FRANCE TELECOM / - FTE Annual and Transition Report (foreign private issuer) (20-F) PART I

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The following is an excerpt from a 20-F SEC Filing, filed by FRANCE TELECOM / on 4/16/2004.

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FRANCE TELECOM / - 20-F - 20040416 - PART_I

PART I

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3. KEY INFORMATION

3.1 SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial and other operating data of France Telecom. The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and “Item 5. Operating and Financial Review and Prospects” appearing elsewhere in this annual report on Form 20-F. The selected financial data presented below has been prepared on a basis constant with the basis of preparation used in the Consolidated Financial Statements as described in Note 2. Prior years have been reclassified as necessary for a consistent presentation. France Telecom’s Consolidated Financial Statements are prepared in accordance with French GAAP, which differs in certain significant respects from U.S. GAAP. See Note 33 of the Notes to the Consolidated Financial Statements for a discussion of the principal differences between French GAAP and U.S. GAAP as they relate to France Telecom and a reconciliation of its net income and shareholders’ equity to U.S. GAAP.

The selected consolidated financial data as of and for each of the five years ended December 31, 1999, 2000, 2001, 2002 and 2003 are extracted or derived from the Consolidated Financial Statements, which have been audited by Ernst & Young Audit and RSM Salustro Reydel, independent auditors, for the years ended December 31, 1999, 2000, 2001 and 2002, and which have been audited by Ernst & Young Audit and Deloitte Touche Tohmatsu, independent auditors, for the year ended December 31, 2003. The Consolidated Financial Statements as of and for the year ended December 31, 1999 have been translated into euro using the fixed exchange rate for French francs and euro on January 1, 1999.


	Year ended December 31,

	2003		2003		2002		2001		2000		1999
	$ ⁽¹⁾		( € millions, except per share data)
CONSOLIDATED STATEMENT OF INCOME DATA
Amounts in accordance with French GAAP:
Sales of services and products	58,101		46,121		46,630		43,026		33,674		27,233
Operating income ⁽²⁾	12,035		9,554		6,808		5,200		4,856		4,490
Interest expense, net ⁽³⁾	(4,995	)	(3,965	)	(4,041	)	(3,847	)	(2,006	)	(662	)
Other non-operating income/(expense), net	(1,410	)	(1,119	)	(12,849	)	(5,904	)	3,957		767
Net income (loss) from integrated companies	8,453		6,710		(12,809	)	(2,316	)	4,975		2,965
Goodwill amortization	(2,113	)	(1,677	)	(2,352	)	(2,531	)	(1,092	)	(136	)
Exceptional goodwill amortization	(1,432	)	(1,137	)	(5,378	)	(3,257	)	–		–
Net income (loss)	4,039		3,206		(20,736	)	(8,280	)	3,660		2,768
Basic number of shares (rounded)	2,463		1,955		1,085		1,103		1,065		1,025
Diluted number of shares (rounded)	2,754		2,186		1,159		1,177		1,091		1,050
Earnings per share/ADS:
Net income (loss) per share (basic)	2.07		1.64		(16.75	)	(6.58	)	3.01		2.37
Net income (loss) per share (diluted)	2.02		1.60		(16.75	)	(6.58	)	2.97		2.34
Dividend per share ⁽⁵⁾	–		–		–		1.00		1.00		1.00
Approximate amounts in accordance with U.S. GAAP: ⁽⁶⁾
Net income (loss)	6,699		5,318		(33,556	)	(19,278	)	5,131		2,905
Earnings (loss) per share/ADS (basic) ⁽⁴⁾	3.43		2.72		(26.70	)	(14.86	)	4.10		2.41
Earnings (loss) per share/ADS (diluted) ⁽⁴⁾	3.24		2.57		(26.70	)	(14.86	)	4.04		2.36


	Year ended December 31,

	2003		2003		2002		2001		2000		1999
	$ ⁽¹⁾		( € millions, except per share data)
CONSOLIDATED BALANCE SHEET DATA
Amounts in accordance with French GAAP:
Intangible assets	53,404		42,392		46,086		53,152		52,338		2,131
Property, plant and equipment, net	38,593		30,635		36,268		31,728		34,623		28,964
Total assets	125,766		99,833		106,587		127,358		129,585		54,055
Short-term borrowings	1,978		1,570		10,490		11,365		25,165		2,479
Long-term debt, including current portion	60,243		47,821		60,393		56,139		38,089		14,784
Borrowings net of available cash and marketable securities	55,640		44,167		68,019		63,423		60,998		14,628
Shareholders’ equity (deficit)	15,150		12,026		(9,951	)	21,087		33,157		18,903
Capital stock ⁽⁷⁾	31,421		24,942		29,511		28,843		28,843		10,727
Approximate amounts in accordance with U.S. GAAP: ⁽⁶⁾
Shareholders’ equity (deficit)	(588	)	(467	)	(26,751	)	11,411		26,311		21,678
CONSOLIDATED STATEMENT OF CASH FLOWS DATA
Amounts in accordance with French GAAP:
Net cash provided by operating activities	14,263		11,322		11,839		7,076		6,613		8,109
Purchase of property, plant, equipment and intangible assets	(6,427	)	(5,102	)	(7,943	)	(8,553	)	(14,313	)	(5,001	)
Proceeds from sale of assets ⁽⁸⁾	752		597		2,916		296		274		150
Cash paid for investment securities, acquired businesses, net of cash and investments in affiliates ⁽⁹⁾	(299	)	(237	)	(2,228	)	(4,355	)	(40,561	)	(2,804	)
Holdings of own shares	–		–		(5,022	)	(8,807	)	–		–
Issuance (repayment) of short-term borrowings and long-term debt, net	(24,919	)	(19,781	)	(63	)	5,514		39,301		(209	)

(1)

In millions. The Consolidated Financial Statements are stated in euro except for 1999, which were originally stated in French francs. The U.S. dollar amounts presented in the table above have been translated solely for the convenience of the reader using the Noon Buying Rate on December 31, 2003 of € 0.7938 to $1.00.

(2)

Operating income for the years ended December 31, 1999, 2000, 2001, 2002 and 2003 includes items ( € 238 million, € 225 million, € 210 million, € 199 million and € 211, respectively) relating to the amortization of part of the additional provision for early retirement payments resulting from the change in 1998 and 1999 in actuarial assumptions used in calculating such provision. See Note 22 of the Notes to the Consolidated Financial Statements.

(3)

Including interest expense on TDIRA.

(4)

Earnings per ADS have been recalculated for all periods presented to reflect the 2002 stock dividend as required under U.S. GAAP, and as discussed in Note 33 of the Notes to the Consolidated Financial Statements.

(5)

In 1996, prior to France Telecom’s change of status on December 31, 1996, a payment of € 686 million, which was appropriated from net income, was made to the French State. No dividend was declared after the change of status. The annual general meeting of the shareholders for the year ended December 31, 2003 authorized a payment of € 0.25 per share to shareholders this year.

(6)

Amounts presented under this caption were calculated by applying the principles described in Note 33 of the Notes to the Consolidated Financial Statements.

(7)

Capital stock represents the sum of share capital and additional paid-in capital.

(8)

Includes, for 2002 and 2003, a gain from the sale of real estate of € 2,550 million and € 419 million.

(9)

Includes, for 2000, a cash payment of € 21,693 million in connection with the acquisition of Orange plc.


	Year ended December 31,

	2003	2002	2001
OPERATING DATA
Telephones lines (standard lines and ISDN channels) at period-end (millions) ⁽¹⁾	49.3	49.5	40.0
ADSL lines in France at period-end (millions)	3.1	1.4	0.4
Total controlled wireless subscribers at period-end (millions)	56.2	49.9	43.2
Number of employees at period-end	218,523	243,573	211,554

(1)

For the purposes of this presentation, each ISDN channel is counted as the equivalent of one standard access line.

3.2 EXCHANGE RATE INFORMATION

Under the provisions of the Treaty on the European Union signed at Maastricht in early 1992, a European Monetary Union (“EMU”) with a single European currency, the euro, was established. On May 3, 1998, European governments and central banks announced that the following 11 member states would participate in the last stage of EMU: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxemburg, The Netherlands, Portugal and Spain. These countries have since been joined by other member states. The last stage of the EMU, which fixed exchange rates between national currencies and the European Currency Unit, and the introduction of the euro for certain purposes, began on January 1, 1999, at which time the exchange rate between the French franc and the euro was established at FF 6.55957 to € 1.00 (or € 0.1524 to FF 1.00).

Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar equivalent of the euro-denominated prices of the shares and, as a result, will affect the market price of the ADSs in the United States. In addition, exchange rate fluctuations will affect the U.S. dollar equivalent of any cash dividends received by holders of ADSs.

The following table sets forth, for the periods and dates indicated, certain information concerning the Noon Buying Rate in New York City for cable transfers for foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York expressed in U.S. dollars per € 1.00. Such rates are provided solely for the convenience of the reader and are not necessarily the rates used by France Telecom in the preparation of the Consolidated Financial Statements included elsewhere in this annual report on Form 20-F. No representation is made that the euro could have been, or could be, converted into U.S. dollars at the rates indicated below or at any other rate.


U.S. dollars per € 1.00	Year/period end rate		Average rate ⁽¹⁾		High		Low

Yearly amounts
1999	$	1.01	$	1.06	$	1.18	$	1.00
2000	$	0.94	$	0.92	$	1.03	$	0.83
2001	$	0.89	$	0.89	$	0.95	$	0.84
2002	$	1.05	$	0.95	$	1.05	$	0.86
2003	$	1.26	$	1.14	$	1.26	$	1.04
Monthly amounts
October 2003	$	1.16	$	1.17	$	1.18	$	1.16
November 2003	$	1.20	$	1.17	$	1.20	$	1.14
December 2003	$	1.26	$	1.23	$	1.26	$	1.20
January 2004	$	1.25	$	1.26	$	1.29	$	1.24
February 2004	$	1.24	$	1.26	$	1.28	$	1.24
March 2004	$	1.23	$	1.23	$	1.24	$	1.21
April 2004 (through April 14)	$	1.19	$	1.21	$	1.24	$	1.19

(1)

The average of the Noon Buying Rates on the last business day of each month during the relevant period.

For information regarding the effects of currency fluctuations on France Telecom’s results, see “Item 5. Operating and Financial Review and Prospects – 5.1.1 Activity and Operating Profitability of the Group”.

3.3 RISK FACTORS

In addition to the other information contained in this annual report on Form 20-F, prospective investors should carefully consider the risks described below before making any investment decisions. These risks, or one of these risks, could have a negative effect on the business, the financial situation, or the results of operations of France Telecom. Moreover, additional

risks not currently known to France Telecom, or that France Telecom currently deems immaterial, may also impair its business operations. France Telecom’s business, financial condition or results of operations could be materially adversely affected by any of these risks and investors could lose all or part of their investment.

The risks described below concern:

Risk factors relating to France Telecom’s business (see “– 3.3.1 Risk Factors Relating to France Telecom’s Business”);

Risk factors relating to the telecommunications and wireless industries (see “– 3.3.2 Risk Factors Relating to the Telecommunications and Wireless Industries”);

Risks factors relating to financial markets (see “– 3.3.3 Risk Factors Relating to Financial Markets”); and

Risk factors relating to legal proceedings (see “– 3.3.4 Risk Factors Relating to Legal Proceedings”).

Risks related to France Telecom, the telecommunications industry and financial markets are described below in each of the categories by order of decreasing importance, according to France Telecom’s current assessment. The occurrence of new external or internal events may lead France Telecom to modify this order of importance in the future.

3.3.1 R ISK F ACTORS R ELATING TO F RANCE T ELECOM ’ S B USINESS

France Telecom may not be able to reduce its debt. If it is unable to reduce its indebtedness, France Telecom’s cash flow may be insufficient to meet its financing needs and its ability to invest in the development of its business may be reduced.

During the period from 1999 to 2002, France Telecom achieved strong external growth at a cost of € 100 billion, of which 80% was paid in cash. This led to a major increase of its net consolidated financial debt, which went from € 14.6 billion at the end of 1999 to € 68.0 billion at the end of 2002.

The major priority of the “Ambition FT 2005” Plan, launched in December 2002, is to reduce France Telecom’s indebtedness through an increase in capital, undertaken on April 15, 2003 for close to € 15 billion and through its operational performance improvement program called “TOP”. These two elements, for the most part, allowed France Telecom to reduce its net consolidated financial debt to € 44.2 billion at December 31, 2003.

Nevertheless, in the future, France Telecom may not be able to generate sufficient cash flow to further reduce its indebtedness. This situation could result from negative factors such as the following:

competition or decisions made by regulatory authorities that have the effect of reducing prices or revenues;

the slowdown of the current growth in terms of business volume (wireless activities, data base services, Internet services);

the decrease in business volume of older sectors (a tendency that is already being experienced in fixed line telephony);

obstacles to the efforts to achieve savings in terms of operating expenses before amortization and depreciation and in terms of investments in tangible and intangible assets;

the necessity, due to competition or technological advancement or changes in regulations, to incur operational or investment expenses that are greater than those planned.

If France Telecom does not succeed in reducing its indebtedness, its cash flow may be insufficient to meet its financing needs, including meeting scheduled repayments of its debt.

Furthermore, France Telecom’s financing agreements contain a certain number of financial covenants (see Note 20 and Note 20.4 of the Notes to the Consolidated Financial Statements). If France Telecom fails to meet its obligations arising from its financing agreements or other payment obligations, its creditors may require early repayment. Many of France Telecom’s financing agreements and its outstanding securities include cross-default and cross-acceleration provisions pursuant to which a payment default or acceleration, or a failure to respect a financial covenant, may result in the acceleration of all or a significant part of France Telecom’s debt and an inability to draw upon its credit lines. France Telecom’s high level of debt, its obligations to maintain certain financial ratios and its other obligations may limit its ability to borrow additional funds and invest in the development of its business.

The “TOP” Program may not achieve the expected results, which could have a material adverse impact on France Telecom’s financial condition and results of operations.

The “TOP” operational performance improvement program strives to achieve optimal levels of performance for each of its activities and generate more than € 15 billion in net cash flow over the period from 2003 to 2005.

The results of the “TOP” Program in 2003 are discussed in “Item 5. Operating and Financial Review and Prospects – 5.1.2.2 Results of the ‘TOP’ Operational Improvements Program”.

In particular, the “TOP” Program allowed France Telecom to generate approximately € 6.4 billion in free cash flow excluding asset disposals (for a calculation of free cash flow excluding asset disposals and a description of the manner in which France Telecom uses it, see “Item 5. Operating and Financial Review and Prospects – 5.4.2 Liquidity” and “Item 5. Operating and Financial Review and Prospects – 5.9 Non-GAAP Financial Measures and Financial Glossary”). France Telecom’s management uses free cash flow excluding asset disposals to analyze its ability to generate net cash available for debt repayment in the context of the “TOP” Program. Operating expenses before depreciation and amortization decreased, on a comparable basis, from € 30.3 billion in 2002 to € 28.8 billion in 2003, representing a decrease of close to € 1.5 billion. Investments in tangible and intangible assets (excluding acquisitions of licenses) decreased, on a comparable basis, from € 6.95 billion in 2002 to € 5.1 billion in 2003, representing a decrease of close to € 1.9 billion.

In the future, the goals of this program may not be achieved or may be delayed, which would have a material impact on the financial condition and results of operations of France Telecom. France Telecom may encounter difficulties in the implementation of the program. For example, reorganization costs may be greater than expected (from € 800 million to € 1 billion), especially in cases of withdrawals from certain markets (for example, the withdrawal of Orange from the Swedish market).

Furthermore, the implementation of the “TOP” Program could lead to unexpected results. For example, investments in tangible and intangible assets, and more generally, the investments made in growth sectors, may be insufficient to maintain the Group’s status as a leader, to improve networks and to develop and promote new and existing services, especially in the highly competitive sectors of wireless and Internet services.

France Telecom may not be able to successfully integrate the companies that it has acquired or to achieve planned synergies.

During 2003, France Telecom continued to pursue its integration of Equant and TP Group. France Telecom may:

have difficulty integrating the operations and personnel of the acquired entities;

fail to successfully incorporate networks or acquired technology into its network and product offerings;

fail to generate anticipated synergies;

fail to maintain uniform standards, controls, procedures and policies; or

fail to maintain satisfactory employee relations with acquired entities as a result of changes in management and ownership.

Any major difficulties related to the integration of these entities or other businesses acquired by France Telecom could have an adverse effect on its business, financial condition and results of operations.

France Telecom faces risks relating to certain subsidiaries and joint ventures in which it shares control or does not hold a controlling interest.

In some of the Group’s activities, especially in the “Orange” and “Other International” segments, France Telecom holds a non-controlling interest. Under the governing documents or agreements for certain of these entities, certain key matters such as the approval of business plans and decisions as to the timing and amount of distributions require the agreement of France Telecom’s partners, and in some cases, decisions regarding these matters may be made without France Telecom’s approval. There is a risk of disagreement or deadlock or a risk that decisions contrary to the interests of France Telecom will be made. For example, following the difficulties encountered with MobilCom, France Telecom was obliged to depreciate the total amount of its investment in MobilCom in 2002.

The consolidated subsidiaries that may be impacted by the risks described above are either proportionately consolidated (as in the case of control exercised with one or more other shareholder(s)) or consolidated according to the equity method (see Note 32 of the Notes to the Consolidated Financial Statements).

Companies that are consolidated proportionately mainly include ECMS (Mobinil), a subsidiary of Orange in Egypt, which is consolidated at 71.25%, as well as operators in Mauritius (Mauritius Telecom) and Jordan (JTC), in which France Telecom has a 40% controlling interest in each.

Companies that are consolidated by the equity method (see Note 11 of the Notes to the Consolidated Financial Statements) mainly include the operating subsidiaries of BITCO/TA Orange, a subsidiary of Orange in Thailand controlled at 49%, and

Radianz, a subsidiary of Equant controlled at 49%. At December 31, 2003, following an additional depreciation, the book value of the securities of BITCO was brought to zero. Moreover, France Telecom has a 36% interest in the share capital of Tower Participations following its withdrawal from TDF and a 20% interest in the share capital of Bluebird Participations France following its withdrawal from Eutelsat.

Finally, France Telecom has non-consolidated holdings (see Note 12 of the Notes to the Consolidated Financial Statements) that could be impacted by the risks mentioned above, in particular, Orange’s interests in the share capital of ONE (17.5%, Austria) and Optimus (20%, Portugal). France Telecom fully depreciated at December 31, 2003 the value of its 27% interest in the share capital of Noos (Cable television, France).

In some cases, strategic or joint venture partners may choose not to continue their partnership. In addition, France Telecom’s arrangements with its joint venture partners may expose France Telecom to requirements for additional financing, or additional capital expenditure or investment requirements or obligations to buy or sell holdings. See Note 28 of the Notes to the Consolidated Financial Statements.

These factors could impact France Telecom’s ability to pursue its stated strategies with respect to those entities or have a material adverse effect on its results of operations or financial condition.

The high cost of UMTS licenses, and investments and expenses necessary for the success of this technology, could adversely affect France Telecom’s business, financial condition and results of operations.

At December 31, 2003, France Telecom had paid over € 8 billion to acquire UMTS licenses in Europe (excluding minority interests, notably MobilCom). Under the terms of these licenses, France Telecom has agreed to make significant investments in its networks in order to offer new products and services. If France Telecom decided not to pursue UMTS development in certain countries, or if it was unable to meet the costs, it may incur significant costs, including revocation of the licenses, relating to its withdrawal from these markets.

For example, if Orange cannot fulfill the conditions under its UMTS licenses or obtain their modification, the licenses may be revoked and Orange may be liable for damages to the state that awarded the licenses, or to its partners in UMTS development in these countries, as well as to its creditors or its suppliers. All of these risks could have a significant negative impact on France Telecom’s financial condition and results of operations.

In addition, once its UMTS network has been launched, the costs related to the development and marketing of new products are difficult to estimate and may be very high, in particular to promote demand for UMTS services or to subsidize UMTS-compatible handsets.

France Telecom cannot be certain that the demand for UMTS products and services will justify the related high costs. Low demand, or demand with weak growth, for UMTS products and services in markets where France Telecom offers them would adversely affect its results of operations. The level of demand for UMTS products and services may be adversely affected by the failure of prior preliminary launches by France Telecom’s competitors or by the launch of alternative technologies. France Telecom will need to offset the high purchase costs of the licenses, network capital expenditures and the related amortization costs with increased revenues from customers. Furthermore, any delay in the provision of UMTS products and services resulting from problems with suppliers of components of the UMTS network, the roll out of the network, the unavailability of products compatible with UMTS services, the inability to comply with the requirements of UMTS licenses or any other factor may adversely affect revenues from UMTS services or the date from which such revenues are generated. If, in the future, France Telecom’s current estimates relating to future cash flow generated under the UMTS licenses are not met, France Telecom’s revenues could be adversely affected, and France Telecom could be required to significantly depreciate the value of its UMTS licenses and related assets recorded in its financial statements.

To the extent that France Telecom expects to generate significant cash flows from its wireless telephony subsidiaries, such as Orange and PTK Centertel, the failure by these activities to generate sufficient revenues could render France Telecom unable to meet its financing needs related to the development of UMTS or its other activities. Its financial condition and results of operations may be adversely affected.

For more information relating to the cost and value of UMTS licenses, see “Item 5. Operating and Financial Review and Prospects – 5.2.2.1 Orange Segment – Investments in Tangible and Intangible Assets”.

France Telecom recorded significant goodwill following the acquisitions it made between 1999 and 2002. Accelerated amortization of this goodwill may be required, which could have a material negative impact on France Telecom’s results.

France Telecom recorded significant goodwill in connection with its acquisitions since 1999, particularly for the acquisitions of Orange, Equant and TP Group. Goodwill amounted to approximately € 26 billion at December 31, 2003. Pursuant to French generally accepted accounting principles, goodwill is amortized over a period determined at the time the goodwill is recorded.

The value of goodwill is reassessed annually and, when events and circumstances indicate that a decrease in value may occur, France Telecom depreciates this goodwill, particularly in the case of events and circumstances that include lasting material adverse changes affecting the economic environment or affecting the assumptions and objectives that were used at the time of the acquisition. For example, France Telecom depreciated its investments in Equant and in certain subsidiaries of Orange and Wanadoo in 2002 and 2003. France Telecom cannot guarantee that new events or unfavorable circumstances will not take place that would lead France Telecom to reassess the value of its goodwill and record additional significant exceptional amortization, which could have a material adverse effect on France Telecom’s revenues.

For further information relating to the exceptional amortization of goodwill, see “Item 5. Operating and Financial Review and Prospects – 5.2.3.8 Goodwill Amortization”.

France Telecom’s technical infrastructure is vulnerable to damage or interruptions caused by floods, storms, fires, power outages, war, intentional acts and other similar events. Technical network and information technology system failures may result in reduced user traffic, reduced revenue and harm to France Telecom’s reputation.

The occurrence of a natural disaster, such as the major storms in December 1999 that affected service in France at the beginning of 2000, or the flooding in southern France in 2002, and other unanticipated problems at France Telecom’s facilities or any other damage to or failure of its network could result in interruptions in its service. In 2000, such damages amounted to approximately € 150 million. In certain circumstances, France Telecom has no insurance for damages to its aerial lines and must itself finance these costs. Information technology system (hardware or software) failures, human error or computer viruses could also affect the quality of its services and cause temporary service interruptions. While the risk cannot be quantified, such events could result in customer dissatisfaction and reduced traffic and revenues for France Telecom.

France Telecom will be obligated to adopt new accounting standards in 2005 that may have a material impact on its accounts and may render a comparison between financial periods more difficult.

In June 2002, the European Union adopted new regulations requiring all listed EU companies, including France Telecom, to apply International Financial Reporting Standards (“IFRS”) (previously known as International Accounting Standards or “IAS”) in their financial statements from January 1, 2005.

The IFRS norms may have a material impact on important items in the accounts and balance sheet of France Telecom. For further information on the impact of IFRS norms, see “Item 5. Operating and Financial Review and Prospects – 5.7.2 Implementation of IFRS (International Financial Reporting Standards) within the France Telecom Group”.

The value of France Telecom’s international investments in telecommunications companies outside Western Europe may be materially affected by political, economic and legal developments in these countries.

France Telecom has made a significant number of investments in telecommunications operators in countries in Eastern Europe, the Middle East, the Caribbean, Latin America, Asia and Africa, particularly with respect to its activities in the “Orange” and “Other International” segments.

The political, economic and legal systems of the countries in these regions of the world (as, for example, in the Ivory Coast) may evolve in an unpredictable manner. Political or economic upheaval or changes in laws may negatively affect the operations of companies in which France Telecom has invested, and may impair the value of these investments.

The downgrading of France Telecom’s debt ratings in 2001 and in 2002 by rating agencies increased the cost of its debt. Despite the ratings increases in December 2002, in 2003 and in 2004, the downgrading of its debt rating could limit its ability to borrow and may increase the cost of access to financial markets.

In October 2001, the rating agencies that evaluate France Telecom’s debt downgraded their ratings on France Telecom’s short- and long-term debt. Standard & Poor’s Ratings Services, or S&P’s, lowered its rating on France Telecom’s long-term debt from A- to BBB+, with a negative outlook, and downgraded France Telecom’s short-term debt rating from A1 to A2. Moody’s Investors Service, or Moody’s, lowered its rating of France Telecom’s long-term debt from A3 to Baa1, with a negative outlook, and downgraded its rating of France Telecom’s short-term debt from P1 to P2. Fitch Ibca downgraded its rating of France Telecom’s long-term debt from A– to BBB+ with a negative outlook, and lowered the rating of its short-term debt from F1 to F2. After the publication of France Telecom’s annual accounts in March 2002, S&P’s and Moody’s placed their respective BBB+ and Baa1 ratings of France Telecom’s long-term debt, on review for downgrade; similarly, Fitch Ibca placed its F2 rating of France Telecom’s short-term debt on review for downgrade beginning March 2002. On May 13, 2002, Moody’s also placed France Telecom’s short-term debt under review.

On June 24, 2002, Moody’s downgraded its rating of France Telecom’s long-term debt from Baa1 to Baa3 and downgraded France Telecom’s short-term debt rating from P2 to P3, with a negative outlook for the long-term debt. On June 25, 2002, S&P’s downgraded France Telecom’s long-term debt rating from BBB+ to BBB and downgraded France Telecom’s short-term debt

rating from A2 to A3. S&P’s also put France Telecom’s long-term rating on review, with a negative outlook. On July 5, 2002, Fitch Ibca downgraded its rating of France Telecom’s long-term debt to BBB-, with a stable outlook, and lowered its rating of France Telecom’s short-term debt from F2 to F3. On July 12, 2002, S&P’s again downgraded its rating of France Telecom’s long-term debt from BBB to BBB-, with a stable outlook.

These ratings downgrades have limited France Telecom’s access to financial markets while it faces significant debt repayments in 2003, 2004 and 2005. According to the rating agencies, the downgrading of France Telecom’s ratings and their placement under review is due to doubts about France Telecom’s ability to execute its debt reduction plan, due to both the deterioration of market conditions in the telecommunications sector and the difficulties encountered by France Telecom in carrying out its asset disposal program. The rating agencies have also expressed concern about the possible assumption by France Telecom of MobilCom’s debt. In this regard, France Telecom recently completed, in 2003, the transactions contemplated by the MC Settlement Agreement with MobilCom (see Note 22.3 and Note 26 of the Notes to the Consolidated Financial Statements).

On December 5, 2002, after the announcement related to the launch of the “Ambition FT 2005” Plan (see “Item 4. Information on France Telecom – 4.2.1 ‘Ambition FT 2005’ Plan”) Fitch Ibca amended its outlook on France Telecom’s long-term debt from stable to positive and S&P’s confirmed its rating of France Telecom’s long-term debt at BBB- with a stable outlook. On December 9, 2002, Moody’s also confirmed France Telecom’s long-term debt rating at Baa3 with a stable outlook. On May 14, 2003, S&P’s increased its rating on France Telecom’s long-term debt from BBB- to BBB with a positive outlook and its rating on short-term debt from A-3 to A-2. On August 7, 2003, Fitch IBCA increased its rating on France Telecom’s long-term debt from BBB- with a positive outlook to BBB with a positive outlook. On September 23, 2003, Moody’s increased its outlook on the long-term debt placed at Baa3 from stable to positive, then on December 5, 2003, placed it under positive review. On February 18, 2004, S&P’s increased its rating on France Telecom’s long-term debt to BBB+ with a positive outlook. On February 19, 2004, Fitch Ibca increased its rating on France Telecom’s long-term debt to BBB+ with a positive outlook. On March 3, 2004, Moody’s increased its rating on France Telecom long-term debt to Baa2 with a positive outlook and its short-term rating to P2, with a stable outlook.

France Telecom cannot guarantee that the rating agencies will not further downgrade its credit ratings, particularly if the TOP Program does not produce the expected results or if France Telecom is unable to reduce its indebtedness.

A significant portion of the debt ( € 17.1 billion outstanding at the end of 2003) includes step-up provisions, or provisions that will lead to the amendment of the coupons or margins should the ratings of France Telecom change. The deterioration in the ratings of France Telecom in June and July of 2002 led to an increase in coupon bonds starting September 2002 for bonds denominated in U.S. dollars or in pounds sterling, and starting in February and March of 2003 for the other bonds (annual bonds). This can be explained by the impact of the deterioration in the ratings of France Telecom that occurred in 2002 on interest expense which was approximately € 40 million in 2002, compared to € 164 million in 2003.

Furthermore, France Telecom S.A.’s securitization programs require, where applicable, a rating above BB-.

France Telecom cannot guarantee that it will succeed in applying the measures adopted to reinforce or maintain its credit ratings. It also cannot guarantee that the rating agencies will deem the undertaken measures sufficient. In addition, factors outside France Telecom’s control, including factors relating to the telecommunications industry or specific countries or regions in which it operates, may affect the rating agencies’ assessment of France Telecom’s credit profile.

For information purposes, France Telecom believes that a decrease of one notch in its long-term debt rating by S&P’s and Moody’s would automatically increase its annual interest expense by approximately € 90 million, based on its current level of indebtedness, and would also adversely affect its ability to access, and the conditions under which it accesses, the financial markets.

In addition, in the event of a ratings downgrade, certain derivatives contracts and certain contracts related to lease transactions with distinct third parties may be terminated or require the posting of collateral. France Telecom has already been required to post collateral for certain of these contracts.

3.3.2 R ISK F ACTORS R ELATING TO THE T ELECOMMUNICATIONS AND W IRELESS I NDUSTRIES

The profound and permanent transformation of the telecommunications industry could render existing technology obsolete. A deficiency in France Telecom’s response to technological advancement could lead to the loss of customers or market share in the sectors in which France Telecom operates and could have an impact on its revenues and results of operations.

The telecommunications industry has experienced profound changes in recent years, and France Telecom believes that these changes will continue. If France Telecom fails to rapidly adapt its business to meet the developments of the telecommunications industry, it may be unable to compete effectively and its business activities, financial condition and results

of operations may suffer. France Telecom may be unable to appropriately anticipate the demand for certain technologies or may not be in a position to acquire or finance the necessary licenses and intellectual property rights in time. Further, new technologies that France Telecom chooses to develop may lead to significant costs and may not be as successful as planned. As a result, France Telecom may lose customers or market share or may be obligated to undertake substantial expenditures to maintain its customers.

The intense competition of the telecommunications industry in Europe may strain France Telecom’s resources.

France Telecom faces intense competition in all areas of its business.

In the fixed line telephony business in France, which has been open to competition since January 1, 1998, France Telecom faces competition that has created a dramatic reduction in rates, as well as a reduction in its market share from 1998 through 2001. In addition, competition in the markets for regional and local calls is intensifying. The recent regulatory changes, such as the unbundling of its local loop, the preselection of operators, number portability and main distribution frame access, have increased the ease with which its customers can use the services of other telecommunications carriers instead of France Telecom’s services. In the local call sector principally, with the introduction of carrier preselection at the beginning of 2002, France Telecom lost approximately 25% of its market share at December 31, 2002. France Telecom expects a further decrease of its market share and continued decreases of rates in the fixed line services in France, where it currently enjoys the greatest market share. In addition, according to France Telecom, an increasing proportion of calls that would previously have been made over the fixed line network are now being made on mobile telephones, a process known as “fixed-wireless substitution”. The level of competition is significantly influenced by decisions of the ART, which could make decisions that would lead to further declines in rates in the fixed line telephony business. For further information regarding competition and regulatory decisions that could affect the level of competition, see “Item 4. Information on France Telecom – 4.5.3 Fixed Line, Distribution, Networks, Large Customers and Operators” and “Item 4. Information on France Telecom – 4.12.2 French Regulations”.

In addition, restructuring by certain competitors and overcapacity in the international transmissions sector could materially affect France Telecom’s results in the international transmissions business. If these conditions continue, they could negatively impact France Telecom’s results in this market. In the data transmissions market, Equant and Transpac, both subsidiaries of France Telecom, face intense competition. The success of the France Telecom group in this market will depend on the ability of Equant and Transpac to compete with the other large telecommunications operators, intellectual property and data specialists and new entrants in this market, including operators from competing networks and suppliers of Internet services or other value added services. France Telecom believes that the number of competitors, the vertical and horizontal concentration of this activity, the pressure on rates and the competition in terms of market share could increase in the future.

In the wireless telecommunications business, France Telecom faces intense competition in all of its principal markets (particularly in France and the United Kingdom) from existing and new market participants. In certain countries, France Telecom must compete with new non-traditional operators that offer wireless communications services without maintaining their own networks (known as mobile virtual network operators). Although competition based on handset subsidies has diminished in France and the United Kingdom, competition based on rates, subscription options offered, coverage and service quality remains intense. As these markets have become increasingly saturated, the focus of competition is starting to shift from customer acquisition to customer retention, which could lead to higher expenses for customer loyalty initiatives. Rates for wireless communications have been declining over the past several years and may continue to decline in France Telecom’s principal markets.

France Telecom also faces competition in the market for Internet and multimedia services, particularly in France. The Internet access market is experiencing increased competition and shifting usage patterns which exert a pressure that may be influenced by regulation, particularly in France. There are few substantial barriers to entry in the Internet industry and connection costs for users and customers are low. As a result, France Telecom’s most significant competitors in this segment may be new entrants such as the French postal service that would not be burdened by the costs of modernizing older equipment. It may be very expensive for France Telecom to upgrade its networks, products and technology in order to continue to compete effectively with other competitors. Wanadoo faces competition in the printed directories market from editors that offer regional directories in France. Online directories remain highly competitive with many market participants.

Competition in any or all of France Telecom’s lines of business could lead to:

price erosion for France Telecom’s products and services;

an inability to increase market share or a loss of market share;

loss of existing or prospective customers and greater difficulty in retaining existing customers;

more rapid deployment of new technologies and obsolescence of existing technologies;

the increase of costs related to investments in new technologies that are necessary to retain customers and market share;

increased pressure on France Telecom’s profit margins, preventing it from maintaining or improving its current level of operational profitability; and

difficulties repaying the debt it incurred to finance its acquisitions and strategic and technological investments if it cannot generate revenues and an adequate gross margin of internal financing.

If growth in the Internet and wireless businesses slows, France Telecom’s revenues may not grow as rapidly as in the past and may even decrease, which in turn could adversely affect its profitability.

In recent years, France Telecom’s revenues, at a constant exchange rate, have grown in large part because of rapid expansion in its Internet and wireless communications businesses, in line with growth in the Internet and wireless markets in Europe. If these markets do not continue to expand, particularly in France and the United Kingdom, France Telecom’s revenue may not grow or may even slow, which in turn could affect its financial condition and results of operations, in particular if the revenues of the “Fixed Line, Distribution, Networks, Large Customers and Operators” segment were to decrease.

Despite the current trend towards deregulation in France and other European countries, France Telecom continues to operate in highly regulated markets in which its flexibility to manage its business is limited.

France Telecom must comply with an extensive range of requirements that regulate and supervise the licensing, construction and operation of its fixed line, wireless and Internet networks and the provision of its products and services. It must also cooperate with agencies or other governmental authorities that regulate and supervise the allocation of frequency spectrum and that oversee the general competitiveness of the telecommunications market. Furthermore, France Telecom faces a number of regulatory constraints as a result of its dominant position in the fixed line telecommunications market in France, including certain obligations that lead to significant costs. For example, France Telecom is required to provide interconnection services to other operators on terms that must be approved by the regulatory authority. France Telecom is also required to have its rates for fixed line voice telephony services approved by the regulatory authority prior to implementation. France Telecom believes that, in general, it fulfills the requirements imposed by the applicable regulations, but it cannot predict the opinion of regulatory or judicial authorities, who could be asked to review or have already been asked to review France Telecom’s compliance.

Like other operators, France Telecom’s activities and operating income may be impacted significantly by legislative, regulatory and governmental changes and, in particular, by decisions made by regulatory authorities and competition authorities in relation to:

granting, modifying and renewing licenses (see “Item 5. Operating and Financial Review and Prospects – 5.2.2.1 Orange Segment – Investments in Tangible and Intangible Assets” for further information on the renewal of the GSM license in France);

rates or the possibility of extending activities to new markets;

network accessibility to virtual network operators and other service providers; or

access to third party networks.

Such decisions could significantly impact results of operations.

The following can be cited as examples of risks related to regulatory changes or decisions: the conditions for the renewal of Orange France’s GSM license and Wanadoo’s obligation to submit to the European Commission accounting information related to its broadband offers.

Regarding the first point, the GSM license granted to Orange France for a period of 15 years, from March 25, 1991, expires in March 2006. In compliance with the terms of the license, the conditions for renewing the license, like those for SFR, were defined in March 2004. The new conditions approved by the French government provide for a 1% fee per year on the revenues of wireless operators, in addition to a fee of € 25 million per year. The wireless operators have agreed to continue to reduce the price of SMS text messages and will work in close cooperation with the French State, local authorities and the regulatory authority to complete the rural area coverage program and ensure 100% wireless telephony coverage for all French towns and villages. In other countries where it operates, France Telecom cannot foresee the new conditions that will be applicable within the framework of GSM licenses following their renewal, and in particular, cannot dismiss the possibility that the cost to the operator may be significantly higher than the current cost of the license fees.

Regarding the second point, within the framework of a July 2003 decision by the European Commission (see Note 29 of the Notes to the Consolidated Financial Statements) imposing a fine of €10.4 million on Wanadoo France for having abused its dominant position in the retail market for broadband Internet access by practicing predatory pricing between 2001 and October 2002 (Wanadoo filed an appeal against this decision), the European Commission has required that Wanadoo France furnish it with its operational accounts related to its broadband offers until 2006, in order to enable the Commission to verify that Wanadoo France is not engaging in predatory pricing.

Furthermore, licenses are required in most countries to provide telecommunications services and operate networks. These licenses frequently impose requirements regarding the way the operator conducts its business, including, in particular, minimum service requirements, roll out completion deadlines, and network quality and coverage.

Failure to meet these requirements could result in fines or other sanctions, including, ultimately, revocation of the licenses.

Alleged health risks of wireless communications devices could lead to decreased wireless communications usage or increased difficulty in obtaining sites for base stations or litigation, that may have adverse effects on the results of operations of France Telecom.

In France, by decree dated May 3, 2002, the Health Ministry required wireless operators to provide their customers with recommendations on the use of mobile telephones and information on the remaining uncertainties relating to potential health risks. In addition, Orange signed charters of good conduct relating to the installation of transmitter sites with other operators and certain municipalities in France. On January 21, 2003, the ART published a scientific study regarding the health risks associated with wireless telephone transmitter sites and mobile telephones. The results of this study, ordered by the French National Institute for Industrial Environment and Risks (the Institut national pour l’environnement industriel et des risques , or “Ineris”), confirmed the conclusions of an independent report published in 2001, which found that “no study has been able to conclude that exposure to radio-frequency fields emitted by mobile telephones or their base stations have had a harmful influence on health”. In total, at least four scientific studies with the same conclusions, including the one mentioned above, were published in 2003.

In the United Kingdom, a study on wireless telecommunications health issues conducted by the Independent Expert Group on Mobile Phones, known as the Stewart Report, reported that to date, there is no evidence that suggests that wireless phone technologies pose a health risk for the general public. The Department of Health in the United Kingdom has nevertheless required that information be made available to customers so that they can make their own informed choices about how to use mobile phones. In the United Kingdom, Orange and other wireless network operators are promoting in-depth scientific research into wireless technology through joint financing of a program with the government of the United Kingdom. The published scientific studies concluded that no long-term health risks exist.

While to date France Telecom is not aware of any substantiation of health risks associated with wireless communication devices, actual or perceived health risks may adversely affect France Telecom’s results of operations or financial condition through a reduction in the number of customers, reduced usage per customer, exposure to potential litigation or other liability. In the event that future evidence is considered to show that health risks exist, the use of mobile phones could be subject to regulations which, for example, could limit emission levels from handsets or transmitter sites. Such regulations could have an adverse effect on France Telecom’s operations and results of operations.

3.3.3 R ISK F ACTORS R ELATING TO F INANCIAL M ARKETS

France Telecom’s business may be affected by fluctuations in exchange rates.

A significant portion of France Telecom’s revenues and expenses are accounted for in currencies other than the euro. Over the course of 2002 and 2003, the main currencies for which France Telecom was exposed to exchange rate risk were the pound sterling, the Polish zloty and the U.S. dollar. Where appropriate, France Telecom enters into derivative instruments to hedge underlying exposures to changes in exchange rates, but France Telecom cannot guarantee that these derivative transactions will effectively or totally hedge its risks. To the extent that France Telecom has not entered into derivative instruments to cover a portion of this risk, or if its strategy of using these instruments is not successful, France Telecom’s cash flow and revenues may be affected. Derivative instruments are described in Note 20 of the Notes to the Consolidated Financial Statements.

For consolidation purposes, the balance sheets of France Telecom’s consolidated foreign subsidiaries are converted into euro using the exchange rate at the end of the period, and their income statements and cash flow charts are converted using the average exchange rate for the period. The impact of such a conversion on the balance sheet and shareholders’ equity may be significant. From one period to another, fluctuations in the average exchange rate relating to a particular currency may significantly affect the reported revenues as well as the expenses incurred in such currency, as reflected in France Telecom’s income statement, which could significantly affect its results of operations. For example, in 2003, the impact of fluctuations in the exchange rate on France Telecom’s revenues was approximately € 2 billion.

France Telecom’s business may be affected by fluctuations in the financial markets, including changes in interest rates.

In the ordinary course of its business, France Telecom is exposed to financial market risks, including changes in interest rates. Where appropriate, France Telecom enters into derivative instruments to hedge underlying exposures to changes in interest rates. The derivative instruments used by France Telecom are described in Note 20 of the Notes to the Consolidated Financial Statements. France Telecom’s exposure to market risks is described in “Item 11. Quantitative and Qualitative Disclosures about Market Risk – 11.1 Exposure to Market Risks and Financial Instruments”.

Risk factors relating to the volatility of France Telecom’s shares.

France Telecom S.A.’s share prices may fluctuate due to a number of factors, including:

a change in France Telecom’s credit rating, or level of indebtedness or sales of assets;

changes in recommendations made by financial analysts with respect to France Telecom;

changes in analysts’ forecasts regarding the markets in which France Telecom operates;

an announcement by France Telecom or one of its competitors regarding strategic partnerships, results of operations, changes in its capital structure or other important changes in activity;

the recruitment or departure of key employees; and

general stock market fluctuations.

Following the exchange offer for Orange shares completed in 2003, France Telecom held none of its own shares at December 31, 2003.

In addition, the share prices of France Telecom’s listed subsidiaries, Wanadoo, Equant and TP S.A., may fluctuate. This could impact the financial condition of France Telecom or its share price.

Future sales by the French State of its shares in France Telecom may impact France Telecom’s share price.

At December 31, 2003, the French State held, directly or indirectly, through the intermediary, ERAP, approximately 54.5% of the share capital of France Telecom. Until January 2004, the French State had the legal obligation to hold more than 50% of the share capital of France Telecom. However, French law no. 2003-1365 of December 31, 2003, relating to the public telecommunications service and to France Telecom, allows the French State to transfer its holding to private investors. If the French State decides to reduce its holding in the share capital of France Telecom, such a sale or even the perception of potential sales could impact France Telecom’s share price.

The price of France Telecom’s ADSs and the U.S. dollar value of any dividends will be affected by fluctuations in the U.S. dollar/euro exchange rate.

The ADSs are quoted in U.S. dollars. Fluctuations in the exchange rate between the euro and the U.S. dollar are likely to affect the market price of the ADSs. For example, because France Telecom’s financial statements are reported in euro, a decline in the value of the euro against the U.S. dollar would reduce France Telecom’s earnings as reported in U.S. dollars. This could adversely affect the price at which the ADSs trade on the U.S. securities markets. Any dividend that France Telecom might pay in the future would be denominated in euro. A decline in the value of the euro against the U.S. dollar would reduce the U.S. dollar equivalent of any such dividend.

Holders of ADSs may face disadvantages compared to holders of France Telecom’s shares when attempting to exercise voting rights. Holders of shares wishing to exercise their voting rights must block their shares for at least five days prior to the shareholders’ meeting pursuant to French law.

In order to vote at shareholders’ meetings, ADS holders who are not registered on the books of the depositary are required to transfer their ADSs for a certain number of days before a shareholders’ meeting into a blocked account established for that purpose by the depositary. Any ADS transferred to this blocked account will not be available for transfer during that time. ADS holders who are registered on the books of the depositary must give instructions to the depositary not to transfer their ADSs during this period before the shareholders’ meeting. ADS holders must therefore receive voting materials from the depositary sufficiently in advance in order to make these transfers or give these instructions. There can be no guarantee that ADS holders will receive voting materials in time to instruct the depositary to vote. Also, the depositary is not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. It is possible that ADS holders, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote at all.

In order to participate in any general meeting, a holder of shares held in registered form must have its shares registered in its name in a shareholder account maintained by France Telecom or on France Telecom’s behalf by an agent appointed by France Telecom by 3:00 p.m. (Paris time) the day before the meeting. A holder of bearer shares must obtain a certificate (c ertificat d’immobilisation ) from the accredited intermediary with whom the holder has deposited its shares, and the certificate must state that the shares are not transferable until the time fixed for the meeting. The holder must deposit this certificate at the place specified in the notice of the meeting by 3:00 p.m. (Paris time) the day before the meeting.

Preemptive rights may be unavailable to holders of France Telecom’s ADSs.

Holders of France Telecom’s ADSs or U.S. resident shareholders may be unable to exercise preemptive rights granted to France Telecom’s shareholders, in which case holders of France Telecom’s ADSs could be substantially diluted. Under French law, whenever France Telecom issues new shares for payment in cash or in kind, France Telecom is usually required to grant

preemptive rights to its shareholders. However, holders of France Telecom’s ADSs or U.S. resident shareholders may not be able to exercise these preemptive rights to acquire shares unless both the rights and the shares are registered under the Securities Act of 1933 or an exemption from registration is available.

If the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case no value will be given for these rights.

3.3.4 R ISK F ACTORS R ELATING TO L EGAL P ROCEEDINGS

France Telecom is involved in several investigations or legal proceedings that are more fully described in Note 29 of the Notes to the Consolidated Financial Statements. France Telecom’s position as the leading operator and provider of networks and telecommunications services in France and one of the leading telecommunications operators in the world subjects it to the scrutiny of its competitors and French and European competition authorities. In addition, France Telecom is regularly involved in legal disputes with competitors as a result of its leading positions in the fixed and wireless telecommunications markets in which it operates. With the exception of the proceedings set forth in Note 29 of the Notes to the Consolidated Financial Statements, France Telecom believes that none of these proceedings, taken by itself, would have a material adverse effect on the financial condition or results of operations of the Group.

Item 4. INFORMATION ON FRANCE TELECOM

4.1 HISTORY AND DEVELOPMENT

History and Development

Formerly a part of the French Telecommunications Ministry, France Telecom was created as a legally distinct public sector operator in 1991. Since December 31, 1996 it has operated as a corporation ( société anonyme ) subject to French corporate law and to the specific laws that govern it. Its length of life is 99 years, except where extended or wound up early. French law no. 2003-1365 of December 31, 2003 now permits the State to hold, directly or indirectly, less than half of the majority of the capital.

France Telecom’s shares have been listed on the Premier marché of Euronext Paris S.A. and on the New York Stock Exchange (“NYSE”) since October 1997, when the French State sold 25% of its shares to the public and France Telecom employees. At December 31 2003, approximately 54.5% of France Telecom’s shares were directly or indirectly held by the French State.

France Telecom’s registered office is located at 6, Place, d’Alleray, 75505 Paris Ledex 15, and its telephone number is: + 33(0)1.44.44.22.22. France Telecom’s agent in the United States, France Telecom North America, is located at 1270 Avenue of the Americas, New York, NY 10020.

In recent years, France Telecom’s business and the regulatory and competitive environments in which it operates have undergone significant changes that have affected the structure of its revenues, as well as its business and its internal organization. All sectors of the telecommunications market in France were opened to competition as of January 1, 1998 (with the exception of the local communications sector which was opened to competition on January 1, 2002), whereas France Telecom previously had a monopoly on the provision of fixed line services. In addition, competition has evolved according to the decisions made by the French telecommunications regulator, the Autorité de Régulation des Telecommunications (“ART”).

From 1999 to 2002, France Telecom pursued a strategy designed to reinforce its competitive position in this context of deregulation and heightened competition, particularly by introducing new services and accelerating its international development through external growth. By pursuing this strategy, France Telecom extended its activities towards new areas of telecommunications services, including wireless telephony, the Internet and data transmission services in France and internationally. Also as part of this strategy, France Telecom made many strategic investments (including acquisitions, minority investments and UMTS licenses). In particular, it acquired Orange plc in 2000, Global One and Equant in 2000 and 2001, acquired interests in NTL from 1999 to 2001, in the Polish operator TP S.A. in 2000 and 2001, in MobilCom in 2000, and acquired UMTS licenses in various European countries.

For the most part, these strategic investments could not be financed through equity, which resulted in a major increase in Group debt and a reduction in the rating of France Telecom’s debt by rating agencies.

Upon his arrival at the head of France Telecom on October 2, 2002, Thierry Breton immediately commissioned a team of experts to carry out a complete review of France Telecom’s businesses and financial situation (the “State of France Telecom S.A.” mission ( Mission Etat des Lieux )). The main conclusions of this study were presented to France Telecom’s board of directors on December 4, 2002:

from an operational perspective, France Telecom remains a competitive group with a portfolio of assets that are leaders in their principal market segments with strong brands such as France Telecom, Orange, Wanadoo and Equant. However, given France Telecom’s strong external growth and the organization put in place over the last few years, the Group has not fully exploited its real potential to improve its operating margins;

during the 1999-2002 period, France Telecom’s external growth cost € 100 billion, approximately 80% of which was paid for in cash. Successive plans for reducing France Telecom S.A.’s debt were not implemented due to the market downturn, and the sale of assets was not sufficient to reduce levels of debt; and

although it was very responsive at the operational level, the Group was organized in an excessively decentralized manner. The central functions did not have enough leverage to develop potential synergies.

Based on the results of this “State of France Telecom S.A.” mission, France Telecom launched the “Ambition FT 2005” Plan for the 2003-2005 period. See “– 4.2.1 ‘Ambition FT 2005’ Plan”.

Corporate Purpose

The corporate purpose of France Telecom S.A., both in France and abroad, as amended by the Shareholders Meeting convened to approve the accounts for 2003, is:

to provide all electronic communication services in domestic and international relations;

to satisfy missions related to public service and, in particular, to provide, where applicable, a universal telecommunications service and other mandatory services;

to establish, develop and operate electronic communications networks open to the public necessary for providing said services and to interconnect the same with other French and foreign networks open to the public; and

to provide all other services, facilities, terminal equipment, electronic communications networks, and to establish and operate all networks distributing audiovisual services, and especially radio, television and multimedia broadcasting services.

Simplified Group Organizational Chart at December 31, 2003

The following diagram shows the main operating subsidiaries and shareholdings of France Telecom S.A. at December 31, 2003. The percentage holdings shown for each company are the percentages controlled directly or the percentage control of the operating company or, where jointly controlled, the percentage used to consolidate the company proportionately:

(1)

This diagram does not show the shareholdings in Germany (MobilCom), in Italy (Wind, sold in 2003) and in Sweden (Orange Sverige) as Orange is withdrawing from these markets.

(2)

Orange and Orascom Telecom have joint control of MobiNil. Therefore, in accordance with French GAAP, MobiNil’s financial and operational data is consolidated on a proportionate basis at 71.25% being the percentage by which France Telecom controls MobiNil.

(3)

France Telecom holds 70.6% of Wanadoo S.A.’s share capital and 71.1% of voting rights (after adjustment for treasury shares).

(4)

As part of a consortium with Kulczyk Holding.

(5)

This percentage represents the share of the capital held by France Telecom in Jordan Telecommunications Company via Jitco which holds 40.0% of Jordan Telecommunications Company which is in turn 88.0% owned by France Telecom.

4.2 STRATEGY

4.2.1 “A MBITION FT 2005” P LAN

The France Telecom management team was reorganized at the end of 2002, by first adopting a simpler organizational structure which clearly distinguishes the operating divisions and central functions with responsibility for the whole Group, and second, giving a greater degree of accountability to senior managers. This team is responsible for implementing the “Ambition FT 2005” Plan in order to fundamentally transform the France Telecom Group, based on three major priorities:

“TOP”: a program to improve operational performances which strives to be the motor for France Telecom to generate during the period from 2003 to 2005 more than € 15 billion in net cash provided by operating activities less net cash used in investing activities. This free cash flow will be allocated to reducing debt. In operational terms, TOP’s goal is to attain a level of excellence in the performance of all processes of the company by 2005. See “– 4.2.2 ‘TOP’ Program”.

“15+15+15”: a plan to strengthen the Group’s financial structure:

more than € 15 billion in net cash generated through the TOP Program and allocated to reduce debt, as described above;

€ 15 billion in additional equity, with the participation of the French State in its capacity as shareholder pro rata to its shareholding interest, or approximately € 9 billion;

€ 15 billion from refinancing the Group’s debt.

A strategy focused on customer satisfaction and integrated operational management of the Group’s assets which are leaders in their principal markets, with strong brands such as France Telecom, Orange, Wanadoo and Equant. France Telecom will consider divesting itself of assets with weak strategic or financial positions, or those for which majority control is impossible. It will strive to develop strategic partnerships in areas that are not part of its core business and where it cannot attain critical size on its own.

These three initiatives will be implemented in parallel, with the objective of gaining greater strategic and financial flexibility and achieving a net financial debt/operating income before depreciation and amortization ratio of between 1.5 and 2 by the end of 2005.

Confidence in France Telecom’s management and the credibility of the announced plan made it possible to refinance debt over the period from December 2002 to February 2003 in an amount of more than € 14 billion.

As the financial pressures in the short–term have decreased and the preliminary results of the TOP Program have exceeded its initial objectives, the Group was able to increase its share capital by almost € 15 billion on April 15, 2003. France Telecom’s liquidity crisis has therefore been resolved and its equity capital position has been strengthened.

In line with the strategy defined in the “Ambition FT 2005” Plan, France Telecom launched a public exchange offer for outstanding Orange S.A. shares it did not already own that permitted France Telecom to increase its ownership of Orange S.A.’s share capital to 98.78% upon closure of the public exchange offer. Following the public exchange offer, France Telecom launched a tender offer (offre publique de retrait) for, that will be followed by a compulsory purchase of (retrait obligatoire) , the outstanding shares of Orange S.A. that it did not already hold. These offers for Orange shares were not, and will not be, extended into certain jurisdictions, including the United States. At December 31, 2003, France Telecom held 99.02% of Orange’s share capital.

At the end of 2003, the Group exceeded its expectations as a result of the TOP Program. As a result, France Telecom has generated new margins for maneuver such that it has decided to increase its efforts in terms of innovation and to launch a new growth initiatives program called the “TOP Line” Program. See “– 4.2.5 Implementing France Telecom’s Strategy – Accelerating the Growth Momentum”. The improved performance under the TOP program will still remain a major priority in the coming years.

The Group continues to streamline its asset portfolio as planned and some non-strategic assets have been sold including, Casema, Eutelsat, Wind, CTE (Salvador) and Telecom Argentina.

As a reference, net cash provided by operating activities less net cash used in investing activities, or free cash flow, amounted to € 7.6 billion in 2003, compared to € 0.3 billion in 2002, as shown in the table below (see “Item 5. Operating and Financial Review and Prospects – 5.4.2 Liquidity”). Excluding asset disposals and the increase in short-term marketable securities, free cash flow in 2003 amounted to € 6.4 billion, compared to a cash need of € 1.1 billion in 2002.


Cash flow (in € millions)	2003		2002

Net cash provided by operating activities	11,322		11,839

Net cash used in investment activities	(3,737	)	(11,514	)

Net cash flow provided by operating activities less cash flow used in investing activities (free cash flow)	7,585		325

Increase in short-term marketable securities linked to the capital increase ⁽¹⁾	1,833		0

Free cash flow excluding the increase in short-term marketable securities ⁽¹⁾	9,418		325

Proceeds from asset disposals	(3,046	)	(1,436	)

Free cash flow excluding asset disposals ⁽¹⁾ and the increase in short-term marketable securities ⁽²⁾	6,372		(1,111	)

(1)

For a calculation of free cash flow excluding asset disposals and a description of the manner in which France Telecom uses it, see “Item 5. Operating and Financial Review and Prospects – 5.4.2 Liquidity” and “Item 5. Operating and Financial Review and Prospects – 5.9 Non-GAAP Measures and Financial Glossary – Use of Non-GAAP Measures” .

(2)

Included in investment securities.

In addition, the total net consolidated debt for the purpose of the net financial debt/operating income before depreciation and amortization ratio mentioned above amounted to € 44.2 billion at December 31, 2003 compared to € 68.0 billion at December 31, 2002 and € 63.4 billion at December 31, 2001. The measure of operating income before depreciation and amortization as determined for the purposes of the same ratio, is operating income before depreciation and amortization of assets and amortization of actuarial adjustments in the early retirement plan; it amounted to € 17.3 billion in 2003 compared to € 14.9 billion in 2002 and € 12.3 billion in 2001. The information used to calculate this ratio is, unless otherwise expressly indicated, that provided in the Consolidated Financial Statements. The information, therefore, reflects changes to the scope of consolidation, such as the effect of asset disposals.

4.2.2 “TOP” P ROGRAM

France Telecom’s return to a healthier financial situation depends above all on improvements in its operational performances. The “TOP” Program is France Telecom’s plan for improving its operational performance. It strives to help France Telecom to achieve optimal levels of performance for each of its activities and by 2005 generate more than € 15 billion in net cash flow over the period from 2003 to 2005, which will be allocated to reducing the debt.

The objective initially set for 2003 was to generate at least € 3 billion in free cash flow, to reduce debt. In view of the results obtained in the first half of 2003, this objective was raised to € 4 billion, excluding asset disposals.

Ultimately, free cash flow in 2003, excluding asset disposals and increases in investments in cash in short-term marketable securities, amounted to approximately € 6.4 billion (see “Item 5. Operating and Financial Review and Prospects – 5.4.2 Liquidity”).

Since the beginning of 2003, France Telecom has been positioning itself to meet the requirements of this program. Each member of the Executive Committee is responsible for one program. Each program is broken down into projects. There are over 150 projects in total. Each operating division therefore manages a certain number of projects specific to it.

There are also cross-company projects that encompass the different functions of the Group. These are programs concerning purchasing, investments, general overhead, working capital requirements, the information system, research and development, communication expenses, logistics, real estate and the reorganization of support functions (financial, legal, human resourses and communication).

A central control unit, reporting to the member of the Executive Committee in charge of the TOP Program, provides the operational divisions with support to help them achieve their objectives, ensures the coherence of the whole of the TOP Program, organizes reporting and warns the Executive Committee of any delays. It proposes, where necessary, corrective measures or the launching of new projects.

Along with those working directly on the projects, all of France Telecom employees have been mobilized to become involved in the TOP Program. France Telecom’s executives have a major role in mobilizing their teams. To emphasize their responsibility for the success of the program, the Executive Committee has decided to base the variable part of managers’ salaries on the results of the TOP Program.

In addition, in order to increase France Telecom’s reactivity and to accelerate its rhythm, the target results and budgets of all the divisions and functions, as well as the variable part of their managers’ salaries, will be redefined every six months.

By the end of January 2003, the projects had been launched, the managers appointed and action plans for 2003 defined. During the launch phase, priority was given to activities that would provide rapid results (for instance, the reduction of general overhead: reduced usage of external consultants and temporary employees, a new travel policy, reduction of communications expenses). The projects then entered the deployment stage entailing a restructuring of processes, a systematic attempt to share resources and the implementation of synergies striving to increase the Group’s operational performance on a long-term basis.

The following are examples of the most important projects in the TOP Program:

The “TOP Sourcing” project has been split into stages, each of which covers a number of categories of purchases. The two first stages covering 70% of spending and 41 and 23 commodities, respectively, were undertaken and carried out between January 2003 and January 2004. The first stage resulted in the reduction of the supplier portfolio concerned by 60%. The combination of negotiations during the first stage and the negotiations regarding commodities that are not included in the stages resulted in an impact on savings of more than € 700 million for the year 2003. The target is to achieve savings of € 4 billion over the period from 2003 to 2005 (see “– 4.8 Supplier s ”).

In relation to investments, the establishment of corporate governance mechanisms, such as the investment committee, has permitted a prioritization of investments in productivity and growth programs. In terms of fixed line telephony, expenses relating to commutation and transmission capacity were reduced because of the very high technical level of the network. Investments were focused on growth sectors, such as the development of ADSL. In the wireless sector, investments were aligned with the needs of the market, leading to large investments in third generation technology in the fourth quarter of 2003. Thus, the Group’s level of investment will ensure long-term growth in key sectors.

In order to quickly reduce the level of operating expenses, excluding depreciation and amortization, savings were produced, two-thirds of which related to external expenses from “life-style” reductions (a new strategy concerning expenses related to travel, consulting and temporary work). The actions taken by the “savings trackers” network and the spread of good practices further contribute to more efficient management.

The reengineering of operational processes and the internalization of activities that were previously outsourced permit a better optimization of resources and a more efficient control over costs. For example, the streamlining of access costs at Equant, the streamlining of international traffic delivery at Orange in the United Kingdom, the improvement of maintenance operations on the fixed line network in France and the streamlining of the information system of Orange France.

With regards to information systems, actions undertaken within the framework of the TOP Program have three goals:

reduction in information system expenses of the Group;

implementation of a Group-wide information system;

establishment of governing principles for the entire Group.

Information system expenses for the Group (operating expenses, excluding depreciation, amortization and investments in tangible and intangible assets) were reduced by 20% between 2002 and 2003, which permitted the reduction of the ratio of information system expenses to revenues. To this result, a systematic analysis of the value of the principal projects was undertaken (especially for the 50 most important projects) in order to select those aspects that are the most valuable for the Group. Also, the number of projects at France Telecom S.A. was reduced by 30% in 2003, with 8% of the projects already in place at France Telecom S.A. being stopped or frozen. Finally, the convergence of the Group’s specifications within the framework of the new purchasing policy was completed.

The first stages of group-wide information system convergence have begun. For example, the publication at the end of 2003 of the urban planning for the information system for the entire Group and the decision to share applications between divisions (in the areas of collection of receivables, wireless service data platforms, billing for content services, etc .). Their roll out will continue in 2004. The concentration of calculation centers, initiated in France, allowed their reduction by a factor of two in 2003 and the concentration of operations teams. The consolidation scenario for all of Europe was envisaged over the course of the year. The consolidation of facility management in France between France Telecom S.A., Orange France and Wanadoo France was started, and the rate of standardized computer workstations went from 43% to 76% at France Telecom S.A.

The establishment, starting during the first quarter of 2003, of governing principles within the Group allowed, in particular, the precise follow-up of the execution of the information system budget for the entire Group as well as a group-wide consolidation of the budget for 2004. The consolidation at the level of the information system division in the Group of various information system activities, further reduced external expenses for the entities concerned.

In order to decrease advertising and communications expenses and other related activities, in relation to their 2002 levels, with an objective of decreasing costs by approximately € 200 million in 2003 and approximately € 600 million over the period

from 2003 to 2005, an advertising investment committee is coordinating France Telecom’s policy and is refocusing expenditure on sales advertising. A committee has also been formed to examine sponsorship and to coordinate and optimize expenditure at the group level.

Support functions for the finance, human resources and real estate divisions are being optimized by decreasing the number of sites, pooling services and streamlining costs.

The priorities of the project to decrease working capital requirements are to reduce debt and inventory and to improve amounts owed to suppliers. Based on working capital requirements of € 4.5 billion in 2002, the goal of achieving a reduction of at least € 0.5 billion in 2003 was exceeded. The reduction in working capital requirements rose to nearly € 1.3 billion in 2003.

For a detailed analysis, see “Item 5. Operating and Financial Review and Prospects – 5.1.2.2 Results of the ‘TOP’ Operational Improvements Program”.

For information regarding risks related to France Telecom’s level of indebtedness, see “Item 3. Key Information – 3.3.1 Risk Factors Relating to France Telecom’s Business – The ‘TOP’ Program may not achieve the expected results, which could have a material adverse impact on France Telecom’s financial condition and results of operations”.

4.2.3 M ARKET G ROWTH AND U SAGE T RENDS

France Telecom’s strategy is a response to the climate of change in the telecommunications sector, which is a growing market characterized by strong growth in usage.

A Growing Market

The telecommunications services market is characterized by a high rate of innovation in uses and new technologies. These services continue to increase as a proportion of GDP as indicated by the table below.


	2002 (in %)	2001 (in %)	2000 (in %)	1999 (in %)	1998 (in %)

France**	2.9	2.9	2.7	2.4	2.1

United Kingdom*	N/A	3.9	3.8	3.5	3.1

Germany*	N/A	3.1	2.7	2.4	2.3

Source: OECD.

Source: Calculation provided by the Company based on INSEE’s data.

Trends in the World Market

The world market for telecommunications services, valued at $1128 billion by Idate, grew by 5.6% in value in 2003 compared to 5.2% in 2002. Based on forecasts for the coming years, growth is expected to continue at an annual rate of approximately 5% between now and 2007 (source: Idate).

The momentum of the sector is mainly driven by the Internet (17% increase in value in 2003 and an expected 12% increase between now and 2007), wireless telephony (11% increase in value in 2003 and an expected 7% increase annually for the period from 2004 to 2007) and by data services (6% increase in 2003). The number of mobile telephones in service in 2003 exceeds the number of fixed lines: 1.3 billion mobile telephones compared to 1.2 billion fixed lines throughout the world. The number of Internet users should reach 1.1 billion by 2007 compared to 700 million in 2003 (source: Idate).

Steady Growth in Europe

In 2003, the European market continued to grow more quickly in value than the North American market (4% compared to 1%) (source: Idate). According to Idate, this difference is likely to continue over the coming years: 3.4% compared to 2.9% annually by 2007 (4.9% in France).

With an 82.5% penetration rate in 17 countries in Western Europe, wireless telephony has become the sector’s biggest segment with 46% of the market in 2003. The continued growth of wireless services will be spurred on by higher speed services (GPRS then UMTS) along with the arrival of new services (MMS, content), with expected growth of more than 4% in value per year between 2003 and 2007. However, the strongest growth will come from broadband and the Internet which will rise by more than 14% in value annually between 2003 and 2007 (source: Idate).

Germany and the United Kingdom are still the biggest markets in Europe with 21% and 18% of the Western European market (17 countries), followed by Italy and France with 14% and 13%, respectively (source: Idate).

In 2003, the French market grew by 5.2% in value. The fixed line market fell slightly by 1% while wireless telephony rose by 6.5% and the wireless penetration rate reached 65% (source: Idate). The Internet and broadband market grew very sharply by over 50% in value between 2002 and 2003, although it only accounts for 6% of the total market. France has the second largest number of broadband customers after Germany (source: Idate).

Usage Trends

The technological momentum of the telecommunications sector has put into the hands of its customers a variety of means of communication, which represent for the customers the characteristics and benefits shown in the table below:


Type of service		Main customer benefits (key words)

Fixed line telephony		Real time, reliable, low cost

Wireless telephony		Personalized, ubiquitous, modern, many functions

SMS		Personalized, private, fast, cheap, always available

Email, Internet		Always available, efficient, cheap, worldwide

Customers now use “communications” (telephone calls, SMS, e-mails, sessions on the Internet etc .) through these different means, depending on their own expectations and the properties of these tools. The number of these communications is rising strongly.

France Telecom estimates that the number of communications per French inhabitant per month has increased from 20 in 1990 (almost entirely telephone calls, with some telematics) to approximately 100 in 2002: this number includes approximately 60 fixed line or wireless telephone calls, about 20 SMS or e-mails, and over 20 Internet sessions. These estimates, which should be considered as orders of magnitude, are based on its traffic observations of its fixed line and mobile telephone subscribers and the average length of their calls, as well as surveys about Internet use. France Telecom estimates that the total number of communications per French inhabitant per month could total some 200 in 2010.

4.2.4 F RANCE T ELECOM ’ S S TRATEGIC V ISION

France Telecom has a complete portfolio of activities, including fixed line, data, wireless and Internet services, covering all customer segments (consumers, small- and medium-sized businesses, multinationals) and all types of usage (personal, domestic and professional) in most situations (home, office, mobile).

France Telecom intends to take advantage of its position as leader in all areas of telecommunications in France and Poland and as leader in the United Kingdom by number of wireless customers and personal Internet users, and leader in Europe in terms of Internet connections and mobile telephones.

France Telecom’s strategy consists in using these major strengths to achieve profitable growth based on the new model for the telecommunications industry, as explained below.

A New Model for the Telecommunications Industry

During the recent period of development of new methods of communication and the gradual process of learning to use them, customers have had to adapt to extremely fragmented services. This is linked to the fact that the telecommunications industry is still organized into separate fixed line, wireless and Internet services. The terminals in each case are different, the service platforms independent and customers have to manage these differences on their own.

customers are required to use several mailboxes (fixed, wireless, Internet) and several address books (stored in the memories of their fixed lines, wireless phones and Internet messaging systems);

several identities are required for the services – telephone numbers, email addresses;

applications can be incompatible with those of their contacts, as is the case with instant messaging programs at present;

there are numerous online payment methods, which are not universally accepted by businesses.

France Telecom believes that these integration issues reduce customers’ ease of use and impede the optimization of efficiency gains from the increasingly numerous and sophisticated services and tools, resulting in a risk of a slowdown in market growth. France Telecom wants to anticipate the structural changes in the industry and introduce a new model in order to provide its customers with telecommunications services. This means integrating the networks and services in order to offer customers a single set of services regardless of the network, platform or terminal they use. Customers need to be offered terminals that are ergonomically simple and familiar. The integrated offer that meets this strategic vision will, for example, include:

single sign-on points;

messaging services that can forward messages to each other according to the customer’s instructions;

notification that an address book contact is present and available;

access to services on any access network or terminal.

This would be a major change in model which will allow customers to define and personalize their services. The services would then become multi-access. The focal point then shifts from the network to the user: the customer is at the center of his own network.

Several technological breakthroughs will encourage this revolution:

Widespread Use of the IP Protocol on all Networks:

The IP protocol will be the means for a greater degree of inter-operability between the various networks and types of services. This will begin to challenge the “silo-based” structure of the present networks (fixed line voice, fixed Internet and wireless) each formed of specialized terminals accessing dedicated services using separate infrastructures and platforms. It will be possible to make terminals, then platforms and services and large parts of the networks common to the various categories of services.

Widespread Use of Broadband:

Technologies such as ADSL, WiFi, gigabit Ethernet and UMTS currently offer or will soon offer very high speeds on all fixed or wireless networks at a competitive price.

In parallel, developments in customer terminals, such as multimedia PCs, traditional cameras and digital cameras and multimedia mobile phones with built-in cameras and game consoles, are leading to a requirement to exchange very high volumes of data, which require high speeds to provide satisfactory ease of use.

Mobility Everywhere:

Technology now satisfies or will soon satisfy the expectations of continuous personal communication capacity: the speed and functionality capacities of wireless networks will be considerably extended by the arrival of UMTS while local wireless technologies (WiFi) are being introduced.

Innovative Multi-Access Terminals:

With the appearance of innovative terminals equipped with multimedia facilities, built-in storage and operating systems, services can be made increasingly independent of the type of terminal. In parallel, technical solutions make it possible to connect various types of terminals to different types of networks. For example, a wireless phone can be connected to a fixed line network through Bluetooth, a PC can be made wireless through GPRS/UMTS or WiFi, and a television can be connected by ADSL.

Domestic networks will play a major role in this greater flexibility in the allocation of services to terminals and of terminals to networks.

Open Systems Making Easier Inter-Operability of Networks:

The inter-operability of networks will be made easier not just by the widespread use of the IP protocol to the networks themselves but also by the implementation of open platforms such as authentication platforms and transaction platforms, with Application program interface (API) and very flexible activation mechanisms such as web services.

France Telecom has introduced major innovations in order to make this transition from the “old world” structured around narrowband fixed line access, broadband Internet access, wireless access and data transmission networks towards a “new world” that will be organized around personal and domestic usage and corporate communications services.

In terms of the evolution in the telecommunications industry, these technological advances lead to a convergence of the businesses of Internet access providers and telecommunications operators.

Evolution of the Business of Internet Access Providers and Telecommunications Operators

After the introduction of the Internet, when Internet access providers searched, above all, for an economic model of the “media” type, which develops clientele through online publicity and e-commerce, it is now clear that Internet access providers must integrate their business activities with those of telecommunications operators in order to profit together from broadband services by offering:

new, advanced Internet services (online games, photo albums, image messaging);

image services (TV through ADSL, VOD);

advanced telephony services (personal communications, videophony);

advanced wireless services (Image messaging, videophony, UMTS).

Broadband access is also transforming telecommunications operators whose goal is to provide new services, such as games, voice over IP, videophony, television or a secured Internet connection for households.

These two evolutions in the business of Internet access providers and telecommunications operators lead clearly to a common development strategy for services, based on the spread of broadband access in order to meet these converging needs.

France Telecom Adapts its Strategy to the New Model of Telecommunications

France Telecom is adapting its strategy to the new model of the telecommunications industry, which is structured around the following:

In terms of business areas, the core areas will be wireless services and broadband access services, providing multi-service offerings;

In terms of services, the three services of the Group are the following:

“Personal services”;

“Home services”;

“Enterprise services”.

In terms of organization, the organization of the Group will be adapted to provide, as much as possible, services to clients by relying on strong brands (Orange and Wanadoo in particular), and on France Telecom’s brand, the ampersand symbol, which is the symbol of the Group’s identity;

Finally, France Telecom, as an integrated operator, benefits from the convergence of its networks and its information systems.

4.2.5 I MPLEMENTING F RANCE T ELECOM ’ S S TRATEGY

In order to implement its profitable growth strategy based on the new model for the telecommunications industry, France Telecom will first make use of the transformation undertaken in order to achieve operational excellence.

This is the purpose of the TOP Program which is not just a cost-cutting program but strives to improve France Telecom’s operational performance: efficiency of working methods, excellence in operations and excellence in customer relations.

On this basis, France Telecom intends to use its first-class portfolio of assets, its innovation potential and its strategic partnerships to successfully change the model within its sector of activity and speed up the growth momentum. See “– Accelerating the Growth Momentum”.

This profitable growth strategy is naturally defined for each market or type of service and for international operations. See “– Main Actions for Implementing France Telecom’s Strategy”.

Accelerating the Growth Momentum

In the second half of 2003, France Telecom launched a growth initiatives program called “TOP Line” to accelerate growth momentum. France Telecom is mobilizing its innovation and R&D potential and is making use of strategic partnerships to sustain this momentum and is implementing the model of an integrated operator.

The “TOP Line” Program

The “TOP Line” program includes 40 growth initiatives projects under the responsibility of the operating divisions and 15 cross-company projects striving to develop and launch new services. A member of the Executive Committee is responsible for each project. Some projects will allow France Telecom to work better as an integrated group while others relate to innovations that France Telecom intends to launch over the next few months:

personal communications;

new broadband services;

company networks.

The priority for personal communications is to develop usages offering greater ease of use and total fluidity between the various networks. Five projects are being conducted by France Telecom with the goal of offering its customers the ability to:

manage identity and authentication procedures independently of the access network (cross-company project: identity/authentification);

have a single address book that can be used from any terminal or service (cross-company project: address book);

know that an address book contact is present and available (cross-company project: contact);

contact someone on their chosen network or terminal regardless of which network or terminal they are being contacted on (cross-company project: availability); and

use simple and universal payment systems (cross-company project: payments).

With regards to new broadband services, France Telecom is already investing in its network to offer more services to view and communicate still and moving images: ADSL television, photo and video albums, personal telephony, video conferencing and video-on-demand. These services relate to the following cross-company projects: ADSL, Home Gateway, Videophony, Voice over IP and Content grouping.

For the corporate sector, innovations developed by France Telecom will allow employees on business trips to access the whole of their company’s information system, messaging system and applications with the same degree of security that they have in their offices, which is the goal of the cross-company “Office” project. France Telecom will also be extending its activities to the operation of corporate networks in order to relieve companies from a considerable increase in the operational workload. Due to widespread use of IP, companies will feel the benefits of the gradual removal of the fragmentation between private networks and public networks. Lastly, France Telecom will offer full network management services to companies on a more frequent basis.

In addition, the cross-company projects aim to facilitate the customer’s usage and training (cross-company project: Ergonomic Services) and reinforce the business performance of the Group (cross-company projects: Market analysis and segmentation; distribution tools).

Mobilizing the Group Potential for Innovation and R&D

This strategy of quickly developing our services will mobilize France Telecom’s innovation and R&D potential in all the main areas of communications technology:

Network technologies: very high speed transmission on fixed line networks, optimized use of the Hertz spectrum, new generations of IP networks;

Functional middleware: communications middleware (identity, presence, localization, contact list, profile management), security technologies, payment mechanisms, technologies to manage conditional access and rights;

Application middleware: development, integration and distribution of applications; development interfaces (“API”), home gateways, home networks, image processing.

All this expertise is accessible to all the France Telecom companies and provides them with a competitive advantage.

Innovation is therefore one of France Telecom’s main priorities. Accordingly, France Telecom will be increasing its R&D efforts. In terms of operating expenses before amortization and depreciation plus investments in tangible and intangible assets, these efforts should represent about 1.3% of the consolidated results of the Group in 2004 as compared to 1.1% in 2003.

Partnerships to Develop New Services and Emphasize France Telecom’s Individuality

France Telecom intends to remain focused on its core business: network deployment and operation, development and marketing of its network services and end-to-end connection services, in all fixed line or wireless technologies, all technical protocols and in all configurations of use whether in public or private networks. In addition, a fundamental aspect of its expertise is to assist customers in using its networks and services by providing the consulting and integration services required.

France Telecom intends to rely on strategic partnerships to create a competitive advantage or to integrate new technologies where a critical size to develop these advantages could not be achieved alone. The priorities of the strategic partnerships will be in four areas:

networks and information systems support technologies;

terminal equipment (for example in the wireless sector with signature devices developed by suppliers according to ergonomic specifications defined by Orange);

content (for example with regards to new offers on ADSL);

distribution channels in order to increase sales, develop customer loyalty and make it easier to learn how to use these new services.

The Integrated Operator’s Model

The integrated operator’s model has created new opportunities in the information systems and network sectors. In the information systems sector, following an initial phase in 2003 and 2004 of streamlining and simplifying under the TOP Program,

the convergence of the information systems will take place in 2004 and 2005 due to the alignment of billing procedures for online content and customer service as well as to the consolidation of infrastructures and data processing centers. For the networks sector, following an initial stage of converging Fixed Line and Wireless in the transportation network, which allowed voice traffic to be on a single circuit switching network (the Time Division Multiplexing network: TDM) and data traffic on a unified ATM packet network, the new infrastructures that will be developed in the medium-term will allow voice and data traffic to be on the same infrastructure, which will lead to a reduction in investment and operating costs.

Main Actions for Implementing France Telecom’s Strategy

The Group’s strategy of profitable growth consists of basing its development on the satisfaction of the needs and expectations of our customers in three main areas:

“Personal services”, essentially consisting of wireless services. In this area, the key to our strategy is reinforcing the growth of Orange through an intimate knowledge of our customers, which will, in particular, permit us to offer our customers with the services that interest them to make the best of multimedia applications. See “– Reinforcing the Growth of Orange”.

“Home services”. The key strategy of the Group in this area consists in enhancing “Home Services” through broadband (see “– Enhancing ‘Home Services’ through Broadband”).

“Enterprise services”, whose goal is to satisfy the totality of the needs of companies through better solutions that combine both performance and innovation, in France and internationally (see “– Development of Enterprise Services” and “– Consolidating Equant’s Leading Position”).

This strategy is implemented internationally, through essentially internal growth and a focus on the most promising assets, in particular, the Polish operator, TP Group (see “– International Strategy”).

Reinforcing the Growth of Orange

Orange intends to reinforce its growth via three methods: customer intimacy, development of partnerships, integration and convergence.

Customer Intimacy: Offering a Unique and Differentiated Experience

After the pragmatic development of networks, winning and localizing the best customers and improving performance, Orange’s strategy is focused on a sales and marketing approach that is as close as possible to customer requirements (“Customer intimacy driving usage”). Orange strives to increase the average revenue per unit in terms of both voice and multimedia services.

Orange will continue its strategy of obtaining and localizing the best customers by focusing on the market share in value, segmenting the market in the same way for each country where it operates, new customer retention schemes and a personalized customer sales policy.

Orange wants to differentiate its services by customizing its offer to customers. Orange wants to provide all customers with a unique wireless communications service by boosting average customer use, expanding the range of communications methods, integrating images, and making MMS as successful as SMS.

Following the launch in 2003 of the Orange World portal in France and the United Kingdom, which was an important stage in the differentiation process, Orange will continue to deploy its portal in at least six other countries in 2004.

Developing Partnerships

Orange has already demonstrated in the multimedia sector its ability to make use of various partnerships to supply services through business models allowing for the remuneration of partners, such as SMS+ in France and Orange Gallery. This policy encourages the development of innovative services on GPRS networks that prefigure the services that could be offered on UMTS networks.

Orange has joined the alliance between TIM (Telecom Italia Mobile), Telefonica Moviles and T- Mobile with the objective of supplying all these customers with voice and multimedia packaged services and allowing Orange customers to access all their services in countries where Orange does not have a presence.

In the corporate market, Orange intends to strengthen its position, in particular in countries where it still has a small market share by using integrated offers such as Intranet and email access via wireless. For this purpose, Orange has established several partnerships with the market leaders such as Palm and Oracle. Orange, France Telecom and Equant are cooperating, furthermore, in order to offer virtual private network services using GPRS.

Along with portable handset manufacturers, Orange is developing an exclusive range with the Orange “signature”. This makes it possible to control and optimize the ergonomics of the handsets to facilitate the development of multimedia services.

Integration and Convergence

France Telecom’s purchase of the interests held by minority shareholders of Orange in 2003 will help it to better respond to a fundamental trend in the telecommunications market – the convergence of wireless, fixed line and Internet environments, which is a priority in France.

The planned opening of the UMTS network in the United Kingdom and then in France in 2004 should make it possible to commercially launch new multimedia mobile services with high added value as the first stage towards the convergence of services.

Orange is also investing in its network and equipment to improve all the customer services and to offer unique and innovative services by adding intelligence to the network and by securing customer information transferred to the network by wireless telephony.

The objective of the Group is to broaden the range of wireless services into a range of personal services providing customers with permanent access to their universe of communications built around fixed line, wireless, and WiFi access:

permanent access to personalized services;

contact list;

extended range of connectivity;

unique authentication.

Enhancing “Home Services” through Broadband

Developing Broadband and the Multi-Services Offer

The development of broadband brought about ADSL is a priority for the Group because it enables the development of an entire range of new “Home services”, and in particular the development of:

Internet access;

television by broadcast or by demand;

new communications services (videophony, voice over IP), which are producing a return on all of the capital spending already incurred in both the copper pair network and the carrier network.

France Telecom has decided to accelerate the roll out of ADSL. The goal is to have 90% of the telephone lines in France able to be connected to ADSL by the end of 2004, and 95% by the end of 2005 (compared to 79% at the end of 2003). In order to do so, France Telecom will invest €100 million more than planned in 2004 and 2005, bringing its total investment in ADSL to €700 million over the period from 2003 to 2005.

Moreover, France Telecom’s goal is to have total ADSL access, excluding unbundling, reach 4.5 million subscribers by the end of 2004. France Telecom’s goal is to have ADSL revenues greater than €1 billion in 2004 (compared to €744 million in 2003). Broadband Internet access will become the norm. The goal is to have the percentage of households connected to the Internet be greater than 40% of the total number of households connected to the Internet at the end of 2004, compared to approximately 30% at the end of 2003 (source: Data nova for 2003).

Developing Internet Access and Internet Services

The Wanadoo access strategy is based on the following two priorities:

Increasing the number of customers in Europe

Wanadoo will continue to promote the growth of Internet access through its presence in all market segments, offering innovative and reliable plans. To that end, it will make the best use of the different kinds of networks, communications channels and handsets and will be supported by an efficient distribution network.

Boosting average income per user

Wanadoo will continue its strategy aimed at expanding the number of paid access plans wherever it operates in Europe. This strategy will focus on moving Freeserve’s users without subscriptions towards unlimited Internet access plans (low speed and

ADSL), in addition to focusing on expanding the number of high speed plans in its primary markets. It will use innovative marketing solutions and techniques such as launching WiFi, ADSL modem + routers for professional customers and attractive price packages.

Services and Content

Wanadoo’s services and content strategy is built around the following two priorities:

localizing users and contributing to winning new customers on France Telecom’s portals and thematic sites, particularly by creating partnerships with top-rate service providers and internal expansion of its portals;

making the user portals more profitable first by increasing its market share of advertising through a dynamic innovation policy and second by distributing paid content and services from users (Wanadoo customers and all web-users) using the kiosk model.

Developing Innovative Services for Fixed Line Consumer Services

As part of its strategy to develop ADSL and in order to optimize the utilization of the fixed line network through innovative offers, France Telecom will first be developing price packages and localizing schemes in the fixed line sector.

Second, the goal is to increase the sale and rental of handsets for the purpose of replacing and updating household equipment and encouraging the use of services such as new ranges giving preference to handsets compatible with new services such as SMS, caller ID, and DECT cordless handsets.

This objective mainly entails increasing the attractiveness of the fixed line services by offering innovative features that make life easier (3131 last call return, auto call back, call transfer, caller number and name ID, voice mail, PCV (collect call) France, fixed line SMS, “MaLigne” TV).

Development of Enterprise Services

In a difficult economic climate, France Telecom is offering its customers solutions that combine performance and innovation.

France Telecom’s broadband service now offers companies broadband connections to their sites so they can exchange a growing amount of data quickly and safely. This service helps bring France Telecom closer to its customers, employees, partners and suppliers.

France Telecom is doing its utmost to become a corporate integrated telecoms services supplier operator: consultancy, engineering, adaptation of network infrastructures, deployment, managed WAN or LAN networks, network outsourcing, customer premises equipment integration, and user support.

To address the expectations of its corporate customers, France Telecom intends to do the following:

integrate the latest technologies (multi service DSL, Gigabit Ethernet, MAN, WiFi, voice over IP);

widely use IP as a unifying means of intra- and inter-company exchanges;

design an Intranet solution suitable for small- and medium-sized businesses;

create a complete catalogue of network services to unburden France Telecom from managing the network, spanning from equipment integration (PBX), virtual private networks to full outsourcing of infrastructure;

take into account all the mobility positions of the France Telecom’s employees regardless of the terminal or the network they are using or of their geographical position: solutions to connect to the France Telecom’s applications when mobile (e-mail, directories, applications, etc . ) from a wireless or WiFi network;

offer application solutions that rely on France Telecom’s network solutions (network security services, hosting of messaging systems and websites);

offer businesses solutions to manage their relationships with their own customers (customer relations management, call centers);

develop partnerships with the leading market players to offer complete solutions.

Consolidating Equant’s Leading Position

Equant’s goal is to consolidate its position as the world leader in data services for multinational companies. To do this Equant plans to:

expand its network in a multimedia structure based on IP;

expand its product range towards services with a higher added value – IT based services;

expand its direct and indirect sales networks;

continue to improve customer relations and quality of service.

In order to implement its strategy, in early 2004 Equant announced that it was reorganizing its service expertise into five expertise centers:

consulting;

project management;

service management;

service integration;

managed services.

International Strategy

France, the United Kingdom and Poland are clearly considered to be vital and of definite strategic importance for France Telecom. The Group holds strong, competitive positions in these countries, which are economically sustainable and already well advanced.

In addition, France Telecom considers Europe to be its new domestic market.

In order to focus on its most strategically important and profitable assets, France Telecom began in 2003 to re-examine all its subsidiaries and shareholdings in order to decide whether to retain them depending on two types of criteria:

strategic criteria:

market growth and profitability;

quality and sustainability of the competitive position;

potential synergies with other assets; and

control of the company or definite opportunity to acquire control.

financial criteria:

operating income before depreciation and amortization;

operating income before depreciation and amortization less investments in tangible and intangible assets (excluding acquisitions of licenses);

impact on the rating issued by credit rating agencies, and in particular the impact on the consolidated net financial debt/operating income before depreciation and amortization ratio; and

potential for creating value through disposals or partnerships.

This analysis has resulted in the sale of some activities such as Casema, Eutelsat, Wind, CTE (Salvador), and Telecom Argentina.

France Telecom believes that, in any event, strengthening the competitive position of its current operations and rapidly improving the profitability of these operations are its top priorities, and that these actions will improve its attractiveness and ability to act however the European market further develops.

For information regarding risks related to the telecommunications and wireless industries, see “Item 3. Key Information – 3.3.2 Risk Factors Relating to the Telecommunications and Wireless Industries”.

4.3 BUSINESS OVERVIEW

4.3.1 D ESCRIPTION OF THE G ROUP

Structure

The Group structure was simplified in December 2002 by creating clear distinctions between the operational divisions and the central functions. On March 30, 2004, France Telecom modified its organizational structure. The new structure is shown in the following table:

Organizational structure of France Telecom

(Divisions and Functions)

Segmentation

In the first half of 2003, France Telecom created the following six business segments in order to reflect its development and the structure of its operations according to the different activities and subsidiaries. These segments were in place for the year 2003 (see “Item 5. Operating and Financial Review and Prospects – 5.7.1 Subsequent Events”).

The Orange segment covers all the wireless telephony activities in the world, in France and in the United Kingdom, which were transferred to Orange S.A. in 2000 following France Telecom’s acquisition of Orange plc at the end of August 2000. This segment corresponds to Orange S.A. and its subsidiaries that represent the Orange operating division.

The Wanadoo segment that includes Internet access services, portals, e-Merchant solutions for businesses and directories which have been combined under Wanadoo S.A. since 2000. This segment corresponds to Wanadoo S.A. and its subsidiaries that represent the Wanadoo operating division.

The Fixed Line, Distribution, Networks, Large Customers and Operators segment combines France Telecom’s fixed line services mainly in France and particularly fixed line telephony, services to operators, business services, cable television, the sale and rental of equipment and the support functions (including R&D services) and the Information Systems division. This segment covers the activities of the following operating divisions: Corporate Solutions (excluding Equant), Fixed Line and Distribution in France, Networks and Carriers, Information Technologies and all the central functions with responsibility for the whole Group.

The Equant segment covers the activities of the new Equant, formed after the merger with Global One on July 1, 2001, in corporate worldwide data transmission services. This segment comprises the Dutch company Equant N.V. and its subsidiaries. Equant is part of the Corporate Solutions division.

Since April 2002, the TP Group segment encompasses TP S.A., the incumbent Polish operator and its subsidiaries, including its wireless subsidiary PTK Centertel. TP Group is part of the International division.

The Other International segment covers other subsidiaries in the rest of the world whose main operations are fixed line telephony outside France. It also covers some of France Telecom’s wireless activities that were not transferred to its subsidiary Orange S.A. These activities are conducted by the International division.

This segmentation is systematically used in the section to follow, “– 4.3.2 Principal Activities” and more generally in the whole of this annual report on Form 20-F.

General Description of Business Segments

Orange

In August 2000, France Telecom acquired Orange plc and later merged most of France Telecom’s wireless businesses with those of Orange plc to create a European wireless operator called Orange whose parent company is Orange S.A. Orange S.A. shares have been listed on the Premier marché of Euronext Paris S.A. and on the London Stock Exchange since February 13, 2001. France Telecom held 86.3% of Orange’s capital at December 31, 2002. On September 1, 2003, France Telecom made a public exchange offer to acquire the Orange shares it did not already hold. France Telecom made an irrevocable offer to exchange Orange ordinary shares for France Telecom existing or new shares based on an exchange ratio of 11 France Telecom shares for 25 Orange shares. This offer was not extended into certain jurisdictions, including the United States. The joint prospectus issued by Orange and France Telecom described this as a natural development stage for the France Telecom groups in line with the “Ambition FT 2005” Plan.

In operational terms, the public exchange offer formed part of the ongoing strategic vision of France Telecom and was based notably on:

the increasing needs of France Telecom customers for integrated services on a fixed to wireless platform;

a growth strategy based on developing new innovative services;

a strong cooperation model between the various activities of France Telecom in key areas such as strategy, development of new services, customer approach and centralized purchasing.

Upon closure of the public exchange offer, France Telecom held 98.78% of the capital and voting rights of Orange.

On October 29, 2003, France Telecom filed with the CMF a tender offer ( offre publique de retrait ) for, that will be followed by a compulsory purchase of ( retrait obligatoire ), the outstanding Orange shares that it did not already hold. The offer was launched on November 20, 2003. Following an application before the Paris Court of Appeals for the cancellation of the decision of admissibility of the CMF and the approval ( visa ) granted by the Commission des opérations de bourse , the tender offer has been extended pending a legal ruling by the Paris Court of Appeals see “Item 5. Operating and Financial Review and Prospects – 5.7.1 Subsequent Events”. Taking into account the Orange shares acquired through the tender offer, France Telecom held 99.02% of the capital and voting rights of Orange at December 31, 2003. The tender offer is not extended into, nor can it be accepted in, the U.S. or in other jurisdictions in which the offering would be illegal or subject to restrictions (see “– 4.3.2.1 Orange – General Description of Orange”).

Orange is one of the leading providers of wireless communications services worldwide. Orange owns controlling or minority interests in wireless companies that offer a broad range of voice and data communications services in 19 countries, mainly in Europe, including France and the United Kingdom.

At December 31, 2003, Orange’s controlled activities had 49.1 million customers compared to 44.4 million customers at December 31, 2002 and 39.3 million customers at December 31, 2001. Orange France is the leading wireless operator in France based on the number of active customers with a market share (including French overseas departments and territories) at December 31, 2003 of 48.8% and 49.8% at December 31, 2002 and 48.2% at December 31, 2001 (source: ART). Orange UK is the leading wireless operator in the United Kingdom based on the number of active customers with a market share of 25.6% at December 31, 2003, 27.2% at December 31, 2002 and 27.7% at December 31, 2001 (source: Orange UK, with the number of the competitors’ customers for 2003 provided by Mobile Communications). In the rest of the world, Orange had 15.1 million customers at December 31, 2003, a strong growth of 27% compared to 11.9 million customers at December 31, 2002 and 9.1 million in 2001. See “– 4.3.2.1 Orange”.

Wanadoo

France Telecom carries out most of its multimedia and Internet activities through its subsidiary Wanadoo S.A. Wanadoo is a major player on the European Internet and directories market. At December 31, 2003, Wanadoo had 9.153 million active customers (8.535 million active customers at December 31, 2002 and 6.067 million active customers at December 31, 2001) (source: Wanadoo), 17.159 million single visitors over all of its properties in December 2003 (14.352 million in December 2002) (source: Nielsen – panel Home) and 641,000 directory advertisers (638,000 in December 2002 and 650,000 in December 2001). Wanadoo is the market leader for Internet services in France and in the United Kingdom, and the second biggest in Spain and in The Netherlands (sources: Idate, ART, European Commission, Conseil de la concurrence , AFA, Interview NSS). At December 31, 2003, Wanadoo had 2.453 million broadband customers via cable and ADSL in France (compared to 1.374 million at December 31, 2002 and 545,000 at December 31, 2001) and 275,000 online advertisers in its directories (compared to 238,000 at December 31, 2002 and 202,000 at December 31, 2001) (source: Wanadoo). Wanadoo S.A. shares have been listed on the Premier marché of Euronext Paris S.A. since July 19, 2000. At December 31, 2003, France Telecom held 70.6% of Wanadoo’s shares, a control percentage of 71.1% taking into account the treasury shares. See “– 4.3.2.2 Wanadoo”.

Fixed Line, Distribution, Networks, Large Customers and Operators

The traditional network and telecommunications services in France are organized under three operating divisions:

Corporate Solutions: services and distribution to large businesses;

Fixed Line and Distribution in France: services for consumers and other businesses and the distribution network in France;

Networks and Carriers: telecommunications networks, including those on foreign markets, and services to telecommunications operators.

France Telecom believes that it has one of the most technologically advanced networks in the world with fully digital commutation and transmission systems. It uses a network of fully Internet based protocols designed mainly to route Internet traffic. It makes extensive use of the ADSL network, which at December 31, 2003 covered 79% of the French population, compared to 70% at December 31, 2002 and 64% at December 31, 2001 (source: France Telecom).

At December 31, 2003, France Telecom had 33.9 customers for fixed line services in France compared to 34.1 million at December 31, 2002 and 34.2 million at December 31, 2001, including 5.0 million served by the Numéris digital network compared to 4.9 million at December 31, 2002 and 4.7 million at December 31, 2001, 3.1 million customers had ADSL connections compared to 1.4 million at December 31, 2002 and 0.4 million at December 31, 2001. 8.8 million consumer customers had fixed rate service plans compared to 6.7 million at December 31, 2002 and 4.9 million at December 31, 2001. Given the strong competition in its national market, France Telecom’s market share of long distance traffic, at December 31, 2003, measured by interconnection rates, was down compared to 2002 when it was stabilized (61.8% at the end of 2003 compared to 64.3% at the end of 2002 and 64.6% at the end of 2001). Losses in the market share of local traffic were significantly reduced in 2003. France Telecom lost 5.1% of its market share of local traffic, compared to 15.9% in 2002 when competition was opened on local traffic. The market share of local traffic was 75.8% at the end of 2003, compared to 80.9% at the end of 2002 and 96.8% at the end of 2001.

France Telecom has a sales distribution network in France of approximately 620 points of sale which supply all the Group’s services.

See “– 4.3.2.3 Fixed Line, Distribution, Networks, Large Customers and Operators”.

Equant

In order to meet the data transmission needs of multinational businesses, France Telecom acquired 100% of the share capital of Global One in March 2000, and in June 2001 became the majority shareholder of Equant NV (“Equant”), a Dutch company, holding approximately 54.2% of the share capital at December 31, 2003. At December 31, 2003, Equant provided services to 220 countries and territories (as at December 31, 2002 and at December 31, 2001). The new Equant, which believes that it has completed for the most part in 2003 the merger of all the former Equant and Global One subsidiaries in other countries, is one of the leading suppliers of global IP, data, network outsourcing and application development services for multinational businesses (source: Gartner). Equant N.V.’s shares are listed on the Premier marché of Euronext Paris S.A. and on the New York Stock Exchange (NYSE). See “– 4.3.2.4 Equant”.

TP Group

In October 2000, a consortium led by France Telecom acquired a 35% holding in TP S.A. In October 2001, the consortium raised this holding to 47.5%. Following the listing of TP S.A. in November 1998 and the sales of the Polish government, it holds

approximately 4% of the share capital of TP S.A., with the 48.5% remaining stake held by other private investors. TP Group is the leading telecommunications service provider in Poland (source: URTiP, the Polish regulatory authority), offering a broad range of services that include fixed line telephony, line leasing, radio communications and Internet services. TP Group is also the majority shareholder in PTK Centertel, one of three wireless operators in Poland, with the balance of PTK Centertel’s share capital (34%) being held indirectly by France Telecom. At December 31, 2003, the TP Group had 11.1 million fixed line customers (10.8 million at December 31, 2002, and 10.5 million at December 31, 2001), and 5.7 million wireless customers (4.5 million at December 31, 2002, and 2.8 million at December 31, 2001) (source: TP S.A.). TP S.A. is listed on the Warsaw Stock Exchange and the London Stock Exchange. See “– 4.3.2.5 TP Group”.

Other International

In addition to TP Group, Equant and the Orange S.A. and Wanadoo S.A. subsidiaries, France Telecom has other telecommunications activities in international markets. These activities are managed by the International Division. They mainly concern the traditional operators in countries outside Europe such as Sonatel in Senegal; CI Telcom in the Ivory Coast; JTC in Jordan and Mauritius Telecom in Mauritius. The last two companies are jointly controlled with partners and consolidated proportionately. France Telecom is also an alternative operator in Europe through UNI 2 in Spain. In accordance with the policy set forth under the “Ambition FT 2005” Plan, France Telecom is carrying out a strategic review of its activities and interests in foreign markets. In 2003, it therefore sold its operations and shareholdings in El Salvador (CTE) and in Argentina (Telecom Argentina) and is trying to withdraw from Intelig in Brazil. See “– 4.3.2.6 Other International” and “– 4.4 Divestitures”.

4.3.2 P RINCIPAL A CTIVITIES

France Telecom offers a full range of telecommunications services to consumers, businesses and telecommunications operators: fixed line telephony, wireless telephony, multimedia, Internet, data transmission, cable television and value-added services. France Telecom’s activities are now divided into six segments: (i) Orange, (ii) Wanadoo, (iii) Fixed Line, Distribution, Networks, Large Customers and Operators (iv) Equant, (v) TP Group and (vi) Other International. See “– 4.3.1 Description of the Group – Segmentation”.

For an analysis of revenues, operating income and tangible and intangible investments by segment, see “Item 5. Operating and Financial Review and Prospects – 5.2.2 Analysis of Operating Income and Investments in Tangible and Intangible Assets by Segment”.

For an analysis of revenues by geographic zone, see Note 4 of the Notes to the Consolidated Financial Statements.

4.3.2.1 O RANGE

General Description of Orange

Structure

In 1989, France Telecom formed a new division to manage its activities and its wireless telecommunications network. In 1991, France Telecom obtained a GSM900 license in France which was extended to GSM1800 in 1998. It started to operate its GSM900 digital network in 1992. In parallel, France Telecom began to expand its international wireless activities following the acquisition of GSM licenses and launched operations mainly in Europe.

En 1994, Microtel Communications Ltd. (“Microtel”), the predecessor of Orange plc, obtained a license to operate a digital GSM1800 network and began to operate its GSM1800 network in 1994 in the United Kingdom.

Following several transactions after which Vodafone owned the capital of Orange plc, France Telecom finalized the acquisition of Orange plc in August 2000 at a cost of € 35.5 billion on a historical basis. In addition, France Telecom assumed the debt of € 6.6 billion owed by a wholly-owned subsidiary of Orange plc, Orange 3G Limited, in connection with its successful bid for a UMTS license in the United Kingdom.

Following this acquisition, France Telecom merged its previous wireless telecommunications activities with those of Orange plc into a new wholly-owned group whose parent company is Orange S.A., a corporation ( société anonyme ) under French law. The corresponding legal transactions were finalized on December 29, 2000.

On February 13, 2001, Orange S.A. shares were listed for trading on the Premier marché of Euronext Paris S.A. and on the London Stock Exchange (LSE), following the issuance of 633 million Orange shares, representing approximately 13% of the capital of Orange S.A., at a price of € 10 per share for institutional investors and of € 9.50 per share for the tender offer principally targeting individuals. At December 31, 2002, France Telecom held 86.3% of Orange S.A.’s capital.

On September 1, 2003, France Telecom filed a public exchange offer to acquire the Orange shares it did not already hold. France Telecom made an irrevocable offer to exchange Orange ordinary shares for existing or new shares in France Telecom on the

basis of 11 France Telecom shares for 25 Orange shares. This offer was not extended into certain jurisdictions, including the United States. The joint prospectus issued by Orange and France Telecom described this as a natural development stage for the France Telecom group in line with the “Ambition FT 2005” Plan.

In operational terms, the public exchange offer was a continuation of France Telecom’s strategic vision and was based notably on:

the increasing needs of France Telecom customers for integrated services on a fixed line/wireless platform;

a growth strategy based on developing new innovative services;

a strong cooperation model between the various areas of the France Telecom group in key areas such as strategy, development of new services, customer approach and centralized purchasing.

On closure of the public exchange offer, France Telecom held 98.78% of Orange’s capital and voting rights.

On October 29, 2003, France Telecom filed with the CMF a tender offer ( offre publique de retrait ) for, that will be followed by a compulsory purchase ( retrait obligatoire ) of, the remaining Orange shares that it did not hold.

The compulsory purchase price was set at € 9.50 per Orange share. The transaction was approved by the CMF and the COB. On completion of this transaction, France Telecom will hold 100% of the capital of Orange and Orange shares will be delisted from Euronext Paris S.A. and the London Stock Exchange (LSE). On the basis of the number of shares in circulation on October 29, 2003, this transaction will cost France Telecom approximately € 560 million. The offer was launched on November 20, 2003.

The Association for the Defense of Minority Stockholders ( association de défense des actionnaires minoritaires ) considered that the price offered in the tender offer was too low, and on November 24, 2003 applied to the Paris Court of Appeals for the cancellation of the CMF’s decision of admissibility of the tender offer followed by a compulsory purchase and against the approval of the COB of the prospectus and at the same time filed a stay of execution of the decisions of the CMF see “Item 5. Operating and Financial Review and Prospects – 5.7.1 Subsequent Events”.

The Paris Court of Appeals made a ruling officially acknowledging the undertaking of the AMF to extend the period of the tender offer for Orange shares until the decision by the Paris Court of Appeals. The date of implementation of the compulsory purchase, which was to be December 4, 2003, the day before the scheduled closure of the tender offer, has therefore been postponed. Taking into account the Orange shares purchased under the terms of the tender offer, France Telecom held 99.02% of the capital and voting rights of Orange at December 31, 2003.

This document does not constitute an extension of the tender offer for Orange shares into the United States or into any other country in which such an offer would be illegal or subject to restrictions (in particular, Canada, Japan, Germany and Italy). The tender offer is not extended into, nor can it be accepted in, and no document related to the offer may be transmitted, directly or indirectly, to the United States or to any of the other countries described above, or to persons residing in the United States or in any of the other countries described above, by mail or by any other means of communication or instrumentality of commerce (in particular, without limitation, transmission by facsimile, telex, telephone, or electronic mail) or through any facilities for securities exchange of the United States or of any of the other countries described above.

Activities

Orange’s activities are mainly centered on voice transmission on digital networks using the Global System for Mobile Communications (“GSM”) norm. The company considers that it is at the forefront of developments in technology increasing the speed and efficiency of its networks. For example, the roll out of General Packet Radio Services (GPRS) has allowed Orange to successfully launch its photo messaging service and provide Internet and multimedia services via mobile phone. Most of Orange’s subsidiaries offer GPRS technology, although the content and services vary among the subsidiaries.

Orange intends to remain among the leaders of the wireless communications market through continued innovation. In particular, in association with some other wireless phone manufacturers, Orange has developed an exclusive range of mobile telephones with the Orange Signature which provide easier access to data transfer, photo messaging and generally to the multimedia services available on the Orange network.

Orange has been involved in several UMTS award procedures in Europe in order to offer third generation services when the markets, services and technologies permit. Orange’s controlled subsidiaries have been awarded UMTS licenses in France, the United Kingdom, Belgium, Denmark, Luxembourg, The Netherlands, Slovakia and Switzerland. Orange’s minority-controlled subsidiaries have been awarded UMTS licenses in Austria and Portugal.

Orange considers the expansion of third generation services to be a strategic priority and to have high growth potential in the future. During 2003, Orange invested in the deployment of its UMTS network in France, the United Kingdom and Switzerland

and intends to launch commercial third generation services during 2004. Orange had already carried out tests on its third generation services at the end of 2003.

Orange continues to take a pragmatic approach with regard to its strategy towards UMTS licenses. In the United Kingdom, where competition is strong (following the entry in 2003 of a fifth competitor, Hutchison 3G) UMTS will be deployed in 2004 when commercially launched in ten major cities, main rail hubs and airports. The same procedure will apply when launched in France between now and the end of 2004. Orange strives to become a market leader in third generation services in Europe.

In March 2003, a new management team was formed at Orange. In the context of the reorganization of the France Telecom group, Solomon Trujillo, Chief Executive Officer of Orange, announced that he intended to accelerate Orange’s growth over the next three years, employing a strategy of differentiation and customer targeting. This strategy follows the announcement in December 2002 of a plan to generate net cash flow from operations, less net cash used in investing activities, of a cumulative figure of between € 5 and € 7 billion for the period from 2003 to 2005 by combining stricter financial objectives with stronger discipline with regards to investment and operating costs.

In accordance with this strategy, Orange decided to withdraw from the Italian market in March 2003 (see “– 4.4 Divestitures”). In addition, Orange has reduced its workforce and operating expenditure in several areas of activity, including the United Kingdom, Denmark, The Netherlands and Switzerland.

The Orange segment earned revenues of € 17.941 billion in 2003 ( € 17.085 billion in 2002 and € 15.087 billion in 2001).

At December 31, 2003, Orange had 49.1 million customers worldwide for all of its controlled activities (44.4 million customers at December 31, 2002 and 39.3 million customers at December 31, 2001).

The following tables list the countries in which Orange currently has operations, the operators, the percentage of each operator controlled by Orange, the total number of customers and the GSM900/1800/1900 frequencies it is authorized to use in each of these countries on its 2G network. Unless otherwise stated, the customer numbers refer to the number of active customers. The definition of an active customer varies according to the local market and from one subsidiary to the next, particularly for minority shareholdings.

France and the United Kingdom

Country

Operator

Percentage
controlled
by Orange
S.A.(%) ⁽¹⁾

Total number of customers
(in millions)

3G licenses ⁽⁶⁾

allocation
date/Renewal date

At
December 31,
2003

At
December 31,
2002

At
December 31,
2001

France

Orange France
(mainland)

100.0

19.6

18.53

17.2

GSM900/1800

August 2001/
August 2021

Orange
Caraïbe

100.0

0.58

0.54

0.5

GSM900/1800

–

Orange
Réunion

100.0

0.16

0.13

0.1

GSM900/1800

–

United Kingdom

Orange UK

100.0

13.65

13.3

12.4

GSM1800

September 2000/

December 2021

Rest of World

Wholly Owned Subsidiaries and Majority Interests ⁽⁵⁾

Country

Operator

Percentage
controlled
by Orange
S.A.(%) ⁽¹⁾

Total number of customers
(in millions)

3G licenses ⁽⁶⁾
allocation
date/Renewal date

At
December 31,
2003

At
December 31,
2002

At
December 31,
2001

Belgium

Mobistar

50.8

2.6

2.3

2.5

GSM900/1800

March 2001/
March 2001

Denmark

Orange
Denmark

67.2

0.6

0.5

0.6

GSM1800

September 2001/
October 2021

Luxembourg

Orange
Luxembourg

100.0

–

June 2002/
June 2017

Netherlands

Orange
Nederland

100.0

1.3

1.0

1.1

GSM900/1800

July 2000/
December 2016

Rumania

Orange Romania

67.8

3.3

2.2

1.6

GSM900

–

Slovakia

Orange
Slovensko

63.9

2.1

1.7

1.2

GSM900/1800

June 2002/
July 2022

Switzerland

Orange
Communications
S.A.

100.0

1.09

0.96

0.9

GSM1800

December 2000/
December 2016

Egypt

ECMS (MobiNil)

71.25 ⁽²

⁾

2.1

1.6

1.4

GSM900

–

Botswana

Orange
Botswana

51.0

0.16

0.1

GSM900

–

Cameroon

Orange
Cameroun

70.0 ⁽³

⁾

0.5

0.3

0.21

GSM900

–

Ivory Coast

Orange Côte
d’Ivoire

85.0

0.6

0.5

0.34

GSM900/1800

–

Madagascar

Orange
Madagascar

65.9 ⁽⁴

⁾

0.14

0.1

GSM900

–

Dominican Republic

Orange
Dominicana

86.0

0.6

0.4

0.28

GSM900

–

Minority Shareholdings ⁽⁷⁾

Country

Operator

Percentage
controlled by
Orange
S.A.(%) ⁽¹⁾

Total number of customers
(in millions)

3G licenses ⁽⁶⁾
allocation
date/Renewal date

At
December 31,
2003

At
December 31,
2002

At
December 31,
2001

Austria

ONE

17.5

1.4

1.3

1.4

GSM1800

November 2000/
December 2020

Portugal

Optimus

20.2

2.0

1.9

GSM900/1800

December 2000/
January 2016

India (Mumbai)

BPL Mobile

26.0

0.85

0.6

0.38

GSM900

–

Thailand

TA Orange

48.9

1.8

1.3

–

GSM1800

–

(1)

At December 31, 2003, directly or indirectly.

(2)

Orange holds MobiNil under joint control with Orascom Telecom. Accordingly under MobiNil’s French GAAP, MobiNil’s financial and operating data are proportionally consolidated at 71.25%. MobiNil’s total customer base (at 100%) was 3 million at December 31, 2003.

(3)

France Telecom holds the remaining 30% of the shares of Orange Cameroun.

(4)

Orange holds 51% of Telsea, a holding company which owns 65.9% of Orange Madagscar. This is the percentage used in the table.

(5)

Orange owns 100% of Orange Sverige AB (Sweden) but has announced that it intends to withdraw from this market.

(6)

For more information on the cost of acquiring UMTS licenses, see “Item 5. Operating and Financial Review and Prospects – 5.2.2.1 Orange Segment”.

(7)

Orange also holds a minority interest of 28.3% in MobilCom (Germany) and has announced that it intends to withdraw from this market. Orange sold its shareholding in Wind (Italy) on July 1, 2003. (See “– 4.4 Divestitures”).

Controlled Wireless Operations in France

On December 31, 2003, France was the fourth largest market for wireless telecommunications in western Europe after Germany, Italy and the United Kingdom. The French market grew by 8% in 2003 (4.3% in 2002 and 24.6% in 2001). The penetration rate of 69.1% (64% at December 31, 2002 and 61.6% at December 31, 2001) is one of the lowest in western Europe. Nevertheless, the priority on the French market has shifted from customer acquisition to creating value and developing customer loyalty.

At December 31, 2003, Orange France had approximately 20.3 million registered customers (including French overseas departments) (19.2 million at December 31, 2002 and 17.8 at December 31, 2001) with a market share of 48.8% (49.8% at December 31, 2002 and 48.2% at December 31, 2001) (source: ART).

Prior to June 2001, Orange France offered its services under three main brands: Itinéris, OLA an

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