Deutsche Telekom AG Annual financial statements and management report as of December 31, 2006 Deutsche Telekom !"§==== Contents. List of abbreviations 4 – 5 Management report of Deutschen Telekom AG 6 – 37 1 Company structure 6 – 10 2 Economic environment 10 – 12 3 Development of business 13 – 19 4 Research and development 19 – 23 5 Employees 23 – 26 6 Sustainability and environmental protection 26 – 27 7 Risk and opportunity management 27 – 35 8 Key events after December 31, 2006 35 9 Outlook 36 – 37 Annual financial statements 38 – 101 Statement of income 38 Balance sheet 39 Statement of cash flows 40 Statement of shareholder’s equity 41 Notes to the financial statements 42 – 101 Statement of noncurrent assets 42 – 43 Exchange rates used 44 Board of Management 45 Supervisory Board 46 – 48 Summary of accounting policies 49 – 54 Notes to the statment of income 55 – 62 Notes to the balance sheet 63 – 84 Notes to the statement of cash flows 85 – 86 Other disclosures 87 – 100 Auditors’ report 101 Deutsche Telekom AG's single-entity financial statements and management report for the 2006 financial year are published in the elec- tronic Federal Gazette (Bundesanzeiger) and can also be accessed on the website of the register of companies. Financial statements and management report of Deutsche Telekom AG Contents List of abbreviations. AB KG Active Billing GmbH & Co. KG, Bonn AktG Aktiengesetz (Stock Corporation Act) Arcor Arcor AG & Co. KG, Eschborn BMF Bundesministerium für Finanzen (Federal Ministry of Finance) BNetzA Bundesnetzagentur (Federal Network Agency) BoD Board of Directors BPS-PT Bundes-Pensions-Service für Post und Telekommunikation e.V., Bonn (joint pension fund for civil servants of Deutsche Post AG, Deutsche Postbank AG and Deutsche Telekom) Deutsche Telekom Deutsche Telekom AG, Bonn DFMG DFMG Deutsche Funkturm GmbH, Münster DSL Digital subscriber line DT Finance Deutsche Telekom International Finance B.V., Amsterdam DTBS Deutsche Telekom Betriebsrenten-Service e.V., Bonn (special pension fund) DTI DeTe Immobilien, Deutsche Telekom Immobilien und Service GmbH, Münster Ernst & Young Ernst & Young AG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft, Stuttgart EStG Einkommensteuergesetz (Income Tax Act) EU European Union EUR Euro GAS German Accounting Standard(s) GBP Pound sterling GG Grundgesetz (Basic Law) GHS Group Headquarters & Shared Services GMG GMG Generalmietgesellschaft mbH, Münster GN Global Networks (business unit transferred from T-Systems Enterprise Services in 2005 for incorporation into Deutsche Telekom) HGB Handelsgesetzbuch (Commercial Code) HRK Croatian kuna HUF Hungarian forint ICSS International Carrier Sales & Solutions (business unit transferred from T-Systems Enterprise Services in 2005 for incorporation into Deutsche Telekom) ICT Information and Communication Technology IFRS International Financial Reporting Standards Intelsat Ltd. Intelsat Ltd., Hamilton, Bermuda IP Internet Protocol ISDN Integrated Services Digital Network ISP Internet service provider IT Information technology Financial statements and management report of Deutsche Telekom AG List of abbreviations KfW Kreditanstalt für Wiederaufbau, Frankfurt/Main MagyarCom Holding MagyarCom Holding GmbH, Bonn MTIP Mid-Term Incentive Plan MVBS Marketing Vertrieb und Business Services (Marketing/Sales/Business Services business unit) NGN Next Generation Network PASM PASM Power and Air Condition Solution Management GmbH & Co. KG, Munich PLN Polish zloty PostBeaKK Civil Service Health Insurance Fund Powertel Powertel Inc., Bellevue, Washington, United States PTNeuOG Postneuordnungsgesetz (Posts and Telecommunications Reorganization Act) PwC PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft, Frankfurt/Main RegTP Regulatory Authority for Telecommunications and Posts SAR Stock appreciation right SEC Securities and Exchange Commission SOP Stock Option Plan T-Com A Deutsche Telekom brand TKG Telekommunikationsgesetz (Telecommunications Act) T-Mobile T-Mobile International AG & Co. KG, Bonn T-Online T-Online International AG, Darmstadt Triple play Combination of telephony, Internet and TV TS BS T-Systems Business Services GmbH, Bonn T-Systems T-Systems International GmbH, Frankfurt/Main USD U.S. dollar UStG Umsatzsteuergesetz (Value-Added Tax Act) VAP Versorgungsanstalt der Deutschen Bundespost (special pension fund of Deutsche Bundespost) VAT Value-added tax VDSL Very high bit rate Digital Subscriber Line (New technology used to transmit exceptionally high data rates via a fiber-optic network) Vivento Service provider of Deutsche Telekom AG for personnel and business (legally dependent organizational unit) VoIP Voice over Internet protocol (technology enabling telephone calls via the Internet) ZB BC Zentralbereich Billing & Collection Financial statements and management report of Deutsche Telekom AG List of abbreviations Management Report of Deutsche Telekom AG. 1 Company structure. Legal company Deutsche Telekom AG, Bonn, is the parent of the Deutsche The trust shares are connected with the acquisition of structure Telekom Group and also its largest operating company. VoiceStream and Powertel in 2001. As part of this acquisiti- Its shares are traded on several stock exchanges, including on, Deutsche Telekom issued new shares from authorized Frankfurt, New York, and Tokyo. As of December 31, 2006, capital to trustees for the benefit of holders of warrants, 68.30 percent of the shares were in free float (2005: 62.51 options, and conversion rights, among others. As regards percent), 14.83 percent were held by the Federal Republic the shares issued to trusts, the trustee in question waived of Germany (2005: 15.40 percent), and 16.87 percent were voting rights and subscription rights and, in general, held by KfW Bankengruppe (2005: 22.09 percent). The dividend rights for the duration of the trust’s existence. shareholding deemed to be held by the Federal Republic The shares issued to the trusts can be sold on the stock amounted to 31.70 percent (2005: 37.49 percent). exchange on the instructions of Deutsche Telekom if the beneficiaries do not exercise their options or conversion The change in the shareholdings over the previous year is rights or if these expire. The proceeds from the sale accrue principally attributable to the reduction in the interest held to Deutsche Telekom. by KfW Bankengruppe resulting from the sale of a package of shares to the private investment company Blackstone The Articles of Incorporation authorize the Board of Man- Group in April 2006. The share held by the Blackstone agement to increase the capital stock with the approval of Group totaled 4.39 percent at December 31, 2006. The the Supervisory Board by up to EUR 2,399,410,734.08 by Blackstone Group agreed with KfW Bankengruppe to lock issuing up to 937,269,818 no par value registered shares up its holding for at least two years. In addition, KfW Bank- for non-cash contributions in the period ending on May engruppe has agreed to a one-year lock-up with respect to 17, 2009 (2004 authorized capital). They also authorize further sales of its shares in Deutsche Telekom. the Board of Management to increase the capital stock, with the consent of the Supervisory Board, by up to As of December 31, 2006, the capital stock of Deutsche EUR 38,400,000 by issuing up to 15,000,000 no par value Telekom AG totaled approximately EUR 11,164 million and registered shares for cash and/or non-cash contributions in was composed of some 4,361 million no par value register- the period ending on May 2, 2011. The new shares are to be ed ordinary shares. Each share entitles the holder to one issued for the sole purpose of granting shares to employ- vote. The voting rights are nevertheless restricted in rela- ees of Deutsche Telekom AG and lower-tier affiliated com- tion to the treasury shares (around 1.9 million as of Decem- panies (employee shares) (2006 authorized capital) (http:// ber 31, 2006) and the trust shares (around 21.5 million as www.deutschetelekom.com/dtag/cms/contentblog/dt/ of December 31, 2006). en/37314/blogBinary/dtag-articles-of-incorporation.pdf). Financial statements and management report of Deutsche Telekom AG Management report The shareholders’ meeting of May 3, 2006 authorized the The main agreements entered into by Deutsche Telekom Board of Management to purchase up to 419,807,790 no AG, which include a clause in the event of a takeover of par value shares in the Company by November 2, 2007, Deutsche Telekom AG, principally relate to bilateral credit with the amount of capital stock accounted for by these lines as well as to a loan agreement. In the event of a take- shares totaling up to EUR 1,074,707,942.40, subject to the over, the individual lenders have the right to terminate the proviso that the shares to be purchased on the basis of credit line and, if necessary, serve notice on it or demand this authorization in conjunction with the other shares of repayment of the loan. A takeover is assumed when a third the Company which the Company has already purchased party, which can also be a group acting jointly, acquires and still possesses or are to be assigned to it under § 71d control over Deutsche Telekom AG. and § 71e of the German Stock Corporation Act (AktG) do not at any time account for more than 10 percent of the In addition, the other members of the Toll Collect consor- Company’s stock. The shares may also be purchased by tium (DaimlerChrysler Services AG and Cofiroute SA) have dependent Group companies of Deutsche Telekom AG a call option