximately 3.0 million at December 31, 2004, and approximately 13.7 million were prepay customers, compared to approximately 12.7 million at December 31, 2004. T-Mobile UK counts its wholesale customers as contract customers.

        Of the total number of T-Mobile UK customers at December 31, 2005 and 2004, approximately 6.2 million and 5.0 million, respectively, were customers of Virgin Mobile Telecoms Limited ("Virgin Mobile"), which is an MVNO. All Virgin Mobile customers currently use T-Mobile UK prepaid technology and are therefore reported as prepay customers. Virgin Mobile reports to T-Mobile UK the number of customers using a churn policy, whereby a customer is churned after a period of 365 days of inactivity. As a virtual network operator, Virgin Mobile purchases airtime minutes and basic mobile services from T-Mobile UK and resells these minutes and services under the "Virgin Mobile" brand name. Until January 2004, Virgin Mobile had been a joint venture between T-Mobile UK and the Virgin Group. At that time, T-Mobile UK sold its 50% equity stake in Virgin Mobile to the Virgin Group and received a payment of GBP 50 million (approximately EUR 75 million) in exchange for waiving its right to participate in any initial public offering of Virgin Mobile. Additionally, T-Mobile UK and Virgin Mobile concluded a telecommunications supply agreement granting Virgin Mobile use of T-Mobile UK's mobile telecommunications network for a further ten years. In 2005, NTL Incorporated announced that it was in talks to acquire Virgin Mobile Holdings (UK) plc, the parent company of Virgin Mobile. This transaction has not yet been concluded. T-Mobile is not able to judge whether this transaction will be ultimately concluded. However, we believe that this planned acquisition will have no significant impact on the telecommunications supply agreement between T-Mobile UK and Virgin Mobile.

        T-Mobile UK's average monthly churn rate (not including Virgin Mobile customers) during 2005 was 3.1%, compared to 2.2% per month in 2004. The increase in churn was predominantly caused by a significant increase in T-Mobile UK's inactive prepay customer base in 2004. The corresponding contract-customer churn rate was 2.9% in 2005, compared to 2.7% in 2004.

        Generally, a prepay customer in the United Kingdom is churned after a period of 180 days if the customer has neither originated nor received a voice or data communication in that period.

    Hungary

        Through T-Mobile Hungary (formerly Westel Mobil Távközési Rt., which was re-named "T-Mobile Hungary Ltd." in May 2004), T-Mobile offers mobile telecommunications services to individual and business customers in Hungary. Our equity interest in T-Mobile Hungary is held through our approximately 59% equity interest in Magyar Telekom (formerly "Matáv"), which owns 100% of T-Mobile Hungary. On February 28, 2006, the Court of Registry in Budapest registered the merger of Magyar Telekom and T-Mobile Hungary Ltd. Accordingly, T-Mobile Hungary Ltd. became a part of Magyar Telekom. As a Magyar Telekom business line, T-Mobile Hungary will continue to fulfill its obligations and commitments and provide seamless service to its customers in unchanged form.

        At December 31, 2005, T-Mobile Hungary had approximately 4.2 million customers, compared to approximately 4.0 million at December 31, 2004. Of the total customers at December 31, 2005, approximately 1.3 million were contract customers, compared to approximately 1.2 million at December 31, 2004. T-Mobile Hungary had approximately 2.9 million prepay customers at December 31, 2005, approximately the same number as it had at December 31, 2004.

        T-Mobile Hungary's average churn rate during 2005 was 1.5% per month, compared to 1.3% in 2004, primarily due to an increase in the prepay churn rate caused by increased competition. The average contract churn rate decreased, from 1.0% per month in 2004, to 0.9% per month in 2005, driven by various customer-retention campaigns in 2005. Generally, in the absence of re-charging, a prepay customer is churned after a period of 12 to 16 months (depending on the amount charged on the prepay card).

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    The Netherlands

        Through T-Mobile Netherlands, T-Mobile offers mobile telecommunications services to individual and business customers in the Netherlands.

        At December 31, 2005, T-Mobile Netherlands had approximately 2.3 million customers, approximately the same number of customers as it had at December 31, 2004. At the end of 2005, approximately 1.2 million customers were contract customers and approximately 1.1 million were prepay customers, compared to approximately 1.1 million contract customers and approximately 1.2 million prepay customer at the end of 2004.

        The average churn rate for 2005 was 3.1% per month, compared to an average churn rate of 2.4% in 2004, due to an increase in the contract and prepay churn rates, which was primarily driven by increased competition. The average contract churn rate increased from 1.7% per month in 2004, to 2.2% in 2005. In general, if a T-Mobile Netherlands prepay customer has neither originated nor received a voice or non-voice activity (or received only SMS/MMS messages) for a period of 180 days, the customer is churned and removed from the customer base, provided the customer's account has not been re-charged during that period.

    Czech Republic

        Through T-Mobile Czech Republic, T-Mobile offers mobile telecommunications services to individual and business customers in the Czech Republic. In May 2003, T-Mobile Czech Republic (then operating as RadioMobil) was re-branded "T-Mobile Czech Republic." T-Mobile's equity interest in T-Mobile Czech Republic is held through its now wholly-owned subsidiary, CMobil, which owns approximately 61% of T-Mobile Czech Republic. Effective March 24, 2005, T-Mobile acquired a further 7% stake in CMobil from TIM International N.V., and effective October 26, 2005, T-Mobile acquired the remaining approximately 1% of CMobil's share capital from Proportions, a.s.

        At December 31, 2005, T-Mobile Czech Republic had approximately 4.6 million customers, compared to approximately 4.4 million at December 31, 2004. Of the total customers at December 31, 2005, approximately 1.3 million were contract customers, compared to approximately 1.1 million at December 31, 2004. T-Mobile Czech Republic had approximately 3.3 million prepay customers at December 31, 2005, which is approximately the same number of customers as it had at December 31, 2004.

        While T-Mobile Czech Republic's average churn rate during 2005 increased slightly, from 1.0% per month in 2004, to 1.1% per month in 2005, the average contract churn rate during 2005 was 0.6% per month, essentially unchanged, compared to the average churn rate for contract customers during 2004. Generally, in the absence of re-charging, a prepay customer is churned 30 days after completing a period of 12 months without charged voice or data communications activity.

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    Austria

        Through T-Mobile Austria, T-Mobile offers mobile telecommunications services to individual and business customers in Austria. At December 31, 2005, T-Mobile Austria had approximately 2.1 million mobile telecommunications customers, a slight increase, compared to approximately 2.0 million customers at December 31, 2004. Of the total customers at December 31, 2005, approximately 1.0 million were contract customers and approximately 1.0 million were prepay customers.

        T-Mobile Austria's average churn rate during 2005 remained essentially unchanged at 1.8% per month, as compared to the average churn rate during 2004. The average churn rate for contract customers during 2005 was 1.3% per month, compared to 1.4% in 2004. Since the beginning of December 2004, T-Mobile Austria has generally churned prepay customers if they have 13 months plus two weeks without any charged data or voice communication, and six months without any mobile-terminated calls longer than one minute in duration.

    Croatia

        Through T-Mobile Hrvatska d.o.o. ("T-Mobile Croatia"), T-Mobile offers mobile telecommunications services to individual and business customers in Croatia. Deutsche Telekom's equity interest in T-Mobile Croatia is held through its 51% equity interest in T-Hrvatski Telekom, which owns 100% of T-Mobile Croatia's share capital.

        At December 31, 2005, T-Mobile Croatia had approximately 1.9 million customers, compared to approximately 1.5 million at December 31, 2004. Of the total customers at December 31, 2005, approximately 0.4 million were contract customers, compared to approximately 0.3 million at December 31, 2004. T-Mobile Croatia had approximately 1.5 million prepay customers at December 31, 2005, compared to approximately 1.2 million at December 31, 2004.

        T-Mobile Croatia's average monthly churn rate during 2005 was 1.0%, compared to 1.1% per month in 2004. The average contract churn rate decreased, from 1.4% per month in 2004, to 1.1% per month in 2005. Until December 2005, a prepay customer was churned after a period of 90 days without re-charging. In December 2005, T-Mobile Croatia changed its churn policy to churn a prepay customer after a period of 270 days without re-charging.

    Slovakia

        Through T-Mobile Slovensko, T-Mobile offers mobile telecommunications services to individual and business customers in the Slovak Republic. T-Mobile Slovensko has been fully consolidated since the beginning of 2005. Prior to 2005, we did not fully consolidate T-Mobile Slovensko as we were not in a control position, due to certain minority holder rights. Deutsche Telekom's equity interest in T-Mobile Slovensko is held through its 51% equity interest in Slovak Telekom, a.s. (formerly Slovenské telekommunikácie a.s.), which owns 100% of T-Mobile Slovensko's share capital.

        At December 31, 2005, T-Mobile Slovensko had approximately 2.0 million customers, compared to approximately 1.9 million at December 31, 2004. Of the total customers at December 31, 2005, approximately 0.8 million were contract customers, compared to approximately 0.6 million at December 31, 2004. T-Mobile Slovensko had approximately 1.2 million prepay customers at December 31, 2005, compared to approximately 1.3 million at December 31, 2004.

        T-Mobile Slovensko's average churn rate during 2005 was 1.9% per month, which represents an increase from 1.4% in 2004. The average contract churn rate increased, from 0.9% per month in 2004, to 1.3% per month in 2005, primarily due to an increase in competition.

        Generally, a prepay customer is churned after a period of 12 months without re-charging calculated from the last use, or if the prepay account is overdrawn.

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    Others

        T-Mobile also offers mobile telecommunications services through MobiMak in Macedonia, and through Monet d.o.o. ("Monet") in Montenegro. MobiMak is a wholly-owned subsidiary of MakTel, which is a 51% owned subsidiary of Magyar Telekom. All of Monet's share capital is held by Telekom Crne Gore A.D., which is an approximately 76.5% owned subsidiary of Magyar Telekom.

        At December 31, 2005, MobiMak had approximately 0.9 million customers and Monet had approximately 0.2 million customers.

    Minority Shareholdings

    Poland

        T-Mobile holds a 49.0% equity interest in Polska Telefonia Cyfrowa Sp. z o.o. ("PTC"). At December 31, 2005, PTC had approximately 10.2 million customers, compared to approximately 8.6 million at December 31, 2004. For information regarding a dispute concerning our investment in PTC, see "Item 8. Financial Information—Legal Proceedings."

    Russia

        In 2005, T-Mobile sold its remaining equity interest of approximately 10% of Mobile TeleSystems OJSC, a Russian mobile telecommunications company, after selling portions of its shareholding in 2003 and 2004.

    Seasonality

        T-Mobile's business in each of its principal markets is affected by seasonal factors, with a general increase in sales of products and services occurring during the fourth calendar quarter, due to holiday purchases. As a result, T-Mobile's performance during the fourth quarter can have a significant influence on its performance for the full year.

    Suppliers

        T-Mobile purchases IT and network components, as well as mobile devices for purposes of resale, from a number of different suppliers.

        T-Mobile believes that it has reduced its technological risks and the risk of delays in the supply of equipment and other technologies, both by contracting with multiple suppliers having significant market share in the network infrastructure and mobile device businesses, and by negotiating contractual penalties to be enforced in the event a supplier does not meet its obligations with respect to timeliness and quality. However, these penalty provisions may not fully mitigate the harm to our business caused by any such contractual breaches.

    Marketing and Sales

        Each of T-Mobile's principal subsidiaries uses its own combination of direct and indirect distribution channels to market its products and services to its customers. In each of T-Mobile's principal markets, T-Mobile markets its products and services to retail customers through its own network of direct-retail outlets, which are continuously being expanded. In Germany, these direct retail outlets (T-Punkt shops) are operated by a separate affiliated company for the entire Deutsche Telekom group. Further direct-sales channels include a direct-sales force dedicated to business customers, sales through customer service and the T-Mobile Web sites, which are used for customer-relationship management as well as for sales transactions. In addition, third-party distributors, who typically market the products and services of multiple mobile network operators, play a significant role in distribution.

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Our mobile telecommunications subsidiaries use a variety of incentives to encourage third-party vendors to sell T-Mobile products and services, such as payment of associated marketing expenses and offering special commissions.

        Mobile telecommunications resellers and MVNO's are also an important distribution channel for T-Mobile products and services, especially in Germany and the United Kingdom. Mobile telecommunications resellers purchase network access at wholesale rates, and mobile devices at a discount, from network operators, resell packaged services and mobile devices under their own brands through their own distribution channels, charge their customers at rates that they set independently and provide customer service and technical support.

        T-Mobile provides its customers with access to third-party content services as well as to the Internet. Content provided to customers is either standard content, in which case the customer only has to pay the normal connection charges to view or "surf" the content, or it is premium content, where a customer pays a specific charge through the customer's mobile telephone bill to access the content.

    Dependence on Patents, Licenses, and Industrial, Commercial or Financial Contracts

        T-Mobile owns a large number of registered patents and generally has a number of patent applications outstanding at any given time for technical innovations in the area of mobile telecommunications applications, as a consequence of its development activities. Patent protection activity is focused on countries with T-Mobile operations. We do not believe that T-Mobile is dependent on any one patent or group of patents.

        To enable us to offer mobile telecommunications services in the different jurisdictions in which we operate, we require, and therefore are dependent on, telecommunications licenses from the relevant authorities in each of these jurisdictions. For further information, see "—Regulation."

        We do not believe that T-Mobile is dependent on any third-party industrial, commercial or financial contracts.

    Competition

    General

        Competition in the mobile telecommunications market is generally intense and conducted on the basis of price, subscription options offered, offers of subsidized mobile devices, coverage, range of services offered, innovation and quality of service.

        In the past, competition in the European mobile telecommunications market was conducted at the national level. Increasingly, however, competition in this market is being conducted on a more international basis, as Europe-wide services are being introduced

        In Western Europe, the rate of mobile telephone penetration is quite high. As a result, T-Mobile expects that the growth in the number of T-Mobile customers in these markets will be significantly lower than in past years, and that the focus of competition will continue to shift from customer acquisition to customer retention, and to increasing average revenues per user by stimulating demand for voice usage and new data products and services. T-Mobile believes that, as competition intensifies in its European markets, customer terminal equipment subsidies will be reduced and competition will focus more on the service revenue market rather than on numbers of customers.

        The global mobile telecommunications industry has been undergoing consolidation in recent years, which may increase competitive pressure, and we expect that this will continue in the coming years.

        In addition, new technologies, whether introduced by us or by others, can be expected to draw customers from existing technologies, including our customers. The competitive dynamics of the mobile

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telecommunications industry, therefore, could change in ways that we cannot predict, which could adversely affect our results of operations and, thus, our financial position.

    United States

        T-Mobile USA faces intense competition in the U.S. mobile telecommunications market from the three other national mobile providers, Verizon, Cingular and Sprint/Nextel, and from various regional operators. In 2005, there was a reduction in the number of national carriers from five to four, due to the merger of Sprint and Nextel, which was completed in August 2005. This follows a reduction in the number of national carriers from six to five in 2004, with the acquisition of AT&T Wireless by Cingular. The four national carriers are estimated to represent approximately 80% of the total U.S. mobile telephony customer base. T-Mobile USA's customer market share, measured against the other nation-wide operators, was approximately 13.1% at December 31, 2005, compared to 12.1% at December 31, 2004. Most of these competitors or their predecessors had been operating in the U.S. mobile telecommunications market for a considerable time prior to the entry of T-Mobile USA's predecessors into the market.

        The three largest U.S. mobile telecommunications carriers—Verizon, Cingular and Sprint/Nextel—together represent approximately 70% of the total U.S. mobile telephony market in terms of customers. These companies have potential advantages of size and scale that could allow them to deliver services in a more cost-efficient manner and thereby negatively affect T-Mobile USA's competitive position.

        The U.S. mobile telecommunications market is quite different in a number of respects from the European mobile telecommunications markets. For example, there is no single communications standard. In addition, licenses to provide wireless services cover numerous localities, rather than the entire nation. It can therefore be difficult for network operators to obtain the spectrum needed in some localities to expand customer bases, upgrade the quality of service and add new services, particularly in densely populated urban areas. Low population density in other areas can cause problems with network efficiency and result in large geographic areas with no or limited coverage. For these and other reasons, including the extremely high penetration level of reliable, low cost, fixed-line telephony services, penetration levels for mobile telephony services in the United States are generally lower than penetration levels in Western European countries, which had an estimated 70% mobile penetration rate as of December 31, 2005. As a result, mobile telecommunications operators in the U.S. market generally continue to invest heavily in order to encourage and capture growth in customer numbers.

        Usage and pricing practices in the U.S. mobile market also differ significantly from those typically seen in European markets. Average voice usage per customer per month is generally much higher in the United States than in Europe. Contract pricing in the United States is typically in the form of a fixed monthly charge at various price points for specified bundles of features and services, which permit usage up to prescribed limits with no incremental charges. Usage in excess of the limits results in incremental charges. Prepay usage is generally priced solely on a usage basis. Typically, both inbound and outbound usage counts against the contract usage limits, and both are subject to incremental charges for excess contract usage and prepaid usage. Monthly average revenue per user (ARPU) is typically higher in the United States than in Europe. However, average revenue per minute of use is substantially lower in the United States than in Europe.

        The differences between the U.S. and European mobile telephony markets result in different competitive pressures in these markets. In the United States, coverage is a key competitive factor, as is the perceived value of bundles of minutes, features and services at the most popular price points. To the extent that the competitive environment requires us to decrease prices, or increase our service and product offerings, our revenues could decline, our costs could increase and our customer retention could be adversely affected.

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    Germany

        In Germany, T-Mobile Deutschland faces intense competition from mobile network operators Vodafone D2, E-Plus and O2. We believe that T-Mobile Deutschland maintained its market leadership position, in terms of number of customers, at December 31, 2005, but its smaller competitor O2 gained ground. E-Plus' market share increased slightly, compared to 2004, although it has changed its strategy and offers services under multiple brands in the German mobile telecommunications market.

        T-Mobile believes that T-Mobile Deutschland had a customer market share of approximately 37% at December 31, 2005, while Vodafone also had a customer market share of approximately 37%, E-Plus had a customer market share of approximately 14% and O2 had a customer market share of approximately 12%. T-Mobile believes that the overall penetration rate in the German mobile telecommunications market was approximately 96% at December 31, 2005.

        In the retail market, in addition to competition from other network operators, T-Mobile Deutschland faces significant competition from resellers. In the beginning of December 2005, the German food discounter ALDI entered the German mobile market with its offer of prepay mobile telephony at rates below market prices at that time. Other resellers immediately responded with offers of even lower prices. Prior to ALDI's entry into the market, in the fourth quarter of 2004, German retailer Tchibo had begun to exclusively sell the mobile services of O2, and Tchibo's efforts significantly supported the growth of O2 in Germany in 2005. T-Mobile expects that, in the short term, the multi-brand strategy of E-Plus, as well as the market entry of existing and potentially new resellers, will significantly affect mobile telephony prices and attract customers from the existing mobile operators. In response, in 2005 T-Mobile Deutschland began to sell a new, lower Internet-only prepay tariff through the Internet and expanded its bucket-plan tariffs ("Relax" tariffs) to include additional attractive options.

        In August 2000, six UMTS licenses were awarded to the four existing mobile communication network operators, the reseller Mobilcom and Quam, a joint venture of Telefónica and Sonera. On December 23, 2003, Mobilcom returned its UMTS license to the Federal Network Agency. For more information, see "—Regulation—Regulation in Germany."

    United Kingdom

        In the United Kingdom, T-Mobile UK faces intense competition, principally from Vodafone, O2 and Orange. In addition, T-Mobile UK faces competition from "3" (a brand name of Hutchison 3G UK Limited), which began operation in 2003, mainly targeted at customers for UMTS services. T-Mobile believes that T-Mobile UK retained its customer market share of approximately 25% at December 31, 2005, compared to December 31, 2004. T-Mobile UK's customer base, which includes customers of Virgin Mobile, has a lower proportion of business customers than its competitors. T-Mobile believes that the penetration rate in the U.K. mobile telecommunications market was approximately 114% at December 31, 2005.

        In the retail market, in addition to competition from other mobile network operators, T-Mobile UK faces significant competition from resellers, as well as from other MVNOs.

        In November 2005, Telefónica notified the E.U. Commission of its interest in acquiring the majority of O2, a competitor of T-Mobile UK. We are not able to judge whether this acquisition will be completed or what impact it will have on the competitive situation in the U.K. mobile telecommunications market.

    Hungary

        In Hungary, T-Mobile Hungary faces competition from Pannon GSM and Vodafone Hungary. T-Mobile believes that T-Mobile Hungary's customer market share was approximately 45% at

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December 31, 2005, compared to approximately 46% in 2004, Pannon GSM had a market share of approximately 33%, compared to 34% in 2004, and Vodafone Hungary had a market share of approximately 22% in 2005, compared to approximately 20% in 2004. T-Mobile believes that the penetration rate in the Hungarian mobile telecommunications market was approximately 92% at December 31, 2005.

    The Netherlands

        In the Netherlands, T-Mobile Netherlands faces intense competition from KPN Mobile, Vodafone, Telfort (formerly O2) and Orange (formerly Dutchtone). T-Mobile believes that T-Mobile Netherlands' customer market share was approximately 14% at December 31, 2005, which was approximately the same as in 2004, and Vodafone, Orange, KPN (including Telfort) had customer market shares of approximately 24%, 12% and 50%, respectively. T-Mobile believes that the penetration rate in the Dutch mobile telecommunications market was approximately 100% at December 31, 2005.

        In the Dutch retail market, in addition to competition from the mobile network operators mentioned above, T-Mobile Netherlands competes with an increasing number of MVNOs.

    Czech Republic

        In the Czech Republic, T-Mobile Czech Republic faces competition from Eurotel Praha spol. s r. o. ("Eurotel Praha") and Vodafone Czech Republic (formerly "Oskar Mobil"). T-Mobile believes that T-Mobile Czech Republic's customer market share was approximately 41% at December 31, 2005, compared to approximately 40% in 2004, Eurotel Praha had approximately 41%, a decline of two percentage points, compared to 2004, and Vodafone Czech Republic had approximately 19%, compared to approximately 17% in 2004. We believe that the penetration rate in the Czech mobile telecommunications market was approximately 111% at December 31, 2005.

        In 2005, Vodafone acquired 100% of the share capital of Oskar Mobil, and Oskar Mobil was renamed Vodafone Czech Republic. Since February 1, 2006, Vodafone Czech Republic offers mobile communication under the Vodafone brand. Also in 2005, Telefónica purchased 51.1% of the share capital of CESKÝ TELECOM a.s, which owns 100% of Eurotel Praha's shares. Due to the market entries of these two global players, T-Mobile believes that competition will increase in the Czech mobile telecommunications market.

    Austria

        In Austria, T-Mobile Austria primarily faces competition from mobilkom austria, ONE, tele.ring and "3". T-Mobile believes that T-Mobile Austria's customer market share was approximately 24% at December 31, 2005, and the customer market shares of mobilkom austria, ONE, tele.ring and "3" at the same point were approximately 39%, 21%, 12% and 3%, respectively. T-Mobile believes that the penetration rate in the Austrian mobile telecommunications market was approximately 106% at December 31, 2005.

        In the fourth quarter of 2005, T-Mobile Austria entered into an agreement to acquire tele.ring's share capital. The acquisition is subject to the approval of the E.U. Commission, which has announced its intent to publish its decision on April 28, 2006.

    Croatia

        In Croatia, T-Mobile Croatia faces competition from VIPnet and Tele2. T-Mobile believes that T-Mobile Croatia's customer market share was approximately 52% at December 31, 2005, which is the same as of the end of 2004. T-Mobile believes that the penetration rate in the Croatian mobile telecommunications market was approximately 82% at December 31, 2005.

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    The Slovak Republic

        In the Slovak Republic, T-Mobile Slovensko faces competition from Orange. T-Mobile believes that T-Mobile Slovensko's customer market share was approximately 45% at December 31, 2005, which is essentially the same as in 2004, and Orange had approximately 55%.

        T-Mobile believes that the penetration rate in the Slovak mobile telecommunications market was approximately 84% at December 31, 2005.

    Others

        In Macedonia, MobiMak faces competition from Cosmofon AD. T-Mobile believes that MobiMak's customer market share was approximately 70% at December 31, 2005.

        In Montenegro, Monet faces competition from Promonte.

Business Customers

        The Business Customers strategic business area provides, through T-Systems, ICT services worldwide, primarily to German and international companies, non-profit organizations and governmental agencies. As a result of the strategic realignment of the Deutsche Telekom group into three strategic business areas, T-Systems became responsible for servicing all of the Deutsche Telekom group's business customers from January 1, 2005, and changed its business model accordingly. These changes are discussed in more detail below.

        Additionally, as part of the strategic realignment of the Deutsche Telekom group, certain services that had previously been provided by T-Systems, such as ICSS, have been transferred to the Broadband/Fixed Network strategic business area, and certain services that had previously been provided by T-Com, such as T-NetPro, and Sales and Marketing Business Customers have been transferred to the Business Customers strategic business area.

        In 2005, Business Customers entered into an agreement to acquire gedas AG ("gedas") for a purchase price of EUR 0.4 billion from Volkswagen AG. Regulatory approval of this acquisition was received on February 28, 2006, and the transaction is expected to be completed in the first half of 2006. A major component of this transaction is an agreement with Volkswagen for the provision of IT services valued at EUR 2.5 billion over a term of seven years. With this acquisition, Business Customers will reinforce its future position in the automotive sector, a key market for IT service providers.

    Principal Activities

        T-Systems uses advanced information technology and its telecommunications expertise to provide ICT infrastructure and tailored ICT solutions to its customers and, in some instances, takes over complete business processes as part of these solutions. T-Systems supports its customers through its global telecommunications network and through its IT infrastructure network, which connects more than twenty countries worldwide.

        Although the majority of T-Systems' customers are headquartered in Germany, as of December 31, 2005, approximately 17.9% of T-Systems' 52,041 employees provided services from locations outside Germany. T-Systems' primary markets are in Western Europe, but T-Systems serves its multinational customers globally through its delivery organizations.

        In furtherance of its growth strategy, T-Systems intends to sharpen its focus on its international business customers. Specifically, T-Systems intends to improve its international delivery capabilities to support its global services offerings to its customers. Additionally, T-Systems intends to strengthen its

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international presence through targeted investments in its sales and service activities in Western Europe.

        In 2005, German-based operations contributed approximately 86% of T-Systems' total revenues. For the year ended December 31, 2005, T-Systems' Business Services business unit generated approximately 35% of T-Systems' total revenues, and its Enterprise Services business unit contributed approximately 65% of its total revenues. Total revenues include intersegment revenues from other Deutsche Telekom group companies and affiliates. For more information, see "Item 5. Operating and Financial Review and Prospects—Segment Analysis—Business Customers."

    Business Model

        From January 1, 2005, T-Systems' activities have been organized through two main business units: Enterprise Services and Business Services, each of which is described in more detail below. The following graphic illustrates this business model:

GRAPHIC

GRAPHIC


*
Services provided for service units of both Enterprise Services and Business Services.

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    Business Services

        Business Services manages approximately 160,000 large-, medium- and small-sized business customers. The Sales & Service Management service unit primarily services customers on a personalized and customized basis. The Marketing & Product Management services unit primarily services customers needing standardized, non-customized products. Business Services is also responsible for the delivery of telecommunications services to business customers of both Business Services and Enterprise Services through its TC Operations service unit.

        Business Services' Sales & Service Management service unit addresses its customers' needs via four sales channels: Large Enterprises (LE), Medium Enterprises (ME), Small Enterprises (SE) and Public & Health organizations (P&H). Sales & Service Management is responsible for managing the customer relationships of the Business Services business unit.

        Business Services' Marketing & Product Management service unit is responsible for developing telecommunications offerings for medium- and small-sized companies and marketing products to such customers. Marketing & Product Management is responsible for the lifecycle management of products and solution modules, as well as the profitability of such products and modules, and for the costs of all purchased inputs relating to customer offerings. Marketing & Product Management is also responsible for innovation management, marketing control, management of purchased inputs and the regulatory compliance of products and services.

        TC Operations is responsible for planning, building and operating T-Systems' global telecommunications service-generating platforms and its customers' LAN and WAN networks. Additionally, TC Operations carries out the delivery functions of Business Services (as described in more detail below). TC Operations is also responsible for quality and process management, as well as the purchasing of telecommunications services (excluding intragroup purchasing).

    Enterprise Services

        Enterprise Services serves T-Systems' largest customers (approximately 60 multinational corporations and large public institutions) through its dedicated Sales & Service Management service unit. In addition, Enterprise Services also delivers information technology services, through its Systems Integration and IT Operations service units, for business customers of both Business Services and Enterprise Services. Enterprise Services' Sales & Service Management service unit provides services through five vertical market segments, called "Industry Lines," which reflect T-Systems' key customer accounts. Sales & Service Management is responsible for managing the customer relationships of the Enterprise Services business unit.

        IT Operations carries out the delivery functions of Enterprise Services (as described in more detail below). IT Operations provides ICT solutions to support business processes or takes over full responsibility for the operation of entire business processes of a customer. Accordingly, this service unit supplies customers with work stations, takes over a customer's operations, service and maintenance functions, and operates data centers, as well as provides systems and applications for customers.

        Systems Integration develops, integrates and manages customized ICT solutions for customers, including industry-specific, as well as industry-independent, solutions. Customer solutions include ICT solution consulting, software and platform development, migration services, systems integration and application management.

        Enterprise Services is organized along five defined Industry Lines, as follows:

    "Telecommunications, Media & Utilities" — Includes other network operators and companies offering fixed-line, mobile and Internet telecommunications services, as well as media, ISP and utilities companies. T-Systems provides information technology outsourcing services and other IT

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      systems, such as customer relationship management, customer care, call center and billing systems.

    "Manufacturing" — Includes manufacturers of automobiles, aircraft and electronics, and manufacturers of component parts used by other manufacturers, including the automotive, aerospace, defense, high-tech, plant and mechanical engineering and process, and consumer goods industries. T-Systems provides electronic supply chain management, product life-cycle management and information technology outsourcing services.

    "Services" — Includes the services industry, such as telematics, healthcare, insurance, travel, transport, logistics, professional, wholesale distribution and retail. T-Systems develops a variety of solutions, including sales support systems, billing solutions, shops for direct sales via the Internet, Internet-based reservation and booking systems and data management systems.

    "Finance" — Includes banks and insurance companies. T-Systems develops a variety of solutions, including industry specific sales support systems and electronic banking solutions.

    "Public" — Includes government agencies, state pension funds, the armed forces of the Federal Republic, research and teaching institutions and international organizations. T-Systems enables public entities (such as, federal ministries and state agencies) to establish innovative business processes, such as services to individuals through the Internet and the management of data and voice networks.

    Media & Broadcast

        Media & Broadcast is the leading provider of broadcast services in Germany and one of the leading broadcast providers in Europe. The main service, and its primary source of revenues, is television and radio network services, which include the planning, installation, maintenance, troubleshooting and operation of terrestrial television and radio transmission equipment. Media & Broadcast is responsible for the entire value chain (e.g., sales, projects, services) and offers these services to national and commercial broadcasters, television production companies and some international broadcasters.

    Detecon

        Detecon offers its customers integrated management and technology consulting. Detecon operates worldwide and focuses on implementing specialized solutions for the telecommunications market. Detecon markets its services separately from the Business Services and Enterprise Services business units.

    Service Offerings Portfolio

        T-Systems has structured its service offerings into three increasingly value-enhancing levels ("Focus Solutions"):

    "ICT Infrastructure Management" — customers receive best-in-class, cost-efficient services through flexible ICT infrastructure management, such as complete SAP applications management, including operating and maintaining mainframe computers and desktop systems.

    "Business Solution Design & Implementation" — customers are provided with complete ICT solutions for their particular business processes. These applications contribute to enhancing specific processes and enhance the value and cost-effectiveness for the customer, such as providing turn-key applications and systems that permit efficient supply chain operation and management.

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    "Business Process Management" — T-Systems takes responsibility for customers' complete process chains (business process outsourcing, enabling customers to concentrate on their core businesses, while at the same time allowing them to benefit from improved processes and cost-effectiveness. For example, T-Systems often takes complete responsibility for business processes, such as invoice management and operations, payroll accounting, and other management and operations on behalf of its customers—including the provision of all necessary equipment and personnel.

    Business Services

        Business Services offers a portfolio of telecommunications services, through TC Operations, to both its customers and those of Enterprise Services. This portfolio includes Network Services, Hosting Services, Global Network Factory-Services, and T-NetPro. In addition, certain T-Com products and services are offered by Business Services, through its Sales & Marketing Business Customers sales unit, described below.

    Network Services

        Network Services is responsible for the installation and operation of customized voice- and data-communications networks for businesses, non-profit organizations and the Federal Republic (including the Federal States and governmental agencies). Projects for customers are generally realized utilizing our global network infrastructure. Network Services provides fast, secure and reliable communication solutions worldwide.

        Network Services offers IP-based VPNs, intranet/extranet solutions based on IP/Multi-Protocol Layer Switching (MPLS), Voice VPN solutions based on traditional voice and VoIP technology, and Hosting Services. All services are designed as separate modules that can be combined to provide solutions for particular customer needs. Network Services' main offerings are:

    "Global Frame Relay/Global ATM"—provides businesses with a cost-effective, flexible way to connect LANs, system network architecture, voice- and IP-based applications.

    "Inter-Business Link/Global Business Link"—an international private leased circuit service with a standard bandwidth range from 64/56 Kbit/s to 622 Mbit/s (in specific cases up to 10 Gbit/s), which provides high-speed, high-quality leased-line connectivity between two endpoints.

    "IntraSelect MPLS"—VPN solutions for "any-to-any" connectivity (any site of a customer is connected to any other site of the same customer), Internet access, dedicated firewall services, encryption services, remote dial-in services and VPN core services with different classes of services, and backed up with cross-service-level agreements ("cross-SLAs").

    "Global Internet"—provides Internet connectivity across a range of access speeds, and complements the IntraSelect MPLS service by extending it to provide public Internet services such as e-mail and file-transfer, together with private intranet services within an IP-based VPN.

    "T-VPN, Business Voice"—includes traditional PSTN voice (narrowband) solutions and Internet-based VoIP solutions. T-VPN combines traditional voice with value-added services (VAS) and VoIP solutions.

        Additionally, Network Services offers the implementation of customized voice communications networks for T-Systems' customers, and the design of complex call-center solutions, which assist customers with the professional management of their incoming calls, faxes and e-mails.

        Contracts relating to Network Services have an average duration of approximately three years. Voice services provided are billed on a per-minute basis, while data services are billed in terms of the bandwidth provided each month. Customers taking advantage of leased-line services pay an initial

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connection fee, based on the type of line leased, and thereafter pay monthly subscription charges, based on the line's capacity (narrowband or broadband), the length of the line (point-to-point connection) and the duration of the lease.

    Hosting Services

        Hosting Services enables our customers to employ Internet technologies in their businesses by arranging (or "hosting") the customers' Internet presence on T-Systems' servers, utilizing a reliable broadband connection through the T-Systems network. In addition, Hosting Services can also manage customer Web sites, which offers opportunities to employ additional value-added services. Hosting Services provides the underlying infrastructure that enables a customer's business to operate seamlessly and more efficiently.

        In addition, Hosting Services provides customers with the software necessary to maintain a secure and reliable Internet connection, through which a customer can manage its business through its WAN or LAN from a central location.

        Hosting Services also provides electronic marketplaces and portals, enabling enterprises to conduct business transactions electronically, either within a single industry or between enterprises of different industries. With these electronic marketplaces and portals, our customers can facilitate their relationships with suppliers ("supply-chain management") or with their customers ("customer-relationship management").

        Within Germany, the Broadband/Fixed Network strategic business area, through T-Com, also markets these Hosting Services to its very small business customers. Outside Germany, these services are marketed through arrangements with third parties. Contracts involving Hosting Services have an average duration of three to five years.

    Global Network Factory-Services

        Global Network Factory-Services is responsible for the global telecommunications service platforms of Business Services. For more information about these service platforms and the equipment necessary to operate them, see "—Description of Property, Plant and Equipment—Network Infrastructure—Cable Transmission Infrastructure—Global Network Factory-Services." As part of the strategic realignment of the Deutsche Telekom group, the global transmission infrastructure of the former Global Network Factory was transferred to the T-Com business unit as of January 1, 2005, and the remaining functions are now called Global Network Factory-Services.

    T-NetPro

        T-NetPro develops and operates customized telecommunications solutions for our group companies. T-NetPro's offering portfolio includes "customized campus solutions," "customized Internet and intranet solutions," "WAN solutions," customized voice solutions, combined data and voice solutions, security solutions (ranging from single firewalls to customized VPNs), mobility solutions (ranging from dial-ups to W-LANs), and network-related applications.

        T-NetPro's fixed assets mainly consist of service platform-related assets, primarily equipment in connection with technical network-related facilities.

    Sales & Marketing Business Customers

        Sales & Marketing Business Customers offers mainly voice-related services, network access and data communication products to small- and medium-sized business customers. This unit was transferred to T-Systems from T-Com as part of the strategic realignment of the Deutsche Telekom group. Accordingly, the products and services sold by Sales & Marketing Business Customers are supported

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through T-Com's fixed-line network. Sales & Marketing Business Customers offers its products and services through direct and indirect sales channels, as well as through a broad range of sales partners. The majority of its revenues in 2005 were derived from fixed-line network communications services (including both access and calling services revenues) primarily within Germany. Sales & Marketing Business Customers controls related fixed assets, which, based on book values as of December 31, 2005, mainly consisted of telecommunications network equipment (87%) and transmission equipment (12%). The service offering portfolio includes:

    Network communications services, consisting of network access products and calling services;

    Value-added services (special purpose telephony services);

    Data communications services and solutions, including W-LAN, IP-based products (such as intranet and extranet solutions), the Telekom Design Network, Ethernet products and Internet solutions (such as "Company Connect" and "IP Transit");

    Terminal equipment for purchase or rent, as well as leading IT manufacturers' products;

    Installation and maintenance services, customer consulting, hotline and network management services;

    Systems integration, including LAN and communications services; and

    E-business solutions.

        For more information relating to these service offerings, see "—Broadband/Fixed Network—Operations in Germany—T-Com."

    Media & Broadcast

        Media & Broadcast has a comprehensive service portfolio, which includes television and radio networks, "Broadcast Contribution Networks" and satellite services. Its customers comprise national public and commercial broadcasters, television production companies and international broadcasters. In Europe, T-Systems is one of the leading providers of broadcast services in terms of revenues. As of December 31, 2005, T-Systems' broadcast network in Germany comprised more than 7,400 analog television and radio transmitters, and approximately 190 digital television and radio transmitters. In addition, Media & Broadcast has expertise in systems-equipment technology and digital broadcasting transmitters.

        Many of these services are delivered via T-Systems' own infrastructure. Media & Broadcast's main service, and its primary source of revenues, is television and radio network services, which include the planning, installation, monitoring, maintenance, troubleshooting and operation of terrestrial television and radio transmission equipment. T-Systems' television and radio transmission infrastructure is the basis for the nationwide, wireless provision of television and radio programming. Its customers include both commercial and public radio and television organizations, including the two leading German public television channels, ARD and ZDF.

        Media & Broadcast transmits television and radio programs within the framework of customer-specific contracts. Contract criteria include effective radiated power, quality, and "availability" (reliability of operations and downtime). Customers pay for Media & Broadcast services corresponding to their use of the services offered. Most contracts have an average duration of four to six years.

        Media & Broadcasts's "Broadcast Contribution Networks" provide links between multiple television and radio studios, and recording facilities, enabling the efficient exchange of television and radio content. Services include temporary transmission lines and outside broadcast units (such as, for live news reporting, sports coverage, open-air concerts) as well as permanent television and radio transmission links.

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        Media & Broadcasts's satellite services include the marketing and delivery of satellite capacity, and the provision and operation of uplinks and downlinks. Contractual relationships are generally of a long-term nature (up to 10 years). For satellite capacity, T-Systems' normal practice is to conclude contracts for the entire useful life of the satellites concerned. T-Systems provides leased satellite capacity primarily to the major European satellite network operators, Eutelsat and SES Astra.

    Enterprise Services—IT Operations and Systems Integration

    Systems Integration

        Systems Integration (SI) provides advice and assistance for a company's entire "plan-build-run" lifecycle and employs approximately 13,000 employees worldwide (of which approximately 3,000 are employed outside Germany). Through its ICT solutions, SI increases the flexibility of business processes and its primary focus is on consulting (e.g., solution design), IT projects (e.g., solution implementation, along with development projects, including software and platform development, re-engineering and migration), and application lifecycle management. The focal points of SI's business model are:

    "Industrialization"—relates to the introduction of uniform processes, methods and tools, and enhancing the re-usability of modular solutions. It is also defined by the maintenance of low-cost structures at production sites. For this reason, in 2004, T-Systems established T-Systems India Private Limited in order to provide offshore programming support, and a sourcing platform in St. Petersburg, Russia.

    "Verticalization" — refocuses SI's business on five industries: Telecommunications, Media & Utilities; Manufacturing; Services; Finance and Public. This concentration on specific markets enhances the quality of marketing and sales activities and helps to achieve greater market and existing customer penetration. Cross-industry services are provided by a separate unit within SI.

    "Internationalization" — through SI, an international network of people and organizations has been established to provide sales and services to international customers by offering them tailored, efficient solutions and service components.

        Detecon International GmbH, T-Systems' wholly-owned subsidiary, offers customers comprehensive management and technology consulting services. Detecon focuses on providing services to software and hardware suppliers of telecommunication systems, to the carriers and other service providers that use such systems.

    IT Operations

        IT Operations is responsible for providing services relating to customer IT infrastructure, including computing services, desktop services, application services and telecommunications services. IT Operations' services are offered to new and existing customers through Enterprise Services' Sales & Service Management service unit.

        IT Operations provides the personnel, servers and infrastructure necessary to operate the IT functions of T-Systems' customers. IT Operations is represented in a large number of locations throughout Germany and the world. As of December 31, 2005, IT Operations had a total of more than 17,000 employees, of whom approximately 73% were based in Germany.

        IT Operations comprises three main service lines: Desktop Services & Solutions, Computing Services & Solutions and Business Process Outsourcing. Desktop Services & Solutions delivers, operates and maintains desktop systems for customers, while Computing Services & Solutions operates data centers for customers, and manages the systems and applications which run in these data centers. Business Process Outsourcing operates solutions that support customers' business processes, taking "end-to-end" responsibility for those processes.

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      Desktop Services & Solutions

        The Desktop Services & Solutions service line is responsible for the development and implementation of complete office systems solutions with wide-ranging responsibility for IT infrastructure. Other core services include stand-alone office systems solutions, including desktop operations, call-center and help-desk services, as well as the operation of computing services infrastructure, consulting and IT design. These services may include sales or leasing contracts relating to desktop computer hardware supplied by third parties. Through Desktop Services & Solutions, T-Systems provides cost-effective desktop services primarily to large customers. Such services cover the entire lifecycle of the workstations provided to the customer, and also include the remote configuration, trouble-shooting and debugging of software running on workstations serviced through Desktop Services & Solutions.

        Through Desktop Services & Solutions, IT Operations also ensures the proper operation of the workstations and services hardware and software products provided. As of December 31, 2005, more than 495,000 workstations with technical support included, and more than 800,000 workstations without technical support, were serviced through Desktop Services & Solutions. Help-desk services are primarily provided through the Services Office platform and the Call Center Platform Management (CCPM) services. The Services Office platform supports one of the largest and most sophisticated Microsoft Exchange applications worldwide, with more than 250,000 mailboxes as well as file, fax and SMS services. CCPM includes services that are required for the smooth operation of a call-center platform.

        In general, desktop services contracts have an average duration of two years. Customers pay for managed desktop services based on contractually agreed service levels. These agreements describe quantities of goods (i.e., the number of computers leased and maintained) as well as customer-specific availability and quality requirements for the services provided.

      Computing Services & Solutions

        Computing Services & Solutions provides customers with the ability to outsource their entire IT operations. The services offered include the operation of data centers, application management, user support and network management. Other services offered include the installation, operation and administration of central computer systems (mainframes), open computer systems (e.g., UNIX, Windows NT), data center infrastructure services and business applications, on behalf of its customers.

        Generally, contracts involving computing services have an average duration of four years or more. Customers pay for computing services based on contractually agreed service levels. These agreements describe the quantity, quality and extent of services to be provided.

      Business Process Outsourcing

        Business Process Outsourcing targets the following markets:

        Human Resources Solutions, including payroll accounting and travel expense management services, human resources support and time management;

        Billing Services for telecommunication companies, media companies and utilities, which involves settlement and collection services, from the collection and processing of data to the generation of invoices and billing;

        Finance & Accounting Services, which includes the processing of accounting-related business transactions according to national and international accounting standards;

        Managed Document Services, which include archiving, printing and mailing, as well as electronic data exchange; and

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        Accounts Receivable Management/Debt Management for business customers, which includes credit rating checks, address investigation and other services.

    Seasonality

        The revenues of the Business Customers strategic business area are not materially affected by seasonal variations. However, its revenues may be subject to quarterly fluctuations depending on sales cycles (currently ranging between six and 18 months) and the purchasing patterns and resources of its customers, which are subject to general economic conditions and, therefore, difficult to predict. Accordingly, revenues received in a particular quarter may not be indicative of future revenues to be received in any subsequent quarter.

    Suppliers

        The principal goods and services purchased by T-Systems are: computer hardware for client servers and mainframes, operating systems and applications software, network capacity, network services, telecommunications network components and IT consulting services. T-Systems manages the risks in the supplier relationships, as well as the risks associated with quality and cost considerations, on behalf of its customers. We do not believe that T-Systems is dependent on any single supplier.

    Dependence on Intellectual Property

        We do not believe that the Business Customers strategic business area is dependent on any individual patents, licenses or industrial, commercial or financial contracts. However, T-Systems is subject to third-party software licenses in connection with the services it provides to its customers. Any breach, violation or misuse of third-party software licenses could result in additional costs with respect to the particular projects that are the subject of such licenses.

    Dependence on Material Contracts

        Business Customers intends to become less dependent on internal customers (i.e., other Deutsche Telekom group companies) and to improve its market position with respect to external customers. In 2005, the other strategic business areas of Deutsche Telekom (primarily Broadband/Fixed Network and Mobile Communications) accounted for approximately 29.5% of Business Customers' total revenues, compared to 28.7% in 2004 and 28.4% in 2003. No other customer accounted for a significant portion of T-Systems' total revenues in 2005.

    Competition

        Business Customers operates in markets that are subject to intense competitive pressures, and the overall market has been characterized by consolidation and increased concentration during the past year. Business Customers faces a significant number of competitors, ranging in size from large IT and telecommunications providers to an increasing number of relatively small, rapidly growing and highly specialized organizations. Business Customers believes that its combination of service, performance, quality, reliability and price are important factors in maintaining a strong competitive position.

        Business Customers holds different market positions (based on total revenues) in different regions of the world. In Germany, Business Customers is the market leader in the IT and telecommunications areas. In Western Europe, Business Customers is one of the five largest vendors, together with IBM Global Services, EDS, HP Services and Accenture with respect to IT, and one of the four largest companies, together with BT Global Services, France Télécom/Equant and Telefónica, in the telecommunications industry. Globally, Business Customers ranks among the top 20 IT and telecommunications companies. Business Customers' global IT competitors include IBM, EDS, CSC,

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and Accenture. In the telecommunications area, Business Customers competes globally with AT&T Business Services, MCI, NTT, France Télécom/Equant and BT Global Services.

        Competition in the telecommunications markets in which Business Customers competes is very intense, both in Germany and globally. The competitive landscape over the past several years has been characterized by market participants attempting to reduce their indebtedness and increase their profitability through strategic refocusing and concentration on IP services. Business Customers expects this strategic refocusing to continue in 2006 and therefore expects similarly fierce competition.

        The ICT market has been characterized by consolidation and increased concentration (e.g., Infonet has been acquired by BT Group, AT&T has been acquired by SBC, and MCI has been acquired by Verizon). In addition, IT competitors, including IBM, EDS, CSC and Atos Origin, have entered the telecommunications and network business.

        Competition is also intense in the information technology area. The current market is characterized by strong pricing pressures, reduced customer IT budgets and prolonged customer sales cycles. As a result of these competitive pressures, many companies, including Business Customers, are attempting to maintain or expand market share through improved productivity, cost-cutting and efficiency measures, and reliance on IT expertise. This situation has also led to a consolidation in the IT sector, which Business Customers expects to continue for the foreseeable future. In addition, Business Customers expects that the global IT services markets recovery that commenced in 2005 will continue in 2006, and that higher market growth rates in some IT markets will be achieved thereafter (especially in the IT Outsourcing and Business Process Outsourcing markets), but competition will likely remain intense.

        We believe that Business Customers can compete effectively, largely due to its strategy of providing comprehensive solutions (planning, building and operating) to its customers' needs across a broad spectrum of IT and telecommunications activities. Offering substantial industry-specific expertise, Business Customers believes it can attain adequate margins and can respond to customers' requirements, acting as a full-service telecommunications and IT provider, effectively and efficiently supporting its ICT customers.

    Toll Collect

        As previously reported, in connection with a project to create and operate an innovative system for the collection of toll charges for the use by heavy vehicles of the German high-speed highway system, we entered into an agreement dated September 2002 (together with all amendments thereto, the "operating agreement") with the Federal Republic (represented by the German Federal Ministry of Transport, Building and Housing (the "Federal Ministry")), DaimlerChrysler Financial Services AG ("DaimlerChrysler Services") and Compagnie Financiere et Industrielle des Autoroutes S.A. ("Cofiroute"). We refer to this project as the "Toll Collect project." The partners are responsible for the development of the toll collection system, which has been built and operated by the joint venture Toll Collect GmbH ("Toll Collect"). DaimlerChrysler Services and we each hold a 45% stake in Toll Collect, with the remaining 10% being held by Cofiroute. Our investments in the Toll Collect project include our equity interests therein, which are recognized in our consolidated financial statements using the equity method of accounting, and certain financial guarantees. We and DaimlerChrysler Services have agreed to indemnify Cofiroute against certain financial obligations in excess of EUR 70 million.

        Commencement of operations of the toll collection system was originally planned for August 31, 2003. On February 29, 2004, the parties agreed to begin operations with on board units with slightly less than full technical performance no later than January 1, 2005 (Phase 1), which obligation was satisfied. On January 1, 2006, following issuance of the preliminary operating permit, the toll collection system began to operate with full technical performance as specified in the operating agreement (Phase 2). Toll Collect expects to receive the final operating permit in the second quarter of 2006.

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However, should the final operating permit not be received by January 1, 2007, the Federal Republic may claim that it is entitled to terminate the operating agreement.

        The Federal Republic has initiated arbitration proceedings against DaimlerChrysler Financial Services AG, Deutsche Telekom AG and the consortium. The Federal Republic is claiming damages resulting from the delay in the commencement of operations and contractual penalties in an aggregate amount of approximately EUR 5.2 billion. Although the outcome of arbitration proceedings is difficult to predict, we believe that these claims are unsustainable and we are contesting the Federal Republic's claims vigorously. For more information, see "Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Liquidity—Contractual Obligations and Other Commitments" and "Item 8. Financial Information—Legal Proceedings."


Group Headquarters and Shared Services

    General

        Group Headquarters and Shared Services ("GHS") performs strategic and cross-divisional management functions for the Deutsche Telekom group. Group Headquarters functions include those performed by many of our central departments, such as treasury, legal, accounting and human resources. Operating functions not directly related to the core businesses of our strategic business areas are considered shared services functions. These functions also include, among others, the administration and servicing of our real estate portfolio (primarily within Germany), fleet management and Vivento. Although many of the Group Headquarters and Shared Services functions are legally part of Deutsche Telekom AG, we manage Group Headquarters and Shared Services as though it were a separate legal entity.

    Principal Activities

        The real estate unit is, based on total and net revenues, the largest shared service within Group Headquarters and Shared Services. The real estate unit is responsible for renting and selling commercial real estate, and for providing facility management services for our group, primarily in Germany. Our real estate operations are conducted through various subsidiaries and include:

    the internal and external group leasing and rental business;

    the power supply and air conditioning solutions business related to our telecommunications facilities;

    facility management services;

    facility management services for Magyar Telekom and third parties in Hungary (our first foreign real estate-related operation);

    the administration and disposition of our real estate interests (through Sireo Real Estate Asset Management GmbH, a joint venture of Deutsche Telekom AG, Corpus Immobiliengruppe GmbH & Co. KG, and Morgan Stanley Bank AG); and

    the operation, management and servicing of our radio transmission sites, such as our radio towers and transmitter masts in Germany (primarily used in mobile, radio and satellite communications, as well as for television broadcasting).

        For more information about our real estate management activities and portfolio, see "—Description of Property, Plant and Equipment—Network Infrastructure—Real Estate."

        Vivento was established in 2002 with the goal of efficiently implementing our staff restructuring measures in a socially responsible manner. Through Vivento, displaced workers are retrained and equipped with new employment qualifications for permanent redeployment within the Deutsche

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Telekom group or with external employers, or for project and temporary assignments. In addition to individual placements, Vivento staffs major projects and workforce-intensive operations and services. To create further employment opportunities, Vivento established and operates its own business lines. At the beginning of 2004, Vivento commenced providing call-center services primarily to some of our group companies and, to a lesser extent, to third parties. These call-center operations consist of a portion of the former call-center operations of T-Com, as well as those of Vivento Customer Services GmbH ("VCS"), which was established in the first quarter of 2004. VCS provides customer-relationship services, including call-center and back-office services, within the group as well as to third parties. VCS operates 18 sites throughout Germany and, as of December 31, 2005, employed approximately 2,800 people. In addition, approximately 400 people from Vivento were employed on a contract or temporary basis as of that date. In July 2004, Vivento set up a further business line by establishing Vivento Technical Services GmbH ("VTS"), which includes a transferred T-Com unit with approximately 350 employees. This company offers installation and after-sales services in the field of technical infrastructure within and outside the group. As of December 31, 2005, VTS had approximately 1,800 employees, and a further 500 were temporary staff from Vivento. In connection with our 2006-2008 personnel-reduction program, we plan to divest certain activities of our Vivento business lines (including VCS and VTS). For more information, see "Item 6. Directors, Senior Management and Employees—Employees and Labor Relations."

        During 2005, Vivento created new placement opportunities through several new projects. In addition to creating additional placement opportunities, Vivento will continue to emphasize cooperation with government agencies and public institutions as one avenue of providing new career prospects, in particular to employees with civil-servant status. This includes continuing its successful cooperation with the Federal Employment Agency (Bundesagentur für Arbeit) and municipal governments in connection with the Federal Government's "Hartz IV" program. In this project, Vivento employees assist the Federal Employment Agency with support and job placements for recipients of long-term unemployment benefits.

        Vivento's top priority is to assist with long-term staff reductions and redeployment within the Deutsche Telekom group. For this reason Vivento will continue to pursue its goal of placing as many employees as possible in permanent jobs outside and inside of the group.

        During 2005, approximately 2,400 of our employees were transferred to Vivento, out of a total of approximately 34,200 employees who have been transferred to Vivento since its creation. Approximately 60% of these employees were transferred from T-Com, both as part of T-Com's program to increase its efficiency, and through the transfer of some T-Com operations into the Vivento business lines. The remaining transferred employees either were apprentices who had finished their professional training within the group, but had not obtained full-time employment, or came from the other Deutsche Telekom's strategic business areas.

        At December 31, 2005, a total of approximately 18,900 employees had left Vivento since its creation, of which 6,100 left during 2005. As of December 31, 2005, approximately 15,300 employees were in Vivento, of which approximately 700 were permanent staff, 7,200 were employees of the Vivento business lines and approximately 4,700 were engaged on a temporary or contract basis within or outside of the group.

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        The following table provides information regarding Vivento's employee structure and movements for the periods presented:

 
  2005(1)
  2004(1)
  2003(1)
Number of employees transferred to Vivento(2)   2,400   12,100   18,000
Number of employees that have left Vivento(2)   6,100   9,100   3,700
Total number of employees in Vivento as of year-end   15,300   19,000   16,000
  of which: Operational staff of Vivento   700   700   400
  of which: Number of employees in business lines   7,200   4,600  

(1)
Figures have been rounded to nearest 100.
(2)
Operational staff of Vivento included.

        Our fleet management company, DeTeFleetServices GmbH ("DeTeFleetServices"), provides fleet management and mobility services, with approximately 42,000 vehicles provided to our group companies and affiliates within Germany. DeTeFleetServices also generates net revenues from third parties through its sale of used fleet vehicles.

        The Central Treasury department is primarily responsible for cash management, investments in securities, leasing arrangements and the refinancing of indebtedness through a variety of financial arrangements, including, among other things, bank loans and other credit arrangements. Furthermore, this unit is responsible for the issuance of debt in the international capital markets, the handling of payments and clearing transactions, and foreign exchange and hedging activities. For more information, see "Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources" and "Item 11. Quantitative and Qualitative Disclosures about Market Risk."

        T-Venture Holding GmbH ("T-Venture") is also included in Group Headquarters and Shared Services. T-Venture's mission is to scout new products, technologies and services and to acquire access to them on our behalf. Accordingly, a central corporate fund has been established for this purpose, in addition to the individual investments that can be made by our strategic business areas.

        The Telekom Training unit is responsible for providing professional training and qualification services for our employees within Germany. This unit also provided training for approximately 10,000 apprentices during 2005.

        Group Headquarters and Shared Services also includes the establishment and maintenance of international intellectual property rights for the Deutsche Telekom group, including the T-Com, T-Mobile, T-Online and T-Systems brands.

        Apart from our facility management operation in Hungary, Group Headquarters and Shared Services has only limited international activities, as most of our international operations have been transferred to our strategic business areas, and our non-core assets have been divested. In the first quarter of 2005, we sold our interest in Intelsat Ltd., which generated proceeds of EUR 0.1 billion. In 2004, we sold our interest in SES Global S.A., which generated proceeds of EUR 0.6 billion. In 2003, we sold certain of our minority and non-core shareholdings in various other entities, which generated aggregate proceeds of EUR 0.7 billion.

        Since January 1, 2005, the former shared service, Billing and Collection, has been managed by the Business Customers strategic business area under the T-Systems brand.

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INNOVATION MANAGEMENT (RESEARCH AND DEVELOPMENT)

Innovation Strategy

        Our innovation strategy focuses on customers and their current and future requirements that we expect to have the greatest impact on our company in the coming years. In 2004, we developed our "4i" strategy, which comprises the following four focus fields, reflecting our strategic innovation portfolio and development priorities:

    Intuitive Usability—seeks to make complicated services and functions more user friendly for all customers.

    Intelligent Access—offers customers the best service available without requiring the user to manually select the network services and access.

    Integrated Communication—promotes the appropriate connection and interaction of many tasks and devices to one another.

    Infrastructure Development—creates the technological basis needed to meet bandwidth, mobility and security requirements in a cost-effective manner for our group and its customers.

        In 2005, we added a fifth focus field:

    Inherent Security—offers our customers network-related security solutions utilizing future technologies and applications.

        Accordingly, our "5i" strategy reinforces our commitment to providing increased customer benefits.

        Systematic analysis and tracking of future customer needs helps us focus our research and development (R&D) efforts on the topics and technologies that are most relevant to our customers. Key innovation and performance indicators and processes enable us to evaluate and provide quality assurance throughout the group. Execution strategies and the timing of the introduction of products to the market are subject to group-wide contribution and effort.

        To implement our strategy, we have developed marketing plans relating to potential market opportunities.

Innovation Partnerships

        We believe that peering with other technology innovation leaders will result in an increased ability to leverage and improve our R&D efforts. In 2004, we and France Télécom agreed to jointly pursue certain R&D initiatives, such as home gateways (individual servers for managing communications, entertainment, and household systems). In April 2005, the Home Gateway Initiative was launched, in which nine founding telecommunications companies from Europe and Japan will cooperate with 48 other members worldwide to achieve cross-border specifications and standardization, to reduce costs to the consumer and to reach a broad market acceptance for triple-play services.

        We are continuing to manage the "Networked Worlds" (vernetzte Welten) project, established by the Federal Republic in 2004, together with contributors from the business and science sectors, as part of the German government's "Partners for Innovation" campaign. This is a partnership among industry, research institutions and the German government to develop joint projects, with the primary objective of developing standards and new technologies that will support new business applications, including future network security and functionality requirements.

        In April 2005, the "Deutsche Telekom Laboratories" was inaugurated in Berlin. Deutsche Telekom Laboratories operates as an annex of the Technical University of Berlin (Technische Universität Berlin). It is our aim to develop Deutsche Telekom Laboratories into a world-leading institute for research and development in the field of telecommunications. This research and development unit aims to achieve

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close collaboration between academia and industry, to rapidly transfer the results of scientific work into practical business applications, to generate new patents and to turn innovations into new marketable products.

Research & Development

        The refocusing of the R&D area in 2003 from technology-oriented development to customer-focused development resulted in the introduction of a number of innovative applications in 2005, such as "Mobile Coupon Service," a service capable of sending coupons directly to mobile telephones. This R&D project started within the "Permission Tracking & Tracing" project within Group Headquarters and Shared Services and has become a true collaboration project among our three SBAs.

        In 2005, we combined the central departments "Technology & Platforms" and "Innovation" to form "Technology & Innovation," a new central department that will harmonize and closely coordinate our strategies for developing new applications and products as well as network platforms.

Research and Development Expenditures

        In 2005, our expenditure on experimental, explorative, and pre-production research and development was EUR 0.2 billion (2004: EUR 0.2 billion; 2003: EUR 0.3 billion). Typical research and development activities included, in particular, the development of new data-transmission processes and innovative telecommunications products. In 2005, 2004 and 2003, investment in internally developed intangible assets amounted to EUR 0.2 billion. This investment related primarily to the development and adaptation of internally developed software, as well as software platforms and architectures, with the aim of improving processes for the provision and operation of services and products. As in previous years, the vast majority of this amount was attributable to the Broadband/Fixed Network and Mobile Communications strategic business areas.

Intellectual Property

        In 2005, we filed 412 patent applications worldwide. As of December 31, 2005, we held approximately 6,700 inventions and patent applications patents, utility models and design models (2004: 5,991; 2003: 5,282). Management of our intellectual property portfolio is based on strict cost/benefit considerations. The portfolio is reviewed on a regular basis and those intellectual property rights that are no longer relevant are eliminated.

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ACQUISITIONS AND DIVESTITURES

        The following table presents each of the principal acquisitions and divestitures made by us during our last three fiscal years:

Year

  Segment(1)
  Event
  Amount
 
 
   
   
  (billions of €)

 
2005   Broadband/Fixed Network   Purchase of shares in Telekom Montenegro   (0.1 )
2005   GHS   Sales of shares in DeASat S.A.   0.1  
2005   Mobile Communications   Purchase of shares in CMobil   (0.1 )
2005   GHS   Sales of shares in Intelsat, Ltd.   0.1  
2005   Mobile Communications   Sale of remaining shares in Mobile TeleSystems OJSC ("MTS")   1.2  
2005   Broadband/Fixed Network   Purchase of additional shares of T-Online International AG   (1.8 )
2005   Broadband/Fixed Network   Sale of shares in comdirect bank AG ("comdirect bank")   0.2  
2004   Broadband/Fixed Network   Purchase of remaining shares in EuroTel Bratislava a.s.   (0.3 )
2004   Mobile Communications   Sale of shares in MTS   1.3  
2004   GHS   Sales of real estate   0.3  
2004   GHS   Sale of shares in SES Global S.A.   0.6  
2004   Broadband/Fixed Network   Acquisition of the Scout24 Holding GmbH   (0.2 )
2004   Broadband/Fixed Network   Acquisition of Stonebridge Communications A.D.   (0.1 )
2003   Business Customers   Sale of shares in TeleCash Kommunications-Service GmbH   0.1  
2003   GHS   Sale of shares in Inmarsat plc   0.1  
2003   GHS   Purchase of additional shares of T-Online International AG   (0.2 )
2003   GHS   Sales of shares in Celcom (Malaysia) Berhad   0.1  
2003   GHS   Sales of shares in Globe Telecom, Inc.   0.4  
2003   Broadband/Fixed Network   Sale of interest in Kabel Baden-Württemberg GmbH & Co. KG   0.1  
2003   GHS   Sales of shares in Eutelsat S.A. and Ukrainian Mobile Communications CJSC   0.2  
2003   Mobile Communications   Sale of receivables in an asset-backed securitization transaction   0.5  
2003   Mobile Communications   Sale of shares in MTS   0.5  
2003   GHS   Sales of real estate   0.8  
2003   Broadband/Fixed Network   Sale of six regional cable television companies   1.7  

(1)
Reflects our reorganized business structure as of January 1, 2005.

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REGULATION

Regulation in Germany

        The strategic business areas, entities and affiliates of the Deutsche Telekom group within Germany are mainly influenced by the decisions of the Federal Network Agency. The Federal Network Agency considers us to be dominant in several markets, especially in fixed-line network calling services. The decisions of the Federal Network Agency have had, and will continue to have, significant effects on the level of competition in the markets for regional and local calls and access to our fixed-line network.

    Liberalization

        The legal framework for the regulation of the telecommunications sector in Germany was completely transformed through the Telecommunications Act, which became effective on August 1, 1996. The Telecommunications Act required the complete liberalization of the German telecommunications market by January 1, 1998, as mandated by the directives of the E.U. Commission as part of its liberalization effort, which had begun in 1989.

        On June 26, 2004, amendments to the Telecommunications Act became effective. Although several changes have been made to the regulatory framework and the precise effects of the amendments to the Telecommunications Act are still not entirely definite in all segments of the telecommunications market, it is already clear that regulatory intervention will continue in certain specific market sectors of our business. The Federal Network Agency is required to decide which telecommunications products and services are to be regulated in a particular market segment. The Telecommunications Act requires regulation of services that are considered by the Federal Network Agency to involve a provider with "significant market power." The Telecommunications Act is based upon the new E.U. regulatory framework on telecommunications. For more information on the E.U. regulatory framework, see "—The E.U. Regulatory Framework—The New E.U. Regulatory Framework."

    The Regulatory Framework

        The Telecommunications Act allows virtually unrestricted market access by qualified entrants. The principal objectives of the Telecommunications Act are to promote competition in the telecommunications sector through regulatory measures, to guarantee appropriate and adequate telecommunications services throughout Germany and to provide for the regulation of frequencies. The Telecommunications Act aims to achieve these objectives principally by allocating frequencies, securing universal service and subjecting, in particular telecommunications markets, providers with significant market power (SMP) to a special regulatory framework.

    Regulatory Supervision

        The Federal Network Agency has significant powers under the Telecommunications Act, including the authority to control network access and interconnection, and to approve or review the tariffs and tariff-related general business terms and conditions of providers with significant market power. It also has the authority to assign and supervise frequencies and to impose universal service obligations.

    Licensing and Notification Requirements; Allocation of Frequencies

        As of July 25, 2003, the Federal Network Agency abolished the requirement to obtain special licenses for telecommunications services. However, approvals are still required to obtain scarce telecommunications frequencies. Frequencies are to be allocated upon request on a non-discriminatory basis according to objective and verifiable criteria. Frequencies may be awarded by auction or by competitive bidding, if the Federal Network Agency determines that frequencies are not available in sufficient quantity for all applicants, or if multiple applications are submitted for the same frequency.

        Payment of an initial frequency fee is required in connection with the grant or allocation of frequencies. In addition, annual contributions to cover the costs incurred by the Federal Network

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Agency in planning and administering efficient and interference-free frequency usage are also required. Furthermore, any entity operating public telecommunications networks and/or providing public telecommunications services on a commercial basis is required to notify the Federal Network Agency of its operations.

        Since 1992, T-Mobile Deutschland has held a mobile (Class 1) license to establish and operate a public digital telecommunications network, based on the GSM standard, with 2 × 12.4 MHz spectrum in the 900 MHz band. This license was originally awarded to Deutsche Telekom (then, Deutsche Bundespost Telekom) in 1990. Following an auction in 1999, T-Mobile Deutschland's GSM license was broadened to include 2 × 5 MHz in the 1800 MHz band. The license will expire on December 31, 2009. Procedures relating to the extension of this license beyond its current expiration date have not yet been established.

        In 2000, T-Mobile Deutschland acquired a UMTS/IMT-2000 license with a frequency allocation of 2 × 10 MHz paired ("FDD") spectrum and 5 MHz unpaired ("TDD") spectrum in the 2 GHz band. This license will remain in force through the end of 2020, provided that T-Mobile Deutschland complies with the general requirements of the Telecommunications Act and the specific conditions of the license. T-Mobile Deutschland's population coverage obligations under the license are 25% by December 31, 2003, which has been achieved, and 50% by December 31, 2005, which has been achieved.

        The Telecommunications Act also contains rules relating to spectrum trading. These new rules will not affect the use of existing spectrum rights by us or our competitors, as such rules are restricted to newly allocated spectrum.

        One of the six UMTS licenses that were allocated in 2000 was returned to the Federal Network Agency at the end of 2003. The relevant spectrum (10 MHz paired spectrum and 5 MHz unpaired spectrum) will be reallocated in the future. However, it is not yet known under what timeframe and conditions such reallocation will take place.

        Pursuant to the 2004 amendments to the Telecommunications Act, new regulatory fees will, in the future, be imposed based on the revenues of respective telecommunications companies. This provision may have a disproportionate effect on large companies, such as Deutsche Telekom, and may have a material adverse effect on our results of operations. The details on how these new regulatory fees will be calculated have not yet been determined and will be promulgated in a separate ordinance, which is expected to become effective during 2006.

    Special Requirements Applicable to Providers with Significant Market Power

      General

        The Federal Network Agency may subject providers with SMP, and their affiliates, to special rules and obligations, including the following:

    The prior approval or retroactive review of tariffs by the Federal Network Agency, insofar as such tariffs and conditions relate to a market in which the provider holds SMP. For more information, see "—Pricing."

    The obligation to offer other companies unbundled special network access (including interconnection) as well as access to certain services and facilities on a non-discriminatory basis. For more information, see "—Network Access."

    The obligation to provide "universal services," which may also be imposed on providers with a market share of 4% or more. For more information, see "—Network Access—Universal Services."

        In addition, providers with SMP can be obliged to maintain segregated accounting systems with regard to access services to allow for transparency with respect to various telecommunications services

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and between such services and unregulated services in order to prevent, among other things, the cross-subsidization of services. In this regard, the Federal Network Agency may specify the structure of internal accounting for particular telecommunications services.

        Furthermore, under general competition law principles, market-dominant enterprises may not abuse their dominant position. For more information, see "—Competition Law."

        "Significant market power" under the Telecommunications Act is defined as the ability of a provider to behave independently of its competitors and end users. Such a position is determined in line with an E.U. guideline based on E.U. competition case law. Based on this case law, in general, a company will be presumed to have SMP if its share of a particular market exceeds 40%. The determination of the product and geographic markets affected, and the criteria relating to SMP under the Telecommunications Act, are made by the Federal Network Agency in agreement with the Federal Cartel Office (Bundeskartellamt).

        Under the SMP concept, companies affected by these regulations have to look to E.U. law and practice for guidance with respect to the actions likely to be undertaken by the Federal Network Agency. The question as to which telecommunications markets the stricter regulatory obligations of the Telecommunications Act apply is now decided pursuant to a specific "market analysis procedure." The results of the analysis are then reviewed on a two-year cycle. The starting point for this market analysis is the "E.U. recommendation on relevant markets," which specifies a list of telecommunications markets that are susceptible to sector-specific regulation. The recommendation includes the retail markets for fixed public telephone services and leased lines and the wholesale markets for unbundled local loop, fixed-line network interconnection, leased lines, broadband access, mobile termination/access, and origination/international roaming and broadcasting transmission services. For more information, see "—The E.U. Regulatory Framework—The New E.U. Regulatory Framework."

        We believe that, for the foreseeable future, the Federal Network Agency is likely to view us as a provider with SMP in various German markets for certain public voice telephony services in the fixed network and in other markets, including most of those in which we held monopoly rights in the past. As a result, we expect that the stricter regulatory provisions of the Telecommunications Act relating to providers with SMP will be applied to our activities in those markets. Considering that in many markets our competitors are unlikely to gain SMP in the near future, we expect that we will have to compete in important markets with providers not subject to these stricter regulatory obligations. Therefore, these competitors may have more flexibility than we have in terms of the selection of services offered and customers served, pricing and the granting of network access.

    Pricing

        Under the Telecommunications Act, tariffs for telecommunications access services offered by providers with SMP and their affiliates can be subjected to price regulation, insofar as it relates to a market in which SMP has been determined to exist. Other tariffs are essentially unregulated. The tariffs of all providers in Germany are, however, generally subject to E.U. and German law, including competition and consumer protection laws and ordinances. In addition, tariffs for universal services must be set at an "affordable price." For more information, see "—Network Access—Universal Services."

        The Telecommunications Act distinguishes between tariffs that require prior regulatory approval and those that are subject to retroactive review. In general, wholesale pricing requires prior approval, whereas retail pricing is subject to retroactive review. But nevertheless, at present all retail pricing measures must be disclosed to the Federal Network Agency two months before they become effective.

    Prior Approval of Tariffs

        The Telecommunications Act provides for two basic approaches to prior approvals of tariffs: a "price-cap approach" and an approach involving individual approvals based on an assessment of the

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costs of providing a particular service (the "cost-based approach"). The cost-based approach generally applies to tariffs for services that may not be, or are not, combined in a "basket" or "bundled" together with other services in accordance with the price-cap approach. The Telecommunications Act does not give priority to either the price-cap approach or the cost-based approach.

        Under both approaches, the Federal Network Agency may not approve tariffs that:

    exceed the costs of efficient provision of the relevant service;

    include discounts that prejudice the competitive opportunities of other companies in a particular telecommunications market; or

    discriminate among customers for the same or similar services in a telecommunications market, unless such discounts or discriminatory features are objectively justified.

      Price-Cap Approach

        In December 2001, the Federal Network Agency established its second price-cap regime, with respect to baskets for access and calls. This second price-cap regime was applicable from 2002 to March 31, 2005. We do not expect a subsequent price-cap regime to be introduced because there is already sufficient competition on the relevant markets. Under the amended Telecommunications Act, our retail tariffs for access and calls are only subject to retroactive review by the Federal Network Agency for the time being. Accordingly, no final decision will be known until the Federal Network Agency finalizes its market analysis procedures relating to the markets for access to the public telephone network, and for telephone services at a fixed location for end customers. In addition, the price-cap approach was not applied to the markets for wholesale products, and we do not expect this situation to change for the time being.

      Cost-Based Approach for Wholesale Products

        Tariffs which require prior approval are eligible for approval when they do not exceed the costs of efficient service provision. The costs of efficient service provision are derived from the long-run incremental costs of providing the service and an appropriate mark-up for volume-neutral common costs, inclusive of a reasonable return on capital employed. Therefore, we have to submit cost-allocation documents to the Federal Network Agency with each prior approval procedure.

      Cost-Based Approach for Retail Products

        The markets for retail products have now reached the point where abuse through the imposition of excessive charges is no longer the focus of attention. Instead, the amended Telecommunications Act is focused on price floors. Abusive practices are suspected when prices do not cover costs, i.e., when they fall below their long-run incremental costs ("price dumping"), or if the difference between the wholesale price and the retail price is not sufficient to allow an efficient competitor to generate a suitable return ("margin squeeze"). As a result, we expect that the Federal Network Agency will include both a price-dumping test and a margin-squeeze test in its retroactive tariff-review procedures in the future. For more information, see "—Retroactive Review of Tariffs." However, the price-dumping regime previously used by the Federal Network Agency (wholesale prices plus 25%) will continue to be used to test the existence of a margin squeeze. The Federal Network Agency uses a modified version of this test to detect price dumping (wholesale prices plus 12.5%). In addition to these tests, the Federal Network Agency retains the option of using benchmarks—which are preferred under the amended Telecommunications Act—as well as requesting cost-allocation documents from providers.

    Retroactive Review of Tariffs

        Under the amended Telecommunications Act, all retail pricing measures of providers with significant market power are subject to retroactive review ("ex post rates regulation"). Where planned rates would be clearly abusive, the Federal Network Agency is required to prohibit introduction of such

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rates within a period of two weeks of receiving notice of the measures. On December 14, 2004, despite the market analysis procedures having not been finalized, the Federal Network Agency imposed on us, as a preliminary measure, the obligation to disclose to it any new retail pricing measures or changes of conditions two months before they become effective. This tariff procedure applied for the first time upon the introduction of our new tariff structure on March 1, 2005. The Federal Network Agency is furthermore required to initiate examination proceedings ("ex post rates investigation") if it becomes aware of facts indicating that tariffs requested by providers with SMP are abusive. Within a period of two months of an investigation being opened, the Federal Network Agency may object to such tariffs and declare them invalid. It can at the same time mandate "non-abusive" tariffs.

    Tariffs

        As of November 2005, T-Com was no longer classified as having a dominant position in the international call market. These services will, however, be taken into account in a review undertaken as part of a retroactive procedure if they form part of a product bundle that contains regulated components.

    Network Access

        The Telecommunications Act authorizes the Federal Network Agency to impose specific network access obligations on network operators with SMP. It provides details concerning these obligations and specifies the manner in which network access (including interconnection) is to be accomplished.

    General Obligations

        Every operator of a public telecommunications network, irrespective of its market position, is obligated, upon request, to make an interconnection offer to other network operators for interconnection with its network. If the parties cannot agree on the terms and conditions of such interconnection, upon application by one of the parties, the Federal Network Agency can compel an operator that controls access to end users to allow interconnection to its network and can impose other access obligations.

    Provisions Applicable to Providers with Significant Market Power

        According to the amended Telecommunications Act, access regulation is to be determined based on the outcome of the market analysis procedure performed by the Federal Network Agency. This market analysis must take into account the E.U. recommendation that specifies a list of telecommunications markets that are considered to be susceptible to, and may therefore warrant, regulation. The Telecommunications Act also identifies several other potential access markets that may be subject to regulation, such as resale, billing services, and unbundled broadband access. The Federal Network Agency may issue regulatory orders (Regulierungsverfügung, "Regulatory Ordinance"), which could include market definitions, the determination of network operators with SMP and appropriate access obligations. Any such orders may relate to network access obligations and may require us to make such offers to our competitors.

        A provider with SMP for telecommunications services to the public in a particular market segment may also be obliged to grand, to competitors active in the same market, access to services that it uses internally for the provision of such telecommunications services to the public. Such access must be provided under the same conditions that the provider with SMP applies to itself, unless the offering of different conditions can be justified.

    Fixed-Fixed Interconnection

        Since January 2002, there has been an "element-based" interconnection tariff system in Germany, which we believe is the international norm. Under this system, the tariff for transmission of traffic is based on the number and type of network elements used in transmission, and not on the distance over

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which the traffic is transmitted. The Federal Network Agency determined our current interconnection pricing levels in November 2003. These tariffs are valid from December 1, 2003 to May 31, 2006. Compared to the previous period, the tariffs were reduced by the Federal Network Agency by 9.5%. This enables competitors in the inter-exchange markets to lower their prices for fixed-line international and domestic long-distance calls. However, we have initiated legal proceedings against the level of the price reductions mandated by the Federal Network Agency, which are still pending. For more information, see "Item 8. Financial Information—Legal Proceedings—Proceedings Against Decisions of the Federal Network Agency." Also some carriers have initiated legal proceedings against the price decision of the Federal Network Agency in order to lower the tariffs. These proceedings are still pending as well. T-Com applied for new fixed-fixed interconnection tariffs on February 2, 2006. We applied for higher tariffs in the local segment and for lower tariffs in the single and double transit segment. The final decision of the Federal Network Agency is expected in April 2006.

        After concluding the market analysis procedures imposed by the amended Telecommunications Act, the Federal Network Agency, on October 5, 2005, published a Regulatory Ordinance in the area of interconnection services. Pursuant to this ordinance, Deutsche Telekom is considered a provider with SMP in the three interconnection services markets and, consequently, we are obligated to provide interconnection and conveyance services, and we are required to grant, for interconnection purposes, colocation rights to our competitors. Colocation rights give a competitor the right to share certain physical premises with us. In addition, we are also obligated to allow our competitors to interconnect directly with other carriers within our colocation rooms and to share their transmission paths. The rates we may charge for such interconnection and conveyance services, as well as for granting colocation rights, remain subject to the prior approval of the Federal Network Agency. With this ordinance the Federal Network Agency also imposed on us the obligation to submit a reference offer for the provision of those interconnection services for which there is general demand by our competitors. On November 4, 2005, we initiated legal proceedings against the obligation to allow our competitors to interconnect directly with other carriers within our colocation rooms. For more information, see "Item 8. Financial Information—Legal Proceedings—Proceedings Against Decisions of the Federal Network Agency."

        We pay termination charges for calls initiated on our networks that terminate on the networks of other carriers. Previously these charges had been billed on a reciprocal basis, i.e., at the termination rate approved by the Federal Network Agency that we may charge other carriers for the termination of calls on our networks. On September 20, 2004, however, the Federal Network Agency stipulated a mark-up of EUR 0.0017/minute (excluding VAT) on the termination rates applicable to approximately 40 non-market dominant carriers. As a consequence, every operator who terminates calls on these networks has to pay this higher, non-reciprocal termination charge. Accordingly, we add a mark-up of EUR 0.0017/min (excluding VAT) onto the retail prices we charge for calls terminating on these networks. The Federal Network Agency's decision regarding this mark-up is valid until May 31, 2006.

    Fixed-Mobile Interconnection

        T-Mobile Deutschland and T-Com have concluded an agreement on the reduction of national termination rates from EUR 0.132 to EUR 0.11 as of December 15, 2005. T-Com also agreed on the same terms with Vodafone, and slightly higher termination rates with O2 and E-Plus (from EUR 0.149 to EUR 0.124 as of December 15, 2005). As a result, T-Mobile Deutschland's termination rates are below the E.U. average. However, further price cuts may be required as a result of regulatory procedures and the ongoing market analysis procedure currently being conducted by the Federal Network Agency, which expects further voluntary reductions by operators. For more information, see "—Provisions Applicable to Providers with Significant Market Power." Such regulatory intervention may have a material impact on our termination revenues.

        T-Com is required to offer all German fixed-line carriers transit rights to all German mobile operator networks at regulated rates. These rates consist of a charge for transit through Deutsche

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Telekom's network and the termination charge of the relevant mobile operator. However, only the transit-charge portion is subject to such regulation.

    Local Loop Access

        After concluding the market analysis procedures imposed by the Telecommunications Act, the Federal Network Agency, on April 20, 2005, published a Regulatory Ordinance in the area of access to the local loop, which confirmed our SMP status in this area. Accordingly, although we have offered unbundled local loop access since 1998, this decision confirmed that we are still obligated to offer such access to other carriers. By allowing competitors to connect to customer access lines within our local networks, unbundling of the local loop allows our competitors to gain direct access to customers without having to build local networks of their own. In this way, competitors are able to use our customer access lines to offer a wide range of local services directly to customers.

        We are involved in a number of pending legal proceedings regarding recent decisions of the Federal Network Agency that concern access charges relating to the local loop, and which have resulted in severe reductions in our charges for such access. We believe that the Federal Network Agency did not take into account a number of our costs that were justifiable costs for these services, and if it had done so, our permitted local loop access charges would have been higher. For more information, see "Item 8. Financial Information—Legal Proceedings—Proceedings Against Decisions of the Federal Network Agency."

        On April 29, 2005, the Federal Network Agency reduced the monthly line rental charges we are allowed to charge our competitors from EUR 11.80 to EUR 10.65. These charges are valid for the period from April 1, 2005, to March 31, 2007. The decision of the Federal Network Agency is based on a decrease of the interest rate on capital from 8% to 7.15% and an alleged reduction in overhead costs. On August 3, 2005, the Federal Network Agency also decided to reduce the one-time activation (takeover of an existing line) charge for subscriber line rental we are allowed to charge our competitors, by approximately 10%, to EUR 45.61 for the most common type of the subscriber line (copper wire pair with high bit-rate use). The corresponding cancellation charges have been reduced as well. In cases in which a customer switches to another carrier or returns to us, the charges were reduced to EUR 5.80 (approximately 71% lower than before). These amended tariffs are valid until June 30, 2007. Due to the importance of customer line rental to our wholesale business, we expect these reductions to have negative effects on the revenues of our T-Com business.

        Since January 2001, we have been offering line sharing (i.e., using a single access line for multiple purposes, including sharing access with competitors) in accordance with E.U. requirements. On August 3, 2005, the Federal Network Agency reduced the monthly line sharing charges from EUR 2.43 to EUR 2.31. This decision was based on a finding of a decrease in overhead costs and a rejection of certain cost-allocation factors. Further, the Federal Network Agency decided on the one-time activation charges for the provision of line sharing, which will be reduced to EUR 51.43. Another reduction concerns the one-time cancellation charges for line sharing, which were lowered to EUR 10.48 and EUR 51.22, respectively (with/without switching the end customer's access to another carrier using line sharing). The amended tariffs are valid until June 30, 2007. However, it became necessary to change our application of these charges in order to prevent the E.U. Commission from opening formal proceedings against us. The E.U. Commission had concluded that there was a negative margin between our line-sharing and T-DSL tariffs, which, in its view, was abusive pursuant to Article 82 of the Treaty of the European Community (the "E.C. Treaty"), because this would not allow our line-sharing customers to effectively compete with us in the retail DSL market. The E.U. Commission inquiry has not yet been finally concluded. Until the end of 2006, we will have to report the development of our wholesale line-sharing and retail DSL tariffs to the E.U. Commission on a regular basis.

        With the Regulatory Ordinance of April 20, 2005, the Federal Network Agency imposed on us the obligation to submit a reference offer of unbundled services to our competitors. This reference offer

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provides for penalties and extended possibilities of cooperation with carriers in the context of colocation. Since this reference offer is still under regulatory examination, we do not know for the time being, to what extent the Federal Network Agency will accept our proposals or impose further regulatory measures upon us.

    Carrier Selection

        Carrier selection for long-distance calls was introduced in the German market in 1998. Since April 25, 2003, we have been required to allow our customers to select alternative local carriers on a call-by-call basis. In addition, permanent customer pre-selection of alternative local carriers commenced on July 9, 2003. On June 4, 2003, the Federal Network Agency approved a one-time fee of EUR 4.40 for the service of pre-selection for local calls, pre-selection for long-distance calls and for a service where pre-selection for local and long-distance calls are ordered together.

    Leased Lines

        In May and July 2002, the Federal Network Agency imposed on us the obligation to modify our contractual conditions for the provision of leased lines to competitors. We were required, among other things, to include in our contracts clauses obligating us to pay penalties in cases of delay, expand wholesale supply and warrant certain delivery periods. In response, we initiated legal proceedings in the Cologne Administrative Court (Verwaltungsgericht Köln). On September 12, 2005, the Federal Network Agency repealed its decisions. Therefore, we abandoned our lawsuit, and the proceedings were subsequently closed by the Cologne Administrative Court.

        In January 2005, the Federal Network Agency approved our leased-line tariffs. Nevertheless, in February 2005, we initiated legal proceedings against the Federal Network Agency's decision to require prior approval of tariffs, which it had made before the completion of its market-analysis procedures. The proceedings in the main action are still pending, and we have committed ourselves to leaving all of the conditions and prices for leased lines unchanged until a final regulatory ordinance has been issued. In response, the Federal Network Agency accepted our self-obligation and decided not to impose the prior-approval requirement prior to the conclusion of its market-analysis procedures with respect to leased lines and the release of the associated Regulatory Ordinance. On January 25, 2006, the Federal Network Agency released its draft of the market analysis for the leased line market. According to this draft, we expect that we will no longer be considered to have SMP status in the market for wholesale leased lines of bandwidths higher than two Mbit/s.

        Our current tariffs for analog and digital retail leased lines are valid until the Federal Network Agency issues a final Regulatory Ordinance, and our tariffs for digital wholesale leased lines are valid until November 1, 2006.

    Resale

        Under the Telecommunications Act, the Federal Network Agency is authorized, at its option, to require us to offer to our competitors for purposes of resale the same services that we offer our own customers. However, the Federal Network Agency has not required any resale offers since the entrance in force of the Telecommunications Act. As far as the possible obligation to offer unbundled resale is concerned, the Telecommunications Act does not authorize the Federal Network Agency to impose this kind of obligation before July 1, 2008. We believe that the financial consequences of our becoming required to provide such services on an unbundled basis could be significant, because our competitors, without having to build their own networks, could be able to compete with us quickly.

    Internet Access

        We offer various Internet access services for alternative carriers via our PSTN. The prices of those services are regularly determined by the Federal Network Agency in a "prior approval of service" procedure, which takes place every other year. In its most recent such decision at the end of

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January 2005, the Federal Network Agency reduced the relevant Internet access charges by an average of approximately 2%. The new tariffs are valid from February 1, 2005, to May 31, 2006. Some carriers have initiated legal proceedings against the price decision of the Federal Network Agency in order to lower the tariffs. Should these legal proceedings succeed, this would have retroactive consequences for T-Com. On February 2, 2006, T-Com applied for higher tariffs in the local segment and for lower tariffs in the single and double transit segment. The final decision of the Federal Network Agency will be known in April 2006.

        The Internet Access tariffs of T-Online which are offered to end users are not subject to regulation under the Telecommunications Act. However, Internet subscribers are indirectly affected by the regulation of tariffs, including wholesale costs and charges for telecommunications services. In June 1999, the Federal Network Agency ruled that the Internet access charges of T-Online are not subject to price regulation because the dominant feature of online services is not telecommunications, but "tele-services" (Teledienste). Nevertheless, there are some indications that the Federal Network Agency may change its view of such price regulation in the future. The Telecommunications Act considers regulation as technologically neutral, which means that any kind of electronic communication may fall under the scope of the Telecommunications Act. Therefore, an extension of sector-specific regulation to the Internet access market cannot be ruled out and will depend on the results of the current market analysis procedures. Moreover, the proposed merger of T-Online into Deutsche Telekom may influence the regulatory setting. As the products and services of T-Online have been considered very closely by the Federal Network Agency in the past year, the regulatory risk has risen and may lead to regulatory measures in the near future.

    Broadband Products

        An important element of T-Com's broadband strategy will be the expansion of a high-speed Internet infrastructure. Although VDSL lines have been included to some extent in the market for broadband wholesale services, we are confident that this new infrastructure will be classified as an emerging market and that no access obligations will be imposed on us, although we cannot be certain that this will be the result. The rollout in ten cities has already begun. Further rollout will only be implemented if such an investment is economically viable in the regulatory environment. The final decision on the scope of regulation for this high-speed Internet infrastructure is still open and will depend on upcoming regulatory decisions as well as on a new amendment to the Telecommunications Act, which is currently under way, but will not become effective before autumn 2006.

        According to the market analysis for broadband wholesale services, which procedure is expected to be completed in 2006, we are classified as having SMP status and, therefore, this market will be subject to regulation. Due to the special network topology in Germany, the Federal Network Agency defines a market for IP-Bitstream Access and a market for ATM-Bitstream Access. The extent to which the Federal Network Agency will impose regulatory measures upon us cannot be foreseen at present, since the associated Regulatory Ordinance will not appear until the first half of June 2006.

        T-Com already offers various broadband wholesale products that provide our competitors with opportunities to construct their own DSL-related offerings, depending on their particular network structures. Besides unbundled local loop and line sharing, T-Com offers its Resale DSL product on a voluntary basis. Since August 1, 2004, we have concluded several Resale DSL agreements with competitors and without the intervention of the Federal Network Agency.

        ZISP is a wholesale broadband service that T-Com is obliged to offer to ISPs. This service is designed to connect T-Com's DSL lines and the Resale DSL lines to the IP backbone of the ISPs so that they can set up end-to-end services to their customers. On October 28, 2005, the Federal Network Agency approved ZISP tariffs that are 5.8% lower than the tariffs previously approved. The new tariffs are EUR 0.49 per ten Kbit/s and are valid until November 30, 2007.

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        Since August 2004, T-Com has been offering its Bitstream Access ("BSA") product on a voluntarily basis. This product is a combination of DSL resale products with additional wholesale IP transport services (for example, ZISP, ISP-Gate, Online-Connect). This product enables ISPs and network operators without their own infrastructure to transport broadband traffic between end-customers and the IP networks of our competitors. In the middle of 2005, T-Com launched an ATM-based Premium Bitstream Access product, which is also offered on a voluntarily basis.

        Under the Telecommunications Act, the Federal Network Agency can impose on T-Com the obligation to offer unbundled broadband access to its competitors. This could also include the obligation to unbundle a wholesale DSL product from the existing telephone lines. No final decision will be known, however, before the Federal Network Agency completes its market analysis procedure for the broadband wholesale services market.

    Voice over IP

        Voice over IP services are currently not subject to regulation in Germany. However, regulatory intervention is possible in the near future. In September 2005, the Federal Network Agency published guidelines regarding the regulatory treatment of VoIP, which signal an increasing regulatory risk.

        According to these guidelines, VoIP services are classified as electronic communication services which must be made subject to lawful interception by law enforcement authorities. The Federal Network Agency hinted that VoIP could also be seen as a publicly available telephone service, which would entail an emergency services obligation as well. However, with further development of VoIP and the increasing use of nomadic services in general, the Federal Network Agency has requested all market participants to submit proposals for the technical solution of emergency services.

        Furthermore, VoIP services have been classified into the same market as PSTN voice services in the ongoing market analysis procedures. However, since the relevant market analysis procedures have not yet been completed, we do not yet know to what extent VoIP services will be regulated. We expect a regulatory ordinance in the near future.

    Universal Services

        The Telecommunications Act includes provisions to ensure the availability of certain basic telecommunications services (referred to as "universal services") throughout Germany. Universal services include public fixed-line network voice telephony with certain ISDN features, directory services, telephone books, public pay phones and certain categories of transmission lines. These services must be universally available to all customers at a price determined by the Federal Network Agency to be an "affordable price."

        Under the Telecommunications Act, if a universal service in a particular product and geographic market is not being appropriately and adequately provided, or if there is reason to believe that such provision will not be accomplished, each provider with a share of at least 4% of the product market for such service, or a position of significant market power in the relevant product and geographic market, can be required to contribute to the cost of providing such universal services. Contributions are required if the provider of a universal service proves that the long-term additional costs of providing the service efficiently in the relevant geographic market, including adequate interest on capital employed, exceed the revenues from providing that service at an affordable price.

        We currently provide the universal services specified by the Telecommunications Act voluntarily and without compensation. If we decide to stop providing any of the services referred to in the Telecommunications Act, we must give at least one year's advance notice. We expect that we will, for some time to come, be the only provider considered suitable for being subject to the universal services obligation. Accordingly, it may prove difficult for us to cease providing universal services in some markets, although we may be able to claim special compensation.

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        If we become formally required to offer universal services, and if the revenues from providing those services are insufficient to cover our additional costs relating thereto, the compensation granted under the Telecommunications Act may be insufficient to cover our full costs of providing that service. This is more likely than not to be the case, because we are required to contribute to the cost of providing these services in proportion to our market share.

    Customer Protection Ordinance

        The Telecommunications Customer Protection Ordinance (Telekommunikations-Kundenschutzverordnung, the "Customer Protection Ordinance") covers special rights and obligations between providers of telecommunications services to the public and their customers, who may be either end-customers or competitors, to the extent that they have concluded a contract or intend to conclude a contract with the relevant telecommunications provider. As a result, nearly all our products and services, with only a few exceptions, such as the marketing of telephones, are subject to the provisions of the Customer Protection Ordinance.

        Pursuant to the Customer Protection Ordinance, market-dominant providers of voice telephony must, upon request, eliminate or repair any malfunction immediately, including at night and on Sundays and holidays. Customers can request a free itemized statement of their calls, which must be detailed enough to allow them to check and monitor the accuracy of their bills. In the event that a customer has made no other arrangements with another provider, the customer will receive a combined bill from his local carrier. In such cases, the charges for all calls that the customer has made via other providers must be listed separately. In addition, as of January 1, 2001, telecommunications service providers have been under an obligation to ensure that any customer who has set a ceiling for its calling charges does not exceed it. The Customer Protection Ordinance also allows for certain limitations on the liability of telecommunications service providers.

        The Customer Protection Ordinance is currently under legislative review. In January 2006, the Federal Ministry of Economics and Technology issued a draft bill mainly relating to revised customer protection rights. The provisions included in the draft bill would mean further tightening of existing regulations, especially with respect to expanded obligations regarding transparency of prices for customers.

    Billing and Collection

        The Telecommunications Act authorizes the Federal Network Agency to require us to offer to our competitors a specified range of billing and collection services, and to deliver customer data for accounting purposes. However, the Telecommunications Act explicitly excludes an obligation to send and enforce late-payment warnings. In addition, it expands the range of billing services to products that are not themselves telecommunication services, but based on them, and sets upper limits for the billing and collection of un-metered services. The Federal Network Agency may not impose obligations with respect to billing and collection services if the party required to provide these services has entered into agreements concerning these services with the majority of the telecommunications service providers to which its customers have access, and grants other telecommunications service providers that are not party to such an agreement access to such services at non-discriminatory terms.

    Competition Law

        The German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) prohibits the abuse of a market-dominant position as well as the distortion of competition through agreements or collusive behavior by market participants. Mergers, including the creation of joint ventures, must be notified to the Federal Cartel Office before they can be executed if the concerned undertakings' turnover reaches a certain threshold, but remains below the threshold above which mergers must be notified to the E.U. Commission. The Federal Cartel Office is obligated to prohibit a merger if it creates or strengthens a market-dominant position.

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        The Federal Cartel Office is empowered to enforce these provisions and may impose sanctions if its orders are violated. However, before taking action against abuses of market-dominant position in the telecommunications sector, the Federal Cartel Office must consult with the Federal Network Agency. Market participants damaged by abusive practices of a market-dominant provider may claim damages under the Telecommunications Act as well as under the Act Against Restraints of Competition.

        For more information on certain disputes in which we are involved, see "Item 8. Financial Information—Legal Proceedings—Competition Law." The requirements imposed upon us by German competition law must also be viewed in the context of E.U. competition rules. For more information, see "—The E.U. Regulatory Framework—Competition Law."

The E.U. Regulatory Framework

    General

        Member States of the European Union are required to enact E.U. legislation in their domestic law and to take E.U. legislation into account when applying domestic law. E.U. legislation can take a number of forms. "Regulations" have general application, are binding in their entirety and are directly applicable in all Member States. "Directives" are also binding, but national authorities may choose the form and method of implementation. "Recommendations" are not binding, but national courts are obligated to take them into consideration.

        Between 1989 and 2001, the European Union adopted a number of liberalization directives and recommendations regarding open and efficient access to, and the use of, public telecommunications networks and services. These were intended to harmonize technical interfaces, usage conditions, and mandatory minimum service standards for all fixed-line users, and provide a general framework for tariffs throughout the European Union. Specific measures have been adopted in a number of areas, including licensing and interconnection. Additional obligations in relation to network access, interconnection charging, accounting separation and cost accounting, publication and non-discrimination can be imposed on those operators that are designated by the relevant national regulatory authority (NRA) in the telecommunications sector (e.g., in Germany, the Federal Network Agency) as having significant market power in an electronic communications market.

    The New E.U. Regulatory Framework

        At the end of 1999, the E.U. Commission initiated a review of the E.U. telecommunications regulatory framework focusing on the development of competition in the telecommunications sector and the increasing convergence of media, telecommunications and information technology. In February and July 2002, legislative measures were adopted consisting of a general framework directive and four specific directives regarding:

    access to and interconnection of electronic communications networks;

    mandatory minimum service standards for all users (universal service) and users' rights;

    authorization and licensing regimes; and

    telecommunications data protection as well as a decision on a regulatory framework for radio spectrum policy in the European Union.

        The E.U. telecommunications directives are intended to:

    Establish the rights, responsibilities, decision-making powers and procedures of the NRAs and the E.U. Commission, including an NRA's obligation to submit to the E.U. Commission as well as the NRAs of other Member States, prior to adoption, proposed regulatory measures relating

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      to market definition and significant market power, and the E.U. Commission's power to require NRAs to withdraw such proposed measures to the extent the E.U. Commission considers such measures to form a barrier to the single European market or to be incompatible with E.U. law;

    Identify specific policy objectives that NRAs must achieve in carrying out their responsibilities (e.g., to promote an open and competitive European market for communications services, to promote the interests of E.U. citizens and to consolidate the European Union's internal market in a converging technological environment); and

    Provide that operators with significant market power in relevant electronic communications markets can be subject to certain obligations, such as obligations relating to the cost-orientation of prices, transparency, non-discrimination between their own subsidiaries and competitors, accounting separation and mandated access to, and use of, network facilities as set out in the directives on universal service and access.

        An E.U. regulation on unbundled access to the local loop entered into force in January 2001. This regulation contains the obligations to provide full unbundled access to the copper paired wire lines and, at the same time, unbundled access to the high frequency spectrum (line-sharing).

        The E.U. Commission issued a recommendation on relevant product and services markets in February 2003. The recommendation identifies certain markets having characteristics that may justify the imposition of regulatory obligations. The recommendation concerns retail markets for fixed public telephone service and leased lines, and wholesale markets for the unbundled local loop, fixed network interconnection, broadband access, mobile termination and access, mobile origination and international roaming, and broadcasting transmission services. In addition, NRAs may analyze additional markets not included in the recommendation if justified by special national characteristics. NRAs are obligated to carry out new market analyses on all communications markets included in the E.U. Commission's recommendation, as well as those that NRAs have decided to include in the scope of sector-specific regulation in agreement with the E.U. Commission. All NRA market analyses are subject to the supervision of the E.U. Commission and can be vetoed if the E.U. Commission does not agree with the NRA's findings. Under the Directive on a Common Regulatory Framework for Electronic Communications Networks and Services (the "Framework Directive"), the E.U. Commission must regularly review its recommendations. The first review of these recommendations is scheduled for the first half of 2006. This review may lead to an increase or a decrease in the number and scope of markets subject to sector-specific regulation.

        The E.U. regulatory framework is subject to a mid-term review in 2006. Any changes to the framework would become effective following their transposition into national law, from approximately 2010 onwards. So far the E.U. Commission has signaled that only minor changes to the regulatory framework will be considered. Whether the reviewed regulatory framework will increase or decrease the regulatory burden on us will depend on the changes being adopted by the European Union, the manner in which revised directives are subsequently implemented in Member States, and how the revised regulatory framework will be applied by the respective NRAs.

        In the context of the E.U. regulatory framework, pressure is increasing to introduce further regulation of wholesale broadband access in Germany. The European Regulators Group (ERG), which has been set up by the E.U. Commission in order to advise and assist with the consolidation of the E.U. internal market for electronic communications networks and services, has published a common position on bitstream access, as well as a report on broadband market competition in Europe, stating that bitstream access is essential to the development of competition in the wholesale broadband access market, and that the NRAs should make the offering of bitstream access products to their competitors mandatory. The Federal Network Agency is currently in the process of reviewing the bitstream access market. For more information, see "—Regulation in Germany—Network Access—Broadband Products."

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        The ERG has taken the lead in establishing common positions relating to the application of specific regulatory remedies to operators with significant market power. This will, in turn, influence national decisions on the imposition of regulatory obligations for specific market failures. In November 2005, the ERG established its program of activity for 2006. The ERG is concerned with, among other things, increasing consumer awareness of the costs involved in making and receiving calls when using a mobile phone abroad. Another priority will be to assist the E.U. Commission with its review of the E.U. regulatory framework. This will include individual discussions on regulation in next generation fixed-line networks, broadband and VoIP. The conclusions of the ERG may lead to a more rigid regulatory regime and negatively influence our businesses.

        In October 2005, the E.U. Commission published a recommendation that established principles for the imposition of accounting separation and cost accounting obligations on operators with significant market power. These recommendations provide that NRAs impose wide-ranging information requirements and the consolidation of separate accounting systems operated for purposes of telecommunications regulation and other statutory accounting obligations. Depending on the exact implementation by the Federal Network Agency, these requirements could result in additional costs for us.

        The European Union has established an E.U.-wide regime of data retention for law enforcement purposes. These data retention rules set just minimum standards for both, the types of the data to be retained and the duration of their retention. The E.U. requirements have to be implemented into national law within 18 months. Depending on the final national rules compliance with this data retention requirement could entail considerable initial investment and recurring annual operating costs for us. At present, it is unclear to what extent those costs will be compensated.

        In March 2004, the E.U. Parliament and the Council of the European Union adopted a directive concerning measures and procedures to ensure the enforcement of intellectual property rights. Although the directive provides for the possibility of wide-ranging claims against third parties, such as ISPs and network operators, no directly binding obligations or liability claims against ISP and network operators were established on the E.U. level. However, regulatory requests to ISPs and network operators for data concerning customers who are linked to alleged infringements might increase and result in further costs. The requests for information are, however, constrained since they can only be pursued within a pending court procedure.

        In December 2005, the E.U. Commission published a proposal for a directive regarding "payment services in the internal market." Current E.U. legislation already provides for the regulation of e-money, inter alia, to combat money laundering. However, the legislation has been interpreted in many different ways by national financial regulators. The purpose of the E.U. Commission's proposal is to fully harmonize the application of the existing framework. Harmonization could lead to an intensified application of financial regulation in countries in which we are active. As a result, it may become necessary for companies in our group to obtain banking or e-money licenses in some or all of the Member States in which we conduct business. Increased regulation could have a detrimental effect on our current business models, such as those involving prepaid mobile services, premium-rate services or micro-payment systems, as well as on future business models.

        In December 2005, the E.U. Commission published a proposal for a "directive on the coordination of certain provisions laid down by law, regulation or administrative action in Member States concerning the pursuit of television broadcasting activities." According to the proposal, in order to modernize and deploy the development of the digital economy against the background of convergence of e-commerce services and media services the directive should apply to "audiovisual media services" and particularly address "media service providers." Accordingly, companies in our group offering new entertainment services are at risk of being obligated to comply with additional media regulations.

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    Infringement Proceedings Against Germany

        The E.U. Commission has launched infringement proceedings against Germany that may affect our regulatory environment. In December 2002, the E.U. Commission commenced a proceeding, claiming that the Telecommunications Act, with regard to carrier selection, unduly limits the obligation to offer carrier pre-selection and call-by-call selection for local calls, because operators that want to offer local calls on the basis of carrier selection are obliged to connect with the local network operator on a local level. The E.U. Commission is of the view that a network operator connected at any level of the network should be able to offer carrier selection for local calls. In July 2003, the E.U. Commission extended its proceedings relating to the imposition of "access deficit charges" (which relate to the subsidy of low access charges through higher call charges). These proceedings may have a negative impact on the regulatory environment with respect to local competition. However, because the 2004 amendments to the Telecommunications Act do not provide for the levy of access deficit charges, these proceedings have been abandoned.

        In October 2004, the E.U. Commission launched an infringement proceeding against Germany concerning provisions of the Telecommunications Act in connection with wholesale network access, including interconnection. The E.U. Commission's concern is that the Federal Network Agency lacked the full flexibility required by the Framework Directive with respect to its authority to issue decisions regarding the imposition of obligations on operators found to have SMP in the field of wholesale network access and interconnection. This infringement procedure could increase the risk of an imposition of pre-approval, cost-based price regulation of wholesale mobile network access services, in particular fixed-mobile termination tariffs. However, the infringement procedure could also lead to more flexibility for the Federal Network Agency to refrain from imposing cost-oriented prices where an access obligation had been imposed on an operator with SMP. In January 2006, the Federal Ministry of Economics and Technology issued draft legislation providing for the amendment of the Telecommunications Act, which amendments are designed to comply with the E.U. Commission's request to give the Federal Network Agency more flexibility to determine the obligations that can be imposed on SMP operators.

        In April 2005, the E.U. Commission launched a further infringement proceeding against Germany, criticizing a provision of the Telecommunications Act that does not allow for the imposition of the obligation to offer carrier pre-selection and call-by-call-selection when there is effective competition between services supplied by mobile network operators and by mobile service providers at the retail level. The E.U. Commission is also concerned that, according to the Telecommunications Act, the Federal Network Agency only has the option of making the rates that SMPs charge for retail telecommunications services subject to price regulation, and does not provide the flexibility to impose less intrusive obligations. It further argues that the Telecommunications Act does not provide enough flexibility for the Federal Network Agency to decide how to apply the price regulation, for example, whether to approve tariffs in advance or retrospectively.

    Competition Law

        The European Union's competition rules have the force of law in the Member States and are, therefore, applicable to our operations. The main principles of the E.U. competition rules are set forth in Articles 81 and 82 of the E.C. Treaty and in the E.U. Merger Regulation (the "Merger Regulation").

        Article 81(1) of the E.C. Treaty prohibits "concerted practices" and all agreements between undertakings that may affect trade between Member States and which restrict, or are intended to restrict, competition within the European Union. Article 82 prohibits any abuse of a dominant position within the common market of the European Union, or any substantial part of it, that may affect trade between Member States. The E.U. Commission enforces these rules in cooperation with the national competition authorities (in Germany, the Federal Cartel Office). The Federal Cartel Office may also

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directly enforce the competition rules of the E.C. Treaty. In addition, the national courts have jurisdiction over alleged violations of E.U. competition law.

        We periodically receive requests for information from the E.U. Commission. Through inquiries of this kind, the E.U. Commission monitors the development of competition in the telecommunications markets in all Member States. Further investigations and other remedial measures of the E.U. Commission, aimed at promoting competition in the European telecommunications sector, may be expected.

        The Merger Regulation (amended effective May 1, 2004) requires that all mergers, acquisitions and joint ventures involving participants meeting certain turnover thresholds be submitted to the E.U. Commission for review, rather than to the national competition authorities. Under the amended Merger Regulation, concentrations will be prohibited if they significantly impede effective competition in the common market, or a substantial part of it, in particular as a result of the creation or strengthening of a dominant position.

        On July 11, 2001, the E.U. Commission issued a press release confirming that E.U. Commission inspectors and officials from national competition authorities had started carrying out simultaneous inspections at the premises of nine European mobile telephony operators located in the United Kingdom and Germany. Our subsidiaries T-Mobile Deutschland and T-Mobile UK were among the companies inspected. The E.U. Commission asserted that an E.U.-wide sector inquiry had established serious competition concerns regarding pricing practices for mobile roaming services, which warranted further investigations, particularly in the United Kingdom and Germany. The E.U. Commission statement indicated that the inspections in the United Kingdom and Germany were to ascertain whether there had been consumer price-fixing by mobile operators in both countries. The statement further indicated that the inspections were intended to verify whether German operators have illegally fixed the wholesale prices they charge to other operators, and whether these prices are excessive or discriminatory. The E.U. Commission has initially focused its inquiry on the U.K. operators, resulting in a number of further requests for information. On July 26, 2004, the E.U. Commission announced that it had sent a statement of objections to Vodafone and O2 in the United Kingdom, but not to T-Mobile UK or Orange UK. We therefore believe that it is unlikely that the E.U. Commission will open formal proceedings against T-Mobile UK. On February 10, 2005, the E.U. Commission opened formal proceedings against, among others, T-Mobile in Germany. The E.U. Commission alleges that T-Mobile Deutschland has been abusing its dominant position in the market for wholesale roaming services by charging excessive tariffs for calls of foreign visitors in its network during the period from 1997 to 2003. T-Mobile has rejected the allegations as being unfounded. Should the E.U. Commission decide to uphold its preliminary findings, it may impose significant fines on T-Mobile. At the end of 2005, the E.U. Commission launched another investigation on whether the agreements concluded between mobile network operators, concerning the provision of wholesale international roaming services, infringe E.U. competition rules. This procedure is being conducted in relation to several E.U. countries, including Germany and the United Kingdom, and investigates a period commencing in 2003. Should the E.U. Commission decide to open formal proceedings against individual operators, such as T-Mobile Germany or T-Mobile UK, it could impose significant fines.

        In addition, T-Mobile may be obliged to lower the wholesale roaming tariffs it charges to foreign operators as a result of a market analysis procedure undertaken by the Federal Network Agency. These activities are being coordinated by the ERG and the E.U. Commission and have resulted in an inquiry being launched by the Federal Network Agency in February 2005. While the ERG has published a common position setting out a framework for the analysis of the roaming market, the analysis of the Federal Network Agency is still ongoing. On February 20, 2006, the E.U. Commission announced that it had begun work on an E.U. regulation on international roaming charges. Such a regulation, which could be targeted at the level of both wholesale and retail international roaming charges, could enter

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into force in the second half of 2007, and would have immediate effect in all E.U. Member States without further transposition into national law.

        T-Mobile and O2 have concluded an agreement concerning UMTS infrastructure sharing and roaming arrangements for their operations in Germany and the United Kingdom. These arrangements were cleared by the E.U. Commission in 2003, subject to time limits for roaming in the areas where UMTS licenses require licensees to build-out their own network infrastructure. A similar arrangement has been established by T-Mobile Austria. The arrangement, which has a limited scope, is currently not subject to notification with the Austrian national competition authority.

        On March 17, 1999, Mannesmann Arcor filed a complaint with the E.U. Commission against the Federal Republic and against us. The complaint is primarily related to our prices for unbundled access to the local loop, which were set by Federal Network Agency, and to our subscriber line prices, which are subject to the German price-cap regime. Other competitors jointly filed two further complaints to the E.U. Commission containing similar allegations. On May 21, 2003, the E.U. Commission adopted a decision against us for allegedly abusing our dominant position by charging our competitors and end-users unfair monthly and one-off charges for access to our local network. The E.U. Commission directed us to end the alleged unfair pricing practices immediately and to refrain from repeating the alleged abusive behavior. In addition, the E.U. Commission imposed a fine of EUR 12.6 million. To comply with the E.U. Commission's decision, we requested that the Federal Network Agency approve a modification of the price-cap regime that would allow us to increase the monthly fee for basic charges for analog access, which request was granted. Additionally, in July 2003, we filed a lawsuit with the Court of First Instance of the European Communities (the "Court of First Instance") to obtain reversal of the E.U. Commission's decision and fine. In the course of the written proceedings the Court of First Instance admitted several of our competitors as intervening parties on the side of the E.U. Commission. Upon our reply to the observations of the intervening parties in December 2004, the written proceedings are now substantially complete. However, the intervening parties are still requesting the disclosure of confidential parts of the case file in order to provide the Court of First Instance with their observations thereto. The Court of First Instance has not yet decided on this request.

        In 2002, following a competitor's complaint with respect to an alleged "price squeeze" between our line-sharing and T-DSL tariffs, the E.U. Commission approached us with several requests for information. The E.U. Commission requested extensive data on our tariffs relating to the cost of line sharing and T-DSL services. On the basis of the provided data, the E.U. Commission came to the conclusion that there was a negative margin between our line-sharing and T-DSL tariffs. The E.U. Commission informed us that in its preliminary view the charging of those tariffs was abusive, pursuant to Article 82 of the E.C. Treaty, because those tariffs would not allow our line-sharing customers to effectively compete with us in the DSL retail market. In order to remedy the E.U. Commission's concerns, we committed ourselves to closing the alleged price squeeze by:

    refraining from charging the line sharing fees as of April 1, 2004 to December 31, 2004;

    restructuring our T-DSL tariffs; and 

    applying to the Federal Network Agency for a reduction of our (monthly and/or one-off) line sharing fees as of January 1, 2005.

        As a result of these actions, the E.U. Commission informed us that it would not open formal proceedings against us, provided that we comply with these commitments. After having implemented the restructuring of our T-DSL tariffs, and after having received an approval for the reduction of our monthly line sharing fees to EUR 2.43, effective as of January 1, 2005, the E.U. Commission closed its investigation in July 2004. Upon request of the E.U. Commission, we regularly provide the E.U. Commission with updated information so that the E.U. Commission can monitor our on-going compliance with these commitments.

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International Regulation

    Regulatory Regime

        We are subject to the regulatory regimes of those countries where we or our subsidiaries or affiliates offer services and/or operate telecommunications networks. Regulation in these countries includes, for instance, procedures for granting or renewing licenses to use frequencies, coverage conditions and other conditions contained in licenses, universal service obligations, price approval and product launch procedures, regulation of the terms of interconnection and network access for other network operators, requirements to permit customers to select an alternative carrier for individual calls or to pre-select an alternative carrier, number portability requirements, regulation relating to potential health effects of mobile telecommunications devices and related regulatory cases. In some countries, the general legal framework and the regulatory framework relating to telecommunications are less well developed than in Germany. This leads to legal and regulatory uncertainty, which could have an impact on our operations in those countries. Certain regulations may limit the flexibility of our subsidiaries to respond to market conditions. This is especially true in the mobile telephony sector.

    General Authorization and Licensing Requirements

        To provide services and to operate our networks, either general authorizations or licenses are required from the regulatory authorities in the respective countries. In line with the new E.U. regulatory framework, in Member States the operation of fixed networks and the provision of public voice telephony services in the fixed network is subject to a general authorization only, requiring at the most notification or registration, but not explicit approval. Accordingly, in the fixed-line segment, only the public voice telephony services of T-Com's Croatian subsidiary, T-Hrvatski Telekom, still require, and are consequently based on, licensing procedures. These licensing procedures also apply to the mobile network operations of the Deutsche Telekom group, whose GSM and UMTS businesses require individual licenses. The duration of any particular license or spectrum usage right depends on the legal framework in the respective country. Most countries limit the duration of licenses or usage rights to between three and 30 years. However, generally, in the United Kingdom and in the United States renewal of licenses is perpetual.

        In addition, T-Systems co-operates with duly licensed operators and service providers in those countries where T-Systems does not maintain its own operators' licenses. In the event that T-Systems has not obtained a required license or otherwise entered into a cooperation arrangement with a licensed operator, T-Systems may be subject to penalties and sanctions, including criminal prosecution, in some countries.

    Subsidiaries of Deutsche Telekom Group in Central and Eastern Europe

        Deutsche Telekom's subsidiaries in Central and Eastern Europe are subject to the laws and regulations of their respective countries, i.e., Slovakia, Hungary, Croatia, Macedonia and Montenegro. Regulation in Croatia, Macedonia and Montenegro is moving towards the European Union's current regulatory framework on electronic communications, whereas it has already been implemented in Hungary and Slovakia. This development may lead to stricter regulation and enforcement, even in countries that are not yet Member States of the European Union.

        Under existing legislation in Hungary and Slovakia, national regulators can impose on telecommunications providers with significant market power the full range of remedies provided by E.U. law, especially those contained in Directive 2002/19/EC of the E.U. Parliament and the Council of the European Union on March 7, 2002, on access to, and interconnection of, electronic

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communications networks and associated facilities (the "Access Directive"). Among the remedies that may be imposed are obligations to:

    disclose information on the terms of interconnection and network access to competitors;

    treat competitors in a non-discriminatory manner;

    keep separate accounts for activities related to interconnection and network access;

    grant competitors network access; and

    comply with wholesale and (under certain additional conditions) retail price controls.

        Furthermore, according to the existing E.U. regulatory framework, operators with significant market power may be required to implement carrier selection and carrier pre-selection, which allow customers to choose a provider other than the incumbent to route and bill their calls. However, all of these remedies may only be applied after the national telecommunications regulator has conducted a prescribed analysis of the relevant markets, showing that regulatory intervention is justified and proportionate.

        At the same time, the fixed-line operations of Deutsche Telekom's subsidiaries in Central and Eastern Europe are facing strong competition from mobile and cable network operators and, to a lesser degree, from VoIP operators. The business impact of increased regulation on Deutsche Telekom's subsidiaries in Central and Eastern Europe will depend on the way in which national regulatory authorities use their newly acquired powers and on whether competitors take advantage of regulatory decisions made in their favor. However, we expect increased pressure on prices and market shares.

    Hungary

      Regulation of Fixed-Line Business

        On November 24, 2003, the Hungarian Parliament adopted a new act on electronic communications (2003. évi C. törvény az elektronikus hírközlésrõl, "the Hungarian Telecommunications Act"). Under this act, our Hungarian subsidiary, Magyar Telekom, is regulated by the Hungarian telecommunications regulator (Nemzeti Hírközlési Hatóság), which can impose the full range of remedies provided by the new E.U. law regarding telecommunications providers with SMP as described above. In addition to these remedies, the Hungarian telecommunications regulator is empowered to examine whether the relationship between Magyar Telekom's wholesale and retail prices constitutes unfair price competition with respect to its competitors. If such a violation were found to exist, Magyar Telekom would be required to adjust its prices correspondingly, and could be fined for its past behavior. In September 2004, the Hungarian Competition Authority (Gazdasági Versenyhivatal, the "Competition Authority") formally ended its investigation into the relationship between some of Magyar Telekom's retail tariff packages and the corresponding wholesale prices, stating that the alleged unfair price competition could not be proven. However, further investigations of the Competition Authority into this or related matters cannot be ruled out at this point.

        Although some competition within the fixed-line network has existed in Hungary for several years, Magyar Telekom still possesses substantial market share in many telecommunications markets within Hungary. The Hungarian telecommunications regulator began its analyses of the Hungarian electronic communications markets in August 2004. As expected, Magyar Telekom was found to have SMP in a large number of the markets currently subject to regulation.

        As of February 2006, the Hungarian telecommunications regulator had issued final decisions regarding 16 of the 18 telecommunications markets singled out as potential candidates for regulation by the E.U. Commission. Magyar Telekom's subscriber line products are now subject to a price cap. According to this price cap, subscriber line prices may not be increased by a higher percentage than the

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rate of inflation during the reference period. At the same time, price controls on universal service packages remain in force: the aggregate price index of network access products and calling services in such tariff packages must not be higher than the expected consumer price index minus 3%. With regard to all call services that do not constitute part of universal service, Magyar Telekom is only required to offer carrier selection and carrier pre-selection services to its competitors. On the basis of carrier selection and carrier pre-selection, alternative providers were able to rapidly gain market share from Magyar Telekom in the relevant telephony markets in 2005, and we expect this trend to continue throughout 2006, but at a reduced pace. In general, the removal of price controls in a large segment of retail call markets allows for greater pricing flexibility. However, in addition to the abovementioned price caps, Magyar Telekom's pricing flexibility is restricted by existing and increasing competition with mobile, cable telephony and fixed-line competitors. Competition has been further facilitated by geographical and non-geographical number portability, which was introduced for the fixed network on January 1, 2004, and which has effectively led to a net loss of lines for Magyar Telekom.

        We also expect that continuing and increased wholesale market regulation will have a negative impact on Magyar Telekom's margins. The Hungarian telecommunications regulator has decided that the previously imposed obligations regarding call origination and termination, unbundling, price regulation and broadband local bitstream access will continue. As in previous years, Magyar Telekom also remains under an obligation to submit reference offers for interconnection and unbundling to the Hungarian telecommunications regulator for prior approval. Moreover, some new obligations, namely price regulations for the termination segment of retail leased lines and broadband national bitstream access have been introduced. At the same time, however, wholesale call-transit services and wholesale trunk segments for leased lines are no longer subject to regulatory controls.

        As competition between Magyar Telekom and cable television providers for telephony, Internet access and television services becomes more intense, Magyar Telekom will be increasingly affected by the disparity of regulatory burdens between services provided over the fixed-line telephony network and those provided over cable networks. Unlike Magyar Telekom, cable network providers are currently not subject to any wholesale obligations.

        Moreover, with respect to competition within the fixed network, Magyar Telekom is required to pay other incumbent PSTN operators in Hungary call termination rates that are 50-90% higher than the regulated rates Magyar Telekom is allowed to charge competitors. As part of a decision on interconnection markets, the Hungarian telecommunications regulator has expressed its intention to reduce this discrepancy to a maximum of 40%. However, the actual extent to which the discrepancy in termination rates will be reduced depends on the upcoming decisions of the Hungarian telecommunications regulator on the reference interconnection offers of the incumbent PSTN operators in Hungary.

        The Hungarian telecommunications regulator is currently collecting market data for the next round of regulatory decisions. Parallel to this, the authority has launched a public discussion about the necessity of a wholesale line rental product, which, if introduced, would provide an added opportunity for some competitors to broaden their customer base.

      Regulation of Mobile Business

        T-Mobile Hungary is subject to regulatory obligations regarding the termination of calls into its network. On January 24, 2005, the Hungarian telecommunications regulator designated T-Mobile Hungary, Vodafone and Pannon GSM as having SMP in the wholesale market for call termination on mobile networks, and required each of these companies to grant access to specific network facilities, act in a transparent and non-discriminatory manner, and maintain long-run incremental cost-based mobile termination rates and accounting separation.

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        On July 25, 2005, the Hungarian telecommunications regulator imposed specific reductions of termination rates on all three mobile network operators. Beginning—retroactively—from May 2005, they were to apply average termination fees based on an international benchmark calculation. All three mobile network operators have appealed the decisions of the Hungarian telecommunications regulator at the City Court of Budapest. While the appeals are still pending, the Hungarian telecommunications regulator has imposed a fine of approximately EUR 600,000 on T-Mobile Hungary on November 25, 2005, for not complying with its July 25, 2005 decision. T-Mobile Hungary filed a suit against the decision and requested the suspension of its application, which was granted. The next regulatory decision on mobile termination rates has been under preparation since August 2005, but has not yet been completed.

        In August 2005, the Hungarian telecommunications regulator initiated a further analysis of the call termination market, as well as of the market for access and call origination on public mobile telephone networks. This may result in further reductions of termination rates and access obligations.

        The national wholesale market for international roaming on public mobile networks was not examined by the Hungarian telecommunications regulator during the market analysis initiated in August 2005. However, the E.U. Commission announced on February 20, 2006, that it intends to introduce an E.U. regulation on international roaming charges. For more information, see "—The E.U. Regulatory Framework—Competition Law."

    Slovakia

      Regulation of Fixed-Line Business

        The Slovak fixed-line telecommunications market was fully liberalized on January 1, 2003, and Slovakia became a full Member State of the European Union on May 1, 2004. Correspondingly, the Act 610/2003 of December 3, 2003 (Zákon o elektronických komunikáciách, "the Slovak Telecommunications Act"), transposing the new E.U. regulatory framework, entered into force on January 1, 2004.

        The Slovak telecommunications regulator (Telekomunikaèný úrad Slovenskej republiky) began the requisite procedures for market analysis and designation of significant market power in 2004. Deutsche Telekom's subsidiary in Slovakia, the incumbent operator Slovak Telekom, will probably be designated as a provider with SMP in all of the fixed-line market segments. Thus far, the Slovak telecommunications regulator has concluded its analyses of the main fixed-line wholesale markets (call origination, call termination, unbundled access to the local loop).

        Slovak Telekom was assigned the obligations to publish a reference unbundling offer and a reference interconnection offer, to keep separate accounts, and to comply with obligations for transparency and non-discrimination in the markets for unbundled local loops, call termination and call origination. We expect that the market analysis procedure will continue until the middle or end of 2006. Additional regulatory obligations must be expected as the market analyses continue. Such obligations could include, among other things, a requirement to modify Slovak Telekom's existing wholesale broadband access products or prices.

        On August 12, 2005, Slovak Telekom published its reference unbundling offer. However, demand for unbundled access to the local loop has thus far remained very low. Fixed-line competitors have provided services via carrier selection since August 2005, based on individual contractual agreements with Slovak Telekom. Slovak Telekom also published its reference interconnection offer in accordance with the obligations imposed by the Slovak telecommunications regulator on August 12, 2005

        At the retail level, price controls for access lines have been lifted by the Slovak telecommunications regulator. There remains an obligation not to engage in excessive or predatory pricing and a requirement to make call-by-call services and carrier pre-selection services available.

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According to two draft decisions awaiting notification to the E.U. Commission, the same rules will also apply to international call services.

        The Slovak competition authority (Protimonopolný úrad Slovenskej republiky) is also taking an active part in shaping the regulatory framework for telecommunications. Pursuant to Competition Law No. 475/20004 Coll. of Laws, the Slovak competition authority investigates cases of alleged abuse of market dominance and has fined Slovak Telekom in several minor and major cases. On May 26, 2005, the Slovak competition authority fined Slovak Telekom SKK 885 million (approximately EUR 23 million), for alleged abuse of its dominant market position by not providing access to its local loop.

        On September 26, 2005, the Slovak competition authority announced the commencement of administrative proceedings against Slovak Telekom, pursuant to Slovak national legislation and Article 82 of the E.C. Treaty. The case concerns alleged abuse of a dominant market position through price squeeze, predatory pricing, bundling PSTN network access with DSL access, and bundling network access with call services. Should Slovak Telekom be found to have abused its position, the Slovak competition authority could impose penalties of up to 10% of Slovak Telekom's annual revenues and require changes to Slovak Telekom's product portfolio.

        On December 23, 2005, Slovak Telekom was designated as provider of all components of universal service for the entire country. Designated universal service providers have the right to request compensation for the net cost of the provision of such services from the universal service fund.

      Regulation of Mobile Business

        On July 7, 2005, the Slovak telecommunications regulator imposed certain obligations on T-Mobile Slovensko, relating to the voice-call termination market, transparency, non-discrimination, accounting separation and network access. However, the decision of the Slovak telecommunications regulator did not impose cost-oriented price regulation. T-Mobile Slovensko has appealed the decision, which is not yet effective. The chairman of the Slovak telecommunications regulator is expected to decide on the appeal shortly.

        The E.U. Commission announced on February 20, 2006, that it intends to introduce an E.U. regulation on international roaming charges. So far, international roaming charges have not been regulated in the Slovak Republic. For more information, see "—The E.U. Regulatory Framework—Competition Law."

    Croatia

      Regulation of Fixed-line Business

        In June 2004, the European Union officially granted the Republic of Croatia accession country status. Accession negotiations with the European Union effectively commenced in October 2005. Though a specific date for accession has not yet been determined, it may reasonably be expected that Croatia will join the European Union in 2009. This means that the current regulatory regime for the telecommunications sector, based on the 2003 Croatian Telecommunications Act (Zakon o Telekomunikacijama, the "Croatian Telecommunications Act"), which brought the country's legal framework roughly in line with the pre-2002 regulatory framework of the European Union, will have to be adjusted during the accession preparations in order to match the new E.U. regulatory framework by the time of accession. In April 2005, amendments to the Croatian Telecommunications Act came into force, most importantly broadening the Croatian telecommunications regulator's authority and increasing the fines for violating the Croatian Telecommunications Act to up to 5% of total annual gross income for the most severe offences, for example, non-delivery of data, non-compliance with decisions of the Croatian telecommunications regulator, non-payment of license or concession fees,

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non-registration of a market concentration, and the failure to publish, determine or adjust prices of services according to the provisions of the Croatian Telecommunications Act.

        The Croatian telecommunications market has been fully liberalized since January 1, 2005. Our subsidiary, T-Hrvatski Telekom, has been designated as operator with significant market power in the interconnection market, the market for public voice services on the fixed network and in the market for leased lines. On October 20, 2005, T-Hrvatski Telekom was also designated as an operator with SMP in the market for transmission of voice, sound, data, documents, pictures and others. In this context, the Croatian telecommunications regulator is empowered to, among other things, regulate network access and interconnection with respect to these markets. On October 20, 2005, the Croatian telecommunications regulator approved the reference unbundling offer to be applied by T-Hrvatski Telekom. In the process, it set the monthly charge for access to the unbundled local loop at approximately EUR 7.19. This is currently the lowest charge for access to the unbundled local loop in Europe. T-Hrvatski Telekom also submitted an offer for line sharing to the Croatian telecommunications regulator, whose approval is still pending.

        In October 2005, the Croatian Regulation on Universal Services was issued, and in November 2005, T-Hrvatski Telekom was designated as a provider of universal services, thereby becoming obligated to offer a minimum set of telecommunication services of a certain quality and at an affordable price to all end users in Croatia, regardless of their geographic location. The Croatian Telecommunications Act excludes financial compensation for the provision of universal service if the designated operator has a market share of more than 80%, thus preventing T-Hrvatski Telekom from claiming financial compensation.

        The Regulation on Telecommunication Services, which entered into force on December 31, 2004, regulates, among other things, voice-and leased-line services, Internet- (including VoIP) and value-added services. It also provides for a single price-approval mechanism to be imposed on T-Hrvatski Telekom, due to its status as an operator with significant market power in the markets for voice and leased lines. The regulation also provides the Croatian telecommunications regulator with pre-approval authority over T-Hrvatski Telekom's terms and conditions for network access, when requested by value-added service providers, ISPs and VoIP providers.

        In January 2004, the Croatian state inspectorate undertook an investigation of T-Hrvatski Telekom on the basis of the Croatian consumer protection law, challenging the per-minute billing interval that T-Hrvatski Telekom had been using to provide voice telecommunication services to its residential customers. The Croatian consumer protection law states that prices for services of general public interest (including telecommunications services) must, when the nature of the service allows, be calculated on the basis of expenditure during an accounting period, by applying a tariff system pursuant to specific rules. This legal obligation has applied to T-Hrvatski Telekom since September 9, 2003, when the consumer protection law entered into force. This might lead to T-Hrvatski Telekom having to refund its customers for the period since September 9, 2003. The investigation is still pending. Meanwhile, an optional pricing system for fixed telecommunication tariffs has been approved by the Croatian telecommunications regulator. This system allows customers to choose between various tariff options, including one based on per-second billing.

      Regulation of Mobile Business

        Since September 2004, T-Hrvatski Telekom's subsidiary, T-Mobile Croatia, has been designated as an operator with SMP in the mobile interconnection market. This designation was confirmed in October 2005 by the Croatian telecommunications regulator. Accordingly, interconnection prices have to be determined in line with the principles of transparency and cost-orientation, based on the actual costs of the services provided, including a reasonable rate of return on investment.

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    Macedonia

        A new Macedonian law concerning electronic communications (Zakon za elektronskite komunikacii, the "Law on Electronic Communication"), which was enacted on March 5, 2005, brings the country's telecommunication regulations closer to the E.U. regulatory framework, with some transitional provisions.

      Regulation of Fixed-line Business

        In July 2005, the Macedonian telecommunications regulator issued regulations governing the conditions of interconnection. Rules for access to, and the use of, specific network facilities were issued in August 2005, and regulations governing the opening of the local loop to competitors, and carrier selection, were adopted in October 2005.

        On August 8, 2005, MakTel submitted its first reference interconnection offer to the Macedonian telecommunications regulator. The interconnection prices contained in this offer were approved on January 23, 2006. MakTel's first reference unbundling offer has been submitted to the Macedonian telecommunications regulator and is expected to be approved in the first half of 2006. On December 31, 2004, MakTel's monopoly rights in the Macedonian telecommunications market expired, thus making it possible for other network and service providers to enter the Macedonian telecommunications markets, upon the submission of notification to the Macedonian telecommunications regulator (and the registration thereof). By February 2006, the Macedonian telecommunications regulator had registered 40 network operators and 29 service providers.

        To prepare for competition in its fixed-line business, during 2004 and 2005 MakTel carried out several changes to its retail-tariff structure. For example, MakTel continued to align the prices it charged for network access products and calling services with the underlying costs, and changed its pulse-based charging system to a more customer-oriented time-based charging system with shorter time units. Because MakTel's monthly fees for network access and the prices it charges for local calls amount to approximately half of the respective E.U. averages, further cost-based realignment of retail prices might become necessary. In addition, on the basis of the Law on Electronic Communication, the Macedonian telecommunications regulator might impose certain wholesale obligations on MakTel. If such obligations were to be introduced while subscriber line prices did not yet fully reflect the cost of service provision, this could have a negative effect on MakTel's competitiveness in the wholesale and retail markets.

      Regulation of Mobile Business

        The services provided by the mobile network operators in Macedonia are currently not subject to price regulation. However, the Macedonian telecommunications regulator is collecting market data on the fixed-to-mobile market. Depending on the outcome and findings of this market analysis, regulatory obligations, including those relating to wholesale pricing, cannot be excluded.

    Montenegro

      Regulation of Fixed-Line Business

        Following the privatization of Telekom Montenegro, the gradual liberalization of the telecommunications markets in Montenegro can be expected in the coming years. The 2000 Montenegrin telecommunication law (the "2000 Law") conferred broad authority upon the Montenegrin telecommunications regulator. The 2000 Law established a licensing regime whereby all telecommunications activity must be licensed by the Montenegrin telecommunications regulator. In addition, a new competition law is expected to come into force in 2006. However, no Montenegrin

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competition agency has yet been set up, and to date, there is no consumer protection law or agency in Montenegro.

        Telekom Montenegro holds a de facto monopoly in the fixed-line telecommunications market, and its wholly-owned subsidiary, Monet GSM, is the second largest mobile network operator in Montenegro, both in terms of customer market share and revenues. In addition, Telekom Montenegro's ISP subsidiary (Internet CG) has a customer market share exceeding 90%.

        We expect that the 2000 Law will be significantly amended during 2006, with the changes beginning to be implemented at the end of 2006, or in early 2007. The major goal of these amendments will be to bring the legislation closer to E.U. directives, such as, to stimulate competition, stimulate Internet usage and to encourage investment in the telecommunications sector. We also expect that the current licensing-based regulatory regime will be replaced with an authorization-based regime. Furthermore, the introduction of cost-based pricing and accounting separation obligations, and of the provision of binding reference interconnection offers by operators with significant market power, can also be expected. All of these obligations would significantly lower the market entry barriers for new providers in the telecommunications markets, thus leading to market-share losses for Telekom Montenegro in the medium and long term.

        Furthermore, the Montenegrin telecommunications regulator has indicated that it is currently considering issuing a tender for VoIP licenses, as well as the imposition of carrier selection and local loop unbundling obligations. These steps could seriously challenge the market position of Telekom Montenegro, in part due to its current tariff structure. Once the market is liberalized, however, we expect a gradual erosion of Telekom Montenegro's market share.

      Regulation of Mobile Business

        A tender for 3G mobile frequencies is currently being contemplated by the Montenegrin telecommunications regulator. If the regulator should put this plan into practice, this could lead to the entry of a third mobile operator in the mid-term future, although the size and saturation degree of the Montenegrin market does not make this appear likely.


International Mobile Regulation

    United States: T-Mobile USA

        Our U.S. operations are regulated by the FCC pursuant to the Communications Act of 1934 (the "U.S. Communications Act") and the Telecommunications Act of 1996 (the "U.S. Telecommunications Act") (collectively, the "Acts") and by various other federal, state and local government bodies. Any of these agencies could adopt regulations or take other actions that could adversely affect our business. If we fail to comply with applicable regulations, we may be subject to sanctions, which may have an adverse effect on our wireless business in the United States. FCC regulations applicable to Commercial Mobile Radio Service (CMRS) operators include, among other things, required service features and capabilities, such as number pooling and portability and emergency 911 service. The FCC does not regulate the rates charged by CMRS operators.

        The FCC generally assigns spectrum licenses for commercial operations through competitive bidding, or auctions. T-Mobile USA operates exclusively in the PCS frequency bands at 1900 MHz. T-Mobile USA's ability to expand coverage and provide additional capacity to handle its growing customer base and new service offerings is limited to those markets where we have obtained or can obtain licenses with sufficient spectrum to provide voice, data and other services, or enter into roaming or leasing arrangements with other GSM carriers. T-Mobile USA will continue to seek opportunities where appropriate to acquire additional spectrum licenses, systems and/or operators, or enter into joint ventures, which will add to its current footprint or increase its spectrum capacity in the U.S. By Public

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Notice released January 31, 2006, the FCC announced the auction of 1,122 separate Advanced Wireless Services (AWS) paired licenses in the 1710-1755 MHz and 2110-2155 MHz bands. The auction, which currently is scheduled to commence on June 29, 2006, will include licenses in six separate spectrum blocks (A through F) covering the entire U.S. geography, including 36 Regional Economic Grouping (REAG) licenses in bandwidths of 10 and 20 MHz; 352 Economic Area (EA) licenses in bandwidths of 10 and 20 MHz; and 734 Cellular Market Area (CMA) licenses in a bandwidth of 20 MHz. Licensees may use AWS licenses to provide fixed or mobile or a combination of fixed and mobile services, and it is expected that winning bidders will use AWS spectrum for a variety of voice and broadband data wireless services. No spectrum has been set aside for Designated Entities (small business entities with revenues and assets below certain established thresholds), but certain Designated Entities are eligible to receive bidding discounts in the amounts of 15% or 25% on all licenses. The FCC has issued a Further Notice of Proposed Rulemaking to reform the Designated Entity program, via which it is considering a change to the Designated Entity rules that would apply to the AWS auction that would prevent any of the large national wireless carriers (Cingular, Verizon, Sprint/Nextel, T-Mobile and Alltel) from partnering with a Designated Entity who is eligible to obtain a bidding credit. The FCC has also sought comment on auction design, upfront payments, minimum opening bids and other auction procedures and is expected to adopt final procedures in the March 2006. Based on the currently scheduled June 29 start date, it is expected that applications to participate in the auction (in which each applicant must identify its bidding entity and the licenses on which it wants to be eligible to bid) will be due in the April 2006. The possibility exists that the FCC could delay the start of the auction, because the FCC released its Further Notice of Proposed Rulemaking to reform the Designated Entity program on February 3, 2006, and has indicated its intent to conclude this proceeding in advance of the AWS auction.

        CMRS licensees are also subject to other FCC and governmental rules and various recent industry developments that may affect U.S. operations, as follows:

    Renewal and construction requirements of spectrum licenses: Our CMRS spectrum licenses have a ten-year term, after which they must be renewed with the FCC. Renewal generally will be granted to a spectrum licensee that has: (1) met its construction requirements during its past spectrum license term, and (2) substantially complied with applicable FCC rules and policies and the Acts.

    Foreign ownership: The U.S. Communications Act limits direct foreign ownership in a FCC spectrum license to 20%. The U.S. Communications Act also mandates that no more than 25% of a FCC spectrum licensee's capital stock may be indirectly owned or voted on by non-U.S. citizens or their representatives, by a foreign government, or by a foreign corporation, absent an FCC finding that a higher level of foreign ownership is not inconsistent with the public interest. In connection with our acquisition of Voice Stream and Powertel, the FCC authorized indirect foreign ownership of T-Mobile USA's licenses in excess of 25%.

    Enhanced 911: The FCC has established timetables for making emergency 911 services available by cellular, PCS, and other commercial mobile service providers, including enhanced 911 ("E911") services, which provide the caller's telephone number, location and other useful information. Fundamentally, such carriers have an ongoing obligation to comply with various implementation standards and deadlines imposed by the FCC relating to E911. In July 2003, T-Mobile USA entered into a consent decree with the FCC governing the deployment and provision of E-911 "Phase II" services, and the FCC required as part of the decree that T-Mobile USA make a "voluntary contribution" in the amount of USD 1.1 million to the U.S. Treasury. The consent decree contained a number of equipment deployment benchmarks, as well as benchmarks related to the deployment of Phase II service with which we have complied. Failure to meet the benchmarks contained in the consent decree which continue into

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      the future could result in initiation of additional enforcement actions against T-Mobile USA, including significant monetary fines.

    Local Exchange Carrier/CMRS interconnection: FCC rules require local exchange carriers (LECs) to provide CMRS carriers interconnection within a reasonable time after it is requested, unless such interconnection is not technically feasible or not economically reasonable. Interconnection allows the completion of calls between wireless and wire line phones. FCC intercarrier compensation rules provide a framework for determining the levels of reciprocal compensation (for traffic originating/terminating in a local area) and access charges (for non-local traffic). In 2001, the FCC embarked on a wide-ranging examination of intercarrier compensation methodologies, which may result in substantial modification of its interconnection rules, and may materially affect T-Mobile USA's operations. This examination includes more than one proceeding and includes continued uncertainty over a provision that permits CMRS to pay the lower ISP rate as the rate for mobile calls terminating at the LEC. The positive or negative impact of such modifications cannot be determined until the FCC issues decisions in these proceedings. The FCC adopted a further notice of proposed rulemaking on these issues in February 2005, which remains pending.

    Wireless local number portability: CMRS carriers are required under FCC rules to provide wireless local number portability (LNP), which enables customers to migrate their landline telephone numbers to a CMRS carrier and vice versa, and to migrate their CMRS telephone numbers from one CMRS carrier to another CMRS carrier. CMRS carriers were required to implement LNP in the top 100 metropolitan service areas by November 24, 2003, and in the remainder of the United States by May 24, 2004. T-Mobile USA has incurred substantial costs in complying with this requirement. Its experience since the introduction of wireless LNP suggests that the increased ability of customers to change their wireless service providers has had no significant impact on its business thus far.

    CALEA: The Communications Assistance for Law Enforcement Act (CALEA) requires telecommunications carriers to ensure that their facilities are technically capable of assisting law enforcement officials' use of wiretaps and similar devices to intercept or isolate customer communications. All CMRS carriers must comply with CALEA. In addition, T-Mobile is subject to an agreement with the U.S. Federal Bureau of Investigation and Department of Justice, which imposes on us certain operational and other requirements designed to ensure that we can effectively respond to, and implement, such wiretap and other information requests by law enforcement agencies. In August 2005 the FCC ruled that CALEA applied to facilities-based broadband Internet access providers, as well as to interconnected VoIP providers, and established a compliance deadline of May 14, 2007. This ruling is currently under judicial review, as well as the subject of reconsideration petitions currently being addressed by the Commission. The specific assistance capability requirements will be determined in a forthcoming FCC order.

    CPNI: Pursuant to Section 222 of the Communications Act, the FCC has set forth rules imposed on carriers for treatment of Customer Proprietary Network Information (CPNI). Due to recent privacy concerns raised by the activities of "pretexters" (i.e., parties that through fraudulent schemes seek to obtain and sell customer call information), the FCC has initiated an investigation of the top five wireless (including T-Mobile USA) and the top five wireline carriers concerning the treatment of customer call records under the FCC's current CPNI requirements. Additionally, the FCC has initiated a rulemaking to consider making certain prospective changes to the carrier processes for handling CPNI. Proposed changes by the FCC include: mandating customer-set passwords; requiring audits trails that record all instances when a customer's records have been accessed; encryption of stored CPNI data; limits on retention of data; and notice to the customers of a security breach. Congress is also examining the issue of CPNI and is considering imposing stricter safeguards upon all telecommunications carriers, plus VoIP

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      providers. These developments have the potential to significantly affect T-Mobile USA's business practices.

    Regulation on the state and local level: Some states, through their respective public utility commissions, or through other means, have taken, or are seeking to take, actions to regulate various aspects of wireless operations, including customer billing, termination of service arrangements, advertising, the filing of "informational" tariffs and certification of operations. These developments have significantly affected, or have the potential to significantly affect, T-Mobile USA's business practices with respect to many aspects of the carrier-customer relationship, including solicitations, marketing, activations, billing and customer care. At the local level, wireless facilities typically are also subject to zoning and land use regulation, and may be subject to fees for use of public rights-of-way. T-Mobile USA's access to additional sites to install wireless facilities is a key component of its ability to continue to deploy wireless services in an effective manner.

    United Kingdom: T-Mobile UK

    Legal Framework

        The principal legislation governing mobile telecommunications networks and services in the United Kingdom is the Communications Act 2003 (the "Communications Act") and the Wireless Telegraphy Acts 1949-1998, as amended by the Communications Act (the "WTA"). Under this legislation, regulation of the telecommunications industry is primarily conducted by the Office of Communications ("Ofcom").

        In December 2004, Ofcom initiated work on a review of the market for wholesale international roaming. The initial stage of this review was coordinated by Ofcom, with some other members of the ERG and the E.U. Commission, as part of a pilot project to determine whether NRAs, such as Ofcom, could reach a common approach, possibly resulting in a regulation of wholesale roaming services. As a result of this work the ERG has produced a common position on wholesale international roaming, establishing a framework for the analysis to be ultimately conducted by Ofcom. A formal market review will commence in spring of 2006. As a consequence, T-Mobile UK may be obliged to lower the wholesale roaming tariffs it charges to foreign operators. For more information, see "—The E.U. Regulatory Framework—Competition Law."

    Licensing and Frequency Allocation

        T-Mobile UK holds a WTA license to operate digital telecommunications systems for frequencies in the 1800 MHz band. Following an auction, T-Mobile UK was awarded a UMTS license allocating frequency packages of 2 × 10 MHz paired spectrum and 5 MHz unpaired spectrum. Ofcom introduced spectrum trading in the United Kingdom in December 2004, although T-Mobile UK's GSM and UMTS licenses will not be tradable until 2007, at the earliest. Ofcom has conducted a major review of spectrum management policy, which will result in the auctioning over the next 2-3 years of 12 bands of spectrum, which may be used for competing mobile services. It has proposed that this spectrum will be auctioned on a technology- and service-neutral basis. Ofcom has said that it will look at spectrum on a case by case basis to determine whether it can be used for UMTS services. It is currently undertaking consultations regarding three proposed spectrum auctions, and it is not proposing to limit the use of such spectrum. However, these pieces of spectrum are not currently designated for UMTS services. T-Mobile UK and the other U.K. GSM operators may be able to change the use of their GSM spectrum after 2007, for example, to use it for UMTS services, but the terms on which they may be able to do so are not yet clear.

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      WTA GSM License

        T-Mobile UK's GSM license will remain in force until T-Mobile UK surrenders it, and is subject to variation or revocation on one year's notice by the U.K. Secretary of State for Trade and Industry in the event of failure to pay license fees, in the interests of national security, to comply with E.U. obligations, for breach of the license terms or for reasons relating to the management of the radio spectrum. T-Mobile UK is also licensed under the WTA to operate microwave links. Most WTA licenses are not currently transferable, although spectrum trading is being introduced in stages in the United Kingdom. The spectrum tradable now includes that used for microwave links. When spectrum trading is extended to T-Mobile UK's GSM license it is likely that its term will change, probably to a five-year rolling term. Other terms of WTA licenses will also change with the introduction of spectrum liberalization.

        T-Mobile UK's WTA licenses specify the performance and technical requirements with which it must comply. The Secretary of State for Trade and Industry may restrict the operations of mobile telegraphy stations or may close stations temporarily or permanently if T-Mobile UK breaches its WTA license conditions. T-Mobile UK may also be required to modify or restrict its use of, or permanently close down, radio equipment if a state of emergency is declared or in the interests of long-term spectrum planning.

        T-Mobile UK's most recent annual license fee for GSM spectrum was GBP 16.6 million. T-Mobile UK's most recent annual license fee for microwave links was GBP 3.4 million. Ofcom has recently consulted with operators and generally on proposals to revise fees. Fees for GSM spectrum are likely to remain at current levels, but are to be reviewed by 2008.

      WTA UMTS License

        T-Mobile's UMTS license was one of five licenses issued following the UMTS auction in the United Kingdom in 2000. T-Mobile UK's license was issued on May 9, 2000, and will remain in force until December 31, 2021, unless it is revoked by the Secretary of State for Trade and Industry or surrendered earlier. The UMTS license may be revoked in circumstances similar to those that permit revocation of the WTA GSM license, but also due to material breach of the U.K. UMTS auction rules or if the UMTS network does not cover 80% of the U.K. population by the end of 2007. It cannot be revoked for reasons relating to the management of radio spectrum. Ofcom published draft guidance on the interpretation of the coverage obligation in its UMTS license, upon which it consulted with licensees and others until March 2005. Ofcom is expected to publish final guidance in early 2006.

        T-Mobile UK does not have any obligation to provide national roaming to third parties. However, in 2003 Oftel—the predecessor to Ofcom—undertook a consultation on proposals to require, among others, T-Mobile UK to offer GSM national roaming if requested by the new entrant UMTS mobile operator "3". All U.K. GSM licensees objected to this proposal. Ofcom issued a consultation in 2004 on whether it has the power to impose such a condition if it is needed and proposed guidelines to be applied if it is required to determine a national roaming agreement. Ofcom has stated that it will not publish its conclusions, pending the outcome of a tendering process for national roaming, being conducted by "3" which is still ongoing.

    Interconnection and Price Regulation

        Oftel published the results of its E.U. market review of call termination rates on December 19, 2003. Ofcom published its final statement on June 1, 2004. As a result, T-Mobile UK was required to reduce its prices so that the average price for call termination for the seven months from September 1, 2004, to March 31, 2005, was below GBP 0.0631 per minute (based on weighted volumes from September 2003 to March 2004) and the average for the year April 1, 2005, to March 31, 2006, is at or

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below the average of the rates for September 2004 to March 2005. The relevant reductions were implemented by T-Mobile UK on September 1, 2004.

        In addition, Ofcom has imposed conditions requiring:

    the provision of network access for GSM call termination;

    no undue discrimination in the provision of such access;

    a requirement to provide Ofcom with copies of new or amended access agreements; and

    prior notification of price changes.

        Ofcom initiated a consultation in June 2005, proposing that these conditions continue to apply until March 2007. The outcome was that T-Mobile has to keep its prices for 2006/2007 at or below the level for 2005/2006. Further, Ofcom commenced another market review of the wholesale mobile call termination market in 2005. Ofcom expects to complete this review at the end of 2006 or early 2007.

    U.K. Competition Law

        The Competition Act 1998 (the "Competition Act") became effective on March 1, 2000, and the Enterprise Act 2002 (the "Enterprise Act") became effective on June 20, 2003. The U.K. Office of Fair Trading and other sector-specific regulators, including Ofcom, are responsible for applying and enforcing both of these acts. The Competition Act prohibits agreements between undertakings, decisions by associations of undertakings, or concerted practices, that have the effect of preventing or distorting competition in the United Kingdom, and also prohibits conduct that amounts to abuse of a dominant position in a market in the United Kingdom. The Enterprise Act prohibits cartels as well as creates criminal offences for breaches of the cartel provisions of the Enterprise Act, which also apply to directors and other officers involved in the prohibited conduct. Both the Enterprise Act and the Competition Act give Ofcom and the Office of Fair Trading concurrent jurisdiction to apply and enforce these acts in the telecommunications sector. Ofcom is, among other things, empowered to carry out investigations into suspected breaches, including requiring the production of documents and information and searching of premises. The Competition Act also enables affected third parties to bring enforcement actions in the U.K. courts directly against telecommunications operators who are allegedly in breach of the Competition Act's prohibitions and seek damages.

    The Netherlands: T-Mobile Netherlands

    Regulatory Framework

        Regulatory supervision of the Dutch Telecommunications Act (1998) (the "Dutch Telecommunications Act") is mainly carried out by the Independent Post and Telecommunications Authority ("OPTA"). On the basis of the new E.U. regulatory framework, the Dutch Telecommunications Act became amended effective May 19, 2004.

    Market analysis

        Following the new E.U. regulatory framework, OPTA has begun analyses of several markets within the mobile telecommunications market. The decisions for the market for access and call origination, and for the market for voice call termination, have been published (see "—Interconnection") and T-Mobile Netherlands has lodged its appeal against the call termination decision. In December 2004 OPTA initiated the review of the market for wholesale international roaming. These activities are being coordinated by the ERG and the E.U. Commission in order to allow NRAs, including OPTA, to reach a common approach, possibly resulting in a regulation of wholesale roaming services. The ERG has produced a common position on wholesale international roaming, establishing a framework for the analysis to be ultimately conducted by OPTA. As a consequence, T-Mobile Netherlands may be obliged

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to lower the wholesale roaming tariffs it charges to foreign operators. For more information, see "—The E.U. Regulatory Framework—Competition Law."

    Licensing and Frequency Allocation

        In 1998 national and regional licenses were awarded for the commercial use of frequencies on the basis of the GSM standard (DCS 1800 MHz). T-Mobile Netherlands acquired six of these regional licenses, which together allow for nationwide coverage. These licenses will expire in 2013. There are four additional national GSM licenses (GSM 900 MHz and/or DCS 1800 MHz) assigned to other mobile operators in the Netherlands.

        In 2000 T-Mobile Netherlands was granted one of five national UMTS licenses, which license will expire in 2016. Under the terms of this license, T-Mobile Netherlands must achieve coverage of all cities with more than 25,000 inhabitants, as well as all major highways, by January 1, 2007.

        A proposal by the Dutch Ministry of Economic Affairs regarding a law that would facilitate trading, transfer and combination of all or a portion of frequency spectrum has been adopted by the Dutch Parliament; the publication of the required decree on the entering into force of this legislation is expected in early 2006.

    Interconnection

        Following investigations by OPTA and the Dutch competition authority into mobile call termination tariffs, all Dutch licensed mobile telecommunications operators voluntarily agreed to amend their call termination tariffs from January 1, 2004, to December 1, 2006. Under this agreement, the Dutch mobile operators may not exceed certain flat-rate and per-minute tariffs in accordance with a specific schedule.

        As a result of these voluntary decreases, the Dutch competition authority has formally ceased its investigation into suspected excessive pricing. OPTA has decided to adhere to the voluntarily set tariffs until December 1, 2005 (which is still in effect), and has adopted the voluntary tariffs in its own policy recommendations under the former regulatory framework. Challenges by fixed-line operators to OPTA's adaptation of these voluntary decreases have so far been denied by OPTA. In its decision regarding the analysis of the market for voice call termination under the current regulatory framework, OPTA has decided that voice call-termination tariffs should be decreased to reflect the actual cost of such termination by July 1, 2008, with such decreases being introduced incrementally, beginning on July 1, 2006.

    Competition Law

        The Dutch Competition Act became effective January 1, 1998, and simultaneously the Netherlands Competition Authority (the "NMa") was created. The Dutch Competition Act is based on, and is closely linked to, E.U. competition law and, hence, uses a system very similar to that of Articles 81 and 82 of the E.C. Treaty. The Dutch Competition Act also includes a system of preventative concentration control, which is very similar to the Merger Regulation.

        According to Article 6 of the Dutch Competition Act, agreements, decisions and concerted practices are prohibited if they have, as their objective or effect, the prevention, restriction or distortion of competition. According to Article 24 of the Dutch Competition Act, undertakings are also prohibited from abusing a dominant position; the criteria of Article 82 of the E.C. Treaty apply.

        As part of the enforcement of the Dutch Competition Act, the NMa can impose fines that may not exceed 10% of an undertaking's turnover, which makes Dutch competition law consistent with E.U. competition law. In addition to the imposition of administrative fines, the NMa is authorized to impose interim measures and sanctions that are designed to ameliorate a violation.

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        According to a decision by the NMa on September 27, 2004, T-Mobile Netherlands was fined EUR 14.8 million for its alleged involvement in an anti-competitive scheme regarding dealer commissions carried out together with the four other Dutch mobile telecommunications operators. T-Mobile Netherlands and the other affected companies have filed an appeal of the NMa's decision on a variety of grounds.

    Czech Republic: T-Mobile Czech Republic

    Legal Framework

        The legal framework for electronic communications in the Czech Republic is set by the Act on Electronic Communications No. 127/2005 Coll (the "Czech Communications Act"), which implemented the E.U. New Regulatory Framework into the Czech law as of May 1, 2005 and replaced the Telecommunications Act, which introduced full liberalization of the telecommunications sector in the Czech Republic on May 1, 2001. Regulatory supervision is carried out by the Czech Telecommunication Office (the "CTO").

        One of the most important changes brought by the Czech Communications Act is the introduction of periodic analyses of relevant markets, which allows for the implementation of flexible and transparent regulatory measures for the electronic communications market. The CTO is required to analyze the 18 relevant markets included in the E.U. Commission's recommendation on relevant product and services markets (including the three mobile markets). This analysis is expected to be completed the first half of 2006.

        In December 2004, the CTO initiated the review of the market for wholesale international roaming. These activities are coordinated by the ERG and the E.U. Commission in order to allow national regulatory authorities, including CTO, to reach a common approach, possibly resulting in a regulation of wholesale roaming services. As a consequence, we may be obliged to lower the wholesale roaming tariffs we charge to foreign operators. For more information, see "—The E.U. Regulatory Framework—Competition Law."

    Licensing and Frequency Allocation

        Frequencies and telephone numbers are to be allocated upon request on a non-discriminatory basis. There is a one-time allocation fee and further usage fees are paid to the CTO. The CTO can refuse frequency allocation if there are more requests than available frequencies. In that case, either an auction or a so-called "beauty contest" must be held. The Czech Communications Act allows for frequency trading but no such transaction has been realized so far.

        Individual authorizations issued by the CTO are necessary to use the allocated radio frequencies and telephone numbers. On September 27, 2005, the CTO issued three decisions on the granting of the rights to use radio frequency allocations for the purposes of the provision of public communications network. This will replace the telecommunication license that had been issued under the previous Telecommunication Act. Based on these three decisions, T-Mobile Czech Republic is the holder of radio frequency allocations for the provision of public communications networks on the GSM (900 and 1800 MHz bands) and UMTS (2 × 19.8 MHz FDD and 5 MHz TDD of spectrum and a part of the 28 GHz band) standards and also a public communications network in the 872 MHz (2 × 3.8MHz) radio frequency band.

        T-Mobile Czech Republic launched its commercial UMTS service in October 2005 and had fulfilled its only coverage area requirement (90% of the area of Prague) by the end of October 2005.

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    Significant Market Power Designations

        The CTO has, under the previous Telecommunication Act, designated T-Mobile Czech Republic as an operator having SMP in the markets for both the operation of a public mobile telephony network as well as the provision of public telephony service via public mobile telephony network. T-Mobile Czech Republic has been formally approached with several requests concerning access by MVNOs to its network, but negotiations with these operators are still ongoing and, as of December 31, 2005, no agreement with an MVNO had yet been signed. However, under the new Czech Communication Act, the CTO has to carry out a new analysis of the relevant mobile access and origination market. Based on this analysis, if T-Mobile Czech Republic is found to have significant market power on this relevant market, the CTO may impose an obligation to allow access to the network, including the obligation to allow an MVNO or service provider access. We expect the analysis of this market to be completed by the middle of 2006.

    Interconnection

        Any network operator establishing and operating a public communication network is, upon request, obligated to negotiate network interconnection with other operators conducting corresponding activity. The majority of interconnection services are price-regulated by the CTO (even when the interconnection was agreed without any intervention by the CTO). Fixed-mobile interconnection is regulated in the same way as fixed-fixed interconnection (i.e., price cap). For more information, see "—Price Regulation." T-Mobile Czech Republic has signed interconnection agreements, and currently has interconnection in place, with the other two Czech mobile network operators and with all major Czech fixed network operators.

    Price Regulation

        Price regulation can be imposed on the interconnection prices charged by undertakings with significant market power and on prices for universal services. The Communications Act stipulates that interconnection prices must be cost-based. In March 2005, the CTO reduced mobile termination charges by 2.5%, compared to the price level determined in March 2004. Further price decreases may be mandated in 2006 (based on the outcome of the relevant market analysis procedures).

    Competition Law

        The competition law framework in the Czech Republic is defined by the Act on Protection of Economic Competition No. 143/2001 (the "Economic Competition Act"). This act focuses on the protection of economic competition, restrictive or other practices endangering economic competition through:

    collusion between competing companies;

    abuse of a dominant position by competing undertakings; or

    concentrations of competing companies.

        The Economic Competition Act prohibits the conclusion of agreements between competing undertakings leading to, or which may lead to, the distortion of economic competition. The Economic Competition Act also prohibits the abuse of a dominant position by competing companies. The protection of economic competition falls within the competence of the Czech Antimonopoly Office. The Czech Antimonopoly Office is entitled, in particular, to impose sanctions for the breach of obligations under the Economic Competition Act. Such penalties may amount to as much as 10% of the net revenues of the breaching entity. The Czech Antimonopoly Office is also entitled to apply Articles 81 and 82 of the E.C. Treaty if agreements between undertakings or abusive practices have an effect on trade between Member States.

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        In its decision of July 20, 2001, the Czech Antimonopoly Office stipulated that T-Mobile Czech Republic abused its dominant position by charging CZK 1.00 higher prices for calls to the Oskar network than for calls to other mobile networks, and imposed a fine amounting to CZK 15 million. T-Mobile Czech Republic challenged the decision and on January 28, 2005, the decision of the Czech Antimonopoly Office was annulled by the Czech Supreme Administrative Court. The case has been returned to the Czech Antimonopoly Office for further consideration. The Czech Antimonopoly Office indicated that it had discontinued the investigations and that it will not continue to pursue the allegations.

        In its decision of October 27, 2003, the Czech Antimonopoly Office stipulated that selected parts of the interconnection agreement between T-Mobile Czech Republic and Vodafone Czech Republic are to be considered a prohibited horizontal cartel agreement and imposed a fine on T-Mobile Czech Republic amounting to CZK 12 million. The Czech Antimonopoly Office argued that selected provisions of the interconnection agreement did not allow for indirect interconnection between the two networks. T-Mobile Czech Republic has challenged this decision of the Czech Antimonopoly Office before the Regional court in Brno. According to a judgment of the Regional court in Brno, the Czech Antimonopoly Office lacks competence to issue the contested decision and therefore the decision is null and void. The judgment of the Regional court in Brno has been appealed by the Czech Antimonopoly Office and is now pending before the Supreme Administrative Court.

    Austria: T-Mobile Austria

    Legal Framework and Market Analyses

        On August 20, 2003, the E.U. regulatory framework was implemented in Austria through the new Austrian Telecommunications Act. Regulatory supervision is carried out by the Telekom-Control-Kommission (the "TKK") and the Rundfunk und Telekom Regulierungs GmbH (the "RTR").

        On October 27, 2004, the TKK has determined that T-Mobile Austria has SMP in the market for call termination in the public mobile networks and imposed the following remedies:

    No discrimination regarding the quality and price of the service "termination in the T-Mobile Austria network";

    Obligation to have available, upon request, a reference interconnection offer;

    Obligation to allow direct and indirect interconnection pursuant to Section 41 of the new Austrian Telecommunications Act; and

    Obligation to charge termination fees based on the long-term incremental costs of an efficient operator.

        In December 2004, the RTR initiated a review of the market for wholesale international roaming. These activities are coordinated by the ERG and the E.U. Commission to allow NRAs, including the RTR, to reach a common approach, possibly resulting in a regulation of wholesale roaming services. The ERG has produced a common position on wholesale international roaming, establishing a framework for the analysis to be ultimately conducted by the RTR. This market analysis was initiated in November 2005 and is expected to be concluded in 2006. As a consequence, T-Mobile Austria may be obliged to lower the wholesale roaming tariffs it charges to foreign operators. For more information, see "—The E.U. Regulatory Framework—Competition Law."

    Allocation of Frequencies

        Due to the new Austrian Telecommunications Act, frequency trading is now permitted in Austria, including for GSM and UMTS frequencies. This may make it easier for T-Mobile Austria, and its competitors, to acquire additional frequencies.

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    Licensing and Frequency Allocation

        T-Mobile Austria holds licenses for GSM frequencies in the 900 and 1800 MHz bandwidths as well as for UMTS frequencies. In accordance with its license conditions, T-Mobile Austria initiated UMTS commercial service in December 2003. T-Mobile Austria's population coverage obligations under this license were 25% by December 31, 2003, and 50% by December 31, 2005, both of which have been achieved.

    Price Regulation and Interconnection

        In December 2005, and following up on its aforementioned decision of October 27, 2004, the TKK published its final decision concerning the mobile termination rates of all network operators including T-Mobile Austria. In this procedure, Mobilkom Austria was found to have the lowest network costs (2005: EUR 0.0679/min). Therefore, Mobilkom will be the benchmark for all other network operators. The mobile termination rates of all mobile network operators shall, commencing November 1, 2005, incrementally be reduced to reach the Mobilkom benchmark by the end of 2008. This target value will be reviewed by the TKK every two years.

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DESCRIPTION OF PROPERTY, PLANT AND EQUIPMENT

Network Infrastructure

        As a result of substantial investments in our telecommunications and cable networks since the early 1990s, we believe that T-Com's fixed-line network in Germany is now one of the most technologically advanced networks in the world, with full-digital switching and nearly 100% digital transmission capability. Advanced ATM, WDM and SDH technologies are incorporated in this network, which not only provide much faster voice and data transmission, but also improved network management and network reliability.

        During 2005, T-Com continued to expand its use of SDH technology. T-Com plans to further increase its use of WDM and SDH technologies, in-line with the demands of its customers and in conjunction with our ongoing broadband strategy. In conjunction with the development of T-Com's high-speed fiber-optic network, T-Com is incorporating ADSL2+ technology and fiber optic-based VDSL technology. Moreover, in addition to its announced efforts to increase broadband access speeds, T-Com intends to continue to increase the use of innovative technologies like WiMAX, VDSL, Outdoor DSLAM and Gigabit Ethernet.

        As of December 31, 2005, T-Com's PSTN in Germany consisted of approximately 7,900 local networks connected by a long-distance transmission network. T-Com's IP platform, the basis for various services offered to individual customers (especially access to the Internet) as well as to business customers (e.g., VPNs and connection of servers to the World Wide Web), consisted of numerous locations primarily linked through router technology.

        The following table provides information on the length of the copper and fiber-optic cables contained in T-Com's access and transmission networks in Germany at December 31, 2005, and each of the two prior years:

 
  Length in km
Year
  Copper Cable
  Fiber-Optic Cable
2003   1.474 million   0.195 million
2004   1.485 million   0.197 million
2005   1.480 million   0.206 million

        For more information about T-Com's network infrastructure, see "—Description of Business—Broadband/Fixed Network—T-Com."

    Global Networks

        As of January 1, 2005, the transmission network responsibilities of the former "Global Network Factory" were transferred from the Business Customers strategic business area to T-Com as part of our strategic realignment and in order to combine our national and global carrier businesses into one strategic business area. Global Networks manages the development, construction and operation of T-Com's global networks outside Germany, including a 2.5 Gigabyte SDH network connecting major European cities. These international networks have been partially migrated into fiber-optic and WDM systems.

    Cable Transmission Infrastructure

        As of January 1, 2005, ICSS was transferred from the Business Customers strategic business area to T-Com as part of our strategic realignment and in order to combine our national and global carrier businesses into one strategic business area.

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        T-Com's global transmission infrastructure consists of underground and submarine cables, which directly link the German national telecommunications network to numerous other telecommunications service providers worldwide. In addition, T-Com holds interests in numerous fiber-optic submarine and terrestrial cable networks worldwide. Restoration contracts with other cable operators and telecommunications carriers have been created to prevent network failures from affecting network availability. T-Com's domestic telecommunications network is connected to submarine cables via various "landing points," five of which are located in Germany.

    Global Network Factory-Services

        Through Global Network Factory-Services, T-Systems' Business Services manages the development, construction and operation of its German and international service platforms. These platforms include IP MPLS, ATM, Frame Relay and VoIP platforms, which are based on transport capacity leased primarily from T-Com and, to a lesser extent, from other providers. As of December 31, 2005, based on book values, these assets consisted of technical facilities (83%), mainly active network equipment; intangible assets (10%), mainly licenses; and the remainder (7%) consisted of furniture and fixtures as well as assets under construction.

    Computing Services & Solutions (CSS)

        As part of the strategic realignment of the Deutsche Telekom group, the former Global Computing Factory has been merged into Computing Services and Solutions.

        CSS possesses the server equipment, software tools and expertise employed in the operation of the computer network infrastructure described above. As of December 31, 2005, CSS's global mainframe systems performance had a combined total computing power of 123,386 millions of instructions per second (MIPS), compared to 130,786 MIPS as of December 31, 2004, due to the consolidation of computer centers.

        T-Systems' mainframe computing equipment in Germany and Switzerland (approximately 81.69% of T-Systems' total worldwide computing power) is based on a leasing contract with IBM. T-Systems only purchases the computing capacity actually required, according to a flexible, demand-driven business agreement. Additional mainframe systems used by CSS are located in Germany, Italy, Switzerland, South Africa, France, Brazil and Spain, most of which are leased from IBM. In addition to these mainframe systems, as of December 31, 2005, a total of 38,392 servers (most of which are owned by T-Systems) were operated worldwide in the following countries: Austria, Belgium, Brazil, the Czech Republic, Denmark, France, Germany, Hungary, Italy, Philippines, Poland, Russia, Singapore, Spain, South Africa, Switzerland, the Netherlands, Turkey, the United Kingdom and the United States (compared to a total of 35,418 servers as of December 31, 2004).

    Mobile Network Infrastructure

        At December 31, 2005, the network infrastructure of our mobile telecommunications business consisted of approximately 62,000 base station cells in Europe and approximately 33,000 base station cells in the U.S.

    Real Estate

        Our German real estate portfolio consists of approximately 10,600 properties, which comprise a total site area of approximately 42 million square meters. The total net floor space of these properties is approximately 9.9 million square meters. In addition, we have leased approximately 3.8 million square meters. Most of this area is used for telecommunications installations, research centers, service outlets, computer centers and offices. Area and sites used for our radio transmission facilities are not itemized in square meters and therefore are not included in these numbers.

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        We manage and service our German real estate portfolio through various subsidiaries.

        The real estate portfolio of our consolidated group had a book value of EUR 11.0 billion at December 31, 2005, including radio transmission properties and real estate assets of our foreign subsidiaries. Approximately 70% of this amount (EUR 7.7 billion) relates to properties held directly by Deutsche Telekom AG on an unconsolidated basis. The remaining 30% is mostly held through our Mobile Communications strategic business area and our Central and Eastern European subsidiaries.

        To improve operational efficiencies, and to dispose of non-core assets, we have continued to monetize certain of our real estate assets. In 2005, we entered into agreements for the sale of properties in the aggregate amount of EUR 427 million. Of the EUR 218 million in proceeds we received in 2005, EUR 134 million related to properties transferred in 2005 and EUR 84 million related to transactions in 2004 and prior years. The properties we sold in 2005 comprised approximately 1.6 million square meters of land area and approximately 0.4 million square meters of lettable floor space. We leased back a relatively small portion of this. Although we will incur rent expense related to the leased-back area, we will achieve a reduction in interest payments and other costs related to the properties sold.

        Our radio transmission sites in Germany, including towers, masts and rooftops, are owned or leased by various subsidiaries. Our subsidiaries manage these radio transmission sites and the related technical infrastructure facilities to provide antenna space for T-Mobile, T-Com and T-Systems in Germany. These subsidiaries also offer these services to third-party radio-network operators. Our subsidiaries currently manage approximately 24,600 radio transmission sites, of which approximately 3,400 are located on Deutsche Telekom AG property. Approximately 22,200 of these transmission sites are owned by our subsidiaries, whereas the remaining 2,400 are owned by third-parties. In addition, we own and operate approximately 19 radio transmission sites for AM, short- and long-wave radio transmission.

Item 4A. Unresolved Staff Comments

        Not applicable.

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ITEM 5. Operating and Financial Review and Prospects

        You should read the following discussion in conjunction with our annual consolidated financial statements, including the notes to those financial statements, which appear elsewhere in this Annual Report. Our financial statements have been prepared in accordance with IFRS, which differs in certain significant respects from U.S. GAAP. For a discussion of the principal differences between IFRS and U.S. GAAP, as they relate to us, and a reconciliation of net profit and total shareholders' equity to U.S. GAAP, see "—Reconciling Differences between IFRS and U.S. GAAP" and notes (48) and (49) to the consolidated financial statements.

        The strategies and expectations referred to in this discussion are considered forward-looking statements and may be strongly influenced or changed by shifts in market conditions, new initiatives we implement and other factors. We cannot provide assurance that the strategies and expectations referred to in this discussion will come to fruition. Forward-looking statements are based on current plans, estimates and projections, and therefore, you should not place too much reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statements in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond our control. We caution you that a number of important factors could cause actual results or outcomes to materially differ from those expressed in, or implied by, the forward-looking statements. Please refer to "Forward-Looking Statements" and "Item 3. Key Information—Risk Factors" for descriptions of some of the factors relevant to this discussion and other forward-looking statements in this Annual Report.


MANAGEMENT OVERVIEW

        Management of our company provides the following discussion and analysis to present an overview of our financial condition, operating performance and prospects from management's perspective.

        Despite increasingly intense competition, 2005 was a very successful year for us. We achieved our goal of continuing profitable growth, and realigned our operations into three strategic business areas: Broadband/Fixed Network, Mobile Communications, and Business Customers. These realigned organizational structures are part of our strategy to transform our company from a technology company to a service company and to position ourselves as the leading service provider in the multimedia market in Europe. The following paragraphs highlight several recent important developments relating to our group.

Organizational structure realigned into three strategic business areas

        On January 1, 2005, three new strategic business areas—Broadband/Fixed Network, Mobile Communications and Business Customers—replaced our previous divisional structure (T-Com, T-Mobile, T-Systems and T-Online). This strategic realignment resulted in changes within the group and transfers between our strategic business areas. Responsibility for servicing small-and medium-sized enterprises (SMEs), for example, has generally been transferred from the former T-Com division to the new Business Customers strategic business area. The planning, rollout, and operation of the service platform for SMEs is now managed by T-Systems' Business Services business unit. The Central and Eastern European mobile telecommunications subsidiaries previously assigned to the former T-Com division are now reported under the Mobile Communications strategic business area. The concentration of our entire national and international wholesale businesses at T-Com resulted in the transfer of the transport platforms (Global Networks) and the international carrier business (ICSS) from the former T-Systems division to the Broadband/Fixed Network strategic business area.

        Another important factor for the successful development of the broadband market is the planned merger of T-Online International AG into Deutsche Telekom AG. A delay in the completion of this merger means that planned synergies may not be realized. For example, until the merger it will not be

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possible to effectively meet the growing demand for a portfolio with fully integrated products, consisting in particular of fixed network telephony and Internet, potentially supplemented by media content. This situation, coupled with the multiple service provider relationships and contacts, makes it more difficult to attract and retain customers. For more information, see "Item 8. Financial Information—Legal Proceedings."

New accounting principles

        For the first time, we are required to prepare our consolidated financial statements in connection with the 2005 financial year in accordance with International Financial Reporting Standards. Our 2005 consolidated financial statements also include comparative financial statements for 2004 and 2003, prepared in accordance with IFRS. Material effects on our net worth, financial position and results of operations resulting from the transition from German GAAP to IFRS are shown in the reconciliation in the notes to the consolidated financial statements, under "Explanation of transition to IFRS," "Reconciliation of consolidated shareholders' equity," and "Reconciliation of profit after income taxes," and the notes contained therein.

Our group's profitable growth continued in 2005

        Our group's continued profitable growth is reflected in our 3.9% increase in net revenues, to EUR 59.6 billion in 2005 (2004: EUR 57.3 billion), and our strong growth in net profit, by EUR 4.0 billion, to EUR 5.6 billion. The main contributor to the increase in our net revenues was Mobile Communications. The share of our net revenues generated by international activities continued to increase, from 39.4% in 2004, to 42.6% in 2005, largely as a result of positive business developments at T-Mobile USA. Our growth in net profit in 2005, compared with 2004, primarily resulted from a decrease in depreciation, amortization and impairment losses, a lower loss from financial activities and reduced income taxes. We believe our financial performance, as well as our reduction of indebtedness, contributed to the increase in our credit rating in 2005.

Proposed dividend

        On the basis of the positive development in our profitability in 2005, our Management Board and Supervisory Board (Aufsichtsrat), are proposing that we pay a dividend of EUR 0.72 for each share carrying dividend rights, so that our shareholders can again participate in our success. If approved at the 2006 annual general shareholders' meeting, this would be the highest dividend we have ever paid.

The group's key growth driver remained the Mobile Communications strategic business area

        In 2005, Mobile Communications was the group's key growth driver. The T-Mobile group substantially increased both its revenues and subscriber base, and T-Mobile USA was again the most dynamic T-Mobile company, with 4.4 million net customer additions. Accordingly, during the course of 2005, the number of T-Mobile USA customers exceeded 20 million for the first time, achieving a customer base of 21.7 million at year-end. In 2005, T-Mobile Deutschland had 2.1 million net customer additions, increasing its customer base to a total of 29.5 million at year-end. This increase was primarily driven by its focused subscriber acquisition strategy. In the United Kingdom, T-Mobile UK recorded approximately 1.4 million net customer additions (including Virgin Mobile customers). Customer numbers at T-Mobile Czech Republic and T-Mobile Netherlands developed satisfactorily in 2005, and in Austria they increased slightly, despite intense competition. Cumulatively, our Central and Eastern European mobile telecommunications companies in Hungary, Slovakia, Croatia and Macedonia reported growth of 0.8 million mobile customers, for a total mobile customer base of 9.0 million. Our Montenegrin subsidiary, Monet, which was first consolidated in 2005, reported approximately 0.2 million mobile customers by year-end.

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The Broadband/Fixed Network strategic business area achieved strong broadband growth

        In 2005, the continued development of the broadband market, despite tough competition, remained the main driver of business development in the Broadband/Fixed Network strategic business area, which consists of the T-Com and T-Online business units. In 2005, Broadband/Fixed Network once again increased the number of broadband customers—both in terms of lines and customers with calling plans—as a result of its successful marketing strategy.

        At December 31, 2005, T-Com had approximately 7.9 million broadband access lines in operation in Germany, including 1.3 million Resale DSL lines marketed on a wholesale basis, i.e., broadband access products sold by other carriers outside the Deutsche Telekom group. This represented an increase of approximately 2.1 million lines. Competition in the broadband market intensified significantly, due, for example, to increased competition in the ISP market and the increased presence of other European telecommunications companies and local-loop operators in the German broadband market. In 2005, T-Com benefited from overall market growth in its Resale DSL activities, and the marketing of high bit-rate unbundled subscriber lines. Our subsidiaries in Central and Eastern Europe were also successful in marketing broadband access lines in 2005, with both T-Hrvatski Telekom and Slovak Telekom surpassing 100,000 broadband access lines by December 31, 2005. Increased bandwidths are a key requirement to benefit from the development of the broadband market. Since July 1, 2005, for example, T-Com has been providing broadband access lines with transmission rates of up to six Mbit/s.

        We intend to press ahead with the expansion of our network through the deployment of new DSL technologies, and the development of a new, high-speed broadband network. By developing ADSL2+ technology, with speeds of up to 25 Mbit/s, and using VDSL2 technology, which is increasingly based on fiber optics and uses bandwidths of up to 50 Mbit/s, we hope to make high bit-rate lines available to a wider market. A further component of T-Com's broadband strategy is its long-term goal of increasing the penetration of broadband and advanced technologies through the promotion of home and public W-LAN access to the Internet. As of December 31, 2005, there were more than 5,500 public HotSpots operated by T-Com and T-Mobile—an increase of more than 30%, compared to 2004.

        The number of narrowband access lines in Germany and abroad fell by 3.7%, to 41.2 million, in the course of the year, with a higher percentage decline in ISDN access lines than in standard access lines. In Germany, the number of narrowband access lines decreased by 4.1%, compared to 35.2 million in 2004, due in part to customer churn in favor of competitors, especially local-loop operators, and in part to mobile substitution. At 9.8 million, the total number of ISDN access lines decreased by 6.1%, compared to 2004, attributable in part to the discontinuation of the price advantage of combining T-DSL with T-ISDN, compared to T-DSL combined with a T-Net access line, and also to the growing saturation of the market and the new VoIP products offered by competitors. We expect the decrease in the number of narrowband access lines we offer in Germany, and in Central and Eastern Europe, to continue in 2006 and beyond.

        Since January 31, 2005, the focus in the Broadband/Fixed Network strategic business area has been on marketing T-Online's full-service broadband packages. By marketing these packages—which comprise a broadband access line, Internet access, and hardware components—throughout Germany, T-Online expanded its broadband customer base in 2005, by 38%, to approximately 4.45 million. T-Online has also accelerated the development of attractive services that are tailor-made for broadband access lines by making its VoIP service, which can be used without a PC, available through W-LAN and DSL telephony routers, since September 2005. Further, T-Online successfully strengthened its foothold on the Western European broadband market with its attractive packages. For example, the number of its broadband customers in France and Spain increased by 77% in 2005. In addition, T-Online laid the groundwork for the establishment of its own, fully IP-based network in France and Spain. This will allow T-Online to offer its customers Internet access, entertainment and broadband communication

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services with high bandwidth and high quality. T-Online's own networks are also providing the foundation in these two markets for planned triple-play offerings, including a TV component.

The Business Customers strategic business area increased the level of new orders in a difficult market environment

        The Business Customers strategic business area, under the T-Systems brand name, stabilized its business, despite continued pressure on margins and significant structural changes in its market environment. In 2005, T-Systems increased its level of new orders, which reflects the success of the Focus on Growth program, and which has enabled T-Systems to further strengthen its customer relationships and tap new growth potential.

        As a result, T-Systems' Enterprise Services business unit was able to gain key, new accounts, including the logistics company DHL and the Sparkasse financial group. In addition to generating significant revenues, transactions of this size are characterized by the establishment of a long-term partnership between the customer and T-Systems. Successful expansion was also present in the business process outsourcing area, in which T-Systems takes over entire business processes from the customer and provides end-to-end support.

        In T-Systems' Business Services business unit, the strategic focus is centered on the re-acquisition and expansion of market share in the area of telecommunications services for large- to medium-sized enterprises. This business unit is also working on expanding its IT services portfolio and recorded increased growth in IT business, compensating for the downturn in voice and network services. Trading conditions remain, however, difficult.

Changes in the consolidated group

        T-Mobile Austria entered into an agreement in the fourth quarter with Western Wireless International Austria Corporation to acquire full control of the Austrian mobile telecommunications operator, tele.ring Telekom Service GmbH. This acquisition is subject to the approval of the Austrian telecommunications regulator and the E.U. Commission.

        At the end of 2005, T-Systems entered into an agreement with Volkswagen AG to buy its global IT arm, gedas, while at the same time securing a master agreement with the VW Group for IT services valued at EUR 2.5 billion over seven years. Approval of this transaction from the Mexican competition authority (Comisión Federal de Competencia) and the E.U. Commission was received on February 28, 2006. We expect the transaction to be completed in the first half of 2006.

        In 2005, we bought and sold several companies. In the first quarter of 2005, Magyar Telekom acquired a majority interest in the Telekom Montenegro group, which has been fully consolidated since the second quarter. T-Systems DSS (part of the Business Customers strategic business area) was sold in the second quarter of 2005. In the Broadband/Fixed Network strategic business area, the Spanish company, Albura, was fully consolidated in the third quarter and merged into T-Online's Spanish subsidiary, Ya.com, in December 2005. In addition, our remaining interest in the Russian mobile telecommunications company, MTS, was sold in September 2005.

        In 2005, we also agreed to sell 25.9% of our interest in Sireo Real Estate Asset Management GmbH to Corpus Immobiliengruppe GmbH & Co. KG. This sale is subject to the approval of the E.U. Commission antitrust authorities. Upon completion of this transaction, we will hold a 25.1% interest in Sireo Real Estate Asset Management GmbH, and our co-shareholders, Morgan Stanley Bank AG and Corpus Immobiliengruppe GmbH & Co. KG, will hold 24.5% and 50.4%, respectively.

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Group strategy

        We believe that the telecommunications market has significant growth potential, in particular in the areas of broadband and mobile telecommunications, for voice and data applications, increased convergence of what used to be separate markets and technologies, and economic benefits of economies of scale. One of the driving forces behind these developments is the application of the Internet protocol (IP), a technology that is used to send and receive data in high-performance broadband networks. However, the market environment is dominated by price pressure and the entry of new competitors in the fixed-line network and mobile telecommunications areas. Mobile substitution, in particular, may result in a further decline in the number of call minutes in the fixed-line network and in intensified competition in the access business.

        Having succeeded with the debt reduction program we initiated at the beginning of 2002, we are entering a new growth and value-enhancement phase in 2006. Our strategic goal is to shape the information and telecommunications sector as Europe's largest integrated telecommunications company and the leading service provider in the industry. We will pursue these objectives primarily through ten strategic measures by the companies of the Deutsche Telekom group:

    Defense of the fixed-line network core business through strategic pricing measures, in the form of bundled products and segment-specific customer retention campaigns.

    Conquer the home in the broadband business, through mass-market penetration with DSL, and also VDSL in combination with fiber-optic networks. We aim to launch customer-oriented double and triple-play offerings (i.e., communications services, Internet access and entertainment services).

    Expansion of the wireless communications core business as a leading service provider, by offering customer-oriented solutions with attractive and simple calling plans.

    Expansion of mobile data services by becoming the leader in mobile broadband and introducing the mobile Internet, for example, with the introduction of "web'n'walk."

    Convergence by developing integrated fixed-line network/mobile telecommunications packages, such as T-Mobile@home and the DualPhone solution, as well as IP-based services and services that can be used with different technologies (multi-access IP), such as VoD and VoIP.

    Reinforcement of the telecommunications core business with both SMEs and multinational corporations, through strategic pricing measures, cross-selling and up-selling, mobile business solutions, and operational excellence.

    Growth with ICT solutions, through growth in the IT-outsourcing core business, by increasing our share in our existing customers' budget and by winning additional large-scale contracts.

    Customer relationship management on the basis of a customer database for all of T-Com's and T-Mobile's customers.

    Operational excellence for leveraging cost efficiencies. Our purchasing volume for goods and services in 2005, for example, amounted to around EUR 19.9 billion. Significant additional synergy potential can be achieved by harmonizing and standardizing products and services and by bundling demands throughout the group.

    Culture change and human resources development, in particular at the customer interface, to improve the quality of service.

        These strategic measures, a ten-point initiative, are being systematically planned and implemented through the Excellence Program, which was launched at the beginning of 2005. In the future, these measures will also be implemented as part of growth programs in the three SBAs and as group-wide

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initiatives, and will form the foundation for a planned fundamental transformation of our corporate culture.

        Our strategies may, of course, be adapted and changed to respond to opportunities and changing conditions. As reported in past years, we may embark on capital expenditure programs and pursue acquisitions, joint ventures, dispositions or combinations of businesses where we perceive real opportunity for profitable growth, cost savings or other benefits for our group. Transactions may be conducted using newly issued shares of Deutsche Telekom or shares of our affiliates, cash or a combination of cash and shares, and may individually or in the aggregate be material to us. As in the past, discussions with third parties in this regard may be commenced, on-going or discontinued at any time or from time to time.

Outlook(1)

    Mobile Communications

        We expect that the Mobile Communications strategic business area will continue to be the growth driver of the group in 2006. Further development will again be driven, in particular, by the U.S. market, which has recorded relatively high customer growth rates. For Europe, despite strong price pressure and high levels of market penetration, we expect to be able to expand our revenue market share, primarily through higher usage on the part of our customers. A further major growth factor will be the speed with which advanced mobile-data services are introduced and accepted by our customers. The rollout of the first "web'n'walk" devices has already begun.

        In Europe, key areas of our capital expenditure in 2006 will include improvements in the quality of our existing GSM networks and the further expansion of our UMTS networks. In the United States, we will drive forward the expansion of network capacity and the acquisition of additional mobile telecommunications licenses to safeguard our medium-term growth. Among other measures, we plan small network acquisitions for this purpose. In addition, we are preparing to invest in a next-generation mobile telecommunications network in the United States.

        Based on these plans and current market conditions, we expect further growth in total revenues in the Mobile Communications strategic business area over the next two years, although we can offer no assurance that our expectations in this regard will be achieved.


(1)
This Outlook discussion contains forward-looking statements that reflect management's current views with respect to future events. Words such as "expect," "anticipate," "believe," "intend," "may," "could," "estimate," "aim," "goal," "plan," "project," "should," "will," "seek," "outlook" or similar expressions generally identify forward-looking statements. Statements with regard to future revenues or operating profitability are forward-looking statements. You should consider forward-looking statements with caution. They are subject to risks and uncertainties, most of which are difficult to predict and are often beyond our control. The risks and uncertainties include those described in the sections "Forward-Looking Statements" and "Risk Factors" of this Annual Report. Please read those sections when considering this Outlook discussion. Among the other relevant factors that might influence our ability to achieve our objectives are: the progress of our workforce reduction initiative and the impact of other significant strategic or business initiatives, including acquisitions, dispositions and business combinations. In addition, stronger than expected competition, technological change, litigation and regulatory developments, among other factors, may have a material adverse effect on costs and revenue development. If these or other risks and uncertainties materialize, or if the assumptions underlying any of these statements prove incorrect, our actual performance may materially differ from the performance expressed or implied by such statements. We can offer no assurance that our estimates or expectations will be achieved. We do not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws (such as our obligations to file annual reports on Form 20-F and reports on Form 6-K) and under other applicable laws.

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    Broadband/Fixed Network

        In 2006, the Broadband/Fixed Network strategic business area will focus on safeguarding and further developing its core voice and access businesses, and on expanding its broadband business by means of innovative products. Our outlook with respect to future business development is based, in part, on the expectation that the merger of T-Online International AG into Deutsche Telekom AG will be completed successfully in 2006.

        The traditional fixed-line network business will continue to be characterized in 2006 by mobile substitution, competition-driven loss of market share, price cuts due to regulatory requirements, and the after-effects of the substantial fall in Internet access fees in 2005. We believe that product innovation campaigns and subscriber-driven growth in the broadband area will not be enough to fully offset the decline in revenues resulting from these factors. However, we do expect broadband growth and revenues from new products based on new technologies, such as VoIP, to begin to offset this decline in 2007.

        In the business for new broadband-access customers, we expect the planned T-Online merger to generate a strong increase in the number of broadband-access lines. In addition, we plan to establish our triple-play offerings under the "Conquer the home" strategy. A major element of this strategy will be the expansion of our high-speed Internet infrastructure, which is scheduled to be rolled out in 50 large German cities by the end of 2007, provided such an investment is economically viable in the regulatory environment. Accordingly, we expect this will be one of our key areas of capital expenditure in 2006, with investment of approximately EUR 3 billion over three years. The roll out of this high-speed infrastructure has already begun in 10 cities.

        The Broadband/Fixed Network strategic business area is also planning to extend its range of convergent fixed-line network/mobile products. For example, we expect to launch the DualPhone solution in mid-2006. This solution combines the benefits of fixed-line network telephony and mobile telecommunications in a single handset.

        Increased market investments in customer acquisition and retention in the Broadband/Fixed Network strategic business area will be necessary in 2006 to support sustainable growth. Based on current market conditions, and the foregoing underlying assumptions, we presently anticipate a medium-term (as of 2007) up-turn in the Broadband/Fixed Network revenue trend. Due to the rapidly changing telecommunications environment and many other factors not under our control, however, we cannot guarantee that our expectations in this regard will be realized.

    Business Customers

        In the Business Customers strategic business area, the Business Services unit will focus on defending its telecommunications business in a fiercely contested market. In the core telecommunications business (voice, data, IP), we are aiming to maintain revenue levels, despite the drop in prices. The primary goals are to extend the customer base and to win back customers. This strategy will be accompanied by efforts to increase telecommunications revenues in areas such as LAN solutions (network solutions for connecting workstations at a company's site). The Business Services business unit expects strong growth in its IT business, especially from small- and medium-sized enterprises, in 2007. Capital expenditures are expected to increase in 2006, due to the technical consolidation of the IT environment and the introduction of value-added services.

        In the Enterprise Services business unit, we plan to significantly expand our market share in the telecommunications business through integrated IT and telecommunications sales activities. In the IT business, meanwhile, we intend to grow primarily by expanding outsourcing activities, in particular through large-scale contracts and continued business process outsourcing with a focus on billing and collection. We are planning to increase capital expenditures also in Enterprise Services, particularly through the assumption of assets in conjunction with business process outsourcing.

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        Assuming the successful achievement of these goals, we currently expect higher total revenues in the Business Customers strategic business area in 2006 and 2007. However, we cannot guarantee that our expectations in this regard will be realized.

        Based on the development of our strategic business areas and the described market investments, we anticipate further group revenue growth for the next two years. Despite the resulting downward effect on our earnings, we intend to invest around EUR 1.2 billion in creating a platform for revenue growth in 2006. We plan to intensify marketing new products, strengthen our sales activities, and introduce new and innovative rates. We believe that the measures implemented in 2006 will contribute to an improvement in operating results in 2007.


CRITICAL ACCOUNTING ESTIMATES

        Our consolidated financial statements prepared in accordance with IFRS, and the reconciliation of our consolidated financial statements from IFRS to U.S. GAAP, are dependent upon and sensitive to accounting methods, assumptions and estimates that we use as bases for the preparation of our consolidated financial statements and reconciliation. We have identified the following critical accounting estimates and related assumptions and uncertainties inherent in our accounting policies that we believe are essential to an understanding of the underlying financial reporting risks, and the effect that these accounting estimates, assumptions and uncertainties have on our consolidated financial statements under IFRS and our reconciled U.S. GAAP financial information.

        Accounting for property, plant and equipment, and intangible assets involves the use of estimates for determining fair value at the acquisition date, in particular, in the case of assets acquired in a business combination. The expected useful lives of these assets must be estimated. The determination of the fair values of assets, as well as of the useful lives of the assets is based on management's judgment.

        The determination of impairments of property, plant and equipment, and intangible assets involves the use of estimates that include, but are not limited to, the cause, timing and amount of the impairment. Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the telecommunications industry, increased cost of capital, changes in the future availability of financing, technological obsolescence, discontinuance of services, current replacement costs, prices paid in comparable transactions and other changes in circumstances that indicate an impairment exists. The determination of recoverable amounts and fair values are typically based on discounted cash flow methodologies that incorporate reasonable market assumptions. The identification of impairment indicators, the estimation of future cash flows and the determination of fair values of assets (or groups of assets) requires management to make significant judgments concerning the identification and validation of impairment indicators, expected cash flows, applicable discount rates, useful lives and residual values. For example, the estimation of cash flows underlying the fair values of our mobile businesses takes into consideration the continued investment in network infrastructure required to generate future revenue through the offering of new data products and services, for which only limited historical information on customer demand may be available. If the expected demand for these products and services does not materialize, our revenues and cash flows may not develop in accordance with our business model, which may lead to write-downs of investments to their fair values.

        Under U.S. GAAP, the recoverability of assets that are held and used is measured by comparing the sum of the future undiscounted cash flows derived from an asset (or a group of assets) to their carrying value. If the carrying value of the asset (or the group of assets) exceeds the sum of the future undiscounted cash flows, an impairment is considered to exist. If an impairment is considered to exist on the basis of undiscounted cash flows, the impairment charge is measured using an estimation of the assets' fair value. Reversal of previously recognized impairment losses is not permitted.

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        The determination of the recoverable amount of a cash-generating unit (under IFRS) or the fair value of an asset group or a reporting unit (under U.S. GAAP) involves the use of estimates by management. Methods used to determine the fair value less costs to sell (under IFRS) or fair value of an asset group (under U.S. GAAP), include discounted cash flow methodologies and models based on quoted stock market prices. Key assumptions on which management has based its determination of fair value include ARPU (monthly average revenue per user), subscriber acquisition and retention costs, churn rates, capital expenditures and market share. These estimates can have a material impact on fair value under both IFRS and U.S. GAAP and the amount of any goodwill write-down.

        Financial assets include equity investments in foreign telecommunications service providers that are principally engaged in the mobile, fixed-line network, Internet and data communications businesses, some of which are publicly traded and have highly volatile share prices. Generally, an impairment charge is recorded, in accordance with IFRS, when an investment's carrying amount exceeds the present value of its estimated future cash flows, and, in accordance with U.S. GAAP, when a decline in fair value is considered to be other than temporary. The calculation of the present value of estimated future cash flows and the determination of whether an impairment is other than temporary involves judgments and relies heavily on assessments by management regarding the future development and prospects of the investee company. In determining value, quoted market prices are used, if available, or other valuation methodologies. To determine whether an impairment is other than temporary, we consider the ability and intent to hold the investment for a reasonable period of time to ascertain whether a forecasted recovery of fair value exceeds the carrying amount, including an assessment of factors such as, the length of time and magnitude of the excess of carrying value over market value, the forecasted results of the investee company, the regional economic environment and state of the industry. Future adverse changes in market conditions, particularly a downturn in the telecommunications industry, or poor operating results could result in losses or an inability to recover the carrying amount of the investment, which could result in impairment charges.

        Management maintains an allowance for doubtful accounts to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful accounts, management bases its estimates on the aging of accounts receivable balances and historical write-off experience, customer credit worthiness and changes in customer payment terms. If the financial condition of customers were to deteriorate, actual write-offs might be higher than currently expected.

        Income taxes are estimated for each of the jurisdictions in which we operate and involve a specific calculation of the expected actual income tax exposure for each taxable item and an assessment of temporary differences resulting from the different treatment of certain items for IFRS consolidated financial and tax reporting purposes. Any temporary differences will result in the recognition of deferred tax assets or liabilities in the consolidated financial statements. Management judgment is required for the calculation of actual and deferred taxes. Deferred tax assets are recognized to the extent that their utilization is probable. The utilization of deferred tax assets will depend on whether it is possible to generate sufficient taxable income, based on applicable tax category and jurisdiction, taking into account any restrictions relating to the loss-carryforward period. Various factors are used to assess the probability of the future utilization of deferred tax assets, including future reversals of existing taxable temporary differences, past operating results, operational plans, loss-carryforward periods, and tax planning strategies. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be affected. In the event of a change in the assessment of future utilization of deferred tax assets, the recognized deferred tax assets must be increased or decreased, as the case may be, and recognized in profit and loss. As a result, the effect of downturns or upturns in our businesses on our net profit or loss can be magnified by the resultant effects on our deferred tax assets.

        Pension obligations for benefits to non-civil servants are generally satisfied by plans that are classified and accounted for as defined benefit plans. Pension benefit costs for non-civil servants are

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determined in accordance with actuarial procedures, which rely on assumptions including discount rates, life expectancies and, to a limited extent, expected return on plan assets. Estimations of the expected return on plan assets have a limited impact on pension costs because the amount of funded plan assets is small in relation to the outstanding pension obligations. Other key assumptions affecting pension costs are based, in part, on actuarial valuations, including discount rates used to calculate the amount of the pension obligation. The discount rate reflects the weighted average timing (approximately 15 years) of the estimated defined benefit payments, which will be settled primarily in euros. The discount rate is based on zero coupon German government bonds with a duration and maturity of 15 years as reported by Bloomberg L.P. A risk premium, based on the yield curve of AA-rated European corporate bonds with a maturity of 15 years and German government bonds with a maturity of 15 years, is then added. Due to the insufficient liquidity of the German market for long-term corporate bonds and the existence of the euro within the euro zone, we refer to European corporate bonds to determine the discount rate risk premium. The assumptions concerning the expected return on plan assets are determined on a uniform basis, considering long-term historical returns, asset allocation and future estimates of long-term investment returns. In the event that further changes in assumptions are required with respect to discount rates and expected returns on invested assets, the future amounts of the pension benefit costs may be materially affected.

        We are obligated under the new Federal Posts and Telecommunications Agency Reorganization Act (Gesetz zur Reorganisation der Bundesanstalt für Post und Telekommunikation Deutsche Bundespost) to pay for our share of any operating cost shortfalls in income of the Civil Service Health Insurance Fund(Postbeamtenkrankenkasse) and benefits to be paid. The Civil Service Health Insurance Fund provides healthcare and medical benefits for its members and their dependents, who are civil servants employed by or retired from Deutsche Telekom AG, Deutsche Post AG and Deutsche Postbank AG. Since January 1, 1995, participation in the Civil Service Health Insurance Fund was closed to new members. The insurance premiums collected by the Civil Service Health Insurance Fund may not exceed the insurance premiums imposed by alternative private health insurance enterprises for comparable insurance benefits, and, therefore, do not reflect the changing composition of ages of the participants in the fund. In the past, we recognized provisions in the amount of the actuarially determined present value of our share in the fund's future deficit, using a discount rate and making assumptions about life expectancies and projections for contributions and future increases in general health care costs in Germany. Since the calculation of these provisions involves long-term projections over periods of more than 50 years, the present value of the liability may be significantly impacted by even small variations in the underlying assumptions.

        We exercise considerable judgment in determining and recognizing provisions and the exposure to contingent liabilities related to pending litigation and other outstanding claims subject to negotiated settlements, mediation, arbitration or government regulation, as well as other contingent liabilities. Judgments are necessary in assessing the likelihood that a pending claim will succeed, or if a liability will arise, and with respect to quantification of the possible range of final settlements. Provisions are recorded for liabilities when losses are considered probable and can be reasonably estimated. Because of the inherent uncertainties in making such judgments, actual losses may be different from the originally estimated provision. Significant estimates are involved in the determination of provisions related to taxes, environmental liabilities, our workforce adjustment initiative and litigation risks. These estimates are subject to change as new information becomes available, primarily with the support of internal specialists or outside consultants, such as actuaries or legal counsel. Adjustments to loss provisions may significantly affect future operating results.

Revenue recognition

    Customer activation fees

        Broadband/Fixed Network's T-Com business unit and Mobile Communications receive installation and activation revenues from new customers. These revenues (and related costs limited to the amount

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of deferred revenues) are deferred and amortized over the expected duration of the customer relationship. The estimation of the expected average duration of the relationship is based on historical customer turnover. If management's estimates are revised, material differences may result in the amount and timing of revenues recognized for a given period.

    Long-term service contracts

        Business Customers conducts a portion of its business under long-term contracts with customers. We account for certain long-term service contracts based on proportional performance, recognizing revenues as performance of a contract progresses. Factors affecting estimates of contract progress may include total contract costs, remaining costs to completion, total contract revenues, contract risks and other judgments. Estimates relating to long-term contracts are subject to regular reviews and are adjusted as necessary.

    Multiple-element arrangements

        The framework of the Emerging Issues Task Force Issue (EITF) No. 00-21 was adopted to account for multiple-element arrangements under IFRS, in accordance with International Accounting Standard (IAS) 8.12, issued by the IASB, as well as under U.S. GAAP. EITF 00-21 requires that arrangements involving the delivery of bundled products or services be separated into individual units of accounting, each with its own separate earnings process. Total arrangement consideration relating to the bundled contract is allocated among the different units based on their relative fair values (i.e., the relative fair value of each of the accounting units to the aggregated fair value of the bundled deliverables). The determination of fair values is complex because some of the elements are price sensitive and, thus, volatile in a competitive marketplace. Revisions to the estimates of these relative fair values may significantly affect the allocation of total arrangement consideration among the different accounting units, and may therefore affect future operating results.


DIFFERENCES BETWEEN IFRS AND GERMAN GAAP

        Commencing with our fiscal year beginning January 1, 2005, we are required to prepare consolidated financial statements in accordance with IFRS, as endorsed by the European Union. The opening IFRS consolidated balance sheet was prepared for the period beginning January 1, 2003 (date of transition to IFRS in accordance with IFRS 1, "First-time Adoption of International Financial Reporting Standards," IFRS 1"). A summary of certain of the differences in the preparation of our consolidated financial statements on the basis of IFRS from that previously reported under German GAAP can be found in the notes to the consolidated financial statements, under "Reconciliation of consolidated shareholders' equity" and "Reconciliation of profit after income taxes," and the notes contained therein.

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CONSOLIDATED RESULTS OF OPERATIONS

        The following table presents information concerning our consolidated income statements for the periods indicated:

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
 
 
  (millions of €)

 
Net revenues   59,604   57,353   55,596  
Cost of sales   (31,862 ) (31,544 ) (29,493 )
Gross profit   27,742   25,809   26,103  
Selling expenses   (14,683 ) (12,870 ) (12,752 )
General and administrative expenses   (4,210 ) (4,476 ) (4,596 )
Other operating income   2,408   1,718   2,359  
Other operating expenses   (3,635 ) (3,916 ) (2,765 )
Profit from operations   7,622   6,265   8,349  
Finance costs   (2,401 ) (3,280 ) (3,589 )
Share of profit (loss) of associates and joint ventures accounted for using the equity method   214   945   356  
Other financial income (expense)   777   (361 ) (890 )
Loss from financial activities   (1,410 ) (2,696 ) (4,123 )
   
 
 
 
Profit before income taxes   6,212   3,569   4,226  
Income taxes   (196 ) (1,552 ) (1,709 )
Profit after income taxes   6,016   2,017   2,517  
Profit (loss) attributable to minority interests   432   424   454  
   
 
 
 
Net profit (profit attributable to equity holders of the parent)   5,584   1,593   2,063  
   
 
 
 

Net Revenues

        We generated consolidated net revenues of EUR 59,604 million in 2005, an increase of 3.9%, to EUR 57,353 million, compared to 2004. Net revenues from Broadband/Fixed Network decreased by 3.0%, primarily due to a decrease in narrowband and calling charge minute net revenues, which was not completely offset by the increase in broadband net revenues. Mobile Communications net revenues increased by 12.1% due to further customer growth, in particular at T-Mobile USA. Business Customers net revenues declined by 2.0%, largely as a result of ongoing competition in the market and the continued reduction in prices of traditional telecommunications services. The full consolidation of T-Mobile Slovensko and Telekom Montenegro in 2005 and positive exchange rate effects also contributed to the increase in the group's net revenues.

        In 2004, net revenues increased by EUR 1,757 million, or 3.2%, to EUR 57,353 million, compared to 2003. This increase was primarily due to revenue growth at Mobile Communications, driven by an increase in the number of customers, offset, in part, by unfavorable exchange rate effects and deconsolidation effects within the group. The introduction of call-by-call and carrier pre-selection in 2003 resulted in a decrease in 2004 net revenues at Broadband/Fixed Network, offset, in part, by an increase in net revenues from the T-Online business unit, due to the consolidation of the Scout24 group, and to the continued rise in customer numbers and the increasing acceptance of paid services. Despite deconsolidations, in particular, of SIRIS and TeleCash, Business Customers net revenues increased slightly in 2004, compared to 2003, primarily due to growth in the Enterprise Services business unit, which more than offset the decline in net revenues of the Business Services business unit.

        For more information on our net revenue development and trends, see "—Segment Analysis."

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Cost of Sales

        Our cost of sales comprises the aggregate cost of products and services delivered. In addition to directly attributable costs, such as direct material and labor costs, it also includes indirect costs, such as depreciation and amortization (other than goodwill).

        Cost of sales increased by EUR 318 million in 2005 to EUR 31,862 million, compared with EUR 31,544 million in 2004. However, compared to our growth in revenues during 2005, our cost of sales increased at a slower pace.

        In addition to the increase in cost of sales as a result of increased sales volume, cost of sales in 2005 was affected by higher amortization expense for UMTS licenses (EUR 345 million), and increased depreciation expense in connection with the acquisition of the mobile networks in California, Nevada and New York. This increase was offset, in part, by a significant decrease in impairment losses on mobile telecommunications licenses (FCC licenses) in the United States of EUR 1,220 million (2005: EUR 30 million; 2004: EUR 1,250 million).

        Cost of sales increased by EUR 2,051 million in 2004 to EUR 31,544 million, compared with EUR 29,493 million in 2003. The increase in 2004 was largely due to the increase in net revenues, an impairment loss of EUR 1,250 million on mobile telecommunications licenses in the United States and the depreciation on UMTS licenses of EUR 519 million. In 2003, there were no impairment losses on mobile telecommunication licenses in the United States and depreciation on UMTS licenses amounted to EUR 1 million.

Selling Expenses

        Our selling expenses include all expenses for activities that do not directly increase the value of our products or services, but help to secure sales. Selling costs generally include all expenses relating to the sales (e.g., commissions), advertising and marketing departments and other sales promotion activities.

        The increase in selling expenses of EUR 1,813 million to EUR 14,683 million in 2005, compared with EUR 12,870 million in 2004, was primarily due to the increase in selling expenses at T-Mobile USA resulting from the growth in the number of T-Mobile stores, as well as to higher customer acquisition costs, and to an increase in marketing and selling expenses in the Broadband/Fixed Network strategic business area in connection with our broadband initiative.

        Selling expenses increased by EUR 118 million in 2004, compared to 2003, primarily due to an increase in selling expenses at T-Mobile relating to higher customer acquisition costs, increased advertising costs and higher customer bad debt expense at T-Mobile USA, offset, in part, by a decrease in selling expenses at Business Customers as a result of cost efficiencies, and at Group Headquarters and Shared Services as a result of decreased expenses for marketing activities.

General and Administrative Expenses

        Our general and administrative expenses generally include all costs attributable to the core administrative functions that are not directly attributable to production or selling activities.

        General and administrative expenses decreased by EUR 266 million to EUR 4,210 million in 2005, compared with EUR 4,476 million in 2004. The decrease in general and administrative expenses was primarily due to decreases at Group Headquarters and Shared Services (due, in part, to the reduction of provisions related to other taxes) and at Business Customers (mainly due to cost efficiencies, partly offset by increased restructuring costs). However, general and administrative costs increased at Broadband/Fixed Network, in particular at T-Com, as a result of increased costs for apprentices and other social costs related to employees.

        General and administrative costs decreased by EUR 120 million in 2004, compared to 2003, primarily as a result of improvements in efficiency and lower costs related to severance payments at

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Broadband/Fixed Network's T-Com business unit, and as a result of the weaker U.S. dollar relative to the euro and the reimbursement of property taxes at T-Mobile USA.

Other Operating Income

        Other operating income consists of reversals of provisions (if not allocated to the functional costs), income from transfer of costs and gains from disposals. Miscellaneous other operating income encompasses a variety of income items for which the individually recognized amounts are largely not material.

        In 2005, the increase in other operating income (EUR 690 million), compared to 2004, was mainly due to higher income from a reversal of provisions. Effective December 2005, a new arrangement was established by the Federal Republic relating to the cost contribution to the Civil Service Health Insurance Fund. The new arrangements for the financing of the Civil Service Health Insurance Fund resulted in a reversal totaling EUR 783 million. For further information, see note (29) to the notes to the consolidated financial statements.

        In 2004, other operating income decreased by EUR 641 million primarily due to the non-recurrence in 2004 of a gain on disposals of EUR 503 million in 2003, primarily relating to the sale of the cable companies, TeleCash and SIRIS.

Other Operating Expenses

        Other operating expenses consist of impairment of goodwill, additions to provisions (if not allocated to the functional costs) and losses on disposals. Miscellaneous other operating expenses encompass a variety of expense items for which the individually recognized amounts are largely not material.

        In 2005, the decrease in other operating expenses of EUR 281 million was primarily the result of offsetting effects. The decrease (EUR 514 million) in goodwill impairment losses, relating mainly to T-Mobile UK (EUR 1,917 million in 2005 and EUR 2,225 million in 2004), was offset, in part, by an increase in miscellaneous other expenses of EUR 269 million, primarily related to personnel adjustment and restructuring measures.

        In 2004, other operating expenses increased by EUR 1,151 million, compared with 2003, primarily attributable to the increase in goodwill impairment losses. In 2004, goodwill impairment losses related to T-Mobile UK (EUR 2,225 million) and Slovak Telekom (EUR 203 million). In 2003, we recognized goodwill impairment losses at T-Mobile USA (EUR 789 million) and Magyar Telekom (EUR 185 million).

Profit from Operations

        Profit from operations increased by EUR 1,357 million in 2005, compared to 2004, primarily as a result of increased revenues and other operating income, as well as decreased general and administrative expenses and other operating expenses, offset, in part, by increased selling expenses and cost of sales. The increase in other operating income was primarily due to a one-time effect in connection with the reversal of provisions (EUR 783 million) relating to the Civil Service Health Insurance Fund. The increase in selling expenses, amounting to EUR 1,813 million, was primarily due to the increase in expenses at T-Mobile USA resulting from the growth in the number of T-Mobile retail stores, as well as to higher customer acquisition costs. Additionally, the Broadband/Fixed Network strategic business area incurred higher marketing and selling expenses, in particular in connection with the broadband initiative.

        In 2004, the significant decrease (EUR 2,084 million) in profit from operations, compared to 2003, was primarily attributable to increased cost of sales and selling expenses, decreased other operating income and an increase in other operating expenses, offset, in part, by increased revenues and a decrease in general and administrative expenses. Cost of sales increased, primarily due to an

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impairment loss on U.S. mobile telecommunications licenses in the approximate amount of EUR 1,250 million in 2004, while other operating income decreased, primarily due to the non-recurrence in 2004 of a gain on disposals of EUR 503 million in 2003. The increase in other operating expenses in 2004 was primarily attributable to the recognition of goodwill impairment losses at T-Mobile UK (EUR 2,225 million) and Slovak Telekom (EUR 203 million). In 2003, we recognized goodwill impairment losses at T-Mobile USA (EUR 789 million) and Magyar Telekom (EUR 185 million).

Loss from Financial Activities

        The following table presents information concerning our loss from financial activities:

 
  For the years ended December 31,
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
  (millions of €)

  (% change)

Finance costs                    
  Interest income   398   377   200   5.6   88.5
  Interest expense   (2,799 ) (3,657 ) (3,789 ) 23.5   3.5
    (2,401 ) (3,280 ) (3,589 ) 26.8   8.6
Share of profit of associates and joint ventures accounted for using the equity method   214   945   356   (77.4 ) n.m.
Other financial income (expense)   777   (361 ) (890 ) n.m.   59.4
   
 
 
       
Loss from financial activities   (1,410 ) (2,696 ) (4,123 ) 47.7   34.6
   
 
 
       

n.m.—not meaningful

    Finance costs

        Our finance costs decreased by EUR 879 million in 2005 to EUR 2,401 million primarily due to a reduction of financial liabilities and an improvement in our credit ratings which resulted in better interest rates on certain existing indebtedness.

        In 2004, finance costs decreased by EUR 309 million, to EUR 3,280 million, compared to 2003, primarily as a result of debt reduction.

        The effective weighted average interest rate applicable to our outstanding indebtedness related to bonds and debentures was 6.5% in 2005, 6.8% in 2004 and 6.8% in 2003. The effective weighted average interest rate applicable to our outstanding indebtedness related to bank liabilities was 6.1% in 2005, 6.5% in 2004 and 6.1% in 2003. Some of our debt instruments have provisions that could cause the interest rate on such investments to increase upon the occurrence of certain downgrades in our long-term unsecured debt ratings. For more information, see "—Liquidity and Capital Resources—Capital Resources."

    Share of profit of associates and joint ventures accounted for using the equity method

        The share of profit of associates and joint ventures accounted for using the equity method in 2005 reflected the gain on our sale of shares in comdirect bank amounting to EUR 62 million. In 2004, the share of profit of associates and joint ventures accounted for using the equity method reflected the gain on the sale of shares in MTS amounting to EUR 972 million, which was partially offset by losses incurred in connection with Toll Collect.

        In 2004, the share of profit of associates and joint ventures accounted for using the equity method increased, compared to 2003, primarily as a result of the sale of shares in MTS (EUR 972 million). In 2003, gains from our sales of shares in MTS, and of our interests in ISH-Holding Moscow and Globe Telecom, totaled EUR 539 million. In addition, improved results, primarily from PTC and MTS

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(EUR 106 million and EUR 177 million, respectively, in 2004, compared to EUR 84 million and EUR 121 million, respectively, in 2003), and from reduced losses attributable to Toll Collect, contributed to this increase in share of profit of associates and joint ventures accounted for using the equity method.

    Other financial income (expense)

        Other financial income (expense) improved by EUR 1,138 million in 2005, compared to 2004, primarily due to the sale of our remaining shares in MTS (EUR 972 million).

        In 2004, other financial income (expense) improved by EUR 529 million, compared to 2003, mainly due to a change in the discount rate in 2003 (EUR 221 million) relating to the Civil Service Health Insurance Fund, which remained stable in 2004. Additionally, expenses relating to financial instruments decreased by EUR 275 million in 2004, compared to 2003.

    Depreciation, Amortization and Impairment Losses

        The following table provides a breakdown of the depreciation, amortization and impairment losses contained in the functional cost line items (cost of sales, selling expenses, general and administrative expenses and other operating expenses):

 
   
  For the years ended December 31,
 
 
   
  2005
  2004
  2003
 
 
   
  (millions of €)

 
Amortization and impairment of intangible assets   (4,427 ) (5,461 ) (2,233 )
of which:   impairment of goodwill   (1,920 ) (2,434 ) (983 )
of which:   amortization and impairment of mobile telecommunications licenses   (951 ) (1,824 ) (55 )
Depreciation and impairment of property, plant and equipment   (8,070 ) (7,666 ) (8,072 )
       
 
 
 
Total depreciation, amortization and impairment losses   (12,497 ) (13,127 ) (10,305 )
       
 
 
 

        Amortization and impairment of intangible assets is mainly related to mobile telecommunications and software licenses, as well as to goodwill. The decrease in amortization and impairment of intangible assets in 2005, of EUR 1.0 billion, primarily resulted from a reduction in goodwill impairment losses at T-Mobile UK (2005: EUR 1.9 billion; 2004: EUR 2.2 billion), and the non-recurrence in 2005 of goodwill impairment losses at Slovak Telekom (EUR 0.2 billion), compared with 2004. We generally perform our annual impairment test each September 30. However, we had not completed this test for our mobile business in the United Kingdom (T-Mobile UK) when our interim financial statements for the third quarter of 2005 were published. Instead, as previously reported, we were still evaluating information from a number of different sources, including the announcement made by Telefónica on October 31, 2005, that it planned to acquire the U.K.-based mobile operator, O2, for a price of 200 pence per share (approximately GBP 17.7 billion, or EUR 26.0 billion). Under IFRS, in determining fair value, greater weight is to be given to prices paid in comparable transactions than to internal, discounted cash flow calculations. Based on the offer made by Telefónica, and using a multiplier valuation model, we determined the fair value of our cash-generating unit, T-Mobile UK, which resulted in an impairment loss of EUR 1.9 billion at December 31, 2005.

        Additionally, in 2004, an impairment loss of EUR 1.3 billion was recorded in connection with our U.S. mobile telecommunications licenses relating to the winding up of GSM Facilities, the network joint venture between T-Mobile USA and Cingular. In 2005, in addition to the impairment losses at T-Mobile UK, there was an increase in the amortization of UMTS licenses (EUR 0.3 billion) as a result of the effect of a full year of amortization charges that had commenced with the start of commercial operations using our UMTS licenses in Germany and the United Kingdom in the second

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and third quarters of 2004, respectively. Amortization of other intangible assets recognized at T-Mobile USA increased in 2005, by EUR 0.2 billion, mainly due to the wholesale agreement on minutes of use between T-Mobile USA and Cingular.

        Depreciation and impairment of property, plant and equipment also increased in 2005, by EUR 0.4 billion, primarily as a result of an increase in depreciation related to the acquisition of the GSM Facilities networks in California, Nevada and New York in the first quarter of 2005.

        In 2004, amortization of intangible assets increased by EUR 3.2 billion, as compared with 2003, primarily due to amortization and impairment losses related to mobile telecommunications licenses at T-Mobile USA (EUR 1.3 billion), goodwill at T-Mobile UK (EUR 2.2 billion) and Slovak Telekom (EUR 0.2 billion), as well as higher scheduled amortization of UMTS licenses (EUR 0.5 billion). In 2003, we recorded goodwill impairment losses at T-Mobile USA (EUR 0.8 billion) and T-Mobile Hungary (EUR 0.2 billion). Depreciation and impairment of property, plant and equipment decreased by EUR 0.4 billion in 2004, compared with 2003, mainly due to reduced scheduled depreciation on technical equipment and machines, as a result of equipment sales and a reduced depreciation basis, as well as reduced investments in previous years.

        For more information relating to our intangible assets, see note (20) to the notes to the consolidated financial statements.

        The following table provides a breakdown of impairment losses:

 
   
  For the years ended December 31,
 
 
   
  2005
  2004
  2003
 
 
   
  (millions of €)

 
Intangible assets   (1,958 ) (3,710 ) (1,017 )
of which:   goodwill   (1,920 ) (2,434 ) (983 )
of which:   U.S. mobile telecommunications licenses   (30 ) (1,250 ) 0  
Property, plant and equipment   (248 ) (158 ) (132 )
of which:   land and buildings   (233 ) (106 ) (94 )
of which:   technical equipment and machinery   (7 ) (45 ) (33 )
of which:   other equipment, operating and office equipment   (5 ) (5 ) (5 )
of which:   advance payments and construction in progress   (3 ) (2 ) 0  
       
 
 
 
Total impairment losses   (2,206 ) (3,868 ) (1,149 )
       
 
 
 

    Profit before Income Taxes

        Profit before income taxes increased by EUR 2,643 million in 2005, to EUR 6,212 million, compared with 2004, mainly due to increased profit from operations and decreased loss from financial activities.

        In 2004, profit before income taxes decreased by EUR 657 million, to EUR 3,569 million, compared with 2003, primarily as a result of decreased profit from operations, offset, in part, by a decrease in loss from financial activities.

    Income Taxes

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Income taxes   196   1,552   1,709   (87.4 ) (9.2 )

        In general, the amount of income taxes we recognize is a function of our profit before income taxes and the various income tax rates applicable to profit before income taxes, and the recognition or

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non-recognition of deferred income taxes in accordance with IFRS. However, the income tax expense recorded on our financial statements is not necessarily reflective of the actual income taxes we paid.

        In 2005, income taxes decreased from EUR 1,552 million to EUR 196 million, a decline of EUR 1,356 million compared to 2004. As described below, in 2005 we recorded previously unrecognized deferred tax assets resulting in an income tax benefit of EUR 2,176 million. Recording this deferred tax asset more than offset the increase in income taxes resulting from our increased level of earnings during the year. In 2004, income taxes decreased by EUR 157 million compared to 2003.

        Our effective income tax rate (income taxes as a percentage of profit before income taxes) was approximately 3% in 2005 (primarily due to the deferred tax asset described below), 43% in 2004 and 40% in 2003. The German statutory income tax rate applicable to us was approximately 39% in 2005 and 2004, and 40.4% in 2003. This statutory income tax rate includes corporate income tax of 25%, a solidarity surcharge on corporate income tax (Solidaritätszuschlag) levied at 5.5% on corporate income tax, and trade tax at an average German national rate.

        Our profit before income taxes was EUR 6,212 million in 2005, EUR 3,569 million in 2004 and EUR 4,226 million in 2003. Profit before income taxes in each of these years included transactions that significantly affected profit before income taxes with no, or a disproportionately small, impact on income taxes recorded.

        Profit before income taxes in 2005 included capital gains on our sale of MTS shares, amounting to EUR 1.0 billion, only 5% of which was taxable. Additionally, profit before income taxes was reduced by a goodwill impairment of EUR 1.9 billion, which we recognized in 2005, primarily relating to T-Mobile UK. Because the goodwill impairments were not deductible for income tax purposes and did not affect deferred income taxes, income tax expense was not reduced by the recognition of the impairment loss. Income tax expense recorded in 2005 was offset by the recording of previously unrecognized deferred tax assets at T-Mobile USA. Based on an assessment of all available evidence, we determined that it had become probable that EUR 2,176 million of the previously unrecognized deferred tax assets at T-Mobile USA was realizable in the near term. A remaining deferred tax asset amounting to EUR 1,705 million was not recognized at that time. Although T-Mobile USA became profitable in 2005, and expects to remain so in the future, the recognition of the deferred tax asset was limited to the amount realizable in the near term, taking into account a significant loss history, uncertainties regarding the demand for future products and services, and uncertainties surrounding the developments within the industry and the competitive environment. We will re-assess the need to recognize deferred tax assets in future periods and review forecasts in relation to actual results and expected trends on an ongoing basis. The achievement of business plan targets in the future may change our assessment regarding the recoverability of the deferred tax asset and may result in the recognition of further deferred tax assets in the period in which the realization of the remaining deferred tax asset becomes probable.

        Our profit before income taxes in 2004 included capital gains on the sale of MTS shares, amounting to EUR 1.0 billion, only 5% of which was taxable. Additionally, profit before income taxes was reduced by the recognition of goodwill impairment losses of EUR 2.4 billion in 2004. Income tax expense was not reduced by the impairment losses recognized in 2004.

        In 2003, profit before income taxes was reduced by the recognition of goodwill impairment losses of EUR 1.0 billion. Income tax expense was not affected by the impairment losses recognized in 2003. In addition, income taxes in 2003 were reduced by a corporate income tax benefit of EUR 0.4 billion at T-Mobile, as a result of the change in the legal form of T-Mobile from a stock corporation to a partnership.

    Net profit

        In 2005, we increased our net profit to EUR 5,584 million, from EUR 1,593 million in 2004, primarily as a result of the factors set forth above.

        In 2004, our net profit decreased to EUR 1,593 million from EUR 2,063 million in 2003, primarily as a result of the factors set forth above.

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SEGMENT ANALYSIS

        The following table presents total revenues (the sum of external (net) revenues and intersegment revenues), net revenues and intersegment revenues of our segments for the years indicated.

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
 
 
  Net
Revenues

  Inter-
Segment
Revenues

  Total
Revenues

  Net
Revenues

  Inter-
Segment
Revenues

  Total
Revenues

  Net
Revenues

  Inter-
Segment
Revenues

  Total
Revenues

 
 
  (millions of €)

 
Broadband/Fixed Network   21,731   4,304   26,035   22,397   4,615   27,012   23,161   5,098   28,259  
Mobile Communications   28,531   921   29,452   25,450   1,077   26,527   22,933   1,394   24,327  
Business Customers   9,058   3,792   12,850   9,246   3,716   12,962   9,267   3,670   12,937  
Group Headquarters and Shared Services   284   3,221   3,505   260   3,266   3,526   235   3,036   3,271  
Reconciliation     (12,238 ) (12,238 )   (12,674 ) (12,674 )   (13,198 ) (13,198 )
   
 
 
 
 
 
 
 
 
 
Group   59,604     59,604   57,353     57,353   55,596     55,596  
   
 
 
 
 
 
 
 
 
 

Broadband/Fixed Network

        The following table presents selected financial information concerning the Broadband/Fixed Network strategic business area:

 
  For the years
ended
December 31,

  Change
  % Change
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
  2005/2004
  2004/2003
 
 
  (millions of €, except where indicated)

 
Total revenues(1)   26,035   27,012   28,259   (977 ) (1,247 ) (3.6 ) (4.4 )
  T-Com total revenues(2)   24,695   25,603   27,170   (908 ) (1,567 ) (3.5 ) (5.8 )
  T-Online total revenues (3)   2,088   2,012   1,851   76   161   3.8   8.7  
    Intra-segment revenues(4)   (748 ) (603 ) (762 ) (145 ) 159   (24.0 ) 20.9  
Intersegment revenues   4,304   4,615   5,098   (311 ) (483 ) (6.7 ) (9.5 )
Profit from operations   5,142   5,551   5,587   (409 ) (36 ) (7.4 ) (0.6 )
Depreciation, amortization and impairment losses   4,034   4,399   4,739   (365 ) (340 ) (8.3 ) (7.2 )
Number of employees(5)   112,872   115,292   128,065   (2,420 ) (12,773 ) (2.1 ) (10.0 )
  of which: T-Com   109,643   112,329   125,428   (2,686 ) (13,099 ) (2.4 ) (10.4 )
  of which: T-Online   3,229   2,963   2,637   266   326   9.0   12.4  

(1)
Total revenues (net revenues and intersegment revenues).
(2)
Includes net revenues, intersegment revenues and revenues from T-Online.
(3)
Includes net revenues, intersegment revenues and revenues from T-Com.
(4)
Intra-segment revenues relates to revenues between T-Com and T-Online.
(5)
Average number of employees during the period (excluding apprentices and interns).

    Broadband/Fixed Network Total Revenues

        In 2005, our Broadband/Fixed Network strategic business area was again a significant contributor to revenues in the Deutsche Telekom group. Broadband/Fixed Network's total revenues decreased by 3.6%, to EUR 26,035 million, compared to 2004, primarily due to a decrease in T-Com's total revenues from network communications. The decline in T-Com's total revenues was due to decreases in net revenues of EUR 725 million and in revenues from other group companies of EUR 183 million. These decreases primarily resulted from the loss of narrowband access lines to other carriers, as well as to

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reductions in calling charge prices and calling minute volumes. In addition, T-Com's revenues from data communications and value-added services also decreased. These decreases in T-Com's total revenues were partially offset by a slight increase in revenues from wholesale services. The decrease in Broadband/Fixed Network revenues was also partly offset, however, by an increase in T-Online's total revenues.

    Broadband/Fixed Network Intersegment Revenues

        Broadband/Fixed Network's intersegment revenues, including revenues from Business Customers, Mobile Communications and Group Headquarters and Shared Services, amounted to EUR 4,304 million in 2005, a decrease of EUR 311 million, or 6.7%, compared to intersegment revenues of EUR 4,615 million in 2004. This decrease was mainly due to the decrease of Broadband/Fixed Network's intersegment revenues from the Business Customers strategic business area. The decrease in intersegment revenues from Business Customers strategic business area was attributable to lower levels of services purchased on behalf of its business customers. In addition, mandatory price reductions in April 2005 led to a decrease in revenues from data communications services in 2005.

        In 2004, Broadband/Fixed Network's intersegment revenues amounted to EUR 4,615 million, a decrease of EUR 483 million, or 9.5%, compared to EUR 5,098 million in 2003. This decrease was primarily attributable to the direct interconnection of the networks of Business Customers and Mobile Communications. In addition, in January 2004, T-Com reduced the price that it charged to Business Customers for ISP services, which resulted in a decrease in intersegment revenues.

    Broadband/Fixed Network Total Revenues by Geographic Area

        The following table reflects Broadband/Fixed Network's total revenues by geographic area:

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Germany   23,218   24,265   25,482   (4.3 ) (4.8 )
Central and Eastern Europe   2,546   2,532   2,608   0.5   (2.9 )
Rest of Europe   272   215   169   26.5   27.2  
   
 
 
         
Total revenues   26,035   27,012   28,259   (3.6 ) (4.4 )
   
 
 
         

        Broadband/Fixed Network's total revenues decreased by EUR 977 million, or 3.6%, to EUR 26,035 million in 2005, from EUR 27,012 million in 2004. In Germany, this decrease was primarily due to the continued decline in T-Com's network communications revenues. The decline was largely a result of the loss of access lines to other carriers, reductions in prices and volumes relating to calling charges, as well as carrier pre-selection and mobile substitution. Domestic revenues (total revenues derived from within Germany) accounted for 89.2% of Broadband/Fixed Network's total revenues in 2005.

        In 2004, Broadband/Fixed Network's total revenues decreased by EUR 1,247 million, or 4.4%, to EUR 27,012 million, from EUR 28,259 million in 2003. Total revenues related to Germany accounted for the bulk of the decrease, which was primarily due to a decline in T-Com's network communications revenues. This decline was a result of reductions in calling charge prices and calling minute volumes, as well as mobile substitution. Domestic revenues accounted for 89.8% of Broadband/Fixed Network's total revenues in 2004. In addition, total revenues in 2003 included amounts from our cable businesses, which were sold in March 2003, with no corresponding revenues from those businesses in 2004.

        Broadband/Fixed Network's total revenues from its Central and Eastern European subsidiaries remained relatively stable at EUR 2,546 million in 2005, compared to EUR 2,532 million in 2004. This

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was primarily due to currency translation effects as well as to the effects of the initial consolidation of Telekom Montenegro.

        In 2004, Broadband/Fixed Network's total revenues from its Central and Eastern European subsidiaries decreased to EUR 2,532 million, compared to EUR 2,608 million in 2003. This decrease was primarily due to a decrease in revenues from Magyar Telekom's network communications products. The decrease in Broadband/Fixed Network's total revenues from its Central and Eastern European subsidiaries was partly offset by an increase in revenues from online and multimedia products in those subsidiaries.

        Broadband/Fixed Network's total revenues in Spain and France (primarily Internet-related revenues) increased by 25.5% to EUR 241 million in 2005, compared to EUR 192 million in 2004, and by 15.7%, or EUR 26 million in 2004, compared to 2003. These increases were primarily the result of the growth of T-Online's DSL-tariff customer base.

    T-Com

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Net revenues   19,848   20,573   21,499   (3.5 ) (4.3 )
Intersegment and intra-segment revenues(1)   4,847   5,030   5,672   (3.6 ) (11.3 )
   
 
 
         
  T-Com total revenues(1)   24,695   25,603   27,170   (3.5 ) (5.8 )
   
 
 
         

(1)
T-Com total revenues includes revenues received from T-Online for T-Com services provided to T-Online.

      T-Com Net Revenues

        T-Com's net revenues decreased by EUR 725 million, or 3.5%, to EUR 19,848 million in 2005, compared to 2004. This decrease was primarily the result of a continued reduction in call revenues, primarily due to further losses of market share and of minutes, due to the loss of narrowband access lines as well as to carrier pre-selection and mobile substitution. In addition, data communications revenues also decreased. The decrease in net revenues in 2005 was partly offset by increased revenues from broadband access lines and wholesale services provided to competitors, especially with respect to Resale DSL and unbundled local-loop lines.

        The estimated average market share of call traffic volume in T-Com's domestic fixed-line network declined from 49.7% in 2004 to 47.2% in 2005. (We base this estimate on the Federal Network Agency's latest Activity Report, published in December 2005.) However, the rate of decline stabilized during the second half of the year, due to the introduction and increasing acceptance of T-Com's new calling rate plans, and to the simplification of its tariff structure. These new rate plans were introduced to counter increased penetration from call-by-call and pre-selection alternative providers, and in order to stabilize T-Com's calling minutes market share.

        Net revenues from wholesale services increased by EUR 189 million, or 5.5%, to EUR 3,639 million in 2005, primarily as a result of increased revenues from Resale DSL, leased lines in the unbundled local loop, interconnection access and interconnection calling minutes. The increase in wholesale service revenues was partly offset by a decline in revenues from ICSS, as well as price reductions in certain wholesale products.

        Data communications net revenues decreased by EUR 18 million in 2005, or 4%, to EUR 445 million. This decrease in net revenues from data communications was mainly due to a reduction in revenues from certain digital products.

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        In 2004, net revenues decreased, primarily due to a reduction in network communication revenues as a result of reduced call charge and wholesale services revenues. In addition, due to the sale of the remaining cable businesses in March 2003, the net revenues attributable to these businesses for the first three months of 2003 did not recur in 2004. The reduction in call charge revenues was primarily due to market share losses resulting from increased competition from other carriers, the introduction in Germany of call-by-call in April 2003 and carrier pre-selection in July 2003, as well as the increased use of optional lower-rate calling plans.

        Net revenues from T-Com's Central and Eastern European subsidiaries decreased slightly by EUR 17 million, or 0.7%, to EUR 2,404 million in 2005, compared to EUR 2,421 million in 2004. This decrease was due, in part, to the effects of the 2005 consolidation of EuroTel Bratislava, which has been re-branded, "T-Mobile Slovensko." In 2004, net revenues from our Central and Eastern European subsidiaries decreased by EUR 86 million, or 3.4%, to EUR 2,421 million, compared to EUR 2,507 million in 2003. This decrease was due to a decline in revenues from both Magyar Telekom and Slovak Telekom. The decrease was partly offset by an increase in revenues, primarily due to favorable exchange rate effects in Hungary, Croatia and Slovakia.

        The components of T-Com's total revenues by geographic area are listed in the following table:

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Domestic revenues                      
  Network communications   13,555   14,322   14,783   (5.4 ) (3.1 )
  Data communications   1,158   1,355   1,320   (14.5 ) 2.7  
  Value-added services   1,076   1,187   1,278   (9.4 ) (7.1 )
  Terminal equipment   491   516   667   (4.8 ) (22.6 )
  Other fixed-line network revenues   248   224   474   10.7   (52.7 )
   
 
 
         
  Total domestic fixed-line network revenues   16,528   17,604   18,522   (6.1 ) (5.0 )
  Wholesale services   4,980   4,870   5,263   2.3   (7.5 )
  Other domestic services   641   596   778   7.6   (23.4 )
   
 
 
         
  Total domestic revenues   22,149   23,071   24,563   (4.0 ) (6.1 )

Central and Eastern European revenues

 

 

 

 

 

 

 

 

 

 

 
  Magyar Telekom   1,376   1,363   1,438   1.0   (5.2 )
  T-Hrvatski Telekom   765   754   752   1.5   0.3  
  Slovak Telekom   405   415   418   (2.4 ) (0.7 )
   
 
 
         
  Total Central and Eastern European revenues   2,546   2,532   2,608   0.6   (2.9 )
   
 
 
         
  Total revenues   24,695   25,603   27,170   (3.5 ) (5.8 )

      T-Com Components of Total Revenues

        Total Domestic Revenues

        Total domestic revenues decreased by EUR 922 million, or 4.0%, to EUR 22,149 million in 2005, from EUR 23,071 million in 2004. The decrease in total domestic revenues was primarily the result of a reduction in total revenues from network communications services, which was a result of a decrease in call charge revenues. This decrease was primarily due to the reduction in the number of narrowband access lines, due to competition from alternative access providers and, to a lesser extent, to carrier pre-selection and fixed-mobile substitution. In addition, in 2005, total domestic revenues decreased, due to a reduction in sales of value-added services, resulting from decreased customer demand for premium-rate services and T-VoteCall. These decreases were partly offset by increased total revenues

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from wholesale services, which was primarily attributable to increases in revenues from Resale DSL and the unbundled local loop. Domestic revenues accounted for 89.7% of T-Com's total revenues in 2005.

        In 2004, total domestic revenues decreased by EUR 1,492 million, or 6.1%, to EUR 23,071 million, from EUR 24,563 million in 2003. The decrease in total domestic revenues was primarily the result of a reduction in total revenues from network communications services, wholesale services, other domestic services, terminal equipment and value-added services. The reduction in total revenues from network communications services was primarily due to the impact of competition. The reduction in wholesale services revenues was primarily due to the impact of mandatory price reductions for interconnection. In addition, total other domestic services revenues in 2003 included revenues from the cable businesses, which were sold in March 2003, with no corresponding revenues from these businesses in 2004. Furthermore, the reduction in terminal equipment was mainly due to the reduced volume of terminal equipment products sold.

        Network Communications

        Network communications revenues consist of revenues from network access products and calling services. Revenues from network access products include monthly access charges and installation fees. Revenues from calling services include call charges relating to local, regional and long-distance calls, international calls, calls to mobile networks and calls to dial-up ISPs. Call charges vary, depending on the rate plan, or tariff, in effect at the time a call is initiated. T-Com customers are able to choose from a variety of calling plans designed to suit a range of individual and business needs. T-Com also offers a number of rate plans with flat-rate components, which are designed to provide customers with reduced per-call rates for an additional monthly fee.

        Network communications total revenues decreased by 767 million, or 5.4%, to EUR 13,555 million in 2005, from EUR 14,322 million in 2004. This decrease was primarily due to a decline in call-charge revenues, which was affected by the reimbursement of mandatory price reductions from fixed-to-mobile termination fees to our customers. The decrease in network communications revenues was offset, in part, by higher broadband access revenues. T-Com expects its retail broadband access revenues to decrease in the future, however, because, as of January 31, 2006, almost all new retail broadband access customers are accounted for by T-Online, which means that T-Com's existing broadband access customer base will gradually migrate to T-Online and other providers. T-Com believes that these decreases in retail broadband access revenues will be partly offset by growth in Resale DSL revenues, which are included in wholesale services revenues.

        The decrease in calling services revenues in 2005 was primarily due to a decline in call minutes, as well as to increased customer usage of optional lower-rate calling plans. The decline in total call minutes, by 9.0% in 2005, compared to 2004, was largely the result of continued losses of access lines to other carriers, increased competition from mobile substitution and carrier pre-selection.

        Although T-Com introduced several innovative rate plan options during 2004 and 2005, its estimated fixed-line network market share, measured in minutes of call time, decreased from 49.7% in 2004 to 47.2% in 2005. T-Com expects that its market share will continue to decrease, due to continued losses of access lines to other carriers, the increased use of VoIP as well as mobile substitution.

        The decrease in network communications calling services revenues in 2005 was also due, in part, to a 4.1% decrease in the number of T-Com narrowband access lines. This decrease resulted from increased competition from alternative network providers and mobile substitution, and from call-by-call and carrier pre-selection for local calling services. However, an increase in revenues from network access products partly offset the decrease in revenues from call charges.

        T-Com expects that its network communications revenues will continue to decrease, primarily as a result of the decline in the number of access lines, a decrease in calling revenues, due to increased use

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of tariff plans with a flat-rate component, mobile substitution, VoIP and price reductions made in connection with optional lower-rate calling plans.

        In 2004, network communications total revenues decreased by EUR 461 million, or 3.1%, to EUR 14,322 million, from EUR 14,783 million in 2003. The decrease was primarily the result of a reduction in calling services revenues from call charges, due to the introduction of call-by-call and carrier pre-selection for local services, as well as the increased use of optional lower-rate calling plans. This decrease was partly offset by an increase in network access revenues, due, in part, to an increase in the price of standard T-Net access products and increased sales of broadband access products.

        Data Communications

        Revenues from data communications include revenues from leased lines, TDN products, VPN products and Ethernet products. As of January 1, 2005, T-Com only services individual and very small business customers, as well as domestic and international carriers. Other business customers are primarily serviced by the Business Customers strategic business area. Accordingly, a substantial portion of T-Com's data communications revenues are derived from products sold to the Business Customers strategic business area for resale.

        Total revenues from data communications services in Germany decreased by EUR 197 million in 2005, or 14.5%, to EUR 1,158 million compared with EUR 1,355 million in 2004. This decrease was primarily due to reduced revenues from certain leased-line products, due to a mandatory price reduction in April 2005 as well as to the loss of market share with respect to these products. In addition, data communications services revenues decreased, due to a continuing shift in customer demand towards wholesale and IP-related services.

        The decrease in revenues from data communications services in 2005 was partly offset by an increase in other leased-line and VPN products, partly due to increased volumes as a result of the acquisition of new customers (carriers) by the Business Customers strategic business area. In 2004 and 2005, T-Com reduced the price that it charged to the Business Customer strategic business area for certain services, resulting in a decrease in intersegment revenues.

        In 2004, total revenues from data communications services in Germany increased by EUR 35 million, or 2.7%, to EUR 1,355 million, compared to EUR 1,320 million in 2003. This increase was largely due to increases in revenues from dedicated customer lines, as well as CompanyConnect. The increase in data communications services revenues in 2004 was partially offset by a decrease, due to price, volume and transfer effects relating to other principal products. T-Com's TDN products also contributed to this decrease, due to external carriers creating their own networks, as well as the migration of customers from data communications products to CSN products, which are included under wholesale services.

        Value-Added Services

        Revenues from value-added services include revenues from toll-free numbers, shared-cost numbers, public payphones, T-VoteCall, premium-rate services, directory-assistance services and other operator services, such as call-center services.

        Total revenues in 2005 from value-added services in Germany decreased by EUR 111 million, or 9.4%, to EUR 1,076 million in 2005, from EUR 1,187 million in 2004. This was mainly the result of a decrease in revenues from T-Com's premium-rate services, due to a decrease in customer demand. In addition, revenues from T-VoteCall, directory-assistance services and other operator services also decreased in 2005. T-Com believes that value-added services revenues will continue to decrease in the future, due to increased use of the transmission fee-based billing model, as well as to decreases in sales from T-VoteCall. For more information, see "Item 4. Information on the Company—Regulation—Regulation in Germany—Network Access—Customer Protection Ordinance."

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        In 2004, total domestic revenues from value-added services decreased by EUR 91 million, or 7.1%, to EUR 1,187 million, from EUR 1,278 million in 2003. This was mainly the result of a decrease in revenues from T-Com's premium-rate services, due to decreased customer demand and a regulatorily mandated change to a transmission fee-based billing model. The decrease in revenues from premium-rate services was partially offset by an increase in revenues from T-VoteCall.

        Terminal Equipment

        Revenues from terminal equipment sales consist of revenues from the sale and rental of conventional and ISDN telephones, and PBXs, which relate to T-Com's fixed-line network.

        Total revenues from sales and rental of terminal equipment decreased by EUR 25 million in 2005, or 4.8%, to EUR 491 million, from EUR 516 million in 2004. This decrease was a result of reduced demand for rentals of conventional telephones and communications systems for business customers, as well as a reduction in the selling prices of such equipment. The decrease in demand was also, in part, a result of business customers' increasing tendency to purchase their own equipment, rather than rent equipment from T-Com. Accordingly, although sales from certain terminal equipment products increased, they did not offset the decrease in T-Com's total revenues from rental and sales of terminal equipment. The decrease in terminal equipment revenues was also partially offset by revenues attributable to the change in our business model of subsidizing the terminal equipment of our broadband customers.

        In 2004, total domestic revenues from sales of terminal equipment decreased by EUR 151 million, or 22.6%, to EUR 516 million, from EUR 667 million in 2003. This decrease was a result of reduced demand for rentals of conventional telephones and communications systems for business customers, as well as a decline in ISDN equipment sales. The decrease in demand was also, in part, a result of business customers' tendency to purchase their own equipment, rather than rent equipment from T-Com.

        Other Fixed-Line Network Revenues

        Other fixed-line network revenues mainly consist of support services for the installation, maintenance and repair of telecommunications equipment and related service support.

        Total other fixed-line network revenues increased by EUR 24 million in 2005, or 10.7%, to EUR 248 million, from EUR 224 million in 2004. The increase in other fixed-line network revenues was mainly due to an increase in maintenance and installation services revenues.

        In 2004, total other fixed-line network revenues decreased by EUR 250 million, or 52.7%, to EUR 224 million, from EUR 474 million in 2003. This decrease was largely attributable to the sale of the remaining cable businesses in March 2003, which contributed net revenues for the first three months of 2003, but no revenues in 2004.

        Wholesale Services

        T-Com's wholesale services business primarily consists of providing services to national and international carriers, and to other Deutsche Telekom group segments. Wholesale services include national and international interconnection, access to the unbundled local loop, Resale DSL, IP-related services and network services (e.g., carrier-specific transmission paths and networks).

        Total domestic revenues from wholesale services, including revenues for services provided to third parties as well as revenues from other entities within the group, increased by EUR 110 million in 2005, or 2.3%, to EUR 4,980 million, from EUR 4,870 million in 2004. The increase in wholesale services revenues was primarily attributable to an increase in the demand for network access services through Resale DSL and the unbundled local loop and, to a lesser extent, to increases related to interconnection services. In addition, customer migration from data communications products and

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services to wholesale products and services also increased wholesale services revenues in 2005. However, these increases were largely offset by a decline in revenues from international carrier services, due to the discontinuation of low-margin products, as well as a decrease in IP-related services revenues, due to several sales price reductions in 2004 and 2005. Prices charged to alternative providers for access to the unbundled local loop decreased by 9.75%, as mandated by the Federal Network Agency on April 1, 2005. This price reduction led to a decrease in T-Com's wholesale services revenues, which partly offset the increases mentioned above.

        T-Com expects that revenues from wholesale access services products (e.g., Resale DSL, local-loop access) will continue to increase in the near term, but that the negative effect on revenues from increased competition for certain IP-related and data-services products will partially offset the increase in wholesale services revenues in the future.

        In 2004, total revenues from wholesale services decreased by EUR 393 million, or 7.5%, to EUR 4,870 million, from EUR 5,263 million in 2003. This decrease was primarily due to an average 9.5% price reduction for interconnection charges, which was mandated by the Federal Network Agency. In addition, total revenues from wholesale services decreased due to carrier migration towards multiple points of interconnection, which led to a reduction in the average price per minute for interconnection. Furthermore, the trend towards direct interconnection between carriers continued, which decreased the amount of traffic among mobile carriers that is routed by T-Com through its fixed-line network. The decrease in wholesale services revenues in 2004 was also due to price reductions for narrowband and broadband IP services, and to decreased revenues from ICSS.

        Other Domestic Services

        Other domestic services revenues mainly consist of sales commissions from other Deutsche Telekom entities from sales of their products through T-Com's sales outlets, such as T-Punkt outlets. Other domestic services also include revenues from the publication and sale of telecommunications service subscriber data (e.g., telephone directories), from the production and sale of prepaid cards for online-shopping and from prepaid cards for telephones.

        Total other domestic services revenues increased by EUR 45 million in 2005, or 7.6%, to EUR 641 million, from EUR 596 million in 2004. This increase was primarily the result of increased sales of mobile devices and accessories through T-Com's T-Punkt outlets, as well as sales of third-party products, which were introduced in 2005. However, the increase in T-Com's other domestic services revenues in 2005 was partially offset by a decrease in revenues from the production and sale of prepaid cards for online-shopping, from prepaid cards for telephones and "other' other domestic services revenues. In addition, the change in 2004 of T-Com's business model in relation to sales of telecommunications equipment, mobile devices and accessories led to further decreases in other domestic service revenues in 2005.

        In 2004, total other domestic services revenues decreased by EUR 182 million, or 23.4%, to EUR 596 million, from EUR 778 million in 2003. This decrease was primarily the result of a change in 2004 of T-Com's business model in relation to sales of telecommunications equipment, mobile devices and accessories. Prior to that time, revenues from sales of mobile devices and accessories through T-Com's T-Punkt outlets were recorded on a gross basis and the corresponding costs shown under cost of sales. Revenues relating to sales of these products after the change in business model were recorded as sales commissions received from other group companies. In addition, total other domestic services revenues decreased, largely because of lower revenues from the publishing and directory businesses in 2004, compared to 2003, due to a decline in advertising revenues and increased competition from online services.

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    T-Online

        The following table presents selected financial information concerning our T-Online business unit:

 
  For the years ended December 31,
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
  (millions of €)

  (% change)

Net revenues   1,888   1,820   1,662   3.7   9.5
Intersegment revenues   200   192   189   4.2   1.6
Total revenues   2,088   2,012   1,851   3.8   8.7

      T-Online Total Revenues

        T-Online generates the majority of its revenues from subscription fees, usage fees, online advertising and business-to-business ("B2B") services.

        Subscription fees comprise fixed monthly payments under subscription plans. This revenue component generally includes established consumer products, including all T-Online access plans that incorporate a basic charge. In 2005, it also included the new DSL-Komplettpakete, which combine a broadband connection with a broadband tariff and hardware components. This revenue category also includes certain other components, such as monthly subscription fees billed for products such as premium e-mail, security packages, extra mailbox space and subscription content plans.

        Usage fees include all non-subscription products and are subject to greater volatility and seasonal variation than subscription fee revenues. Usage fees comprise per-minute or volume-based access tariff components and products, such as VoD, Musicload, Gamesload and all non-subscription revenues from e-commerce and paid content. This revenue category generally includes all products made available on a pay-per-use or pay-per-view basis.

        Online advertising and B2B services revenues consist of advertising and B2B revenues from hosting and security products, and from content management services for business clients operating traffic-intensive portals.

        T-Online generated total revenues of EUR 2,088 million in fiscal 2005. This represents a year-on-year increase of 3.8%, or EUR 76 million (compared to 8.7% from 2003 to 2004). In addition, the acquisition of Albura resulted in revenues of EUR 14 million in 2005.

        The following table presents T-Online's total revenues by geographic area.

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Germany   1,818   1,794   1,682   1.3   6.7  
  Subscription fees   1,063   1,001   884   6.2   13.2  
  Usage fees   438   556   576   (21.2 ) (3.5 )
  Online advertising and B2B   317   237   222   33.8   6.8  
    Portal advertising agreement with Deutsche Telekom   148   148   148   0.0   0.0  
    Other   169   89   74   89.9   20.3  
Rest of Europe   286   230   171   24.3   34.5  
  Subscription fees   182   162   128   12.3   26.6  
  Usage fees   51   33   29   54.5   13.8  
  Online advertising and B2B   53   35   14   51.4   150.0  
Consolidation   (16 ) (12 ) (2 ) 33.3   n.m.  
                       

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Total   2,088   2,012   1,851   3.8   8.7  
Less intersegment revenues   200   192   189   4.2   1.6  
Net revenues   1,888   1,820   1,662   3.7   9.5  

n.m.—not meaningful

        Total subscription fee revenues increased to EUR 1,245 million in 2005, compared to EUR 1,163 million in 2004. Total subscription fee revenues increased by EUR 151 million, in 2004, compared to 2003. The increase for each period was primarily the result of T-Online's growth in its DSL tariff customer base largely as a result of its broadband strategy, which focused specifically in the current year on competitive positioning in both geographical areas.

        As of December 31, 2005, T-Online had approximately 5.1 million DSL tariff customers, compared to 3.6 million at December 31, 2004, and 2.4 million at December 31, 2003. Customers in Germany increased 38.0% from 2004 to 2005, and 49.4% from 2003 to 2004. Customer in Rest of Europe increased by 77.0% from 2004 to 2005, and 36.0% from 2003 to 2004.

        Total usage fee revenues decreased by EUR 100 million in 2005 compared to 2004, and by EUR 16 million in 2004 compared to 2003. The decrease in usage fees revenues for each period was primarily the result of the increasing efforts to migrate customers to broadband subscription plans offering attractive access rates and content.

        Online advertising and B2B revenues increased by EUR 95 million in 2005 compared to 2004, and by EUR 36 million in 2004 compared to 2003, primarily as a result of the increasing attractiveness and quality of broadband advertising products for the top international brands.

        A substantial portion of T-Online's intersegment revenues is generated pursuant to a portal advertising agreement between T-Online and Deutsche Telekom AG. Under that agreement, T-Online provides Internet-based links to the various Deutsche Telekom Web sites.

      Total Central and Eastern Europe Revenues

        Magyar Telekom, T-Hrvatski Telekom and Slovak Telekom accounted for all of T-Com's Central and Eastern European revenues in 2005 and contributed EUR 2,546 million, or 10.3%, to T-Com's total revenues. Mobile services revenues generated by the Central and Eastern European subsidiaries are reported under the Mobile Communications strategic business area.

        Total revenues from T-Com's Central and Eastern European subsidiaries increased slightly in 2005 to EUR 2,546 million, from EUR 2,532 million in 2004, primarily due to exchange-rate effects and, to a lesser extent, to the consolidation of Telekom Montenegro on April 1, 2005. Total revenues measured in local currency decreased at all three Central and Eastern European subsidiaries, primarily due to decreases in voice revenues at all three subsidiaries, due to continued deregulation, increasing competition and mobile substitution.

        The decrease in total revenues measured in local currency in 2005 was partly offset by increased wholesale services revenues at all three Central and Eastern European subsidiaries, due to increased traffic from competitors and mobile operators, increasing international traffic and, to a lesser degree, to increased data communications at all three subsidiaries, and to increased multimedia and broadcasting revenues at Magyar Telekom.

        In 2004, total revenues from the Central and Eastern European subsidiaries decreased slightly, to EUR 2,532 million, from EUR 2,608 million in 2003, mainly due to a decrease in total revenues from Magyar Telekom. When measured in local currencies, revenues from the Central and Eastern European

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subsidiaries also decreased, compared to 2003. Revenues from fixed-line networks continued to decline in all Central and Eastern European subsidiaries during 2004, primarily due to continued deregulation, increasing competition and mobile substitution. This decline was partially offset by an increase in online and broadband revenues in all three subsidiaries.

      Magyar Telekom

        Magyar Telekom generates revenues from fixed-line network services, data communications services, wholesale services, online services, multimedia services and its broadcasting (cable television) business.

        Total revenues at Magyar Telekom increased by 1.0%, to EUR 1,376 million, from EUR 1,363 million in 2004, due to exchange-rate effects and the inclusion of nine months of revenues from Telekom Montenegro in 2005. However, total revenues measured in local currency declined by 1.2% in 2005, compared to 2004. This decrease was due to decreases in network communications revenues in Hungary, which were partially offset by an increase in wholesale services revenues.

        Measured in local currency, fixed-line network revenues decreased slightly in 2005, compared to 2004, due to increased competition from alternative carriers and mobile substitution. Magyar Telekom is acting to slow this trend through the introduction of innovative offers and a simplified rate structure, including flat-rate plans.

        Revenues from wholesale services in Hungary increased in 2005, due to increased sales of interconnection services as well as to exchange-rate effects. Wholesale services revenues increased although price reductions for certain wholesale services occurred in 2005.

        In 2004, Magyar Telekom's total revenues decreased by 5.2%, to EUR 1,363 million, from EUR 1,438 million in 2003, due to lower fixed-line network, wholesale services and value-added services revenues. The decrease in fixed-line network revenues was due to price decreases in connection with regulatory constraints, as well as to a reduction in market demand resulting from increased competition and mobile substitution. In addition, wholesale services revenues decreased, due to lower levels of traffic terminating in the fixed-line network. The decrease in fixed-line network revenues was partially offset by increased revenues from online services and data communications.

      T-Hrvatski Telekom

        T-Hrvatski Telekom generates revenues from fixed-line network services, data communications services, online services and wholesale services.

        Total revenues in Croatia increased by EUR 11 million, or 1.5%, to EUR 765 million in 2005, from EUR 754 million in 2004. This increase was primarily due to exchange-rate effects. In local currency total revenues at T-Hrvatski Telekom decreased by 0.6%. This decrease primarily resulted from lower revenues from fixed-line network services, resulting from mobile substitution. The decrease was partially offset by increases in wholesale services revenues, data communications and online services revenues. Since the middle of 2005, T-Hrvatski Telekom has been subject to increased competition, particularly in the fixed-line network communications business. T-Com expects fixed-line network revenues to continue to decrease, due to competition as a result of the liberalization of the Croatian telecommunications market.

        Total fixed-line network revenues increased in 2005, compared to 2004, mainly due to an increase in data communications revenues. This increase was partly offset by decreased revenues from access fees for traditional access lines as well as call charges.

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        Online services revenues increased in 2005, compared to 2004. This increase was primarily due to an increase in revenues from broadband access lines. The number of broadband customers increased, from 22,000 at the end of 2004, to 101,000 at the end of 2005, primarily due to a price decrease.

        The increase in wholesale services revenues was due to the introduction of services for other fixed-line network operators and increased international telephone traffic.

        In 2004, total revenues increased, compared to 2003, due to currency translation effects, and to a lesser degree, higher revenues from online services, which were partially offset by lower revenues from fixed-line network services.

      Slovak Telekom

        Slovak Telekom generates revenues from fixed-line network services, data communications services, wholesale services, online services and broadcasting services. Slovak Telekom's total revenues decreased by EUR 10 million, or 2.4%, to EUR 405 million in 2005, from EUR 415 million in 2004, primarily due to a decrease in fixed-line network revenues. Total revenues from Slovak Telekom in local currency decreased 4.9%, primarily due to a decrease in fixed-line network revenues, as a result of mobile substitution. The decrease in fixed-line network revenues was partly offset by increases in revenues from online services (mainly due to broadband) and wholesale services.

        The decrease in fixed-line network revenues in 2005 was primarily attributable to a decrease in the number of access lines, as a result of mobile substitution, as well as to price decreases related to higher competitive pressures and the introduction of lower prices in connection with calling plans. T-Com expects that revenues from Slovak Telekom's fixed-line network will continue to decrease in 2006. Slovak Telekom is acting to slow the loss of lines through the introduction of innovative offers and new calling plans.

        Revenues from wholesale services in Slovakia increased in 2005, primarily as a result of higher revenues from fixed-line network interconnection, due to the introduction of services for other fixed-line carriers.

        Slovak Telekom's online services revenues increased in 2005, compared to 2004. This increase was driven primarily by an increase in Internet services customers using broadband. The increase was also partially due to the acquisition of Zoznam.

        In 2004, Slovak Telekom's total revenues decreased by EUR 3 million to EUR 415 million, from EUR 418 million in 2003. The decrease was primarily attributable to mobile substitution.

    Operating Expenses

        The following discussions provide information regarding the components of T-Com's and T-Online's operating expenses. The T-Com and T-Online information presented does not give effect to intra-segment consolidation adjustments within the Broadband/Fixed Network strategic business area.

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    Broadband/Fixed Network Operating Expenses

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Cost of sales   14,337   15,114   16,479   (5.1 ) (8.3 )
Selling expenses   5,329   4,916   4,919   8.4   (0.1 )
General and administrative expenses   1,874   1,479   1,589   26.7   (6.9 )
Other operating expenses   153   399   563   (61.7 ) (29.1 )
   
 
 
         
Total Broadband/Fixed Network Operating Expenses   21,693   21,908   23,550   (1.0 ) (7.0 )
   
 
 
         

    T-Com Total Operating Expenses

        The following table provides selected information regarding the components of T-Com's operating expenses:

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Cost of sales   13,888   14,754   16,227   (5.9 ) (9.1 )
Selling costs   4,593   4,312   4,426   6.5   (2.6 )
General and administrative cost   1,753   1,369   1,507   28.0   (9.2 )
Other operating expenses   177   404   502   (56.2 ) (19.4 )
   
 
 
         
T-Com Total Operating Expenses   20,411   20,839   22,662   (2.1 ) (8.1 )
   
 
 
         

      T-Com Cost of Sales

        Cost of sales decreased by EUR 866 million in 2005, or 5.9%, to EUR 13,888 million, compared to EUR 14,754 million in 2004. This decrease primarily resulted from a price decrease with respect to fixed-to-mobile termination fees, as well as from other reductions in interconnection costs, and depreciation and amortization for the fixed-line network. The decrease in cost of sales was partially offset by an increase in personnel costs, due to higher accruals for employee severance packages, primarily related to the recently announced restructuring plans in Germany. Lower sales and rentals of terminal equipment also contributed to the decrease in the cost of sales.

        Interconnection costs decreased, largely as a result of the price decrease for fixed-to-mobile termination fees, as well as from other reductions in interconnection costs. The reduction in depreciation and amortization costs was largely related to the increasing number of T-Com's network assets that have been fully depreciated. In addition, T-Com's building lease costs decreased in 2005. For more information, see "—Group Headquarters and Shared Services."

        In 2004, T-Com's cost of sales decreased by EUR 1,473 million, or 9.1%, to EUR 14,754 million, compared to EUR 16,227 million in 2003. This decrease was primarily due to the reduced cost of interconnection as well as to a decrease in depreciation and amortization related to T-Com's fixed-line network. In addition, personnel costs and employee benefit costs decreased, due to reductions in headcount and working hours. Lower sales and rentals of terminal equipment also contributed to this decrease. The reduced cost of interconnection was largely due to the direct network interconnection between T-Mobile Deutschland and its competitors, and due to a decreasing number of calls between T-Com's fixed-line network and mobile customers. In addition, the number of calls terminating in the networks of third-party providers decreased, which resulted in lower termination costs. Furthermore, the cable businesses, which were sold in 2003, did not contribute to cost of sales in 2004. The decrease

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in T-Com's cost of sales in 2004 was partly offset by an increase in cost of sales in the Central and Eastern European subsidiaries, primarily as a result of higher costs related to severance payments, higher impairment costs and currency-translation effects.

      T-Com Selling Expenses

        T-Com's selling expenses increased by EUR 281 million in 2005, or 6.5%, to EUR 4,593 million, compared to EUR 4,312 million in 2004. This increase was primarily due to an increase in T-Com's personnel costs, which was primarily related to an increase in costs related to T-Com's recently announced restructuring plans in Germany, which include increases in accruals for employee severance payments. To a lesser extent, the increase in T-Com's selling expenses in 2005 was due to increased customer acquisition costs and due to increased re-branding costs related to T-Com's Central and Eastern European subsidiaries. The increases in T-Com's selling expenses in 2005 were partially offset by a reduction of costs attributable to Deutsche Telekom's central billing department.

        In 2004, T-Com's selling expenses decreased by EUR 114 million, or 2.6%, to EUR 4,312 million, compared to EUR 4,426 million in 2003. This decrease was primarily due to reductions in headcount, employee hours and allowances for bad debts in 2004. The decrease was partially offset by increased advertising and marketing costs related to T-Com's broadband initiatives, and by an increase in selling costs related to T-Com's Central and Eastern European subsidiaries.

      T-Com General and Administrative Expenses

        General and administrative expenses increased by EUR 384 million in 2005, or 28%, to EUR 1,753 million, compared to EUR 1,369 million in 2004, primarily as a result of increased training costs for apprentices and other social costs related to employees. In addition, general and administrative expenses increased, due to the transfer of T-Com's financial accounting functions from Group Headquarters and Shared Services to T-Com during 2004.

        In 2004, general and administrative expenses decreased by EUR 138 million, or 9.2%, to EUR 1,369 million, compared to EUR 1,507 million in 2003, primarily as a result of improvements in efficiency and lower costs related to severance payments for T-Hrvatski Telekom employees. Furthermore, the cable businesses, which were sold in 2003, did not contribute to general and administrative expenses in 2004. The decrease in T-Com's general and administrative expenses in 2004 was partly offset by increased costs related to the transfer of T-Com's financial accounting functions from Group Headquarters and Shared Services to T-Com during 2004.

      T-Com Other Operating Expenses

        Other operating expenses amounted to EUR 177 million in 2005, representing a decrease of EUR 227 million, or 56.2%, compared to EUR 404 million in 2004. This decrease was primarily the result of goodwill impairment and, to a lesser extent, other non-recurring costs.

        In 2004, other operating expenses amounted to EUR 404 million, a decrease of EUR 98 million, or 19.4%, compared to EUR 502 million in 2003. This was mainly a result of lower expenses related to Deutsche Telekom's ABS (asset-backed securitization) program, lower foreign currency transaction costs and lower costs related to additions for legal accruals. Furthermore, payments to Vivento in 2004 declined significantly, compared to 2003. These decreases were partially offset by higher goodwill impairment.

      T-Com Depreciation and Amortization

        Depreciation and amortization decreased by EUR 425 million in 2005, or 9.9%, to EUR 3,882 million, from EUR 4,307 million in 2004. This decrease was primarily related to lower

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depreciation and amortization costs associated with T-Com's fixed-line network, which were primarily due to the increasing number of assets that had been fully depreciated. In addition, the decrease was related to non-recurring goodwill impairment costs for Slovak Telekom.

        In 2004, depreciation and amortization decreased by EUR 350 million, or 7.5%, to EUR 4,307 million, from EUR 4,657 million in 2003. The decrease in depreciation and amortization in 2004 was primarily due to a reduction in depreciation related to the assets of the cable businesses that were sold in 2003, and to lower depreciation and amortization costs associated with T-Com's fixed-line network in Germany.

      T-Com Personnel Costs

        Personnel costs primarily consist of wages and salaries, but also include social security, pension costs and other employee benefits. Personnel costs increased by EUR 556 million in 2005, or 11.1%, to EUR 5,574 million, from EUR 5,018 million in 2004, primarily as a result of an increase in accruals in 2005 for employee severance payments in subsequent years, increases in wages and salaries, as well as higher personnel costs resulting from the transfer of T-Com's financial accounting function from Group Headquarters and Shared Services to T-Com during 2004. Although T-Com reduced its total headcount in 2005, personnel costs increased as a result of increased personnel requirements, due to an increase in the number of T-Punkt outlets in Germany. These increases were partially offset by decreases in personnel costs in T-Com's Central and Eastern European subsidiaries, as a result of reduced headcounts.

        In 2004, personnel costs decreased by EUR 551 million, or 9.9%, to EUR 5,018 million, from EUR 5,569 million in 2003. This decrease was primarily due to reductions in headcount and employee hours in 2004. The reduction in headcount was achieved through the transfer of employees to Vivento, early retirement programs, voluntary redundancy programs and attrition, as well as through the transfer of certain service lines to Group Headquarters and Shared Services. For more information, see "—Group Headquarters and Shared Services."

      T-Com Capital Expenditures

        T-Com's capital expenditures increased in 2005, compared to 2004. This increase was primarily due to increased investments in Germany. This was mainly attributable to the continued expansion of T-Com's access network in order to increase broadband penetration in Germany, as well as its SDH transmission platform and the commencement of the build-out of its high-speed access network. In addition, this increase in capital expenditure included a reclassification from current assets to non-current assets. T-Com's large-scale capital investment program, which is expected to be built-out from 2005 to 2007, and which has the goal of providing high-speed broadband access in 50 large cities, will form the basis for Broadband/Fixed Network's innovative multimedia offerings, including new services and applications.

        In 2004, capital expenditures remained relatively stable and included a reclassification from current assets to non-current assets. In Germany, T-Com intensified its capital spending on the SDH transmission platform, access networks and, in particular, on DSL technology. T-Com reduced its capital expenditure related to international carrier connections.

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    T-Online Operating Expenses

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Cost of sales   1,058   956   1,014   10.7   (5.7 )
Selling expenses   829   598   512   38.6   16.8  
General and administrative expenses   124   109   82   13.8   32.9  
Other operating expenses   12   14   21   (14.3 ) (33.3 )

      T-Online Cost of Sales

        Cost of sales mainly includes goods and services purchased. The increase in cost of sales in 2005 was a result of an increase in the goods and services purchased in Rest of Europe, an increase of expenditure in connection with the DSL-Komplettpakete and a partially offsetting decrease, due to better utilization of capacity purchased from the T-Com business unit. Goods and services purchased remained relatively stable in 2005, compared to 2004, and decreased to EUR 716 million in 2004 from EUR 755 million in 2003, primarily due to better utilization of the capacity purchased from T-Com.

      T-Online Selling Expenses

        Selling expenses increased to EUR 829 million in 2005, compared to EUR 598 million in 2004 and EUR 512 million in 2003, due in 2005 to marketing campaigns for combined DSL packages, and increased advertising for entertainment services like Musicload and the ElectronicScout24 vertical portal.

Mobile Communications

        The following table presents selected financial information concerning Mobile Communications:

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Net revenues   28,531   25,450   22,933   12.1   11.0  
Inter-segment revenues   921   1,077   1,394   (14.5 ) (22.7 )
   
 
 
         
Total revenues   29,452   26,527   24,327   11.0   9.0  
   
 
 
         
Profit before income taxes   3,521   1,602   2,985   119.8   (46.3 )

    Net Revenues

        Net revenues from our Mobile Communications strategic business area, which consist of revenues from customers outside of the Deutsche Telekom group, increased by EUR 3,081 million, or 12.1%, to EUR 28,531 million in 2005, from EUR 25,450 million in 2004. This increase was primarily attributable to continued growth in numbers of customers, and to the first-time consolidation of T-Mobile Slovensko. Mobile Communications counts its customers by the number of SIM cards activated and not churned. The aggregate number of Mobile Communications customers increased by 14.7%, from 75.5 million in 2004 to 86.6 million in 2005 (including 5.0 million customers in 2004 and 6.2 million in 2005 from the Virgin Mobile MVNO). This increase was mainly a result of strong customer growth in the United States, and to a lesser extent, customer growth in Europe and the first time consolidation of T-Mobile Slovensko.

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        In 2004, net revenues increased by EUR 2,517 million, or 11.0%, to EUR 25,450 million, from EUR 22,933 million in 2003. This increase was primarily attributable to continued growth in numbers of customers. The aggregate number of Mobile Communications customers increased by 13.4%, from 66.6 million in 2003, to 75.5 million in 2004 (including 3.6 million customers in 2003 and 5.0 million in 2004 from the Virgin Mobile MVNO). This increase was mainly a result of strong customer growth in the United States, and to a lesser extent, customer growth in Europe.

        In Germany, the United Kingdom, Hungary, Austria, the Czech Republic and the Netherlands, the rate of mobile telephone penetration is quite high. As a result, Mobile Communications expects that the growth in the number of its customers in these markets will be significantly lower than in past years, and the focus of competition will continue to shift from customer acquisition to customer retention, and to increasing ARPU by stimulating demand for voice usage and new data products and services.

    Total Revenues

        Total revenues include both net revenues from external customers and revenues from other entities within the Deutsche Telekom group. The most significant component of Mobile Communications' intersegment revenues relates to revenues received from the Broadband/Fixed Network strategic business area, for terminating calls on our mobile network in Germany that originate from T-Com's fixed-line network in Germany.

        Total revenues is mainly comprised of service revenues. Service revenues is comprised of revenues generated by customers for services (i.e., voice services, including incoming and outgoing calls, and data services) plus roaming revenues, monthly charges, and revenues from visitor roaming.

        Revenues from mobile termination fees are primarily generated in our operations outside of the United States. In 2005, in Germany and in the Czech Republic, the regulatory authorities and mobile operators agreed to decrease mobile termination fees. Because this price reduction first became effective in Germany in December 2005, it had only a minor impact on Mobile Communications' total revenues in 2005. However, the reduced mobile termination fees in the United Kingdom (since 2004), Germany, and in the Czech Republic, as well as Hungary, the Netherlands and Slovakia in 2005, as agreed with or determined by the regulatory authorities in those countries, did negatively affect Mobile Communications' total revenues in 2005. Additionally, mobile termination fees were reduced by the regulatory authorities in Austria in December 2005. These decreased mobile termination fees will continue to have a negative impact on Mobile Communications' total revenues in 2006 and beyond. Mobile Communications believes that mobile termination fees will further decrease in its markets in the future.

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        The following table reflects the number of Mobile Communications customers by subsidiary:

 
  As of December 31,
Subsidiary

  2005
  2004
  2003
  2005/2004(1)
  2004/2003(1)
 
  (millions)

  (% change)

T-Mobile USA   21.7   17.3   13.1   25.4   32.1
T-Mobile Deutschland   29.5   27.5   26.3   7.2   4.6
T-Mobile UK(2)   17.2   15.7   13.6   9.6   15.4
T-Mobile Hungary   4.2   4.0   3.8   5.0   5.3
T-Mobile Netherlands   2.3   2.3   2.0   0.0   15.0
T-Mobile Czech Republic   4.6   4.4   4.0   4.5   10.0
T-Mobile Austria   2.1   2.0   2.0   5.0   0.0
T-Mobile Hrvatska (Croatia)   1.9   1.5   1.3   26.7   15.4
T-Mobile Slovensko (Slovakia)(3)   2.0       n.a.   n.a.
Other(4)   1.1   0.8   0.5   10.0   42.9
   
 
 
       
  Total(1)   86.6   75.5   66.6   14.7   13.4
   
 
 
       

n.a.—not applicable

(1)
Percentages and total numbers of customers calculations have been based on actual figures.
(2)
Includes Virgin Mobile customers of 6.2 million in 2005, 5.0 million in 2004 and 3.6 million in 2003.
(3)
Fully consolidated as of the first quarter of 2005.
(4)
Other includes MobiMak (Macedonia) and Monet (Montenegro). Monet was consolidated for the first time in the second quarter of 2005.

        The figures in the table above represent the total numbers of contract and prepaid customers at year-end for the periods presented. The customer counting methodologies employed differ in some respects between national markets, so that the figures in the table above may not be directly comparable with one another. For more information relating to how we calculate our customer data, see "Item 4. Information on the Company—Description of Business—Mobile Communications."

        Mobile Communications expects that the number of customers in its Western European markets will not grow significantly in the future, as most of the mobile telecommunications markets in Western Europe are relatively mature and at or near saturation. Mobile Communications expects that the number of its customers in the U.S. market will continue to increase in the future, because that market has not yet reached saturation.

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    Total Revenues by Geographic Area

        The following table reflects Mobile Communications' total revenues by geographic area:

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
United States(1)   11.887   9,278   7,492   28.1   23.8  
Germany(1)   8,621   8,745   8,479   (1.4 ) 3.1  
United Kingdom(1)   4.153   4,344   4,312   (4.4 ) 0.7  
Hungary(1)   1,090   1,049   999   3.9   5.0  
The Netherlands(1)   1,064   1,046   860   1.7   21.6  
Czech Republic(1)   938   827   757   13.4   9.2  
Austria(1)   885   882   1,098   0.3   (19.7 )
Croatia(1)   512   436   377   17.4   15.7  
Slovakia(1)(2)   378       n.a   n.a.  
Other(1)(3)   174   135   122   28.9   10.7  
  Intra-segment revenues(4)   (250 ) (215 ) (169 ) 16.3   27.2  
   
 
 
         
    Total revenues   29,452   26,527   24,327   11.0   9.0  
   
 
 
         

n.a.—not applicable

(1)
These amounts relate to each mobile subsidiary's respective, separate financial statements (single-entity financial statements adjusted for uniform group accounting policies and reporting currency), without taking into consideration consolidation effects at the strategic business area level (which effects are included under "Intra-segment revenues" in the table) or at the group level.
(2)
Fully consolidated as of the first quarter of 2005.
(3)
Other includes MobiMak and Monet. Monet was consolidated for the first time in the second quarter of 2005.
(4)
In addition to consolidation effects at the SBA level, "Intra-segment revenues" also includes revenues as defined under footnote (1) for the following subsidiaries: T-Mobile International UK (2005: EUR 83 million, 2004: EUR 90 million, 2003: EUR 81 million) T-Systems Traffic (2005: EUR 5 million, 2004: EUR 13 million, 2003: EUR 13 million) and T-Mobile International Holding (2003: EUR 2 million).

    United States

 
  For the years ended December 31,
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
  (millions of €)

  (% change)

Total revenues   11,887   9,278   7,492   28.1   23.8
  less Terminal equipment   1,353   1,289   1,034   5.0   24.7
  less Other   1,010   224   168   350.9   33.3
   
 
 
       
Service revenues   9,524   7,765   6,290   22.7   23.4
   
 
 
       

        Total revenues in the United States increased by EUR 2,609 million, or 28.1%, to EUR 11,887 million in 2005, compared to EUR 9,278 million in 2004, primarily due to an increase in the overall average customer base in 2005. In local currency, the total revenue increase was lower on a percentage basis before currency translation effects. Total revenues increased by EUR 1,786 million, or 23.8%, to EUR 9,278 million in 2004, compared to EUR 7,492 million in 2003, primarily due to an increase in service revenues as a result of an increase in the average customer base and, to a lesser extent, from an increase in revenues from sales of terminal equipment.

        Service revenues increased by EUR 1,759 million, or 22.7%, to EUR 9,524 million in 2005, compared to EUR 7,765 million in 2004, mainly as a result of an increase in the average number of customers. Service revenues increased by EUR 1,475 million, or 23.4%, to EUR 7,765 million in 2004, compared to EUR 6,290 million in 2003, also primarily due to an increase in the average number of

142



customers. However, non-voice service revenues increased at a greater rate than the increase in the average number of customers in 2004, compared to 2003, due to increased customer acceptance of these services.

        Revenues from sales of terminal equipment increased by EUR 64 million, to EUR 1,353 million in 2005, compared to EUR 1,289 million in 2004, as a result of 13.6% higher gross customers additions ("gross adds") and reduced cost from suppliers which were passed on to customers in 2005. Revenues from sales of terminal equipment increased by EUR 255 million, to EUR 1,289 million in 2004, compared to EUR 1,034 million in 2003, mainly due to an increase in gross adds of 28.6%.

        Other revenues increased to EUR 1,010 million in 2005, compared to EUR 224 million in 2004. This increase was primarily driven by network usage revenues from Cingular customers in California, Nevada and New York who had not yet been transitioned to the Cingular network, pursuant to an agreement that began to be implemented in the first quarter of 2005. In 2004, other revenues increased to EUR 224 million, from EUR 168 million in 2003, mainly as a result of an increase in activation revenues, primarily due to higher gross adds. We expect a substantial decline in other revenues in the coming years as Cingular completes the transition of its customers to its own network.

        We expect further customer and revenue growth at T-Mobile USA, albeit at a slightly decreased pace, compared to previous years. However, revenue growth, as expressed in our reporting currency versus U.S. dollars, may be affected by unfavorable exchange rate developments between the euro and the U.S. dollar.

    Germany

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Total revenues   8,621   8,745   8,479   (1.4 ) 3.1  
  less Terminal equipment   564   677   809   (16.7 ) (16.3 )
  less Other   300   411   172   (27.0 ) 139.0  
   
 
 
         
Service revenues   7,757   7,657   7,498   1.3   2.1  
   
 
 
         

        Total revenues in Germany declined by EUR 124 million in 2005, or 1.4%, compared to 2004. This decline was primarily attributable to reductions in other revenues and revenues from sales of terminal equipment, which was partially offset by an increase in service revenues. In 2004, total revenues in Germany increased by EUR 266 million, or 3.1%, compared to 2003. This increase was primarily attributable to increases in service revenues and other revenues, offset, in part, by a decrease in revenues from sales of terminal equipment.

        Service revenues increased by EUR 100 million, or 1.3%, to EUR 7,757 million in 2005, compared to EUR 7,657 million in 2004. This increase was primarily attributable to higher voice and non-voice revenues, as a result of an increased average customer base. In 2004, service revenues increased by EUR 159 million, or 2.1%, compared to 2003. This increase was primarily attributable to increases in both non-voice and voice revenues, as a result of an increased average customer base.

        Revenues from sales of terminal equipment decreased by EUR 113 million, to EUR 564 million in 2005, compared to EUR 677 million in 2004, due to reduced costs from suppliers, which were passed on to customers, and higher discounts granted as part of the customer acquisition and retention process. Revenues from sales of terminal equipment decreased by EUR 132 million, to EUR 677 million in 2004, compared to EUR 809 million in 2003, due to a lower total number of gross adds and a lower share of contract gross adds.

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        Other revenues mainly consist of MVNO revenues, activation revenues and disconnection fees. MVNO revenues are generated from O2 traffic being routed through the T-Mobile Deutschland network. MVNO revenues accounted for 85% of total other revenues in 2005, compared to 76% in 2004. MVNO revenues accounted for 56% of total other revenues in 2003.

        Other revenues decreased by EUR 111 million, to EUR 300 million in 2005, compared to 2004, primarily as a result of lower MVNO revenues due to the signing of a new national roaming agreement with O2 for lower per-minute prices. In 2004, other revenues increased by EUR 239 million, to EUR 411 million, compared to 2003, primarily as a result of higher MVNO revenues, caused, in part, by an increase in O2's customer base. Under its national roaming agreement with O2, T-Mobile is required to provide roaming services for O2's customers through 2009.

    United Kingdom

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Total revenues   4,153   4,344   4,312   (4.4 ) 0.7  
  less Terminal equipment   384   403   427   (4.7 ) (5.6 )
  less Other   231   232   410   (0.4 ) (43.4 )
   
 
 
         
Service revenues   3,538   3,709   3,475   (4.6 ) 6.7  
   
 
 
         

        Total revenues in the United Kingdom decreased by EUR 191 million, or 4.4%, to EUR 4,153 million in 2005, from EUR 4,344 million in 2004. This decrease was predominantly due to a decrease in service revenues and, to a lesser extent, to a decrease in revenues from sales of terminal equipment. In 2004, total revenues increased by EUR 32 million, or 0.7%, to EUR 4,344 million, from EUR 4,312 million in 2003, due to an increase in service revenues, which was partly offset by decreases in terminal equipment revenues and other revenues.

        Service revenues decreased by EUR 171 million, or 4.6%, to EUR 3,538 million in 2005, compared to EUR 3,709 million in 2004. This decrease was mainly a result of the reduction in mobile termination fees imposed by the U.K. telecommunication regulator in September 2004, and a result of lower voice usage per customer and a negative foreign exchange effect between the British pound sterling and the euro. Service revenues increased by EUR 234 million, or 6.7%, to EUR 3,709 million in 2004, compared to EUR 3,475 million in 2003. This increase was primarily attributable to increases in both voice and non-voice revenues, as a result of an increased average customer base.

        Revenues from sales of terminal equipment decreased in 2005, compared to 2004, mainly due to reduced costs from suppliers, which were passed on to customers, and higher sales discounts. Revenues from sales of terminal equipment decreased in 2004, compared to 2003, also mainly due to higher sales discounts in 2004.

        Other revenues decreased slightly by EUR 1 million, to EUR 231 million in 2005, compared to EUR 232 million in 2004. Other revenues had more significantly decreased from 2003 to 2004, primarily because T-Mobile UK sold its stake in Virgin Mobile at the end of January 2004, and because T-Mobile UK and Virgin Mobile renegotiated their shareholder and service agreements in 2004. The new service agreement significantly decreased T-Mobile UK's inbound revenues from the joint venture, which are now passed directly to Virgin Mobile. However, at the same time, T-Mobile UK's marketing contribution payment to Virgin Mobile was phased out, which had a positive effect on the overall results of T-Mobile UK. Virgin Mobile currently pays an MVNO fee for using T-Mobile UK's network.

144



    Hungary

 
  For the years ended December 31,
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
  (millions of €)

  (% change)

Total revenues   1,090   1,049   999   3.9   5.0
  less Terminal equipment   82   89   81   (7.9 ) 9.9
  less Other   26   19   19   36.8   0.0
   
 
 
       
Service revenues   982   941   899   4.4   4.7
   
 
 
       

        Total revenues in Hungary increased by EUR 41 million, or 3.9%, to EUR 1,090 million in 2005, compared to EUR 1,049 million in 2004. In local currency, total revenues also increased. The development between the Hungarian forint and the euro had a positive currency translation effect. The increase in total revenues was mainly related to an increase in service revenues, as a result of a larger average contract customer base. Total revenues increased by EUR 50 million, or 5.0%, to EUR 1,049 million in 2004, compared to EUR 999 million in 2003, mainly due to an increase in service revenues, primarily as a result of an increased average contract customer base.

        Service revenues increased by EUR 41 million to EUR 982 million in 2005. This increase was mainly a result of an increased average customer base, especially the average contract customer base. Service revenues increased by EUR 42 million, to EUR 941 million in 2004, from EUR 899 million in 2003. This increase was due to a larger average customer base and higher visitor-roaming revenues.

        Revenues from sales of terminal equipment decreased by EUR 7 million, to EUR 82 million in 2005, compared to EUR 89 million in 2004, due to a lower average price per handset sold. Revenues from sales of terminal equipment increased by EUR 8 million, to EUR 89 million in 2004, compared to EUR 81 million in 2003, primarily due to higher average sales prices of terminal equipment.

    The Netherlands

 
  For the years ended December 31,
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
  (millions of €)

  (% change)

Total revenues   1,064   1,046   860   1.7   21.6
  less Terminal equipment   37   47   42   (21.3 ) 11.9
  less Other   35   51   35   (31.4 ) 45.7
   
 
 
       
Service revenues   992   948   783   4.6   21.1
   
 
 
       

        Total revenues in the Netherlands increased by EUR 18 million, or 1.7%, to EUR 1,064 million in 2005, compared to EUR 1,046 million in 2004. The increase in total revenues was mainly related to an increase in service revenues, partly offset by decreases in revenues from sales of terminal equipment and other revenues. Total revenues increased by EUR 186 million, or 21.6%, to EUR 1,046 million in 2004, compared to EUR 860 in 2003, primarily due to an increase in service revenues and, to a lesser extent, to increased revenues from sales of terminal equipment and other revenues.

        Service revenues increased by EUR 44 million, to EUR 992 million in 2005, compared to EUR 948 million in 2004, primarily due to a higher proportion of contract customers, who tend to generate higher service revenues than prepay customers, in the average customer base and a lower inactivity rate. Service revenues increased by EUR 165 million, to EUR 948 million in 2004, compared to EUR 783 million in 2003, primarily due to an increased average customer base.

        Other revenues mainly include customer activation revenues, disconnection fees and other operating revenues. Other revenues decreased by EUR 16 million, or 31.4%, to EUR 35 million in 2005, compared to EUR 51 million in 2004, primarily due to a decrease in other operating revenues.

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Other revenues increased by EUR 16 million, or 45.7%, to EUR 51 million in 2004, compared to EUR 35 million 2003, mainly due to an increase in other operating revenues.

    Czech Republic

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Total revenues   938   827   757   13.4   9.2  
  less Terminal equipment   52   40   26   30.0   53.8  
  less Other   18   14   24   28.6   (41.7 )
   
 
 
         
Service revenues   868   773   707   12.3   9.3  
   
 
 
         

        Total revenues in the Czech Republic increased by EUR 111 million, or 13.4%, to EUR 938 million in 2005, compared to EUR 827 million in 2004. In local currency, total revenues also increased. The development of the Czech koruna and the euro had a positive currency translation effect. The increase in total revenues was mainly related to an increase in service revenues, as a result of having a larger average customer base and the positive currency translation effect. Total revenues increased by EUR 70 million, or 9.2%, to EUR 827 million in 2004, compared to EUR 757 million in 2003, also due to an increase in service revenues, as a result of a larger average customer base.

        Service revenues increased by EUR 95 million in 2005, to EUR 868 million. This increase was mainly a result of an increased average customer base and higher visitor-roaming revenues. In 2004, service revenues increased by EUR 66 million, to EUR 773 million, from EUR 707 million in 2003. This increase was also due to a larger average customer base and higher visitor-roaming revenues.

    Austria

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
  (millions of €)

  (% change)

 
Total revenues   885   882   1,098   0.3   (19.7 )
  less Terminal equipment   29   42   70   (31.0 ) (40.0 )
  less Other   22   20   182   10.0   (89.0 )
   
 
 
         
Service revenues   834   820   846   1.7   (3.1 )
   
 
 
         

        Total revenues in Austria increased by EUR 3 million in 2005, or 0.3%, to EUR 885 million, from EUR 882 million in 2004. This increase was predominantly due to growth in service revenues, partly offset by a decrease in terminal equipment revenues. Total revenues decreased by EUR 216 million, or 19.7%, to EUR 882 million in 2004, from EUR 1,098 million in 2003. This decrease was due to decreases in other revenues and sales of terminal equipment and, to a lesser extent, in service revenues.

        Service revenues increased by EUR 14 million in 2005, to EUR 834 million. This increase was mainly to an increased average customer base and to a higher proportion of contract customers, who tend to generate higher service revenues than prepay customers. In 2004, service revenues decreased by EUR 26 million, or 3.1%, to EUR 820 million, from EUR 846 million in 2003. This decrease was primarily due to decreasing tariffs in a competitive environment.

        Revenues from sales of terminal equipment decreased by EUR 13 million in 2005, to EUR 29 million, compared to 2004, mainly due to a negative one-time effect, and due to reduced costs from suppliers, which were passed on to customers. In 2004, revenues from sales terminal equipment decreased by EUR 28 million, to EUR 42 million, compared to EUR 70 million in 2003, due to higher discounts.

146



        Other revenues increased by EUR 2 million in 2005, or 10%, to EUR 22 million, from EUR 20 million in 2004. In 2004, other revenues decreased by EUR 162 million, or 89.0%, to EUR 20 million, compared to EUR 182 million in 2003, primarily due to the January 2004 disposal of Niedermeyer GmbH, an Austrian electronics retail chain, that had been owned by T-Mobile Austria. Prior to 2004, other revenues had been substantially derived from revenues received from the sale of non-telecommunications products and services sold through Niedermeyer GmbH. In 2004, other revenues primarily consisted of activation fees and other operating revenues. In 2003, other revenues included EUR 153 million from Niedermeyer GmbH.

    Croatia

 
  For the years ended December 31,
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
  (millions of €)

  (% change)

Total revenues   512   436   377   17.4   15.7
  less Terminal equipment   25   21   21   19.0   0.0
  less Other   12   9   5   33.3   80.0
   
 
 
       
Service revenues   475   406   351   17.0   15.7
   
 
 
       

        Total revenues in Croatia increased by EUR 76 million, or 17.4%, to EUR 512 million in 2005, compared to EUR 436 million in 2004. In local currency, total revenues also increased. The development between the Croatian kuna relative and the euro had a minor positive currency translation effect. The increase in total revenues was mainly related to an increase in service revenues and, to a lesser extent, to increases in revenues from sales of terminal equipment and other revenues. In 2004, total revenues increased by EUR 59 million, or 15.7%, to EUR 436 million, compared to EUR 377 million in 2003, primarily due to increases in service revenues and, to a lesser extent, in other revenues.

        Service revenues increased by EUR 69 million to EUR 475 million in 2005. This increase was mainly a result of a larger average customer base and as a result of higher visitor-roaming revenues. In 2004, service revenues increased by EUR 55 million, to EUR 406 million, from EUR 351 million in 2003. This increase was due to an increased average customer base and to higher visitor-roaming revenues.

    Slovakia

 
  For the years ended December 31,
 
  2005(1)
  2004
  2003
  2005/2004
  2004/2003
 
  (millions of €)

  (% change)

Total revenues   378       n.a.   n.a.
  Less Terminal equipment   10       n.a.   n.a.
  less Other   21       n.a.   n.a.
   
 
 
       
Service revenues   347       n.a.   n.a.
   
 
 
       

n.a.—not applicable

(1)
Fully consolidated as of the first quarter of 2005.

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        With an average customer base of 1.9 million customers in 2005, T-Mobile Slovensko generated total revenues of EUR 378 million.

    Average Revenue Per User by Geographic Area

        The following discussion provides additional revenue information by geographic area with respect to ARPU. We use ARPU to measure the average monthly service revenues on a per-customer basis. We believe that ARPU provides management with useful information concerning usage and acceptance of our product and service offerings, and as an indicator of our ability to attract and retain high-value customers. We calculate ARPU as revenues generated by customers for services (i.e., voice services, including incoming and outgoing calls, and data services), plus roaming revenues, monthly charges, and revenues from visitor roaming, divided by the average number of customers in the month. Revenues from services does not include the following: revenues from terminal equipment sales, revenues from customer activations, revenues from MVNOs, and other revenues not generated directly by T-Mobile customers. However, visitor-roaming revenues have been included in ARPU as of the first quarter of 2005, and historical data has been calculated accordingly. We believe this change improves comparability with our competitors. However, ARPU is neither uniformly defined nor utilized by all companies in our industry group. Accordingly, such measures may not be comparable to similarly titled measures and disclosures by other companies. For a more detailed breakdown of our customers by geographic area, see "Item 4. Information on the Company—Description of Business—Mobile Communications." The calculations of ARPU numbers below have been based on actual figures, expressed as a monthly average for each annual period.

    United States

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
   
   
   
  (% change)

 
Total revenues (millions of €)   11,887   9,278   7,492   28.1   23.8  
  thereof service revenues (millions of €)   9,524   7,765   6,290   22.7   23.4  
Average customers (in millions)   19.3   15.3   11.5   26.1   33.0  
ARPU (in euro)   41   42   45   (2.4 ) (6.7 )

        ARPU in the United States decreased to EUR 41 in 2005, compared to EUR 42 in 2004, primarily due to an increase in the proportion of prepay customers in the overall customer base, and a decrease in prepay ARPU. The decrease was positively affected by favorable foreign exchange rate developments between the U.S. dollar and the euro in 2005, compared to 2004.

        ARPU decreased to EUR 42 in 2004, compared to EUR 45 in 2003, due to changes in local currency exchange rates. In local currency, ARPU increased slightly, mainly due to the inclusion of regulatory fees and USF (Universal Service Fund) fees as part of service revenues, beginning in 2004. The positive effect on ARPU attributable to both fees was less than EUR 1.50 in 2004. ARPU in local currency was positively affected by an increased usage of data and SMS services.

    Germany

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
   
   
   
  (% change)

 
Total revenues (millions of €)   8,621   8,745   8,479   (1.4 ) 3.1  
  thereof service revenues (millions of €)   7,757   7,657   7,498   1.3   2.1  
Average customers (in millions)   28.2   27.0   25.3   4.4   6.7  
ARPU (in euro)   23   24   25   (4.2 ) (4.0 )

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        ARPU in Germany decreased to EUR 23 in 2005, compared to EUR 24 in 2004. This decrease was due to lower voice and non-voice usage per customer, as well as to lower tariffs and mobile termination fees.

        ARPU decreased by EUR 1 in 2004, compared to 2003. This decrease was due to lower usage per customer, together with lower average prices per minute for outgoing calls. Partly offsetting the decline in ARPU in 2004 was an increase in the proportion of contract customers in the total customer base, who tend to generate a higher ARPU than prepay customers.

    United Kingdom

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
   
   
   
  (% change)

 
Total revenues (millions of €)   4,153   4,344   4,312   (4.4 ) 0.7  
  thereof service revenues(1) (millions of €)   3,538   3,709   3,475   (4.6 ) 6.7  
Average customers (in millions)(2)   10.6   10.5   9.6   1.0   9.4  
ARPU (in euro)(2)   28   29   30   (3.4 ) (3.3 )

(1)
Does not include revenues earned from Virgin Mobile customers, which revenues are not included in the service revenues component of the ARPU calculation.
(2)
Does not include Virgin Mobile customers in the average number of customers component of the ARPU calculation.

        ARPU in the United Kingdom decreased to EUR 28 in 2005, compared to EUR 29 in 2004, mainly due to a reduction in mobile termination fees imposed by the U.K. telecommunications regulator in September 2004, as well as to lower voice usage per customer and a negative foreign exchange effect between the British pound sterling and the euro.

        ARPU decreased to EUR 29 in 2004, compared to EUR 30 in 2003, mainly due to the decrease in mobile termination fees in September 2004 mentioned above, and a decrease in voice usage per customer, which was primarily driven by lower usage by prepay customers.

    Hungary

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
   
   
   
  (% change)

 
Total revenues (millions of €)   1,090   1,049   999   3.9   5.0  
  thereof service revenues (millions of €)   982   941   899   4.4   4.7  
Average customers (in millions)   4.1   3.9   3.5   5.1   11.4  
ARPU (in euro)   20   20   21   0.0   (4.8 )

        ARPU in Hungary remained constant at EUR 20 in 2005, compared to 2004. ARPU was primarily negatively affected by decreasing tariffs and lower mobile termination fees, which were mainly offset by increased revenues resulting from higher voice usage per customer.

        ARPU decreased to EUR 20 in 2004, from EUR 21 in 2003. ARPU was negatively affected in 2004, due to decreased tariffs as a result of increased competition and decreased mobile termination fees, which were imposed by the Hungarian telecommunications regulator.

149



    The Netherlands

 
  For the years ended December 31,
 
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
 
   
   
   
  (% change)

 
Total revenues (millions of €)   1,064   1,046   860   1.7   21.6  
  thereof service revenues (millions of €)   992   948   783   4.6   21.1  
Average customers (in millions)   2.3   2.2   1.7   4.5   29.4  
ARPU (in euro)   36   36   38   0.0   (5.3 )

        ARPU in the Netherlands remained constant at EUR 36 in 2005, as in 2004. This parity was primarily due to an increase in voice usage per customer and a higher proportion of contract customers in the average customer base, offset, in part, by a reduction in mobile termination fees, imposed by the Dutch telecommunications regulator in December 2004 and 2005.

        ARPU decreased to EUR 36 in 2004, from EUR 38 in 2003. This decrease was primarily the result of decreasing tariffs, driven by high competition, as well as by reductions in mobile termination fees, imposed by the Dutch telecommunications regulator in January and December 2004.

    Czech Republic

 
  For the years ended December 31,
 
  2005
  2004
  2003
  2005/2004
  2004/2003
 
   
   
   
  (% change)

Total revenues (millions of €)   938   827   757   13.4   9.2
  thereof service revenues (millions of €)   868   773   707   12.3   9.3
Average customers (in millions)   4.5   4.1   3.6   9.8   13.9
ARPU (in euro)   16   16   16   0.0   0.0

   &n