Deutsche Telekom AG (DT)

T-Systems has strengthened its position internationally.

As in previous quarters, T-Systems has continued to strengthen its position outside Germany, as is underscored by the following major international outsourcing agreements.

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Overall economic situation/ industry situation.

Global economic development

The global economy has been witnessing a substantial slowdown since early 2008. The downturn gained momentum globally in the third quarter of 2008. This was caused by the inflationary push fuelled by commodity prices and the extensive corrections in the housing and financial markets. The current deterioration of the financial market crisis has also worsened the economic outlook. In their “Joint Economic Forecast Fall 2008” the leading German economic research institutes cut their expected 2008 growth figure for gross domestic product in Germany to 1.8 percent. The International Monetary Fund (IMF) has cut its forecast for global economic growth this year to 3.9 percent.

Overall economic risks

Inflationary pressures have eased off over the past few months thanks to a sharp decline in commodity prices. The main risk facing the global economy is the extent and duration of the financial market crisis and the scale of the impact on the real economy, along with the willingness of consumers to buy and businesses to invest.

Outlook

The economy may move into a phase of recession in the majority of industrialized nations. Most economic indicators point to a downturn in the United States. The leading eurozone indicators have also fallen sharply over the past few months; consumer and investment sentiment is at its lowest level for many years. The “Joint Economic Forecast Fall 2008” pegs growth at just 0.2 percent for German gross domestic product in 2009. The IMF forecasts a further slowdown in growth in the global economy to 3.0 percent for 2009. Both studies assume the global economy could gradually recover from mid-2009, with the banking sector stabilizing as a result of the joint rescue packages adopted by the industrialized nations.

Telecommunications market

The price index for telecommunications services in Germany issued by the Federal Statistical Office also points to a further reduction in consumer prices in the third quarter of 2008. The consumer price index for fixed network and Internet decreased to 94.5 in September 2008, compared with 98.6 in September 2007. The consumer price index for mobile communications decreased from 89.0 in September 2007 to 86.9 (base 100 in 2005).

According to a study carried out by the Association of Telecommunications and Value-Added Service Providers (VATM) on the telecommunications market in 2008, revenue from telecommunications services in Germany will total some EUR 60.6 billion in 2008, a year-on-year decrease of 4.1 percent, which is essentially due to prices being reduced by competition both in the fixed and mobile networks. The VATM currently believes the financial market crisis will not impact the telecommunications sector. Based on a recent survey (October 2008), Bitkom also expects the financial market crisis to have hardly any impact on the German IT and telecommunications market.

Regulatory situation

Reform of the EU regulatory framework (EU Review).

At a first reading on September 24, 2008, the European Parliament discussed a whole range of reform proposals relating to the telecommunications regulatory framework. The idea is to promote investment in new superfast fiber-optic access networkswhile ensuring competition based on unrestricted third-party access to new infrastructures. The European Parliament has made proposals on promoting investment in fiber-optic lines. However, these proposals do not include any clear statements on the distribution of the digital dividend. This issue is largely regarded as falling within the competency of national governments. The Commission’s proposals are currently being reviewed by the Council.

Geographic differentiation.

Following the model adopted by other European regulatory authorities, the Federal Network Agency is looking at easing existing nationwide regulation of IP bitstream. In regions with intense competition from

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local-loop operators and cable-TV providers, regulation of IP bitstream could then be pared back. The relevant regulatory process is currently underway. A decision from the Federal Network Agency is expected in January/February 2009.

Charges approved for carrier leased lines at the end of September 2008.

In a resolution dated September 30, 2008, the Federal Network Agency re-approved the charges for carrier leased lines. The charges remain unchanged, with one exception. The Federal Network Agency has reduced the charges for carrier leased lines with a transmission bandwidth of 2 Mbit/s by 11 percent across the board. All charges have been approved for six months through March 31, 2009. Further proceedings regarding carrier leased line charges are currently pending, the outcome of which will also be felt beyond March 31, 2009. The rate ruling for carrier leased lines was received on October 31, 2008. The approval applies from January 1, 2009 until October 31, 2010. This supersedes the decision of the Federal Networks Agency of September 30, 2008 and reduces the period of Validity of the approval from six months to three months, i.e., from October 1, 2008 to December 31, 2008. The ruling of October 31, 2008 is currently being analyzed.

Legal situation

Ruling by the Federal Administrative Court on charges for the provision of subscriber data strengthens Deutsche Telekom’s position.

Deutsche Telekom AG is permitted to impose charges for the provision of so-called additional data of Deutsche Telekom AG’s telephone customers and for third-party data. As before, Deutsche Telekom can still only charge for transport costs for the basic data of is own customers. In the reasons for its ruling, the Court stated that the standard upon which the ruling was based, whereby the recipients of the data could only be charged for the costs for the pure transportation of the data, only applied to the basic data (name, address and telephone number) of Deutsche Telekom AG’s own customers. This standard does not apply, however, to charges for the provision of additional data relating to Deutsche Telekom AG’s telephone customers and to subscriber data of other network operators.

Deutsche Telekom intends to introduce a new price model on the basis of the ruling. In addition, Deutsche Telekom AG intends to orient the prices that will be charged retroactively from August 2005 towards the principles set out by the Federal Administrative Court in the reasons for its ruling. Comprehensive analyses are still necessary.

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Group strategy.