As filed with the Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF
	THE SECURITIES EXCHANGE ACT OF 1934

	OR

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

	For the fiscal year ended December 31, 2006

	OR

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

	OR

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

	Date of event requiring this shell company report

Commission file number: 1-13980

Koninklijke KPN N.V.

(Exact name of registrant as specified in its charter)

Royal KPN N.V.

(Translation of Registrant’s Name into English)

The Netherlands

(Jurisdiction of incorporation or organization)

Maanplein 55

2516 CK The Hague

The Netherlands

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

		Name of each exchange
Title of each class		on which registered

Ordinary Shares		New York Stock Exchange*
American Depositary Shares		New York Stock Exchange

* The Registrant’s Ordinary Shares are not listed for trading, but only in connection with the registration of American Depositary Shares (“ADSs”) which are evidenced by American Depositary Receipts (“ADRs”).

Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Securities Exchange Act of 1934:

None

Number of outstanding shares of each of the Registrant’s classes of capital or common stock as of December 31, 2006, the close of the period covered by the annual report:

· 1,928,551,326 Ordinary Shares

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

Yes x

No o

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

Yes o

No x

Note—checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

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

Yes x

No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

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

Item 17 o

Item 18 x

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

Yes o

No x

Annual Report and Form 20-F

This publication is prepared in both Dutch and English comprising the full Annual Report and Form 20-F for 2006 of Koninklijke KPN N.V. This document complies with the applicable Dutch regulations. For Dutch statutory purposes, the official English language version of the Annual Report and Form 20-F prevails. It also forms the 2006 Annual Report and Form 20-F for filing with the Securities and Exchange Commission (SEC) in the United States. Cross-references to Form 20-F are set out at the end of this document.

Profile

KPN is the leading multimedia company in the Netherlands, providing consumers and consumer households with fixed and mobile telephony-, internet- and TV services. To business customers, KPN delivers voice-, internet- and data services as well as fully-managed, outsourced ICT solutions. Both nationally and internationally, KPN provides wholesale network services to third parties, including operators and service providers. In Germany and Belgium, KPN pursues a multi-brand strategy with its mobile operations, and serves multiple customer segments in consumer as well as business markets.

At December 31, 2006, KPN served 6.3 million wireline voice subscribers, 8.6 million mobile customers, 2.1 million Internet customers and 0.3 million TV-customers in The Netherlands as well as 15.0 million mobile customers in Germany and Belgium while we employed 28,368 individuals (25,976 FTEs).

KPN was incorporated in 1989. Its shares are listed on Euronext Amsterdam and the stock exchanges of New York, London and Frankfurt. Our credit ratings on December 31, 2006 were BBB+ with negative outlook (Standard & Poor’s) and Baa2 with stable outlook (Moody’s).

Mission statement

Our customers trust us to provide them with high-quality, reliable services to help them achieve their business and personal goals, and to enrich their work and leisure time. We offer them a range of innovative products which enable them to access information and entertainment, anytime, anywhere, and let them choose how to do that, from, for example, a phone, a computer, a PDA or a television. We also let them choose from a wide range of brands which we have designed to suit different needs and pockets – from the reliable high-quality KPN brand, to youth brands such as Hi, or no-frills brands such as Het Net and Simyo.

We believe that the society of satisfied customers this approach creates forms the basis for profitable growth and, as a result, creates value for our shareholders. Equally, we believe that our commitment to quality and customer satisfaction can be realized only if our employees are motivated to provide the best possible products and services.

We are equally conscious of our responsibilities to the wider community: it is our policy to use our knowledge and technology to contribute to the well being of all our stakeholders, and take steps to account to them for our environmental performance.

Foreword by the Chairman and CEO

Results

Our results for the full year 2006 were good and met the raised guidance that we issued to the market during the year. They are a direct result of the progress that we have made in transforming our business and are characterized by a continued strong performance across the group in challenging markets.

Revenues and other income were up 1.0% for the year to EUR 12.1 billion. Profit for the year increased from EUR 1.5 billion in 2005 to EUR 1.6 billion in 2006. Our cash flow from operating activities minus capital expenditures amounted to EUR 2.4 billion ¹⁾. Our financial performance, combined with our share repurchase program, led to EPS growth of 20% to EUR 0.79.

As a result of this performance, we are recommending an increase in the final dividend per share to 34 cents, making a total of 50 cents for 2006, representing an increase of 11% over 2005. For 2006 we will have returned in total EUR 2.6 billion to shareholders, comfortably exceeding the commitment we made a year ago to return at least EUR 2 billion. We have also announced to invest a further EUR 1 billion on a share repurchase program through the end of 2007.

For 2007, investors should assume that the total dividend to be paid will at least be EUR 950 million. Thus, we will continue to deliver industry-leading levels of shareholder value.

A changing world

The telecommunications industry has been changing rapidly and fundamentally, principally through technological advances and deregulation, and is to some extent unrecognizable from that of even five years ago. Indeed, we are nearly at the stage when it is no longer accurate to classify it as ‘the telecommunications industry’: the traditional boundaries between communication, information and entertainment have almost disappeared, and any company which wants to compete in this new environment has to welcome change and make it work to its advantage.

We have developed our business in anticipation of these changes in technology and deregulation through our ‘Attack, Defend and Exploit’ strategy, which was introduced in March 2005. This has enabled us to make the right choices in a market which is not only increasingly competitive, but is also beset with innovation. As part of this strategy, during 2006, we launched new internet protocol- (IP) based services and, at the same time, successfully defended our existing leading market positions in the ‘old’ world of fixed line telecommunications. Indeed, the level of operational excellence that we continued to deliver maintained our position as one of the very best European operators.

Our strategy

We continue to develop our business from one that was traditionally technology and product oriented to one that is focused on the behaviour and needs of our customers. In this changing telecommunications world we see the division between fixed and mobile services as being increasingly irrelevant and, from January 1, 2007, our business was reorganized into three customer-focused, rather than technology-driven divisions: Consumer, Business and Wholesale. In this world we look at new services as being an opportunity rather than a threat and are determined to become the leader in new services, such as VoIP, in the markets in which we operate.

We are attacking costs. We are implementing an All-IP infrastructure by connecting 28,000 street cabinets to fiber and, from those cabinets, connecting to our customers with fiber or VDSL. Starting in the second quarter of 2007, we will start to install FttH (Fiber to the Home) in new built residential areas. By operating this ‘hands-free’ network management system, we will be able in due course to discontinue a wide range of non IP-based services. This, in turn, will lead to us closing 1,100 out of 1,300 local telephone exchanges and will result in a dramatic reduction in our headcount requirement of some 8,000 FTEs. This process, which began in 2005, is expected to be substantially completed in 2010.

In our mobile wholesale business, although capital costs are reducing rapidly, we are employing what we call a ‘smart follower strategy’. This entails us building relationships with suppliers to enable us to challenge the established infrastructure vendors and thereby avoid making major investments in the current, expensive, UMTS 3G technology.

We are committed to giving our competitors access to our infrastructure. Since owning a network cannot be a sustainable barrier to entry, we are of the view that sharing our infrastructure will give us two principal benefits: it will enable us to improve our competitive position in the services business by reducing unit costs and will also enable us to service parts of the market to which we currently have no access.

We are replacing old services with new IP-based services. By the end of 2007, at the current rate of progress, we anticipate that one-third of our fixed-line voice customers in the consumer market will be connected to VoIP (bundled with broadband access) and, by 2010, to have converted the majority of the other two-thirds. We are transferring dial-up internet customers to broadband.

We are encouraging our business customers to replace traditional leased-line services with IP-VPN (Virtual Private

Networks operated through the Internet) and E-VPN (Ethernet Virtual Private Networks) services and will migrate them to our new network.
Our determination to upgrade these services is evidence of our long-term strategy. While this may lead to a short-term decline in revenue and profitability, we believe it will reduce churn and will present us with opportunities to sell value-added services.

We have a pipeline of initiatives targeted at increasing revenue from consumers. We are, for example, attacking the television-market with four offers. DVB-T, a value-for-money digital product for terrestrial broadcasts, gives us entry to the market by being less expensive than cable; IPTV will give access to premium services, including video on demand, and later in the year will offer interactivity and on-demand advertising; DVB-H which is DVB-T technology transmitted to hand-held devices; and MediaMall, an interactive TV Portal, which enables local communities to share content and which will bridge the gap between Internet, content and the TV.

In addition, we plan to further exploit advertising revenue opportunities on our existing ISPs (Internet Service Providers) and new formats. We are also building a range of value-added services, such as content and Internet-security services, to increase revenue from fixed and mobile telephony, broadband, and data, as well as looking for ways to increase customer value by adapting functionality. For example, we created a new segment in the German market by offering subscribers cheaper minutes, rather than free mobile handsets; and in the Dutch fixed market we sell rental contracts for DECT-phones bundled with calling minutes.

Over the past few years, we have built a strong base in network connectivity and voice services and will continue to build network outsourcing services, together with housing and hosting services. During 2006, we made several acquisitions to strengthen our position in integrated ICT (Information and Communication Technology) solutions. We are creating new revenue streams and, within these, specific applications for the healthcare, security and educational sectors. We see narrowcasting as a growth area which enables us to provide access, information and advertising to discrete audiences.

Our capabilities

In a world in which our customers can buy the same, or similar, products from competitors, we have turned our focus onto what makes us different: this, we believe, is our skill in distribution, customer management, branding, execution and IT.

In The Netherlands, it is our goal to take the lead in distribution. We are expanding our stores and services in all the areas in which we operate and are also upgrading our online presence to improve online transactions. Wherever we operate, we seek third-party distribution deals, often in combination with sharing our infrastructure with MVNOs (Mobile Virtual Network Operators), such as in our partnership with the ALDI supermarket chain in Germany.

We not only want to be easy to buy from, but also want to create a satisfied and loyal customer base in order to seize cross- and up-selling opportunities. We are therefore investing significantly in CLM (Customer Lifecycle Management) and CRM (Customer Relationship Management).

Our long-held belief that customers want true choice, leads us to continue our commitment to a multi-brand strategy in all territories. Our policy of offering different products to suit different budgets enables us to optimise our profitability. We offer, however, more than price differentiation: we are building other services, such as mobile music downloads, MSN (email and access to the web) and special brands, such as our Turkish-language offer Ay Yildiz for ethnic minorities.

Customer satisfaction has been one of our key performance indicators for the past three years. While we have made great progress, we believe there is still room for improvement and are determinedly improving and simplifying our product range, rationalizing our IT and improving processes.

We are using our IT capabilities as an enabler for change, innovation and execution, and are working with our IT team to develop the business. Within three years, we plan to have moved from legacy systems to standard packages in all our operations, with the aspiration of being the trail blazer for a dozen or so applications. We will deviate from standard functionality only where there is a clear competitive advantage.

Regulation

We continue to work hard to ensure that regulation keeps pace with the changes in our industry, both on a national and a European level. We consistently aim for deregulation and the creation of a level playing field for KPN when entering new markets such as broadcasting and the mobile markets of Belgium and Germany. The asymmetry between regulation of cable TV operators and KPN has consistently been put on the regulatory agenda by us and is a debate that will continue.

Our All-IP program has attracted much attention in the national and international regulatory community. The open and innovative character of All-IP is generally welcomed, though OPTA’s (the independent Dutch regulator of post and electronic communications) concern is about safeguards to ensure competition. KPN aims for a continuous and open discussion with OPTA and market parties about the rollout of the All-IP network.

In 2006 political pressure to regulate the international mobile roaming tariffs has increased. We are proponents of the regulation of wholesale roaming tariffs in order to create a level playing field between pan-European players and alliances and regional players.

The Board

There were a number of changes to the Board of Management during 2006. Eelco Blok, who has worked for KPN since 1983, and Stan Miller, who has been with KPN since 1998, were both appointed to the Board in June 2006. Eelco is responsible for our Business activities as well as Wholesale and Operations and Stan for our International Mobile activities. Baptiest Coopmans joined us from Unilever in September 2006 and brings valuable experience to running the Consumer division.

Corporate social responsibility

We are conscious of the responsibilities that our position in the community entails. During 2006, we reviewed our corporate social responsibility policy to increase its focus on consistency. We emphasize a sustainable business which includes ethics, the environment, and social policy. In this context, we conform to as many guidelines of the Global Reporting Initiative as possible and we have made substantial progress in a number of areas. We have taken measures to limit the fuel consumption of our commercial vehicles.

We contributed to society in general during 2006 and will again in 2007, through our support of the Ronald McDonald Children’s Fund. We contribute people’s time and knowledge as well as assist with fund raising. We also develop and promote products and services for education, healthcare and safety. Examples include the Internet filters which we incorporate in some of our products, and the ‘Mijn Kind Online’ (My Child Online) Foundation which contributes to the responsible use of new media by young people.

Stakeholders

We are very grateful to our shareholders for their loyalty and support for our strategy. In particular we would like to thank the Dutch State which sold its remaining stake in KPN last September for the support we received over the years. In line with our focus on our customers, we have begun 2007 by launching a new organizational structure built around their needs, rather than around technology and products. We have an excellent record of developing our strategy to best address our world and believe firmly that this latest strategic step is, again, the best way of serving the interests of our shareholders.

We also want to express special thanks to our employees for their contribution over the past year. Executing our strategy and achieving our ambitions very much depends on the continued commitment of our people. In 2007, we will work more than ever with our customers, and partners in order to remain well positioned for the future.

Looking ahead

In a relatively short period of time, KPN has taken some major steps to transform itself from an incumbent technology and product-orientated telecommunications provider into an independent commercial enterprise that provides a wide range of multi-media services for consumers and managed ICT and network services for businesses.

We have had to make many tough decisions to reach where we are and no doubt we will have to make many more. We know that we will never ‘arrive’, but will have to continue to be alert to changes in customers’ behaviour patterns and expectations, as well as to technology and regulation, to continue to progress. We are, however, determined to do that and will continue to navigate the risks and challenges that the business might face in order to achieve our goal of creating and maintaining a successful and sustainable business that delivers value to all those who have a stake in it.

Key information

Presentation of financial and other information

In this Annual Report and Form 20-F (referred to hereinafter as ‘Annual Report’):

1.	‘KPN’ refers to Koninklijke KPN N.V.;
2.	‘We’, ‘us’, ‘our’, the ‘Company’, the ‘Group’ and similar terms refer to KPN and any or all of its subsidiaries, associates and joint ventures as the context requires;
3.	‘KPN Mobile’ refers to KPN Mobile Holding B.V. or KPN Mobile N.V. and any or all of its subsidiaries, as the context requires;
4.	‘E-Plus’ refers to E-Plus Mobilfunk GmbH & Co. KG a limited liability partnership - and any or all of its subsidiaries, as the context requires;
5.	‘BASE’ refers to BASE N.V./S.A.;
6.	‘KPN Mobile The Netherlands’ means KPN Mobile The Netherlands B.V. and any or all of its subsidiaries, as the context requires; and
7.	‘Telfort’ refers to Telfort B.V. and any or all of its subsidiaries, as the context requires.

In compiling the information in this Annual Report, we have used data and projections obtained from industry surveys, market research and other publicly available information. Such data and other publications generally state that the information they contain has been obtained from sources believed to be reliable but that the accuracy and completeness of such information is not guaranteed and that the projections they contain are based on a number of significant assumptions. We have not verified this information independently or determined the reasonableness of such assumptions. As a result, this information may not be accurate, complete, adequate, up-to-date or comprehensive.

Our market share in traditional voice is defined as our share in the total traffic volumes. These figures are based on externally available market data, which may not be completely accurate.

Our market share in Internet is defined as the total number of our KPN ISPs’ active narrowband and broadband Internet users as percentage of the total number of active Internet users (including cable). These figures are based on externally available market data, which we cannot verify for accuracy.

Our market share in consumer broadband is defined as the total number of our ADSL broadband connections as percentage of total consumer broadband connections, which consist of ADSL competitors and broadband via cable. These figures are based on externally available market data, which we cannot verify for accuracy.

The customer figures of our mobile network operators consist of the number of registered SIM cards – excluding dual cards but including data-only PC connections and machine-based SIM cards – at the end of each reporting period. The customer base also comprises inactive prepaid users, who have had neither incoming nor outgoing traffic during a three-month period, but have not yet met the disconnection criteria (mostly 12 months of inactivity). We define mobile market revenue share as our mobile network operators’ share in the total revenues of the respective countries’ mobile telephony markets.

Other mobile network operators may calculate their number of customers differently than we do, which may affect the comparability and accuracy of data.

Service revenues are defined as the aggregate of connection fees, monthly fixed subscription fees and traffic revenues. ARPU is the quotient of service revenues during a month and the average number of customers during that month.

Details of key exchange rates used in the preparation of this Annual Report are given elsewhere in this document together with Noon Buying Rates in New York for the equivalent periods.

Forward-looking statements

We have made forward‑looking statements in this Annual Report. These statements are based on our beliefs and assumptions and on information currently available to us. They include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance or expense improvements and the effects of future legislation or regulation.

Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words ‘believe’, ‘expect’, ‘plan’, ‘intend’, ‘anticipate’, ‘estimate’, ‘predict’, ‘potential’, ‘continue’, ‘may’, ‘will’, ‘should’, ‘could’, ‘shall’, or the negative of these terms or similar expressions. Examples of forward-looking statements include but are not limited to:

1.	telecommunication usage levels and market conditions, including the number of telephone access lines, traffic patterns (including Internet usage) and development in customer numbers;
2.	competitive forces in liberalized markets, including pricing pressures, technological developments, alternative routing developments and our ability to retain market share in the face of competition from existing and new market participants;
3.	regulatory developments and changes, including with respect to the levels of tariffs, the terms of interconnection, electromagnetic field strengths of mobile transmission equipment, customer access and international settlement
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	arrangements, and legal and regulatory proceedings and investigations;
4.	the success and market acceptance of business, strategic, operating and financial initiatives (many of which are untested), the level and timing of the growth and profitability of new products, startup costs associated with entering new markets, the successful deployment of new systems and applications to support new initiatives, efforts at improving customer satisfaction, and local conditions and obstacles;
5.	the amounts of future capital expenditure;
6.	our dependence on and relationship with suppliers;
7.	the timing of the rollout of Universal Mobile Telecommunication System (UMTS) networks, the All-IP fixed network and other new, enhanced or upgraded networks, systems, products and services, and their performance and impact on our financial position;
8.	any acquisitions, dispositions or mergers we or our subsidiaries may enter into;
9.	the availability, terms and deployment of capital;
10.	the impact of tax rulings, the timing for settlement of tax losses carried forward and uncertainties regarding future tax liabilities;
11.	the amount and timing of any potential future impairment charges for our licenses, goodwill or other assets;
12.	the impact of regulatory competitive developments on capital outlays and our ability to achieve cost savings and realize productivity improvements;
13.	uncertainties associated with developments related to the International Financial Reporting Standards (IFRS), as well as with developments related to United States Generally Accepted Accounting Principles (US GAAP);
14.	general economic conditions, government and regulatory policies, and business conditions in the markets we and our affiliates serve;
15.	risks related to information and communication technology systems generally;
16.	fluctuations in foreign exchange rates, interest rates and property prices;
17.	international political and economic conditions; and
18.	asset retirement obligations.

Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. No undue reliance should be put on any forward-looking statements. Unless required by applicable law or applicable rules of any stock exchange on which our securities are listed, we have neither the intention nor an obligation to update forward-looking statements after distribution of this Annual Report.

Key financial figures

The following tables show our selected historical financial data for the years ended December 31, 2002 through 2006.

Our Consolidated Financial Statements for the years 2006, 2005 and 2004 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. There are no differences between IFRS applied by KPN and IFRS as issued by International Accounting Standards Board (‘IASB’). The SEC adopted on April 12, 2005 amendments to Form 20-F for foreign private issuers related to the first-time adoption of IFRS. This amendment allowed KPN to provide only one year of comparative IFRS figures in the consolidated financial statements over the year 2005. As a result we have not adjusted our 2003 and 2002 Consolidated Financial Statements for IFRS. Therefore comparative amounts for these years are not available.

Our Consolidated Financial Statements for the years 2003 and 2002 were prepared in accordance with Dutch General Accepted Accounting Principles (Dutch GAAP).

US GAAP differs in certain significant respects from IFRS. For information on the differences between IFRS and US GAAP as they relate to us, please refer to the Notes to our Consolidated Financial Statements.

You should read this table together with ‘Operating results’ and our Consolidated Financial Statements and the Notes thereto, which are included elsewhere in this Annual Report.

¹⁾	Please refer to Note [8] of the Consolidated Financial Statements for a discussion on the method used to calculate profit or loss per share
²⁾	KPN applies IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations as from January 1, 2005. As a result, we report figures as of January 1, 2005
³⁾	Please refer to ‘Information on US GAAP’ for a description of the adjustment of KPN’s profit before and after taxes and earnings per share for the years 2004-2005 due to the change in accounting policy regarding the incremental direct costs of up-front connection fees. We have also restated 2002 and 2003 numbers.

The proposed dividend for 2006 consists of a cash dividend of EUR 0.50 per share of which EUR 0.16 was paid as an interim dividend. For further information about our dividend policy refer to our section ‘Information about the KPN Share’.

ANNUAL HIGH AND LOW CLOSING PRICES OF OUR ORDINARY SHARES ON EURONEXT AMSTERDAM AND OUR ADSS ON THE NEW YORK STOCK EXCHANGE

For further information about closing prices of our ordinary shares refer to the section ‘Information about the KPN Share’.

Risk factors

Our business is subject to various risks relating to changing competitive, economic, political, regulatory, legal, social, industrial, business and financial conditions. These conditions are described below and discussed in greater detail elsewhere in this Annual Report. The following risk factors could harm our business, financial condition and operating results, adversely affect our revenues and profitability, and lead to a drop in the trading price of our shares.

The markets in which we operate are increasingly competitive and our principal businesses face significant competition. If we are unable to compete effectively, this could lead to loss of revenue, reduced margins and loss of market share and adversely affect our financial position.

The competitive landscape for our Fixed division is changing rapidly and is one of the most dynamic and competitive in Europe. The traditional voice market continues to contract, while the VoIP penetration starts to accelerate as Cable and ADSL operators enter this (new) voice market, already offering multiplay solutions (Television, Internet and Telephony combined). Meanwhile, mobile operators are pushing for fixed-to-mobile substitution and non-Telco service providers (like MSN, Google, IBM) have started offering voice as an integral service. Combined with the fact that the Dutch broadband acceleration is unrivalled and the penetration of broadband in the households in The Netherlands is the highest in Europe, this changing competitive landscape for our Fixed division may result in acceleration of the decrease of fixed-line subscriptions and traditional traffic volumes and price declines of broadband and VoIP, which would adversely affect our revenues, margins and financial position.

In addition, in our business market segment, ICT has become increasingly important. There also is an increased demand for managed services and a continuing shift in focus from network technology towards functionality of applications. New communication services are IP-based and data access has become independent of hardware devices. Because of these developments, IT and system integrators (e.g. Cap Gemini, Accenture, IBM, etc.) are moving down the value chain and could gain market share at our expense. In addition, global telecommunication solution providers are increasingly penetrating our national corporate markets, as customers increasingly search for global network solutions. KPN’s strategy in the business market segment is aimed at grasping the opportunity to shift from decreasing traditional communication services towards services in the larger and growing market for end-to-end ICT services. But our goals will be difficult to achieve due to the fact that we are attempting to enter new markets and face new and more (global) competitors. In addition, some of our competitors are able to charge lower prices than we do. Our dominant position limits in the Fixed telephony business in The Netherlands our flexibility in terms of pricing and sales incentives and bundling. If we are not able to cope with the continuing pressure for lower prices and lower our costs, our financial results will be adversely affected.

In general, our Fixed division may not be successful in both offering resistance to the increasing competition and the need to move from our traditional services to services based on our new All-IP network, as a result of which our revenues within the Fixed business could decline more than we currently anticipate.

Because of the aforementioned developments in our competitive landscape, the Fixed business increasingly shows similarities with the Mobile business, as subscriber acquisition and retention costs and marketing expenses increase. In addition, the introduction of new products and services (e.g., TV, VoIP and ICT solutions) result in new costs and puts pressure on our existing operating structure. Our upcoming migration to an All-IP network should reduce costs in the long term, but requires additional capital expenditures in the short to mid-term. In order to cope with the anticipated pressure on our revenues and consequently, the risk of deterioration in our profitability, our Fixed division has set up an ambitious restructuring and cost saving program. While our aim is to reduce around 8,000 FTEs (starting in 2005 and expecting to be substantially completed in 2010), we may not be successful in these efforts, and as a consequence, our financial position could deteriorate. Our restructuring and cost saving program also may result in one-time special charges and costs, and may have other adverse consequences on our organization and business.

Our Mobile division business faces intense competitive pressure from existing and new market participants in all our markets. In our core markets, we compete with the largest international groups and alliances of mobile operators. Competition based on price, subscription options offered, coverage and service quality remains intense and we expect ongoing pressure on calling rates as we compete with other operators for market share. Our mobile markets for voice have become increasingly saturated and the market for mobile data is picking up more slowly than expected. As a result, the focus of competition is shifting towards brand and distribution power and also from customer acquisition to customer retention and satisfaction efforts. Substantial expenses are required for customer retention and satisfaction efforts, and significant customer defections would have an adverse effect on our financial position.

We face competition from a variety of competitors, including, but not limited to, existing fixed and mobile network operators, operators offering new mobile network services such as wireless fidelity services (WiFi) and/or WiMAX, providers of higher speed xDSL and glass fiber services, and others. Some of these competitors are smaller and may be more flexible and responsive than we are. Other competitors may operate on a broader scale and have more financial resources and capital at their disposal, enabling them to compete more effectively than we do. For instance, of our competitors many have more aggressive pricing, and achieve better time-to-market with new products and services, network quality and network rollout, and customer care

and satisfaction. Our mobile subsidiaries E-Plus in Germany and BASE in Belgium both compete in their respective market with top-two operators that have significantly higher market shares and thus an ability to exert significant influence over the market. As a result, our subsidiaries may be at a competitive disadvantage and could rapidly lose market share, which could harm our financial results.

Our public image is important to our sales, marketing and customer relations efforts. Any damage to our image, whether as a result of corporate actions, developments of particular business units or otherwise, could adversely affect our market position and ultimately harm our financial results.

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

Most of our network activities in The Netherlands are monitored by regulatory bodies. These authorities regulate, among other things, the prices we may charge for many of our services and the extent to which we have to provide services to our competitors. In recent years, these authorities have compelled us to reduce some of our prices. Regulatory authorities may increase the severity of pricing controls, extend the range of services to which regulations apply (including any new services that we may offer in the future), and extend the services that we have to provide to our competitors. For instance, the Dutch telecommunications regulator, OPTA, has in a recent decision subjected our wholesale line rental business to regulation and forced us to withdraw our volume discounts for transit services. Regulatory decisions could also influence the rollout planning of the All-IP network and/or the conditions under which we are allowed to migrate to an All-IP network operator such as the deferment of the dismantling of the MDF locations or the imposition of new access obligations. These and other regulatory actions may adversely impact our financial position, increase the severity of competition and decrease our profitability.

In our Mobile division, we have to comply with an extensive range of requirements regarding the licensing, construction and operation of our mobile networks and services. Decisions by regulators regarding the granting, amendment or renewal of licenses, to us or to third parties, could adversely affect our future operations. Governments in the countries in which we operate may issue telecommunications licenses to new operators whose services will compete with ours. In addition, other changes in the regulatory environment concerning the use of mobile phones may lead to a reduction in the usage of mobile phones or otherwise adversely affect us. Additionally, decisions by regulators could further adversely affect the pricing for services we offer. In the countries in which we operate, mobile terminating tariffs are either currently regulated or are expected to be in the future. Tariffs for mobile roaming services have also attracted the attention of regulators and politicians. In the coming years, we expect further obligations to be imposed by the European Union on all mobile operators to reduce wholesale and retail roaming tariffs. Such regulatory intervention will likely increase the pressure on our pricing and could negatively affect our financial position.

The markets in which we operate undergo rapid technological changes. As a consequence, we have to make substantial investments in our business on an ongoing basis to remain competitive. New communication services are more and more IP-based and, especially in our Fixed business, services are less dependent on underlying hardware. As a consequence, new (global) competitors are entering the market and competition is increasing in all areas of our business. This may be disadvantageous for us and may lead to a decline in our operating results.

Since our markets are undergoing rapid technological change, our future success depends, in part, on our ability to anticipate and adapt in a timely and effective manner to those technological changes. To remain competitive, we must continuously improve the speed and features of our existing products and services and develop attractive new products and services for our customers.

Technologies for mobile services include EDGE and UMTS and the enablers for data services (such as i-mode, content downloads and location based services). New licensed and unlicensed spectra may become available in the future, posing a constant threat to our mobile business based on GSM, UMTS and WiFi technologies, as the additional spectrum facilitates the entry of new competitors providing new entrants to wireless and mobile communications services.

Within our Fixed division, our strategy to migrate to an All-IP network operator and service provider is the basis for our new service portfolio and our planned cost reductions. The technical rollout of our All-IP network (currently in a piloting phase) is expected to take several years. We may not be successful in the timely rollout of such a network as a consequence of which our main competitors may successfully compete with us and gain market share at our expense. In addition, our strategy for migrating our customers towards IP-based solutions could be less effective and efficient than we anticipate. Furthermore, our investments in new IP-based services and solutions could prove to be more time consuming and more expensive than we had estimated, all of which could adversely affect our financial position.

In general, we may not succeed in developing, introducing or improving technological innovations in an economical or timely manner, or at all. Our competitors may be able to improve existing products and services or develop and introduce new products and services faster than we are able to. The changes require substantial ongoing investments in both our Mobile and our Fixed business if we are to achieve organic growth and remain competitive. We must also correctly estimate customer demand, and there is the risk that customers will prefer the new products and services introduced by competitors over our new products and services. This could adversely affect our financial position.

In the future, we may be confronted with very significant costs related to asset retirement obligations (i.e. removal of KPN cable networks) following an amendment of the Telecommunications Act, which became effective on February 1, 2007. This could negatively affect our financial position. Reference is made to ‘Regulatory developments’.

As we are drastically changing our technical infrastructure, we may not be able to succeed in meeting the high quality standards we delivered in the past with our traditional product portfolio. This may have a negative effect on the value of our brands in the various markets in which we operate and negatively affect our financial position.

We have made substantial investments in UMTS licenses in our core markets. We may not generate a sufficient return on these investments.

We have made substantial investments in UMTS licenses in our core markets. The size of the market for these products and services is yet unknown and may fall short of expectations as UMTS technology may prove not to be superior to existing or other future technologies. We cannot be certain that the demand for UMTS services will justify the related costs. In some locations, the investments, although required under the licenses, may not be commercially desirable or may not be justified given the level of customer demand. In addition, we have a number of significant competitors in each of our geographic markets. Our competitors may be able to build out their UMTS networks more economically or quickly than us. This could place us at a competitive disadvantage in providing UMTS services in the relevant market. Although we recently acquired the right to use 900 MHz frequencies in Germany, we could be legally forced to share these frequencies with Deutsche Bahn. Deutsche Bahn and other competitors have challenged our acquisition of the 900 MHz frequencies. For further information, refer to ‘Regulatory developments’. If our strategy is not successful, our financial position as well as our business strategy may be adversely affected.

Based on regulatory requirements, we expect to incur additional substantial capital expenditures for the rollout of our UMTS networks. In addition, we expect to incur significant marketing and other costs in relation to the further rollout of our UMTS services. As a result, our net income can be expected to decrease, except to the extent enhanced earnings from UMTS networks offset such charges.

In Belgium, a further rollout of our UMTS network started in 2004 in order to comply with the license requirement of minimum 50% population coverage by the end of 2007. Until now, the Belgian regulator BiPT has not yet carried out any measurements. Non-compliance with the license obligations may lead to the incurrence of an administrative fine and may ultimately result in the loss or suspension of the UMTS license of BASE.

In The Netherlands we have acquired Telfort, which has its own DCS/E-GSM and UMTS licenses. We are integrating the networks of Telfort and KPN Mobile and are selling part of the licenses of Telfort EGSM to T-Mobile. Risk is withdrawal of licenses if we would not meet license requirements.

If we fail to introduce new or enhanced products and services successfully, our revenues and margins could be lower than expected.

Part of our business strategy is based on the introduction of new or enhanced products and services, including VoIP and WLR, Interactive IPTV formats, integrated communication and messaging clients, content and entertainment services, new mobile data services, machine-to-machine services. Any of the new or enhanced products or services we introduce may encounter technical difficulties or fail to achieve market acceptance. Alternatively, new or enhanced products or services introduced by our competitors may be more appealing to customers. If our new and enhanced products and services are not successful or are delayed, our customers may decide to discontinue using our services and choose other telecommunication providers. In addition, newly introduced products and services may not be profitable in the short term. As a result, we may not recover the investments, such as the costs of network upgrades and marketing expenses we plan to make to launch new products and services.

Changes in markets, our business plans and network infrastructure and the relevant valuation methodologies have resulted, and may in the future result, in substantial write-downs of the carrying value of our assets.

Our regular review of the carrying value of our assets (including goodwill, intangibles, tangibles and financial fixed assets) has resulted in significant impairments in the past, and we may in the future be required to recognize additional impairment charges. Events in technology and telecommunications markets, including significantly reduced share prices, market capitalizations and credit ratings for other participants, as well as the ongoing review and refinement of our business plans and network infrastructure and changes in the valuation methodologies applied and the underlying assumptions, have resulted, and may in the future result, in substantial impairments of our intangible or other assets, including licenses and network equipment. In addition, we have recognized, and may be required in the future to recognize, increased depreciation and amortization charges if we deem the useful lives of our non-current assets to be shorter than originally expected.

We depend on our relationship with various partners and suppliers and any disruption in these relationships may adversely affect our business.

Our business depends upon our ability to obtain adequate supplies of telecommunications equipment, related software and IT services, our contractors’ ability to build and rollout telecommunications networks on schedule, and our suppliers’ ability to deliver dependable technical support. Due to downturns in economic conditions, some of our suppliers may cease to

do business. We cannot be certain that we will be able to obtain quality telecommunications equipment and support from alternative suppliers, particularly in relation to new technologies, on a timely basis if our existing suppliers are unable to satisfy our requirements. This could lead to an interruption in the operation and build-out of our networks, which may affect our financial position and results of operations. In addition, as part of our cost reduction program we have sold a substantial part of what we considered to be our non-core assets. A significant part of the services previously rendered to us by these non-core assets are now provided to us by new owners of the assets, or other external suppliers. We depend on our relationship with these suppliers, for the continuation of these services, some of which are vital to our business.

Network interruptions or service slowdowns caused by local or global system failures, misuse of our network and related applications as a result of inadequate security, may result in reduced user traffic, reduced revenue and harm to our reputation and business operations.

Our ability to operate our business depends significantly upon the performance of our technical infrastructure. Failures in power supply by power companies could occur in The Netherlands and may harm our technical infrastructure. Although our critical infrastructure equipment has power interruption backup facilities, these facilities may prove not to be adequate during a prolonged interruption. Our technical infrastructure is also vulnerable to damage or interruption by floods, fires, telecommunication failures and similar events. It also may be subject to break-ins, sabotage, terrorism, vandalism and similar misconduct. Furthermore, the security of our network and related applications may be inadequate, which may result in access and misuse by hackers and other unauthorized users and may adversely affect our operations. The occurrence of a natural disaster, other unanticipated problems at our facilities or any other damage to, or misuse of or failure of our systems could result in interruptions in our service. System failures, including failure of our network and the networks used by our suppliers, and hardware or software failures or computer viruses, could also affect the quality of our services and cause temporary service interruptions, resulting in customer dissatisfaction, penalties and reduced traffic volumes and revenue. Any of these factors could affect our business and financial position.

Our Mobile and Fixed division’s business may be hampered because of more stringent regulation of the exposure of the public to electromagnetic fields of base stations.

Our businesses may increasingly be subject to more stringent regulation of exposure to electromagnetic fields of mobile transmission equipment. Health risks perceived by public opinion may cause national and local governments to further impose restrictions on the construction of base station towers, the upgrade of networks and the replacement of existing antennae and other related infrastructure. Partly as a result, we are experiencing difficulties and delays in obtaining building permits for our mobile transmission equipment. This may prevent us from completing the further build-out of our mobile networks, providing new services and fulfilling UMTS license terms. In addition, it may become more difficult to renew leases for existing base stations and other equipment, with the cost of such leases increasing. Any of these factors could affect our business and financial position.

Although various scientific reports have denied that certain radio frequency emissions from wireless handsets and mobile base stations pose health risks, local and national governments have begun to regulate the emission of electromagnetic fields as an environmental threat. We cannot rule out that exposure to electromagnetic fields from mobile base stations will be identified as an environmental issue and potential health risk in the future. Any perceived health risks associated with mobile communication equipment may lead to a more restrictive approach towards building permissions for base stations and could result in a radio network of insufficient quality. A reduction in network quality may result in a lower number of customers and a reduced usage per customer.

We have liabilities with respect to our pension plans and the actual cost of our pension plan obligations could exceed current estimate. Any pension funding obligations may impact our financial position.

As of December 31, 2006, we recognized pension provisions of EUR 1.2 billion as a result of defined benefit plans. The recognition of the pension provision is subject to actuarial and financial assumptions, which are management estimates of, among other things, future salary increases, discount rates, expected indexation of the benefits and return on assets. These determine the costs and cash flows of providing the post-employment benefits. Changes in assumptions can result in changes of the pension obligation and the related pension costs as well as the contributions to the pension funds. In that event, the adjustments required to be made to our recorded provision for these benefits may have an adverse effect on our results of operations and financial condition, and cash payments to fund these plans could have an adverse effect on our cash flows.

World stock markets have always experienced volatility that has affected the market prices of equity securities, including those of telecommunications companies and our company. This has led to large swings in trading prices in short periods of time and has not always been related to the operating performance of the companies concerned.

The factors that have caused, and may cause in the future, fluctuations in our share price, many of which are beyond our control, include the following:

•	the general state of the securities markets, with particular emphasis on the European telecommunications sector;
•	competition, regulatory conditions and the status of
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	telecommunications liberalization in Europe;
•	the build-out of our networks (such as UMTS and All-IP), the development of compatible handsets, delays in the rollout of UMTS services and networks and costs relating thereto;
•	competitors’ positions in the market and ongoing consolidation in the telecommunications industry;
•	the failure to integrate our domestic and international acquisitions into our organization;
•	changes in the financial estimates by securities analysts;
•	our earnings releases and the earnings releases of our competitors;
•	the outcome of legal proceedings;
•	fluctuations in foreign exchange rates, interest rates and property prices; and
•	international political and economic conditions.

We are involved in several legal proceedings. Such proceedings could eventually lead to payments of claims and damages or otherwise harm us.

We are a party to several legal proceedings of a regulatory and other nature. The proceedings themselves could divert management attention and capacity from our core business and could harm our public image. If we lose our cases, we could be forced to reduce our tariffs, make payments of claims and damages and suffer other disadvantages.

For a discussion of current legal proceedings, please refer to the section titled ‘Commitments, contingencies and legal proceedings’ in our Consolidated Financial Statements and to ‘Regulatory Developments’.

We may be subject to additional tax liabilities in the future, including as a result of audits of our tax returns.

The tax authorities may audit our tax returns and may disagree with the positions taken in those returns.

An adverse outcome resulting from any settlement or future examination of our tax returns may subject us to additional tax liabilities and may adversely affect our liquidity and annual effective income tax rate. In addition, any examination by the tax authorities could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

We may need to incur additional debt or issue new equity to finance strategic and technological investments and to refinance debt.

Financing and refinancing conditions will largely depend on future market conditions, our credit ratings, the telecommunication industry ratings, and our results of operations and future prospects, and we cannot be certain that financing will be available to us on favorable terms, or at all. Our credit rating may be impacted by the rapid technological and industry developments, our operational performance and our competitive and financial position going forward. If we cannot raise new funding, we may be unable to pursue growth opportunities or to refinance our existing indebtedness.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent or detect fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our securities.

Effective internal controls are necessary for us to provide reliable financial reports and prevent or detect significant fraud. If we cannot provide reliable financial reports or prevent fraud, our financial results could be harmed.

We devote significant attention to establishing and maintaining effective internal controls over financial reporting. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete.

We also depend on our control framework to abide by the rules set under the Telecommunications Act for KPN as a party that holds significant market power in various segments of the telecommunications market. These rules concern among others pricing, bundling and rebates.

We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial reporting processes and related Section 404 reporting requirements. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our financial results or cause us to fail to meet our reporting obligations. Any such failure could also adversely affect our assessment of the effectiveness of our ‘internal control over financial reporting’. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the market price of our securities. Non-compliance with the rules set under the Telecommunications Act may lead to the incurrence of an administrative fine, as well as claims for damage.

Information about the Company

History and developments

Koninklijke KPN N.V. was incorporated under the laws of The Netherlands on January 1, 1989. On June 28, 1998 our name was changed from Koninklijke PTT Nederland N.V. to Koninklijke KPN N.V. We have our corporate seat in The Hague, The Netherlands. We are registered under number 02045200 at the Commercial Register of the Chamber of Commerce for Haaglanden, The Hague, The Netherlands, and our executive offices are located at Maanplein 55, 2516 CK The Hague, The Netherlands. Our telephone number is (+31) 70 4460986. Our agent for service of process in the United States is KPN INS, Inc., 494 8^th Avenue, 23^rd floor, New York NY 10001.

Our main objectives, as described in article 4 of our Articles of Association are to participate in and to manage other enterprises and companies, among such, companies that operate in the field of the transmitting, storing and converting of information, as well as to manage and dispose of information and to let our subsidiaries carry out the concessions or licenses that are granted by the government in the field mentioned above. Our Articles of Association are accessible at the Chamber of Commerce and filed with the SEC as an exhibit to this Annual Report on Form 20-F.

KPN provides telephone, Internet, television services to personal customers through its fixed network in The Netherlands. For business customers, we provide a range of services, from voice, Internet and data services to fully-managed outsourced ICT solutions, in The Netherlands and internationally. For both retail and business customers, we offer mobile services in The Netherlands, Germany, Belgium and other western European countries.

KPN was incorporated with two main subsidiaries: PTT Telecom B.V., offering telecommunication services, and PTT Post B.V., serving as the primary postal company in The Netherlands. In the period from incorporation until the listing of our shares on Euronext Amsterdam in June 1994, the State of The Netherlands was our sole shareholder. At the end of 2006, the State held no interest in our outstanding shares (2005: 7.76%).

The demerger of our mail, express and logistics business operations to TNT Post Group (TPG) was completed in 1998.

In November 1999, we transferred our mobile business to a separately incorporated subsidiary, KPN Mobile N.V. KPN Mobile issued new shares to NTT DoCoMo in August 2000, as a result of which NTT DoCoMo held a 15% interest in KPN Mobile. In connection with a financial restructuring of KPN Mobile in December 2002, NTT DoCoMo elected not to exercise its anti-dilution rights, resulting in a decrease of its interest to 2.16%. In October 2005, we purchased NTT DoCoMo’s remaining interest in KPN Mobile N.V.

In the period from 2000 to 2002, we acquired E-Plus and BASE, mobile network operators in Germany and Belgium respectively. Following these acquisitions and the purchase of UMTS licenses, KPN initiated a refinancing program. The refinancing included share offerings in 2000 and 2001 and the sale of non-core assets.

In June 2006, iBasis, a global NASDAQ listed VoIP company, and KPN agreed to merge KPN’s international voice wholesale business into iBasis. iBasis will acquire KPN’s subsidiary Global Carrier Services and will receive USD 55 million in cash from KPN, while iBasis will issue approximately 40 million ordinary shares to KPN, representing a 51% interest in iBasis on a diluted basis. The transaction is subject to customary closing conditions, including regulatory approval and the approval of iBasis shareholders.

In September 2006 KPN reached agreement regarding the acquisition of Tiscali SpA’s Dutch operations for a consideration of EUR 255 million. KPN will take over the provision of services to 276,000 broadband and 126,000 dial-up Internet customers as well as take over Tiscali’s infrastructure in The Netherlands. The acquisition is subject to approval by the Dutch competition authority, NMa. The data presented in this Form 20-F do not reflect such acquisition.

For the financial impact of our recent major asset disposals, please refer to the section titled ‘Sale of activities and assets’, under ‘Other consolidated results of operations’.

Organizational structure

Fixed division

Our Fixed division consists of the segments Consumer, Business and Wholesale and Operations.

Mobile division

The Mobile division comprises our mobile activities in Germany, The Netherlands and Belgium.

Other activities

Other activities comprise the retail distribution channel (Primafoons and Business Centers) and KPN Sales. The results of our Corporate Center (support) are also included in Other Activities.

The overview below reflects our organizational structure as per December 31, 2006.

Our main joint ventures include Esprit Telecom (formerly known as Zeus Telecom), Tetraned, Mobirail, Pluk and Nostalgienet. Schiphol Telematics has been dismantled during 2006.

New organizational structure 2007

KPN has embarked on a comprehensive program to achieve a structurally lower cost base. KPN is in the process of changing its organizational structure, which has become effective as from January 1, 2007. With a new organization along the segments Consumer and Business, we have changed from a product-oriented company to a service-oriented company. In the new structure, the distinction between Fixed and Mobile ceases to exist in The Netherlands. As of January 1, 2007, KPN in The Netherlands consists of:
• Consumer
• Business
• Wholesale & Operations
• IT Netherlands
• Corporate Center

The new organizational structure provides us with the opportunity for an integrated customer approach. We can offer integrated services, both as a multimedia company in the Consumer market (fixed, mobile, TV and Internet) and as a managed ICT company in the Business market. KPN is one of the first in the market with such an integrated approach. We expect this to contribute to further profitable market share and revenue growth.

The integration of our Fixed and Mobile divisions might have major implications for the way we report our financial results, which we are currently finalizing.

For more information, please refer to the section titled ‘Legal structure’, under ‘Additional information for shareholders’, elsewhere in this Annual Report.

Fixed division

KPN offers voice and data services through its fixed network in The Netherlands and data services in Western Europe. We are the leader in the traditional Dutch market segments, such as switched voice communication and leased data lines, and are actively growing our market share in the new IP-based services.

Revenue growth is a key challenge for the industry, in particular for KPN as an incumbent operator in a very competitive market. In today’s dynamic market, various competitors are trying to create new positions for themselves in areas such as VoIP and multiplay (combinations of voice, Internet, VoIP and television). These new services are generally rendered at lower tariffs and the revenues from these new growth areas do not entirely compensate for the decline of revenue in the traditional services.

In order to counter these developments, our strategy in the Dutch fixed-line market is threefold:

1.	attacking the market with new communication, information and entertainment services (and migrating our network to complete IP in the next 4 years to enable us to deliver them), aimed at establishing leading positions that deliver attractive long-term financial returns;
2.	defending traditional services to maintain our leading market share in declining markets, including leveraging our scale advantage through wholesale offers; and
3.	exploiting our leadership of both traditional and new services markets in order to achieve a cost structure that is unrivaled by our competitors and which will represent a significant sustainable competitive advantage.

To fulfill our ambitions, the Fixed division is improving its position in the broadband market through intensive subscriber acquisition programs and by developing new, attractive, customer-focused broadband communication services (like ADSL, VoIP, IP-VPN, and Digital TV), as well as by offering improved bundled packages and services.

Throughout this report we will describe our business and financial analysis consistent with our organizational structure as per December 31, 2006, and all comparable figures are aligned with this structure.

Segment Consumer

Dutch Dynamics

More rapidly than other European countries the Dutch communication market is moving towards broadband-centric customers wanting to enjoy the advantages of ‘digital communications’ such as low cost calling, flat-rate pricing and digital entertainment. Dutch consumers are rapidly adopting new technologies. Impressive are the extremely high broadband penetration rate (increased from approximately 58% in December 2005 to approximately 69% in December 2006 ¹⁾) and the rapid adoption of VoIP (VoIP penetration rate increased from approximately 9% in December 2005 to approximately 28% in December 2006 ²⁾). In addition, the take-up of digital TV accelerated over the year; by December 2006 approximately 2.1 million Dutch homes have digital TV services.

An additional dimension to our home market is the cable penetration, an exception in Europe. Almost all Dutch homes are connected to cable, offered by regional operating cable operators. In 2006, three major operators, Multikabel, Essent Kabelcom and Casema, agreed to merge. The merged group will have a combined customer base of approximately 4.9 million at the end of 2006, representing more than half of the total cable footprint in the country. As a provider of broadband services this ‘new’ cable company already sold approximately 1 million broadband lines.

At the same time, several municipalities started Fiber-to-the-Home (FttH) projects, of which Amsterdam’s Citynet is one of the biggest. In addition private FttH initiatives colored the Dutch access market in 2006.

In 2006 we launched several trials of VDSL-2, as a cornerstone of our foreseen All-IP network. Our All-IP plans include reducing the number of telephone exchange buildings (Central Offices) from 1,350 to 200, rolling out fiber to 28,000 street cabinets and deploying VDSL2 or fiber in the last mile. We believe that All-IP will lead to better and more services, lower costs, and continuing investment in innovative technologies by us and by competitors.

Meanwhile international Internet players such as Google and Microsoft continue to offer similar services as we are offering in The Netherlands. We believe that our home market is one of the most competitive markets in Europe.

In this dynamic market setting we are proud to state that we have strengthened our position as the leading provider of voice and broadband services and that we continue to be a fast growing provider of digital TV. Our market share in traditional voice increased to more than 65% in 2006. Our share in VoIP gross additions steadily increased during the course of 2006, exceeding 40% in the second half of 2006. As a result, we proved to be the fastest growing VoIP player in 2006. In the broadband market we grew more than all cable companies combined, as reflected in our fast growing retail market share, which increased from 36% in 2005 to approximately 41% in 2006. And last but not least, with our KPN TV offerings we created a solid platform in the cable-dominated TV market. By doing so, we are prepared in time for the increasingly integrated telephony, Internet and television markets.

Competition heats up

The most profound change taking place in the consumer segment today is the recognition that the Internet (and other technological developments that rely on IP) is providing highly functional, new and efficient ways to transmit all forms of

telecommunications, from voice to video. The shift to IP removes barriers to entry and allows us and competitors to offer voice, television and Internet on a single IP platform. This promotes multiplay offerings from just one broadband connection, forcing the customer to choose between either a (KPN-based) DSL solution or a package from a cable operator.

With the availability of broadband in The Netherlands more widespread than anywhere else in Europe, it is attractive for both us and competitors to market the advantages of VoIP over traditional voice telephony and digital TV over analog television. An increasing number of competitors focus these days especially on gaining market share apart from focussing on revenue and profit-diminishing risks. As a consequence, during 2006 the migration to VoIP and digital TV accelerated.

In this highly competitive climate our fixed line operations experienced pressure on various levels. In the consumer segment we successfully relied on our marketing strength to gain (broadband) subscribers and (broadband) market share. We are also continuing implementing our plan to acquire additional ISPs. The most notable transaction has been the announced acquisition of Tiscali’s Dutch subsidiary. This acquisition is still subject to regulatory approval by the Dutch competition authority (NMa).

However, we continue to face significant challenges from cable VoIP and product bundles. Telephone line loss in our segment increased considerably. We intensified our marketing efforts in selling our VoIP solutions (InternetPlusBellen and Slim), resulting in a fast rising share in VoIP adds. We are satisfied with this result, taking into account that in 2006 all relevant cable operators were offering VoIP solutions.

Digital TV use accelerated in 2006, partly due to our new KPN TV offerings. We acquired Nozema, through which we were able to extend our DVB-T network to almost all Dutch regions. National in-house coverage will be completed in 2007. With ‘Digitenne’ we successfully made inroads in the Dutch TV market.

implementing our strategy

Given the market environment, in 2006 we reinforced our ‘attack-defend-exploit’ strategy. We attacked on broadband by acquiring ISP market share, we were aggressive on VoIP to counter line loss and we delivered consistent growth in digital TV. Our multi-branding and multi-channel strategy helped us to support our business. We successfully exploited the revenue potential of our customers by using database driven quantitative marketing techniques (known as Customer Lifecycle Management). As a result, we are now able to market a diverse portfolio providing attractive bundles and value added services under our multiple brands and reducing our network related cost-base.

Attacking the market for new communications, information and entertainment services aimed at establishing leading positions that deliver attractive long-term financial returns (attacking the market for broadband, TV and new IP-based services).

In 2006, we took full advantage of the VoIP opportunity. Our InternetPlusBellen proposition, one bundle for VoIP and broadband Internet with attractive flat fee calling add-ons, conquered the market. Our multi-brand and multi-distribution approach contributed to this market success. All our prominent brands (besides KPN also Planet, Het Net and XS4ALL) were used for different market segments. Under the brand Slim we marketed VoIP as a no-frills, voice-only product especially aimed at cable TV customers with a high churn risk.

With the acquisition of 99 thousand broadband customers from two ISPs (Speedlinq and Demon), we remain committed to continuing selective acquisitions to enhance our strategic position. As a result of these acquisitions and autonomous growth, our retail market share increased from 36.1% as of December 31, 2005 to approximately 40.9% of December 31, 2006.

Using our brands Planet and Het Net, we intensified during 2006 our marketing activities for naked ADSL. We mainly used this product line as a powerful customer retention tool. We have further extended the range of options on offer to Internet customers. We moved away from offering just bandwidth by adding services that bring us closer to our customers. Examples are the extending functionality of our WiFi service HotSpots, our music downloading service MusicStream and our in-home maintenance service ‘ServiceThuis’.

Another important element in our strategy is to move into consumer applications. A first milestone we reached in 2006 is our participation in ‘Klasse TV’. In this TV portal for primary schools a variety of media content is delivered which can be easily integrated in regular school material. In addition to revenues derived from schools themselves, we expect revenues from spin-off effects to teachers and parents. We also foresee additional revenue opportunities when the reach of this e-learning initiative extends to other education institutions, to other applications such as e-gaming (‘learning by gaming’) and when advertising models will be introduced.

The introduction of KPN TV services in October 2004 (from October 2006 branded as ‘Digitenne by KPN’) forms part of our multiplay strategy to create a level playing field against cable operators and to offer our customers a combination of TV, Internet and voice services. ‘Digitenne by KPN’ is a value for money proposition, offering 23 TV channels and 17 radio channels for only EUR 7.95 per month in 2006. Selling points are a plug & play technology, a personal recorder with hard disk offering TV entertainment whenever you want, and outdoor and car watching possibilities. As of December 31, 2006, we had approximately 265,000 KPN TV subscribers. In only two years we have reached a market share on digital TV of almost 12% (in 2005: 3%). Strategically important is that ‘Digitenne by KPN’ brings additional value to KPN by reducing customer churn in our Voice and Internet business lines.

In September 2006 we announced a distribution agreement with Tele2 to expand offerings from both parties for digital TV. The agreement allows us to expand our offering to Digitenne and Mine customers with Tele2’s Dutch premier league football channels. We consider this as an excellent supplement to the PSV, Ajax and Feyenoord football club channels we introduced earlier in 2006.

In addition to our ‘Digitenne by KPN’ service, we intensified our efforts to complete our interactive TV offer ‘Mine’, our second brand in the TV market. Providing choice in TV channels, video-on-demand and unique content we want to reach a competitive positioning for this new IPTV product. A limited customer-friendly trial started in the second half of 2006. A full commercial launch is now planned for the first quarter of 2007.

MediaMall is another example of how we are developing new business areas. MediaMall provides a revolutionary, interactive television experience by offering the customer the possibility to start his own television channel. Anyone can take part, irrespective of whether it is an individual, a club or a content provider. All can actively contribute and create programs themselves, reporting on sports, hobbies or other (local) topics resulting in personalized television. Branded as ‘MediaMall’, pilots for this personal TV service are now underway in Sittard, Geleen and Roermond, towns in the southern part of The Netherlands.

Defending traditional services to maintain our leading share in declining markets (defending our leading market share in the traditional voice market).

In 2006, we noticed an accelerating shift in communications consumption patterns away from conventional telephony towards VoIP. This evolution was driven by a number of factors, most importantly the greater overall consumer awareness of VoIP.

In 2005 we launched an innovative mobile-like handset program, called ‘Telefoon met Belminuten’. With modern designs and equipped with functions and navigation menus familiar from mobile handsets, this new line of DECT handsets converts the old fixed-line telephone into a terminal with a color display, icon-based menus, a wide range of ring tones and text messaging. We combine these phones with minute bundles for a monthly fee with a three year contract. Due to this business model churn reduced significantly in 2006, while fixed-to-mobile calling proved to be a main driver of ARPU increase. At December 31, 2006, our base of bundled DECT handsets grew to almost 250,000.

During 2006 we introduced new flat fee bundles for fixed-to-mobile and international calling, expanding our regular BelPlus packages that capture the opportunities of the new regulatory framework. At December 31, 2006, approximately 29% of our telephony customers subscribed to one of these packages.

An accelerating decline in traffic minutes and PSTN/ISDN connection lines marked our 2006 results. This negative trend reflects in particular technological and behavioural changes that drive customers away from traditional telephony services towards IP-based communication solutions. In one year we lost more than 1 million PSTN and ISDN connections. On the other hand, the turnaround in market share development, becoming visible in 2005, continued. KPN’s market share in traditional minutes was in 2006 approximately 3.5% higher than in 2005. This trend towards higher voice market shares reflects our policy that the market for fixed telephony remains fundamental for us in terms of customers, revenues and profits. In 2006, we made a number of enhancements in our fixed telephony portfolio such as:

• ‘BelVrij’, ‘BelNaarMobiel’ and ‘BelBuitenland’ minutes packages; and
• continuously adding new lines of DECT phones to our innovative handset portfolio.

Products, Tariffs, Competition and Distribution

The Consumer segment primarily generates revenues from our Voice business line (including VoIP), our Internet business line and from our TV/Media business. Our products and services can be grouped in products and services relating to access, traffic, equipment, supplementary services and digital TV.

We are continuously expanding the range and functionality of our supplementary services and equipment portfolio. We are now offering cordless handsets with voice bundles, as well as WiFi (HotSpot) services and Shoobidoo services (video uploading service). MusicStream (our music downloading service), ServiceThuis (subscription for at home maintenance of Internet equipment) and PC Veilig (Internet security package) are other examples of KPN initiatives to enhance the digital services for our customers.

Voice and VoIP

KPN offers fixed-line telephony access services through analog (PSTN) and digital lines (ISDN). Each PSTN line provides a single telecommunication channel, whereas ISDN access lines offers either one or two channels. Using ISDN, a single line can be used for a number of purposes at the same time, including voice, data, Internet and fax.

The revenues from these access services consist principally of subscription fees charged bi-monthly to customers and one-time connection fees. Total net sales from connections depend on the number of new connections and customer lines, the mix of the customer base (fees for digital lines are higher than for analog lines) and fees charged for our services.

We are the largest provider in the traditional voice access market, but experience continued competitive pressure. In the consumer market there is competition from mobile-only solutions and

increasingly from VoIP solutions. As of December 31, 2006, approximately 18% of Dutch households have only mobile phones (compared to 16% as of December 31, 2005). Broadband penetration (the number of households with a broadband connection) increased significantly, from approximately 58% in 2005 to approximately 69% in 2006. These high broadband penetration rates make it attractive for cable operators and alternative DSL providers to introduce a low-priced VoIP service to compete with us. Most of these VoIP lines have replaced a PSTN or ISDN connection from KPN.

Under the name ‘InternetPlusBellen’ we introduced our own VoIP product in 2005. After an initial limited rollout to reach the necessary quality standard, we began a full commercial rollout in 2006 of VoIP, using our multibrands. Very successful was the launch of ‘Surfen en Bellen’, our VoIP offer from ‘Het Net’. We also launched a new brand, Slim, by which we especially focus on churn-sensitive cable TV customers.

At the end of 2006, more than approximately 1.4 million households were using VoIP products, and many of them had disconnected their traditional phone line. With a market share of approximately 49%, the cable operators provide most of these VoIP lines. In the second half of 2006 our market share in net VoIP adds increased to more than 40%, resulting in a fast rising market share from approximately 3% in December 2005 to approximately 36% in December 2006. This market share corresponds to approximately 0.5 million KPN VoIP customers which makes us the largest VoIP operator in The Netherlands.

Overall, the number of PSTN and ISDN lines declined sharply during 2006. As of December 31, 2006, we supplied approximately 3.9 million PSTN and ISDN connections to residential customers (compared to 5.0 million as of December 31, 2005).

As stated above, we believe that our home market is one of the most competitive telecommunication markets in Europe. Carrier Pre Select (CPS) operators always had a significant presence in The Netherlands. Due to the advance of broadband and VoIP, infrastructure ownership has become more important for competitors to maintain strong and profitable customer relationships. Combined with our more aggressive marketing approach, this has lead to a gradual decline in importance of CPS. This was reflected in an increase of our traditional voice market share from approximately 65% as per December 31, 2005 to a market share between 65% - 70% per December 31, 2006.

Cable operators - positioning themselves as an alternative to KPN - increased their efforts to cash in on their broadband-enabled networks in 2006. During the year they focused their activities on rolling out VoIP and on intensifying their marketing efforts on digital TV as a cornerstone of their strategy to increase market share.

In the voice market, we offer services in different segments:

1.	local telephony traffic: call minutes from calls within a call area or to an adjacent area;
2.	national long-distance traffic: call minutes from calls between customers in different local call areas in The Netherlands;
3.	fixed-to-mobile traffic: call minutes from one of our fixed lines to a mobile telephone; and
4.	outbound international traffic: call minutes from international calls by direct dialing.

In order to maintain our market share, we increasingly focus on providing more value to our voice customers through an extended range of voice bundle discount packages. In addition, we combined the benefits of our portfolio of flat fee packages with the advanced capabilities of the new DECT handsets.

Since its introduction in the second quarter of 2003, approximately 1.1 million consumers have opted for one of our minute packages, representing a penetration rate of approximately 29% of our total residential telephony customer base. Since their introduction in 2005 approximately 250,000 bundled handset packages (‘Telefoon met Belminuten’) have been sold.

Through these activities in the traditional voice market, we have been able to increase our market share in traditional voice calls for the second successive year. At the end of 2006, our market shares were: between 70% - 75% (for local calls), approximately 65% (national), approximately 70% (fixed-to-mobile) and between 40% - 45% (international - excluding international traffic from telephone cards).

Our tariffs for fixed-line voice telephony services are subject to regulatory approval, except for international voice services. Under the regulatory framework applicable to the Dutch telecommunication sector, these tariffs will continue to be subject to regulation for as long as the Dutch regulator designates us as having significant market power. During 2006, our traffic tariffs remained unchanged.

The level of monthly subscription fees is higher for ISDN access lines than for standard PSTN access lines. During 2006, our subscription fees for PSTN and ISDN lines remained unchanged.

Internet

In The Netherlands, approximately 80% of the households have Internet access, while penetration of broadband is one of the highest in the world. As a consequence of this high broadband penetration, dial-up Internet services rapidly decreased in significance. Many providers operate in this mature broadband market, including cable operators, alternative DSL operators and other service providers.

As part of our strategy to increase our broadband market share, the aggressive rollout of InternetPlusBellen, our bundle for VoIP and ADSL, was very important. A large part of the InternetPlusBellen contracts are for either new KPN customers or KPN customers that did not yet have an ADSL connection.

Equally important as part of this strategy are executing smart acquisitions. In 2006 we acquired Speedlinq and Demon.

The total number of KPN ADSL connections increased by 23%, from 1.7 million at the end of 2005 to more than 2.1 million ADSL lines at the end of 2006, representing 43% of the total broadband market in The Netherlands (including broadband offered by cable operators).

We offer customers broadband access through our KPN Internet organization. ‘Direct ADSL’ (which offers a direct ADSL connection without using an ISP), Planet, Het Net and XS4ALL are the brands under which we sell our range of broadband products. Our ISPs plus Direct ADSL increased their number of broadband subscribers from 1,485,000 as of December 31, 2005 to 2,044,000 as of December 31, 2006.

Subscribers using ADSL by KPN receive additional savings on premium services (such as “Service at home” and PC-safety) and have access to specific broadband services. Subscriptions at (introductory) discounts are offered in order to gain market share. During 2006, we increased the ADSL transmission rate, while keeping prices stable in order to attract new customers. Competition in the ISP market remains strong. Our main competitors in the ISP market are cable operators (such as @home and Chello) and DSL operators (such as Tele2 and Orange).

We are building on our existing customer base and on the strength of our brand names in The Netherlands. We charge our ADSL Internet customers monthly subscription fees that are comprised of two parts: the ISP charges the customer the fee for Internet use, while the use of the infrastructure is charged directly to the customer. Additional services are charged per service through the ISP. All customers of our ISPs pay a monthly subscription fee.

Apart from broadband ADSL services, we offer narrowband Internet dial-up services: Internet dial-up both to customers of our own ISPs as well as to customers of third party ISPs (via so-called 0676 numbers). As a result of the migration of dial-up customers to broadband offerings, our Internet dial-up access minutes are rapidly decreasing.

We offer Internet dial-up minutes to our own and other ISPs. Due to the increasing penetration of broadband and the migration of dial-up customers to broadband, our Internet dial-up customers (338,000 as of December 31, 2006 compared to 564,000 as of December 31, 2005) and minutes (1.1 billion minutes as of December 31, 2006 compared to 2.6 billion minutes as of December 31, 2005) continued to decrease rapidly during 2006.

Given technological developments and competition, which result in pressure on ADSL subscription fees, we are offering higher transmission speeds while maintaining our ADSL tariffs. The highly competitive environment, however, is forcing us to discount our modem prices and to offer (partly) free installation.

Tariffs for dial-up subscriptions and connection fees remained unchanged in 2006.

Digital TV

We have offered wireless digital broadcast TV and radio (based on DVB-T) since October 18, 2004, as part of our multiplay strategy to become an all-round provider of voice, broadband Internet and TV services. We were one of the first telecom operators to venture into the TV market. At the end of 2006, ‘Digitenne by KPN’ could be received in the main metropolitan areas in which approximately 3 million (or approximately 45%) of the Dutch households reside. National in-house coverage will be completed in 2007.

The offering is comparable to standard cable, but at lower subscription prices per month (multiplay price) and lower set-top box prices. Our additional football package is offered for an additional price per month.

During 2006, we experienced an increasing market growth for digital TV, due to our own efforts and as a result of marketing actions from cable operators.

As of December 31, 2006, we had approximately 265,000 KPN TV subscribers, of which the majority chose packages in combination with Voice and ADSL.

Our Brands and Marketing

For the consumer market the main objectives are the alignment of products, market concepts and brands to a number of homogeneous market groups. For each of these groups we have put tailored multiplay packages aimed at increasing overall customer satisfaction. As a consequence, we put less emphasis on nationwide promotion campaigns on TV and concentrate more on regional and personal marketing.

Our products and services are sold under various brands. We aim to reach specific customer groups with segmented brands. Our Enhanced Customer Lifecycle Management tools support this approach.

We have a number of so-called value brands. ‘Het Net’ is positioned as a ‘no frills, no nonsense Internet’ brand. ‘Digitenne by KPN’ is our brand for Digital TV at low costs. Both ‘Het Net’ and ‘Digitenne by KPN’ focus on price sensitive customers. And in 2006 we introduced ‘Slim’, our no-frills voice-only brand especially aimed on cable TV and mobile only customers.

We also support a number of so-called premium brands. The KPN brand is our primary brand and intends to convey reliability and high quality. ‘XS4ALL’ stands for top quality and innovative Internet. Our brand ‘Planet’ refers to Internet, content and market leadership. Our new ‘Mine’ brand is used as a symbol for premium interactive television.

We believe consumers broadly consider our brands to represent reliable and competitively priced services. ‘XS4ALL’ has repeatedly been named in independent tests as the preferred

brand for its reliability and high-service quality. Our other brands are scoring in the top range of these polls as well.

As a multi-channel approach is important, we continuously focus on widespread distribution and an excellent level of service. Different store outlet chains support our marketing philosophy with ‘Primafoon’ as our main stream outlet and ‘Hi’ retail stores aimed at the youth market. During 2006 we have started several trials with new distribution concepts, extending our experience in the multimedia business.

With this policy, we anticipated the more individual approach the market is increasingly requiring from us. This has contributed to the developments reported above: attack with VoIP, continuous increase of market share in the traditional voice market, continued strong growth of ADSL sales and the successful extension of Digitenne by KPN.

SEGMENT BUSINESS

Implementing our STRATEGY

Competition in the Dutch business market remains fierce. Major demographic trends force businesses to innovate processes, services and business models. Fast, secure access to information is becoming increasingly important. ICT is vital in this process. New communication services are IP-based and access to data is possible through various kinds of hardware devices. This enables companies to develop more efficient working practices. Employees can access information through various devices, at any place and any time. Communication with and between machines provides additional information sources and reduces human intervention.

While using ICT becomes easier, the management of it is getting increasingly complex. This results in steadily growing demand for end-to-end managed ICT services, as well as an ongoing demand for unmanaged services.

In the traditional telecom market, our main competitors are national and international telecommunication providers as well as cable companies. Price competition continues, since basic telecom services have become commodity services.

Global software and Internet players (e.g. Microsoft, Google, eBay) integrate (free) communication services into their offer, which leads to additional competitive pressure in the small and medium enterprises market.

In the large enterprise market, we face competition from international companies offering managed ICT services (e.g. system integrators), as well as from niche players in specific (vertical) market segments. The integration of IT and telecommunications in many cases motivates (large) companies to buy IT and telecommunications services from a single provider. It is therefore important to be able to provide customers with the services they require, both managed and unmanaged, in order to remain as their (primary) business partner.

Attacking the market for new communications, information and entertainment services aimed at establishing leading positions that deliver attractive long-term financial returns

KPN’s strategy in the business market is aimed at grasping the opportunity to shift from decreasing traditional communication services towards services in the larger and growing market for end-to-end ICT Services. We are the preferred supplier for IP-VPN, Ethernet VPN (E-VPN), IP-PBX, DSL Access services and POTS (traditional telephony services) in The Netherlands. This is an excellent basis for our ambition to establish a leading position in the markets for communication, information and business media services, delivering attractive long-term financial returns.

In 2006, KPN introduced a range of online application services for small and medium enterprises. Applications online enable companies to access software and content via Internet. The applications are hosted in KPN cyber centres, safe and secure, relieving companies from the installation and management of applications on servers on their premises. Employees can log on to the applications from any location through for example a PDA, a private PC or a laptop, enabling them to work anytime, anyplace. KPN’s strategy is to continuously expand the application portfolio, which currently consists of Exact Online, Exchange Online, Back-up online, CRM Online and Werkplek Online.

In July 2006, KPN acquired NewTel Essence, a Dutch company specialised in the provision of IT solutions, including contact centre solutions and customer relationship management. NewTel Essence has 110 employees and generated a turnover of EUR 25 million in 2005. The acquisition is in line with KPN’s stated aim of strengthening its position in fast-growing new communication markets. KPN Contact Centre Solutions enables companies to improve their customer facing processes, resulting in higher customer satisfaction and loyalty, by integrating mail, web, phone and messaging communication streams.

In October 2006, KPN acquired 100% of the shares of Gemnet. Gemnet offers a range of ICT services to municipalities, waterboards and provinces in The Netherlands. The vast majority of Dutch municipalities have a Gemnet connection to access crucial government registers, most importantly the GBA (Municipal Register for their citizens or ‘Gemeentelijke Basis Administratie’). This acquisition is a stepping stone for KPN to strengthen our position as a provider of managed ICT services in the public sector.

In 2006, KPN acquired three innovative and successful organizations in the field of Narrowcasting: NN Solutions, QBIX and eYe-display offering end-to-end narrowcasting services, including content exploitation.

It is increasingly difficult to reach consumers through traditional (mass) media. According to research carried out by the Dutch Association of Advertisers, retail outlets will play an increasingly important role in interactions between manufacturers and consumers. On average 75% of decisions to buy are made at the actual place of purchase. Narrowcasting – marketing to targeted groups using television screens placed in retail outlets – offers companies the ideal solution. Companies can inform, influence, and entertain specific targeted groups while they are making their decision whether or not to buy. Companies and organizations can use this innovative form of communication in their internal and external communications and it also works to strengthen the brand name and the feeling for the product.

In 2006 KPN formed a strategic partnership (joint venture) with Heineken in ON B.V. ON is a narrowcasting platform targeting the Dutch entertainment audience. ON provides the leisure industry with LCD-screens including the transportation of high-quality video (moodfilms, clips, live concerts etc.) over a broadband connection. This partnership is in line with KPN’s ambition to be the market leader for narrowcasting total solutions and to become a multimedia company.

After a successful joint pilot project during the first half of 2006 testing internet and narrowcasting in moving trains, KPN and NS (Dutch Railways) agreed upon a partnership for the roll-out and exploitation of connectivity to moving trains, WiFi HotSpots and Narrowcasting in trains. The narrowcasting services are expected to grow to a gross reach of 240 million travellers per year.

KPN signed a contract to provide narrowcasting and RFID services to Dutch Water Dreams, the new Olympic based wild watercourse in The Netherlands (Zoetermeer). Visitors can watch the adventures of other visitors live on narrowcasting screens, along with commercial messages and other content. The experience of each participant is audiovisually recorded, using RFID to keep track of individual participants.

In March 2006, KPN introduced ‘ZorgConnect’, a nationwide highly secure fiber optic network for the health care sector, providing hospitals with access to and sharing of relevant information to improve their efficiency and effectiveness.

KPN acquired E-Zorg, a company which offers sector specific applications, with high value for general practitioners, pharmacists and hospitals, based on a secure, reliable communications platform between organizations in the health care sector. We have connected this E-Zorg network with KPN’s ZorgConnect network, thereby creating a national communications platform for the health care sector.

KPN has acquired from Siemens Nederland part of their activities in the field of Large Enterprise Sales and Service Corporate Networks (Enterprise Networks). Enterprise Networks supplies, implements and maintains corporate communication systems for the large enterprise (‘LE’) market. The strong position Enterprise Networks holds in the LE-market fits well with KPN’s ambition to offer integrated solutions for (IP) communication. The focus of Enterprise Networks on the healthcare sector is in line with earlier initiatives in health care, such as E-Zorg and ‘Zorg op Afstand’.

The combination of the acquisitions of NewTel Essence, CSS Telecom and Enterprise Networks, further strengthens KPN’s position in the field of business communication solutions.

Epacity is KPN’s brand name for IP-VPN services. Epacity is a value added business package for multi-site companies in The Netherlands. It integrates IP-VPN functionality (such as any-to-any IP-based connectivity, quality of service, security), several access options (such as ADSL, SDSL, Leased Lines, Ethernet) and managed customer premises routers into a single business offer. Epacity IP-VPN is still growing above expectations, with most of the growth coming from existing customers. The number of customers that have KPN manage their routers as a value added service to Epacity IP-VPN also continues to grow. As a result KPN is able to expand its existing customer relationships leading to higher revenues per customer. We believe that we are the preferred supplier for IP-VPN services in The Netherlands, providing us with an excellent basis to sell services and applications that are based on IP-VPN to our customers.

The demand for dedicated high bandwidth solutions is moving from the higher SDH bandwidth ranges (34, 155Mb) towards the Gigabit range and beyond. These private line solutions are especially used in LAN and Storage Area Networks (SAN’s) that require high resilience, security, guarantee relay and dedication. Sarbanes-Oxley, EU storage requirements in regard to telephony and Internet traffic and local data storage for municipalities and other legislative initiatives are helping to increase the demand for more bandwidth and highly secured storage. With these (backbone) services, in combination with KPN’s highly secured Cyber Centers and network services like Epacity and E-VPN, KPN can offer customers integrated network solutions.

Private Lines are offered with a wide range of interfaces for all major storage systems (such as Gigabit Ethernet, Escon (IBM) and Fiberchannel) and providers.

A national product portfolio is not sufficient to be successful in the top end of the business market. Corporate customers increasingly require international solutions for their international and national business. To meet those shifting requirements, KPN has developed an international proposition based on a smart combination of its own European data network and various partner networks. With this low cost infrastructure KPN is able to deliver advanced seamless data and voice services to global customers under one contract, one helpdesk and one invoice.

Defending traditional services to maintain our leading share in declining markets.

The business market aims to defend market shares in its hyper-competitive traditional markets. Our proven traditional services are a vital part of the solution for current communication needs of our customers. They are also the stepping stone for migration to IP. We defend our market share by improving customer focus throughout the organization and cross and upselling new and existing services to our existing customers. The combination of telephony, internet, mobile and content services provides excellent opportunities to exploit our reputation as a reliable and innovative partner for telecommunication services.

Discussions with our customers are leading to the creation of tailor-made packages and an agreement upon optimal migration timing. This approach has reduced churn for traditional services.

KPN will continue to introduce new services that will both increase customer satisfaction and exploit traditional voice. Packages will be designed that attract specific target groups. Packages that will not meet the planned penetration will be phased-out immediately to sustain operational excellence.

This portfolio management process, in addition to other critical business processes, will be further improved and accelerated. KPN plans for a re-branding and remodeling of its traditional voice portfolio to further align it with customer needs. Additional online services such as rate plan advisory service and migration will be created to fulfill customer satisfaction. Since January 1, 2006, OPTA regulation has been more favorable to KPN. Free competition on international telephony has been established and KPN has been given more room to maneuver on national telephony. New packages and discount offerings have been developed (e.g. ‘Zakelijk Belvrij’, Worldline XL remodeled, Corporate Voice National, Corporate Voice International, ‘Zakelijk InternetPlusBellen’), giving KPN an opportunity to stabilize market share decline or even increase market share.

We further reduce churn by building customer-focused program teams for our largest accounts. This results in improved responsiveness to customer demands, for both new and existing customers. Where relevant we advise and help our customers to migrate from traditional to new technologies to better support their business processes and reduce the total cost of ownership.

A strategic partnership with MKB-Nederland (an organization representing the interests of Small and Medium Enterprises) should further stimulate ICT within the SME market segment. Through several activities, including an Internet site (www.mkbenict.nl) and specific events, companies are informed about the way ICT could assist them in seizing commercial opportunities.

We continue to expect a further decrease in the number of leased lines. Since leased lines have a high penetration in the business market, migration to IP-VPN type connectivity will negatively affect the number of leased lines. Competition on the 2 MB market for leased lines and alternatives remains severe.

Products, Tariffs, Competition and Distribution

The Business segment primarily generates revenues from our Voice business line, our Data business line, (international) Managed Services, our Equipment (solutions) business line and Customer Interaction Solutions.

We offer telecommunication solutions for the large, small and medium markets through a variety of sales and distribution channels. The small and medium market is serviced by KPN Personal Sales (approximately 1,200 sales employees), KPN Sales stores (KPN Business Centers), Value Added Resellers, call centers (in- and outbound) and online sales via KPN.com.

Large corporate customers are serviced by dedicated (strategic) account management, supported by consultants offering integrated solutions. We have improved our distribution capabilities for this market by differentiating our sales approach and implementing multi‑channel initiatives in alignment with the customer profile and value.

Voice Services

KPN offers fixed-line telephony access services through analog (PSTN) and digital lines (ISDN) and new fixed-line telephony through Voice over IP (VoIP).

The revenues from traditional access services consist principally of subscription fees charged bi-monthly to our customers. Total net sales from connections, for which we charge a one-off connection fee and subscriptions, depend on the number of new connections and customer lines, the mix of the customer base (fees for digital lines are higher than for analog lines) and fees charged for our services.

In 2006, KPN has started to offer various VoIP services in the business market, including

•	‘Zakelijk InternetPlusBellen’ (Voice over IP-solution for the small and medium enterprise market); and
•	VoIP Connect (Voice over IP-solution for large enterprises).

KPN offers national and international calls. The revenues from these traditional traffic services consist of minute-based fees charged bi-monthly. The minute-based fees range from our standard BelBasis offering to discount packages such as: ‘BelZakelijk’ (prepaid call allowances with reduced tariffs), ‘Zakelijk Belvrij’ (flat fee package on national telephony), Wordline XL (a volume based discount arrangement) and Corporate Voice National (a volume-based discount arrangement for our corporate clients). As from January 1, 2006 international calls are no longer subject to OPTA regulation. In the beginning of 2006 we introduced special discount offerings for our medium sized business clients (Business Voice International) and corporate clients (Corporate Voice International).

Our tariffs for fixed-line national voice telephony services are subject to regulatory approval. Under the regulatory framework that applies to the Dutch telecommunication sector, these tariffs will continue to be subject to regulation for as long as the Dutch regulator designates us as having significant market power. The level of monthly subscription fees for ISDN access lines is higher than for standard PSTN access lines.

Our VoIP tariffs are also subject to OPTA regulation. The tariffs components of ‘Zakelijk InternetPlusBellen’ consists of a DSL subscription and voice subscription fee. International and fixed-to-mobile calls are charged per minute and are equal to the traffic fees of the consumer proposition ‘InternetPlusBellen’. Our VoIP Connect offering is based on a license fee per user combined with an IP solution of the customer. Traffic fees are charged per minute.

We face aggressive competition in a declining traditional voice market due to the high pace substitution from fixed to mobile and data (VoIP) together with a high penetration of broadband connections.

In the corporate market traditional voice telephony is increasingly being replaced by broadband and IP-VPN solutions. This trend is also increasing now that IP-VPNs are being equipped to provide intercompany voice traffic (for free).

In the small business market we experience heavy access competition from cable operators, which are now offering VoIP solutions bundled with broadband Internet. Increasing broadband penetration in the business market enables competitors to offer more business services at lower costs, e.g. electronic payments, and poses a high risk for our traditional voice access services.

In the traditional voice access market we are the largest provider, but experience continuing competitive pressure from direct access and Carrier Select and Carrier Pre Select competition. Our main competitors are Tele2/Versatel, BT Ignite, Verizon, TTG, Colt, Essent and Priority.

Data and Internet access services

We offer a range of data communication services for business customers. We are the leading provider of these services in the Dutch business market both in terms of revenues and in terms of number of connections. In addition, we offer data services in Europe through our KPN EuroRings network and worldwide with our partners. The telecommunication solutions based on data/IP services we offer include:

KPN offers an extensive portfolio of data services ranging from Traditional Transmission Services such as Leased lines and broadband services to Network Services such as IP-VPN, Ethernet VPN services and Internet Access Services. KPN is the leading provider of Internet Access Services in The Netherlands. Both xDSL (e.g. ADSL, SDSL) access technology and optical fiber access technology are supported. These services are targeted at business Customers and at ISPs.

Through our KPN EuroRings network we provide international connectivity services in Europe. The international services also vary from Transmission Services such as international leased lines to Network Services such as IP-VPN and E-VPN-Services. Furthermore, for worldwide solutions we work with partners like SingTel, Telefónica and Sprint. This is complemented with substantial participations in various sea cables.

KPN provides Managed Network Services, Managed IT Services and Mobile Data Solutions to customers who are outsourcing parts of their ICT-infrastructure and management to KPN. KPN aims to provide one seamless, end-to-end solution tailored to each customer’s specific ICT requirements.

The pricing of KPN’s data services, Internet access services and integrated & managed solutions is largely based on recurring monthly subscription fees. The pricing depends on the bandwidth, the quality level and the functionality provided. The pricing of leased lines also depends on the geographical distance. Some services have an additional volume-based pricing component. Customers are typically billed on a monthly basis. Data services are partly regulated. The service fees of regulated services are therefore based on prescribed cost-based calculations as stipulated by the Dutch telecommunication regulator, OPTA.

The price levels of data and Internet access services are declining. This is the result of a combination of intense competition, overcapacity of bandwidth and the migration from traditional services with higher prices to next generation services with lower prices.

We have many competitors in the data communications services market, such as BT Global Services, MCI, IBM, Colt, Essent, Enertel, Versatel, Global Switch, TNF Network Factory and BBNed. Our competitors invest in the construction of backbone infrastructures in The Netherlands and in local networks in large Dutch cities, comparable to our CityRings network. Local government fiber initiatives also increased the competitive pressure within The Netherlands and introduced new competitors.

Equipment, voice and data solutions (EnterCom)

KPN designs, delivers, integrates and services voice and data communication solutions (such as PBX installations and Local Area Networks) and offers communication solutions for special events, call centers and dealing and trading. Anticipating Fixed and Mobile convergence, we offer combined solutions to meet

customer demand in new areas like video surveillance, security, Dynamic Instore Marketing (narrow casting) and healthcare. We use high-quality partners to enable us to acquire specialist knowledge in new areas. Increasingly customers require managed solutions.

KPN provides outsourcing solutions for all or part of the telecom operations and infrastructure of companies, increasingly focusing on the integration of fixed, mobile and data communication. We offer the know-how of our consultants, project and implementation managers and specialists in management and technology.

In 2006, KPN acquired two companies, CSS Telecom and Siemens Enterprise Networks, in order to further strengthen our position in the field of enterprise communications in general and healthcare solutions in particular.

CSS Telecom provides advice on, supplies, implements and maintains business integrated communication solutions for spoken, visual and data communication. CSS Telecom targets small and medium businesses and has a special focus on the health care sector. The company has 191 employees. Their 2006 revenues amounted to EUR 33 million.

Siemens Enterprise Networks supplies, implements and maintains corporate communication systems for the Large Enterprise market. Annual turnover is approximately EUR 10 million. Enterprise Networks has 44 employees.

We believe we are able to offer competitive prices for our products, service contracts and other services due to our excellent supplier relations, extensive knowledge of communication solutions and the use of technology (such as service on line) for servicing the products.
By offering ongoing support and other services, revenues from equipment and voice and data solutions move increasingly from one-off revenues to recurring revenues (for example Managed Solutions ‘tariff per minute’ in a managed call center environment and Managed ICT solutions).

Our competitors are numerous and vary in size, depending on the product/service we sell in the ICT market space. Our main competitors are Imtech, Getronics and Dimension Data.
We maintain our leading position with high success rates and high customer satisfaction. Clients have chosen KPN increasingly for our end-to-end full service provisioning and Fixed and Mobile convergence as well as our innovative solutions.

Customer Interaction Services (CIS)

The Business to Business (‘B2B’) portfolio of SNT combined with KPN’s already existing ‘interaction portfolio’ created the new Customer Interaction Services unit which is fully equipped for a new growing market of ‘interaction services’ between businesses and their customers. Through this business unit, KPN provides a wide range of corporate-voice-inbound and interaction services varying from conferencing services and 0800/0900 service numbers to new services like CRM software applications.

Under the new Telecommunications Act the 0800/0900 service numbers market prices have been deregulated in 2006. This development has improved our competitive position.

The competition for interaction services varies from operators (0800/0900) to software companies (CRM software) such as BT, Priority, Versatel and Colt. We believe the ability to offer a combination of traditional routing facilities and CRM applications gives KPN a competitive advantage. To exploit this competitive advantage, KPN has established a number of selected partnerships with companies like RightNow Technologies and Epiphany.

Our Brands and Marketing

For business customers in The Netherlands, KPN is the primary brand for both fixed telephony, Internet/broadband and data network services. KPN also owns Infonet Netherlands, which offers data networking services, as an exclusive distributor of Infonet Inc. in the Dutch Market. In 2006, KPN’s marketing further refocused from a product to a market orientation for both consumer and business customers. For Small and Medium Enterprises as well as Large Enterprises, our major goal has been to offer our customers a range of services and easy-to-use solutions based on their business needs. To meet this goal we often successfully play the role of ICT advisor. Advising the customer is also a part of the continuous improvement in our customer service and satisfaction. Examples of advising the customer are ‘ZekerWeten’ (a fixed-mobile campaign emphasizing our advisory capabilities based on innovative advisory tools), ‘Telecomscan’ (an online advisory tool for SMEs to identify the best possible communications mix, taking into account a company’s mobile and fixed telephony usage) and the Business Continuity Quick Scan, a tool which supports large enterprises to gain insight in the continuity of their business processes in case of a crisis.

We have both increased our sales of broadband (Office DSL), IP-VPN and E-VPN network solutions, nationally as well as internationally. During 2006 we continued offering managed services that optimize business processes and contribute to business continuity and ultimately cost savings. In the SME market KPN has strengthened its position with intensified marketing campaigns for KPN’s DSL offering and KPN’s new product line up.

Segment Wholesale and Operations

Within the Wholesale and Operations segment our main external activities are:
1. national wholesale and local-loop services;
2. international wholesale voice and wholesale data services; and
3. customer relations management activities.

Implementing our strategy

In the wholesale market there is a growing demand for higher bandwidth and new broadband services, while revenues from traditional voice and switched internet services are decreasing. As a consequence of this shift we see increases in (external) wholesale volumes as Cable and ADSL operators are entering the retail voice market via Voice over IP. The transit volumes we handle for other operators tend to decrease in the future given that direct-interconnection initiatives are surfacing more and more. Internationally, there is a trend towards international consolidation and strategic alliances, as a consequence of which the downward pressure on tariffs increases, only partly offset by increasing volumes.

Attacking the market for new communications, information and entertainment services aimed at establishing leading positions that deliver attractive long-term financial returns

In our wholesale market we continue to search for new opportunities. In 2005 we introduced Wholesale ADSL. This service is a value-added service in addition to local loop unbundling, which enables ISPs and other operators to add ISP-specific value, such as e-mail services, spam- or virusfilters and firewalls, without the need to invest in the construction of their own DSL network. Interconnection services based on IP, white label VoIP Services and wholesale fiber to the home were developed in 2006 and will be commercially launched in 2007.

Defending traditional services to maintain our leading share in declining markets

We continue to search for possibilities to maintain or increase our (traditional) revenues by leveraging our scale advantages and responding to consumer desire for choice through wholesale offerings in addition to KPN-branded retail offers.

Exploit to achieve a structurally lower cost base and improved customer satisfaction

In March 2005 we announced our Exploit initiative to achieve a structurally lower cost base. We launched several cost savings programs, mainly concentrated in the categories of personnel, traditional IT systems and infrastructure.

The IT Transformation Program announced is now fully operational and has delivered its first benefits in 2005. Agreements were made with KPN’s main IT suppliers and the first cost savings have been realized. Best-practice processes were implemented in the IT organization, rationalizing IT applications and leading to a 20% reduction of IT applications in 2005.

National Services

The national services we offer can be divided in national wholesale services and national local-loop services.

Within the national wholesale services we offer a comprehensive range of services that give other telecommunication companies access to our fixed telephony network. These services include:

•	terminating services: we offer terminating access to end users connected to our network, allowing customers from other operators to reach our customers;
•	voice-originating services: we offer Carrier (Pre)Select operators access to calls originating on our network and we offer customers of our network interconnection with so-called premium numbers (with prefixes of 0800 or 0900), pagers and virtual private networks;
•	Internet-originating services: we offer ISPs the possibility to bill their customers directly for their Internet traffic volume usage through the use of special dial-up numbers (with 0676 prefix); and
•	transit services: we offer other telecommunication operators the routing of incoming and outgoing national and international calls between other operators’ networks through our network.

The services are offered on the traditional switched network and VoIP platforms. Interconnection services based on IP and white labeled VoIP services were developed and tested in 2006 and will be commercially launched in 2007.

In 2006 traffic volumes decreased for originating and terminating voice services due to strong competition in the national voice market by competitors like Versatel/Tele 2, Verizon and BT for traditional switched voice traffic as well as for voice over IP. Also competition from cable operators with their VoIP offerings increased significantly over the course of 2006. In addition, fixed mobile substitution contributed to further decreases. As a result of the substitution from Internet dial-up access to broadband Internet access services, the volume of Internet-originating services declined substantially during 2006.

Due to the migration of the end customer from fixed to mobile and the growing market of voice over IP, the transit market is increasing. KPN faces continuing strong competition in this market from direct interconnection as well as competitors such as Orange and BT. Despite strong competition KPN has been successful in defending market share, resulting in increasing traffic volumes for transit voice services. The main driver behind this growth remains the continuing growth in mobile-to-mobile voice traffic.

Within the national local-loop services, we offer access services to ‘the last mile’ of our network. These services include:

1.	Main Distribution Frame (MDF) access: this service physically connects networks of other operators to the local loop network of KPN. With this service we offer operators direct access to homes and offices of their customers;
2.	MDF co-location: we offer other operators the possibility to install their equipment in or alongside KPN buildings, towers and masts to connect their systems and networks to our network. This service offers operators direct access to the local loop network of KPN;
3.	Wholesale Line Rental (WLR): KPN introduced on December 29, 2006 the service wholesale line rental which enables other operators to sell PSTN/ISDN connections. WLR is mainly for those operators who already offer Carrier (Pre)Select. Together with WLR they can offer subscription and traffic services to the end user;
4.	Subloop Distribution Frame (SDF) access: since the beginning
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	of October 2006 SDF co-location and SDF line services have been available as part of the All-IP program.
5.	Wholesale broadband Access (WBA): consisting of bitstream access, wholesale ADSL and wholesale Fiber to the Homes. Bitstream offers operators and ISPs the possibility to develop individual DSL-based services. Wholesale ADSL is a value-added service on top of local loop unbundling, which enables ISPs and other operators to add ISP-specific value, without the need to invest in the construction of an own ADSL network. In 2007 wholesale Fiber to the Home will be introduced; and
6.	Interconnect Leased Lines services: we offer a unique connection between an end-user location and the transmission network of an operator.

The decrease in PSTN and ISDN connections continued in 2006. MDF access increased due to the introduction of end-user services like VoIP, Tele2compleet of Tele2 and Livebox of Wanadoo. Due to the developments in the broadband market, there was an increase in Wholesale ADSL for 2006.

International Services

The international wholesale services we offer can be divided into voice services and data services. Data services are primarily handled by Segment Business, for example KPN EuroRings. The international voice services transport international voice traffic originating outside and inside The Netherlands to any place in the world and includes:

1.	Premium Voice Services: offers worldwide access through KPN’s high quality voice network in Europe and our international access points in Hong Kong, Miami, New York and Singapore;
2.	Wholesale Voice Services: offers worldwide voice termination at competitive prices;
3.	Solutions for mobile operators: offers services for voice traffic and SMS-, MMS- and UMTS related services; and
4.	Solutions for ISPs: offers voice access services connecting VoIP traffic to switched networks internationally.

In 2006, volumes further increased in a growing market for international voice traffic. Our main competitors in this area are the major telecommunication companies.

Tariffs

Our national wholesale tariffs for fixed telephony and for wholesale unbundled local loop services are subject to regulatory approval. As a result of the market analysis performed in 2005 by the Dutch telecom regulator OPTA, our transit services have been subject to regulation since January 1, 2006. Therefore regulatory obligations like non-discrimination apply, which could lead us to change our tariffs for these services which would impact our business results. We believe our wholesale tariffs for terminating services and originating services approximate the average tariffs of an EU benchmark. Our tariffs for transit, originating and terminating services are composed of a call set-up fee and a charge per minute. For Local Loop Services we charge a one-off connection fee and a monthly subscription fee. The ongoing liberalization and increased international competition as a result of European regulation puts continuing pressure on international tariffs. In September 2006, OPTA published the directive on wholesale price caps for a three-year period beginning April 1, 2006. Wholesale regulated voice tariffs remain unchanged and other wholesale tariffs for regulated services have been lowered.

Customer Relationship Management

KPN Contact is the in-house call center of KPN. Consumers and business customers call KPN with questions about a variety of matters, including Internet services, interferences, invoices, mobile phone purchases, maintenance and service migration. There are four sites with approximately 4,500 employees (3,100 FTEs) handling approximately 100,000 calls per day.

The main objectives of our in-house callcenter are to resolve all questions of our clients during one call and reduce client waiting time. Our call centers are also anchored by the COPC quality program, a specific quality certification program for contact center businesses.

SNT Nederland is the call center for external Dutch clients as well as for certain KPN services, such as number information services and outbound calling. SNT Nederland is the market leader, a position gained through high quality customer services.

SNT Belgium is a call center for clients in Belgium, including BASE mobile customers.

SNT Germany is a call center for German clients, including E-Plus mobile customers. Handling 1.5 million calls per week, with 3,200 employees on 7 sites, SNT Germany is one of the major participants in the German call center market. SNT Germany is focused on providing first-rate services.

Mobile division

KPN is a provider of mobile telecommunications services in Western Europe with a particular focus on Germany, The Netherlands and Belgium, serving 23.6 million customers as of December 31, 2006. KPN delivers mobile telecommunications services ranging from standard voice and value-added services (call waiting, call forwarding, voicemail and message services like text messages and MMS) to advanced data services (i-mode, video telephony and mobile broadband Internet). KPN expects person-to-person communication services (voice, text messaging, e-mail) to remain the main source of revenues for mobile operators in the coming years, with advanced data services becoming increasingly important. In addition, the increasing number of mobile-only users reflects the trend towards growing use of mobile networks at the expense of fixed networks.

Pursuant to license agreements with NTT DoCoMo, KPN has offered i-mode services in our three main markets since 2002. i-mode services comprise communication (including e-mail), information, entertainment and transaction services via so-called content sites.

UMTS was introduced in Germany and The Netherlands in 2004. UMTS enhances the functionality of mobile data services (e.g., i-mode services and mobile Internet) by adding video and increased transmission speeds. KPN is continuously investing in its UMTS networks to follow market demands driven by the increased availability of UMTS-enabled handsets. In 2006, KPN Mobile The Netherlands upgraded its entire UMTS network to HSDPA, thereby offering the most extensive coverage in The Netherlands. At year-end, around 90% of the Dutch population could use the mobile broadband Internet services. KPN expects the introduction of UMTS-based services to accelerate the use of advanced data services in the coming years.

In October 2005, KPN acquired Telfort, until then the only independent mobile network operator in The Netherlands. Also in 2005, KPN incorporated Sympac, a European mobile communication services provider that renders mobile voice, Internet and data services to multinational companies.

The strategic goals of the Mobile division are summarized below:

•	in The Netherlands, to further strengthen our market leadership position and profitability; and
•	in Germany and Belgium, to establish growing profitable businesses by challenging the competition, while further improving network quality.

For details on how customer data are calculated, please refer to ‘Presentation of Financial and Other Information’.

Germany

We are active in the German mobile telecommunications market through our mobile network operator E-Plus. During 2006, E-Plus’ customer base increased to 12.7 million customers, reflecting the growth of the German mobile market. In an enlarged German mobile market, we succeeded in expanding our service revenue market share by over a full percentage point to 12.9% (2005: 11.7%).

In the middle of 2005, we changed our strategy. The strategy revision was aimed at accelerating growth and to put E-Plus on a solid path to profitability. The new strategy centered on a number of initiatives:

•	E-Plus moved away from a ‘push’ (reliance on handset and dealer subsidies) to a ‘pull’ strategy (attractive and simple tariffs inciting the prospective customer to ask for our products rather than rely on the reseller’s advice). E-Plus’ new brands ‘BASE’ (flat fee), ‘Simyo’ (Internet only) and ‘Ay Yildiz’ (Turkish community) are delivering significantly improved AMPUs and ARPUs in comparison to the E-Plus brand. Also for the ‘E-Plus’ brand, handset subsidies were tightened;
•	MVNO-type contracts were signed and implemented with well-known German partners such as Medion (Aldi Talk), Freenet and Conrad; and
•	we began expanding our captive distribution, with 197 stores at the end of 2006 compared to 171 at the end of 2005. E-Plus also has tested a regional marketing approach with very encouraging results.

Our growth strategy focuses on increasing our customer base, revenues and market share on the one hand and profitability on the other. We succeeded in 2006 in attracting more than 1.9 million new customers. Our focus on partnerships such as with Aldi meant that a large share of this growth was with prepaid customers. The number of postpaid customers as of December 31, 2006 amounted to 6.0 million – representing a 47% share of our customer base (2005: 52%) – whereas we served 6.7 million prepaid customers.

Products and services

Under the ‘E-Plus’ brand, we offer a range of propositions to the business and consumer markets, with an increasing focus on postpaid customers. These propositions include bundled packages, such as ‘Time & More’ for consumers, ‘Professional’ (S, M, L, XL) for the business market and ‘Free & Easy’ prepaid packages. In the second half of 2006, we introduced ‘CleverOne’, the first postpaid proposition in Germany without a monthly subscription fee. In addition to standard mobile services, we also offer under the ‘E-Plus’ brand a wide range of value-added voice and data services.

In 2005, E-Plus embarked on its multi-brand strategy with the launch of new brands featuring innovative tariff structures: ‘BASE’ offered the first flat-fee package on the German mobile market, ‘Simyo’ was the first web-only prepaid mobile operator and ‘Ay Yildiz’ the first tailor-made offering for Turkish-speaking people.

We offer wholesale solutions for an increasing number of partners which act as branded resellers, including Debitel and MTV.

In 2002, E-Plus became the first operator to introduce i-mode services in Europe. In April 2004, we launched WiFi services

based on a service provider model. In June 2004, we took the first step in delivering UMTS services through UMTS data cards for laptop users. The first UMTS-enabled handsets were launched in August 2005. Our UMTS network currently covers over 50% of the German population.

As of December 31, 2006, we offered customers the possibility to use mobile telecommunications services outside Germany in 172 countries through international roaming agreements.

Tariffs

We offer a variety of tariff structures for postpaid and prepaid customers. We have different tariffs per minute – depending on the time of the day and day of the week – to stimulate off-peak calls. Under the postpaid propositions, bundled minutes at discounted rates per minute are being offered. For postpaid and prepaid offers, we provide a special tariff option for calls to fixed-line numbers. These offers aim at capturing a larger share of the total voice market.

The ‘BASE’ brand offers a flat fee for on-net and fixed network calls and a simple tariff structure for all other calls. ‘Simyo’ also offers a simple tariff structure with one tariff for every call regardless of the time of the day. ‘Ay Yildiz’ in its turn offers a simple tariff structure for Turkish-speaking people.

We structure i-mode pricing either in a fixed fee per data volume used or in four packages (S, M, L and XL) based on a flat fee for a certain threshold; if a customer exceeds this threshold, charges are invoiced by data volume used. For UMTS data cards, our customers can choose between time and data volume packages.

As a reaction to E-Plus’ challenge, our competitors have also introduced a variety of new tariffs.

The German regulator Bundesnetzagentur (BnetzA, the former RegTP) ordered the German mobile network operators to reduce their MTA tariffs in three steps, the first two steps became effective on December 15, 2004 and 2005, respectively. The third consecutive reduction was announced on August 30, 2006 and became effective as of November 23, 2006.

Competition

Four mobile network operators, all holding UMTS licenses, are currently active in the German mobile telecommunications market: T-Mobile, Vodafone, E-Plus and O₂. The two largest mobile telecommunications providers – T-Mobile and Vodafone – hold an estimated combined service revenue market share of 73% (2005: 75%). In the past years, E-Plus and O₂ have been successful in growing their respective service revenue market shares.

In addition, numerous independent service providers in Germany package and sell products and services from various network operators under either the network operators’ brand or private labels. Some of these service providers operate exclusively with one network operator, while others offer competing products and services. In all cases, service providers sell to both business and private customers. The main German service providers are Debitel, Talkline, Victor Vox and MobilCom. Service provider customers form for approximately 18% part of our total customer base.

Brand strategy

During 2006, E-Plus continued to pursue its multi-brand strategy with tailor-made offers to well-defined customer groups concentrating on customer needs, like voice telephony and simple services.

Distribution and sales

We offer our products and services through our own chain of 197 shops as well as E-Plus’ website. Apart from these channels, we offer our services through resellers and service providers that may repackage our offers, tailoring them to their customers’ needs. Resellers include Debitel, MobilCom, Talkline and Aldi through their Medion brand. For the business market segment, we also use these sales channels in addition to a direct sales force.

Licenses and coverage ratios

Our 2.5G-enabled network currently covers over 99% of the German population (2005: 99%). We improved our indoor coverage during 2006 to approximately 78%, an increase by some 7 percentage points compared to the end of 2005. This is mainly due to the rollout of E-GSM base stations that provide better indoor coverage than 1800 MHz base stations. Our 3G network had over 50% outdoor population coverage by the end of 2006, exceeding the applicable 50% minimum rollout requirement under our UMTS license.

As of January 2006, BnetzA granted us the right to use frequencies in the 900 MHz E-GSM band. In order to obtain these frequencies, we had to return some of our unused 1800 MHz spectrum to BnetzA for redistribution. During 2006, we invested in 900 MHz equipment, thereby improving our coverage.

The Netherlands

In October 2005, KPN acquired Telfort, until then the only independent mobile operator in The Netherlands. As a consequence of this acquisition, KPN currently owns two mobile operators in The Netherlands. Telfort provides a range of mobile telecommunications services based on its own mobile network – covering over 99% of the Dutch population – to consumer and business customers in the Dutch market. Telfort’s products and services are marketed branded as well as non-branded (wholesale white label). Telfort is consolidated as from October 4, 2005. The 2005 figures for The Netherlands include therefore Telfort for the consolidation period, unless otherwise indicated.

As a result, KPN is present in the Dutch mobile telecommunications market via its operators KPN Mobile The Netherlands and Telfort. With 8.6 million customers and an estimated 46.9% share of total market service revenues in 2006 (2005: 39.9%), KPN is the largest mobile telecommunications provider in The Netherlands.

During 2006, KPN continued to focus on customer value, being defined as customer margin over lifetime. This became most

evident in the ongoing growth of its contract subscriber base. At year-end 2006, the number of postpaid customers amounted to 3.9 million, representing 44.6% of our total customer base (2005: 3.3 million, or 40.4% of the total customer base), while KPN served 4.8 million prepaid customers. KPN Mobile also has lowered its postpaid subscriber acquisition and retention costs by lowering handset subsidies and shifting sales to less expensive channels such as Internet.

The Telfort network integration project – which started in 2006 – with respect to the radio network (the first phase) is expected to be finalized at July 1, 2007, whereas the core networks are expected to be integrated in 2008. On November 21, 2006, we reached an agreement with T-Mobile to transfer E-GSM frequencies currently used by Telfort. The transfer is expected to be effective as of September 1, 2007 and concerns 5 MHz of bandwidth.

KPN believes its leading role in all segments – customer, business and wholesale – of the Dutch mobile telecommunications market is the result of its well-known brands (‘KPN’, ‘Telfort’, ‘Hi’, ‘Simyo’ and ‘Ay Yildiz’), quality of its mobile networks, its extensive distribution network, its commitment to customer care and its innovative products and services.

Products and services

KPN offers a range of standard and value-added mobile voice and data services. KPN continues to pursue a multi-brand strategy to effectively appeal to different target markets. The ‘Hi’ brand focuses on the young consumer and heavy text message users, while the ‘KPN’ brand is dedicated to other segments of both the consumer and business markets. With the introduction of the web-only ‘Simyo’ brand, we also serve cost-conscious consumers who prefer basic mobile services (only voice and text messages) at low tariffs and with low distribution costs. A new brand named ‘Ay Yildiz’, is the tailor-made offering for Turkish-speaking people. Telfort successfully offers branded prepaid and postpaid propositions under its ‘Telfort’ brand to consumer and business clients. Furthermore, KPN Mobile The Netherlands makes its network available to other organizations that wish to offer mobile telecommunications under private label; currently 18 wholesale customers are being served.

KPN expects the growing demand for mobile data services – particularly those based on the latest Internet technologies – to lead to increased usage of its mobile networks. Furthermore, KPN supplies data and fax transmission services, VPNs for business customers as well as multimedia services and WiFi as part of its mobile data services portfolio. The ‘Internet Everywhere’ product is being offered in combination with WiFi access.

In July 2004, KPN started rendering UMTS services via UMTS data cards, the first UMTS-enabled handsets being launched in October 2004. The UMTS network covers currently 87% of the Dutch population, with the network and handset portfolio expanding continuously. In October 2006, KPN Mobile successfully introduced HSDPA. Since May 2005, Telfort has offered data services based on EDGE technology.

As of December 31, 2006, KPN’s customers could use mobile telecommunications services outside The Netherlands in 204 countries (341 network operators) via international roaming agreements.

Tariffs

KPN provides its mobile services through either a postpaid or prepaid proposition. The postpaid structure combines a monthly subscription fee and traffic-based pricing for business market customers. Under the postpaid consumer offerings, KPN offers bundled minutes at discounted rates per minute, committing the customer to a minimum fee per month. The prepaid proposition is mainly based on traffic-based pricing. Data services like text and multimedia messages are charged on an-event basis, whereas other data services like i-mode and UMTS services are based on flat fees, traffic bundles or usage in Mb.

In response to regulatory requirements, KPN reduced its MTA tariffs in January 2004, December 2004 and December 2005. In 2005, we introduced the new web-only ‘Simyo’ brand, targeting customers preferring limited mobile services at low tariffs and with low distribution costs. In 2006, OPTA intended to oblige all Dutch mobile operators to further lower their MTA tariffs. But the tariff reduction obligation had to be based on a decision by OPTA whether or not the mobile operators exert significant market power (‘SMP’) on their respective networks. That decision by OPTA was rejected by the Trade and Industry Appeals Tribunal (‘CBb’, College van Beroep voor het bedrijfsleven), which ordered OPTA to prepare a new SMP decision.

Competition

KPN’s competitors in the Dutch mobile market are Vodafone, T-Mobile and Orange. During the last two years, a growing number of MVNOs and service providers entered the Dutch market; most of these resellers offer private-label mobile services. Some of these resellers have a direct contractual relationship with the customer, while other resellers act as an intermediary for KPN and Telfort. As a result of the Telfort acquisition, KPN’s revenue share generated through MVNOs and service providers increased.

Brand strategy

KPN offers customers the possibility to choose between different propositions under separate brands – ‘KPN’, ‘Telfort’, ‘Hi’, ‘Simyo’ and ‘Ay Yildiz’ – tailored to the needs of different customer segments. During the sales process, special attention is paid to explaining the relevance of services to each individual customer.

Distribution and sales

In The Netherlands, we offer subscriptions through third-party channels (e.g., T for Telecom and The Phone House), KPN-owned outlets (with ‘Primafoon’ as our mainstream outlet and ‘Hi’ retail stores aimed at the youth market) and our direct-sales force, while wholesale services are provided to external service providers. Non-store channels, such as the Internet, are gaining in popularity and sales volumes.

Licenses and coverage ratios

Our 2.5 G-enabled networks currently covers over 99% of the Dutch population (2005: >99%). Indoor coverage at year-end was 98% (2005: 98%). Under our UMTS licenses, we are obliged to cover all large municipalities (over 25,000 inhabitants) plus all highways and major connecting roads by January 1, 2007.

Belgium

In Belgium, BASE is the number-three mobile telecommunications provider - serving 2.4 million customers as of December 31, 2006 (2005: 2.0 million) - with an estimated service revenue market share of around 15% (2005: over 13%). Through our policy of combining distinctive and simple offers with tailor-made propositions for specific market niches, we have achieved a solid growth in our customer base, revenues and market share since the fourth quarter of 2003.

Products and services

We offer a portfolio of voice and data products and services directed at ease of use and supported by a clear tariff structure. We also offer products and services focused on specific market segments. Examples thereof are the ‘Ay Yildiz’ proposition (targeted at the Turkish community), and our low-cost ‘Simyo’ brand.

As of December 31, 2006, our customers could use mobile telecommunications services outside Belgium in 204 countries via international roaming agreements.

Tariffs

We offer a range of prepaid and postpaid propositions, including various plans tailored for the SoHo/SME market. Our plans are characterized by simple tariff structures and bundles of free minutes. The majority of our postpaid propositions contain a fixed fee for a package with bundled minutes and no monthly subscription fee. i-mode customers pay fixed monthly fees excluding the subscription fees for specific content sites. We also introduced the web-only ‘Simyo’ brand to Belgium, targeting customers who prefer basic mobile services at low tariffs and low distribution costs.

Competition

The other mobile operators in Belgium are Proximus and Mobistar. Proximus is a wholly-owned mobile subsidiary of Belgacom, the incumbent telecommunications provider in Belgium. Orange holds a 50.37% equity interest in Mobistar. Proximus is the obvious market leader in Belgium – having over half of the market’s revenues – with Mobistar as the runner-up at a clear distance. BASE, the third-largest provider, is the challenger in the Belgian mobile market.

Brand strategy

We have positioned BASE as our network operator, distinguishing ourselves from the competition by ‘doing things differently’. To this end, we introduced a multi-brand strategy to better tailor our services to specific customer segments. For certain segments, we have teamed up with partners and branded resellers.

Distribution and sales

Our products and services are available at well-known nation-wide retail chains as well as at our 45 BASE shops and via the internet. We also offer our services through branded-resellers, service providers, and MVNO’s that may repackage our offers and tailor them to their customers’ needs.

Licenses and coverage ratios

Our 2.5G-enabled network currently covers over 99% of the Belgian population (2005: 99%). The indoor coverage at the end of the year was 98%, a slight improvement over 97% at the end of 2005. During 2006, we decided to further enhance our 2.5G-enabled network by installing EDGE technology, a technology that provides high-speed bandwidth based on the GSM infrastructure, enabling features formerly only available based on UMTS technology. In November 2006, we were able to launch EDGE-based data services. The minimum UMTS rollout requirement under our UMTS license was 40% by the end of 2006 (2005: 30%). During 2006 we invested in our UMTS network to meet this requirement. BiPT may measure the actual UMTS coverage of BASE during 2007.

Other activities

During the year under review, our other activities included our international participation Xantic, KPN Retail (Primafoon stores and Business Centers), KPN Sales (KPN’s own personal sales force) and Corporate Center (support functions). Our Corporate Center mainly provides group internal services.

KPN Retail

Different retail store outlet chains support our marketing philosophy with ‘Primafoon’ and Business Centers as our main stream outlet and ‘Hi’ retail stores aimed at the youth market. During 2006 we have started several trials with new distribution concepts, extending our experience in the multimedia business. The shops sell telephones, mobile and fixed communication solutions as well as KPN TV and for example personal computers.

Xantic

As per February 14, 2006, KPN and Telstra sold their total holdings in Xantic B.V. (a satellite communications provider) to the Canadian Stratos Global Corporation.

Property, plant and equipment

Telecommunication services depend upon a core network for the transfer of data or voice information. The ongoing growth in bandwidth and services require continuous development in design and capabilities. Our existing fixed and mobile infrastructures and our development plans are described below.

Fixed networks

The fixed network can be described in two dimensions: on the one hand the network infrastructures (access networks and the backbone networks) which enables services and on the other hand the service layers (voice, video and data), that are operated on the network infrastructures. In addition to the national network infrastructure and service layers, KPN owns an international network infrastructure and service layers.

National fixed infrastructure

Access networks

Our access network consists in principal of twisted pair copper. This enables us to provide nearly all of the eight million Dutch homes with two pairs of copper wire in the access network.

Despite the continuing migration to mobile-only solutions, at December 31, 2006, over 60% of the Dutch households were actively connected to our access network.

At December 31, 2006, 251 CityRing areas (in 107 concentration points) and about 720 other access areas form our fiber access network. Fiber access generally permits transmission rates in excess of 155 Mb/s. The fiber network is partly upgraded to 1 Gb/s and 10 Gb/s C/DWDM/Ethernet technology. These fiber networks are used to offer services to large business customers.

In certain cases, wireless transmission systems are used in the access network (for example, as backup or if fiber access is not available). At hotspot locations broadband Internet access is provided using WiFi. By the end of 2006, over 900 HotSpots were operational (including Enertel Wireless). During 2006 we built around 300 new HotSpot locations and closed down around 100 old locations which turned out to have insufficient revenue potential. Compared to 2005, the number of unique users of the HotSpot network almost tripled and the total minutes used more than doubled. In cooperation with NS (Dutch Railways) we operate WiFi HotSpots in the major railway stations. After a successful joint pilot project during the first half of 2006 testing internet and narrowcasting in moving trains, KPN and NS agreed upon a partnership for the roll-out and exploitation of connectivity to moving trains, WiFi HotSpots and Narrowcasting in trains. In 2006, KPN HotSpots acquired Attingo B.V., the only provider of public Internet and business communication services at Amsterdam Airport Schiphol. With the acquisition of Enertel,

In 2005 KPN has acquired two frequencies in the 26 Ghz Wireless Local Loop frequency band which can be used as a line of Sight point-multipoint access technology.

Backbone networks

Our backbone networks facilitate voice, video and data traffic between access points. The backbone can be divided in the Lambda DWDM-network (fiber optic backbone), Hirka SDH-network (traditional backbone), dedicated service-related networks and several long distance CityRings (fiber).

The traditional backbone (Hirka) has a maximum network capacity of 155 Mb/s. To accommodate the fast growth in demand for high-speed transmission, defined as 155 Mb/s and higher, KPN has implemented a fiber optic network with synchronous digital hierarchy (SDH) and dense wavelength division multiplexing (DWDM)-based transmission technology. This fiber optic (Lambda) network became operational in 2000. As of the end of 2006, about 201 locations are interconnected with 10 Gb/s transmission routers and 734 locations are interconnected with 2.5 Gb/s transmission routers. Each of the access areas is connected to the transmission backbone network at two separate locations to ensure continuity.

The development and rollout of cost-efficient infrastructures relies on the technically advanced MPLS (multi-protocol label switching) infrastructure, which is based on fiber techniques and suitable for advanced DSL type of services as well as broadcast IPTV services. This network is fully integrated with our Ethernet network. This infrastructure builds upon the Lambda infrastructure interconnecting various Metro rings across the country using 1 Gb/s and 10 Gb/s fiber-optic infrastructures. Moreover, this core infrastructure is used to interconnect regional Ethernet and IP access nodes.

Service layers of our national network infrastructure

The service layers on our core infrastructure networks are comprised of switched voice, video and data network services. Service edges connect the Access Network to our Backbone.

Switched voice networks

Our public switched telephony network (PSTN) and ISDN network in The Netherlands consist of approximately 1,350 local exchange areas and 2 x 20 trunk exchanges connected by a long-distance transmission network. Our network is also connected to other operators’ networks.

Our telephony network is designed and engineered to have general availability with internal blocking and outages during peak hours below 1% end-to-end, as measured on a yearly basis.

Data networks

We operate a frame relay (FR) network, known as Natvan, to provide a large number of data services for:

•	the backbone infrastructure that supports the KPN dial-in network from 20 dial-in PoPs (Points of Presence) to the ISPs;
•	LAN (Local Area Network) interconnect services for corporate customers;
•	supporting the backbone infrastructure that enables the bulk transport of X.25 services through leased lines as well as through ISDN channels; and
•	native frame relay (64 Kb/s through 2 Mb/s) VPNs (Virtual Private Network).

Our Asynchronous Transfer Mode (ATM) network is used to provide flexible leased line services and a carrier network for our frame relay network and to connect ADSL/SDSL customers to our data/IP services backbone.

KPN’s Ethernet is the most recent national network infrastructure KPN currently has deployed in The Netherlands. This advanced network is based upon a switched native Ethernet infrastructure, using either dark fiber or C/DWDM (dense wavelength division multiplexing) as underlying infrastructures. Within this network, Ethernet interfaces up to 10Gb/s are in use. The Ethernet network is fully integrated with KPN’s new national core MPLS (multi-protocol label switching) infrastructure.

In March 2006 KPN acquired Nozema Services which provides services to broadcasters. These services include analog radio (MW, FM, SW), digital radio (T-DAB) and Digital TV (DVB-T: Digital Video Broadcasting - Terrestrial). Prime customers for these include the public broadcasters, various commercial FM radio stations and Digitenne. Nozema Services also provides analog TV services for the public national and regional broadcasters. The analog TV services have been terminated as of December 11, 2006 (‘analog switch off’).

Since acquiring Nozema Services, KPN has launched a full rollout of DVB-T. DVB-T is the DVB European consortium standard for the broadcast transmission of digital terrestrial television. On

December 11, 2006 KPN closed down the analog TV service and continued to roll out its nationwide DVB-T network.

At the end of 2006 KPN also started to roll out a DVB-H (Digital Video Broadcasting – Handheld) network in the Randstad. The rest of The Netherlands will follow in 2007 and 2008 (main cities in The Netherlands will have coverage in mid 2007). DVB-H technology adapts the successful DVB-T system for digital terrestrial television to the specific requirements of handheld. Already, mobile operators have shown interest to provide end-users with over-the-air digital entertainment to mobile devices using a DVB-H standard.

International network infrastructure

Our international infrastructure can be divided according to three major networks: transmission, voice and data.

International voice networks

For the provisioning of international wholesale voice services we operate an international transmission network (in consortia) that includes land and submarine cables as well as satellite transmission systems, which directly connects approximately 400 telecommunication operators worldwide. The network is partly circuit switched and partly based on IP trunking technology with a flexible capacity. Its main international switches are located in The Netherlands. In addition, KPN has eleven points of presence in Europe (Frankfurt, Paris, London, Brussels, Milan, Madrid, Zurich, Copenhagen, Lisbon, Vienna, Warsaw) and four further points of presence outside Europe: Hong Kong, Miami, Singapore and an exchange point in New York.

International data networks (EuroRings)

The KPN EuroRings transmission backbone is based on KPN-owned Fiber infrastructure, equipped with SDH and C/DWDM technology in The Netherlands, Germany, France, Belgium, the United States (New York) and the United Kingdom. In addition, KPN has provided access nodes over 22 European countries using leased infrastructures based on either wavelength rings or protected SDH circuits. For access in the various countries KPN uses DSL, Ethernet, leased line and/or fiber technology. Other regions are connected and served via the use of trusted partners. Services that we deliver on these networks include MPLS-VPN, ATM, Ethernet, IPT, IPLC, SDH, wavelength, dark fiber and fiber channel.

IP/MPLS

KPN is running a European IP backbone, using more than 200 IP/MPLS devices, making this infrastructure one of the largest IP infrastructures in Europe. It covers all major business centers and international Internet exchanges and assures quick access to the United States, via multiple dedicated high-speed connections. The KPN EuroRings MPLS VPN service offers an industry leading network solution for corporate clients, providing a reliable and secure environment with guaranteed quality of service, including real time class of service.

In 2004, KPN and Singapore Telecommunications (SingTel), one of Asia’s leading communications group, announced a significant expansion of their IP-VPN MPLS network coverage through a partnership agreement. The interconnection of both carriers’ IP-VPN MPLS networks enables SingTel and KPN to leverage each other’s extensive networks in their respective markets in Asia Pacific and Europe. In 2005 KPN and Telefónica signed an agreement to enable the interconnection of their IP-VPN MPLS networks. This agreement enables KPN to increase international coverage in most of Latin America. The services offered will range from a totally managed solution to pure basic bandwidth services. In addition, KPN expects to offer services like remote access, security solutions, housing and hosting. Access to the MPLS VPN service is provided using DSL, leased line and Ethernet technology.

International Ethernet VPN

International Ethernet VPN is part of the further step in the All-IP strategy of KPN, with one international MPLS network for all VPN services. The International Ethernet VPN service provides Ethernet connectivity between two or more locations, national and international. It is a fully managed, end-to-end service including local access, offering high-quality, high-speed, flexible service with scaleable bandwidth access. The Ethernet also will offer multiple service classes and integration into a single platform. It is based on existing Ethernet technology which enables point-to-point and any-to-any connectivity. Ethernet technology was originally used for local area networks (LAN) and has been extended to wide area networks (WAN). Our international Ethernet will be available in The Netherlands, Belgium, UK, France, Germany with further extensions planned in over 20 countries.

ATM/Frame Relay

The KPN owned and managed EuroRings ATM network provides a secure closed private network with the highest guaranteed service level covering all major European business centers. The KPN EuroRings ATM network is designed to meet the most demanding requirements for flexible but secure networking. The KPN EuroRings ATM network offers both ATM and Frame Relay access, can provide integrated access to the Internet, while also providing the technology to support voice, data, multi media and IP applications within one single network infrastructure.

Development of our Fixed Networks

As part of our strategy to achieve a leading position in the broadband market and develop new communication services, we are rolling out services and networks based on IP and broadband. We expect that IP and broadband will become dominant and mainstream within the industry and will take over all current services and networks. We develop and upgrade our network to enable us to introduce new IP and broadband services.

In addition to the traditional transmission networks SDH and ATM, we have introduced within the last few years very high capacity transmission networks. The C/DWDM fiber backbone is recently upgraded and will this year be extended to more nodes in our network. The data networks IP-MPLS and Ethernet,

first primarily used for business connectivity services, is now becoming the new high capacity transport network. Ethernet has been rolled out to more than half of The Netherlands to support new consumer broadband services like IPTV that will become available from 2007 on. In the coming years Ethernet will replace the SDH and ATM networks and IP-MPLS will replace the traditional data networks like Frame Relay. This will lead to both the ability to offer new broadband services to customers and reduce the operational costs of the core transmission networks.

With the introduction of VoIP and IP Television, we implemented two new IP services networks, the IMS-based platform and TV-middleware. These service platforms are independent of the underlying transmission and access networks and will in the mid-term meld together into one new services environment. This will enable us to offer converged services: fixed-mobile, voice-tv-Internet, and new business applications like security and a national victim tracking system.

We have upgraded our broadband DSL network to ADSL2+ in 70% of The Netherlands, with which we offer Internet access services of up to 12 Mb/s. By the end of 2005 we have trialed new television and video services on the even higher capacity VDSL1 access network. In addition, we increasingly deploy ‘Fiber to the Office’ to the business market.

In the beginning of 2007 we will start rolling out ‘Fiber to the Home’ in newly built areas, providing bandwidth up to 100 Mb/s. We will also start extensive pilots with the newest access technologies that support both broadband services like VDSL2 (providing capacities up to 50 Mb/s) and narrowband services like PSTN and ISDN. If these pilots are successful, we will be able to replace the current broadband nodes and telephony switches in the coming years, leading to both new services and a fundamental streamlining of the access and backbone networks.

Since telephony traffic in the fixed network is declining due to mobile only use and Voice over IP, we are minimizing the investments in the telephony network. If the above mentioned pilots on the newest access technologies are successful, we will transfer the remaining telephony customers from the telephony switches to these new multi-service access nodes over the next few years.

Mobile networks

Developments

In addition to the current second-generation (2G) networks – based on GSM technology – and the third-generation (3G) UMTS networks currently being deployed, an entire range of mobile data technologies is emerging to support the need for mobile and online usage. Our strategy is to benefit from the increasing demand for mobile data services. We offer our customers secure mobile data services solutions regardless of the access technologies applied. We will continue to invest in our 2.5G-enabled GSM network to maintain or improve quality and coverage, while providing sufficient voice and data capacity.

Mobile broadband technologies (e.g., EDGE and UMTS) offer three advantages over narrowband technologies that we expect will be crucial for our future success:

•	increased speed, enriching our current services and making these more user friendly, such as video-like services;
•	larger data volumes, enhancing the number and types of services (e.g., pictures, clips, ringtones, music, radio) and rendering them more useful (applications for business users); and
•	improved data service quality, making guaranteed throughput and quality possible rather than ‘best-effort’ services.

Our end-user oriented strategy to be ‘always best connected’ means we wish to provide customers with the best available network capabilities for the specific services requested and in the most cost-efficient way. Boundaries between networks are blurring: most of our services (voice and messaging) will run with nationwide coverage on any technology, although some (e.g., video telephony) depend on real-time high speeds and will therefore only work in geographic areas equipped with broadband networks. When all technologies are available in a certain geographic area, we make every effort to use the network capacity as efficiently as possible to keep investments and operational costs down. We expect this will allow for competitive retail pricing that benefits our customers.

Rollout

The current network rollout is focused on achieving maximum synergies among GSM/GPRS, EDGE and UMTS, for instance with respect to infrastructure and transmission. Reutilization of 2.5G-enabled infrastructure in certain areas may provide a substantial part of the basic infrastructure. Ericsson and Huawei are our mobile network suppliers in Germany, The Netherlands and Belgium.

We intend to comply at least with the minimum regulatory rollout requirements and in The Netherlands we surpassed the requirements by far in terms of inhouse coverage and available speed where commercially attractive.

By the end of 2006 the conditions to the Belgian UMTS license required us to reach minimum UMTS coverage rates of 40%. The Belgian telecommunication regulator (BiPT) may measure the actual UMTS coverage in Belgium during 2007. The BASE UMTS coverage currently exceeds 40%.

Germany

During recent years, we have directed our efforts at increasing the quality and coverage of the GSM/GPRS network. In 2006, we additionally obtained 900 MHz E-GSM frequencies, enabling us to further improve the quality of our network. We believe our network coverage is currently at a competitive level.

With the innovative Ultra High Sites concept (using tightly bundled sites located at a height of over 100 meters), we are able to increase the speed of our UMTS rollout. At the end of 2006, we had over 5,600 UMTS base stations covering over 50% of the

German population, including all cities of more than 300,000 inhabitants. As E-Plus has – in accordance with its low-frills challenger strategy – focused on voice and SMS as the main area of activity, 3G rollout has not been re-assumed for now.

The Netherlands

Our 2.5G-enabled network consistently scores high on quality, reliability and coverage. Recent surveys show especially high scores on indoor coverage compared to competitors. We began the rollout of our UMTS network in 2003, while commercially launching UMTS services in the second half of 2004. By the end of 2006, we had installed more than 2,100 UMTS sites, covering 585 cities with more than 5.000 inhabitants or around 90% of the population. Moreover KPN Mobile The Netherlands upgraded almost its entire UMTS network to HSDPA in 2006, thereby offering the most extensive HSDPA-coverage in The Netherlands. At year-end, around 90% of the Dutch population could use the mobile broadband Internet services.

We own and operate two 2.5G networks and one 3G network. Synergies on operational costs are an important feature of the Telfort acquisition. We have determined the best scenario is to integrate both 2.5G networks and to concentrate our 3G investments. It has been decided to switch off the Telfort 2.5G radio network by mid 2007 and transferring all traffic to KPN Mobile The Netherlands’ radio network. In a later stage – currently estimated early 2008 – the core networks of both operators will be replaced by a new integrated network.

Belgium

During 2006, we further increased the quality and coverage of our 2.5G-enabled network by adding approximately 110 GSM base stations. In 2006, we further enhanced our 2.5G-enabled network through the installation of EDGE technology, a technology providing high-speed bandwidth based on the GSM infrastructure and enabling features that were formerly only available based on UMTS technology. We completed our EDGE rollout in the fourth quarter of 2006.

In September 2003, the technical launch of our UMTS network took place. The minimum UMTS rollout requirement under our UMTS license was 40% by the end of 2006; BiPT may measure the actual UMTS coverage during 2007. The ultimate UMTS rollout requirement implies that BASE should aim to reach an 85% population coverage by 2009.

FACTS AND FIGURES

The tables below show the number of active base stations as of December 31, 2006, the average network usage as well as the coverage ratios of our networks as of year-end 2006:

Properties

KPN holds 1,811 buildings as of December 31, 2006, the majority of which are owned freehold and located principally in The Netherlands. Approximately 1,800 of our buildings and data transmission network equipment, which cannot readily be adapted to alternative uses. The remainder of the properties comprises offices, shops, storage facilities, residential properties and buildings for other miscellaneous uses.

Research and development

On January 1, 2003, the Dutch Organization for Applied Scientific Research (TNO) acquired the research and development activities of KPN and placed it with TNO Telecom. TNO Telecom and KPN entered into a cooperation agreement, under which we have agreed to annual purchase commitments.

We intend to continue to benefit from the telecommunication and technology expertise of TNO Telecom in order to support the technological innovations required for our business. Measures have been taken to obtain the critical mass for mid- and long-term projects carried out by TNO Telecom. In 2006, we extended the cooperation agreement with TNO for one year until December 31, 2010. The total remaining commitments until December 31, 2010 amount to EUR 52 million.

Our research and development expenditures with TNO Telecom in 2006 totaled EUR 17 million (2005: EUR 20 million).

Intellectual property

Our current portfolio of intellectual property rights consists of approximately 25 registered core trademarks and 370 patent families. We continue to invest in the growth of our intellectual property rights portfolio, among others through our targeted long term research and development program. This R&D program runs as from 2006 in close cooperation with TNO Telecom and augments to about 5% of our research spending.

We take the necessary steps to protect the intellectual property rights which we create and we generate value from these rights where appropriate. In order to protect these rights, we currently rely on a combination of patents, trademarks, service marks, trade secrets, copyrights, database protection, confidentiality agreements with our employees and third parties and protective contractual provisions. Approximately 15 of the patents which we own are essential for the commercial exploitation of telecommunication technology and services. A number of suppliers have entered into license agreements with us related to these and other of our patents.

Regulatory developments

Regulatory highlights 2006

All-IP

In November 2005, we launched our All-IP strategy, which offers our customers numerous attractive opportunities such as video communications and collaborative working. In an All-IP environment, our network management becomes much more efficient. The rollout of our All-IP network has an impact on the business of our wholesale customers who use unbundled access to our main distribution frames (MDF) to provide broadband services to their customers. The dismantling of our local exchanges requires that wholesale customers move over to an alternative access point. The alternatives offered by us are wholesale broadband access and unbundled access to the local sub loop. On October 3, 2006, OPTA published its position paper on All-IP. In this position paper, OPTA accepts the rollout of a new All-IP network but requires conditions and guarantees such that other DSL operators will not be forced out of the market as a direct consequence of the wholesale portfolio changes by us. We are to announce the dismantling of buildings beforehand and have to put a reference offer for sub loop unbundling in the market. OPTA will perform a new market analysis on local loop unbundling and wholesale broadband access and will also publish rules on the dismantling of co-locations. We already have a reference offer for sub loop unbundling in the market. On January 24, 2007, OPTA published a letter on the guidelines of our All-IP plan, in which OPTA announced the results of an investigation carried out by analysis into the migration of the co-locators from the MDF locations to the street cabinets. Analysis concluded that the viability of the business case for access to the street cabinet is limited. In the eyes of OPTA this could mean that DSL operators do not have a full alternative for the dismantling of the MDF locations. OPTA therefore decided that it will investigate other alternatives. The decision of OPTA does not affect the start of the rollout of the new street cabinets in June 2007. We will discuss the outcome of the Analysis report with OPTA. Today the wholesale broadband access service is already in use by DSL operators and this service will also be delivered on our new All-IP infrastructure. We will also explore other possible alternatives for access to our All-IP network in order to be able to dismantle the MDF locations according to our original plans. The first dismantling of MDF locations is expected to take place in 2008. At that time we expect to have developed alternatives that are compliant with views of OPTA.

Amended Telecommunication law in 2007

On February 1, 2007 the Telecommunications Act has been changed. The key change is that landlords (including municipalities) now have an explicit right to require the retirement of cables which have been idle for at least 10 years as from the moment the usage of these cables has been terminated. For current idle cables landlords of public grounds cannot require retirement before 2018 to the extent that these idle cables do not hinder existing other cables and other underground infrastructure. Currently the KPN network in The Netherlands comprises of approximately 350,000 kilometers of cables and ducts.

Currently KPN is investigating whether the adjustment to the Act will result in legally enforceable retirement obligations and the recognition of an obligation. When KPN concludes that the new Act leads to a legally enforceable retirement obligation an asset retirement obligation should be recognized if the obligation can be reliably estimated. The initial recognition of such an Asset Retirement Obligation will then be capitalized for an equal amount under Property, Plant and Equipment. The provision should be measured at the present value of management’s best estimate of the expenditure required to settle the obligation.

Important parameters which may have an impact on a possible Asset Retirement Obligation are:

•	the total length of cables and ducts becoming idle, which is strongly related to future network strategy and innovation;
•	the number of landlords requiring retirement; and
•	the timing of retirement.

In case of recognition of a provision and the capitalization of an equal amount, future results will be impacted by additional depreciation on Property, Plant and Equipment and by additional Finance Costs. Because the new act is effective as from February 1, 2007, it has no effect on the balance sheet at December 31, 2006.

Market analysis decisions fixed markets (The Netherlands)

The implementation of the new regulatory framework was finalized on January 1, 2006, the day on which OPTA’s December 21, 2005 decisions for the markets for fixed telephony, leased lines and broadband entered into force. From the market analysis procedures carried out by OPTA it was concluded that KPN had ‘significant market power’ in a number of wholesale and retail markets and that OPTA would impose several obligations on KPN in order to remedy the competition problem identified. The decisions on the cable TV markets were published on March 17, 2006. These decisions will also be of relevance to KPN. The following table provides a list of all markets on which KPN was found to have significant market power and the obligations imposed on KPN on each of these markets.

All of the above market review decisions will be reviewed no more than three years from their effective date, unless the development of market conditions give reason for an earlier review.

Compared to the regime which was in force prior to the implementation of the new regulatory framework, OPTA’s decision to discontinue the regulation of international calls, retail leased lines of 2 Mbs bandwidth and interconnecting leased lines of bandwidths above 2 Mbs stand out. Furthermore, the new price floor regime developed by OPTA for the retail call charges (the so-called combinatorial price squeeze test) will give us more flexibility to respond to competitive developments. A retail tariff package should recover its incremental costs based on the tariffs of the required wholesale inputs plus the relevant incremental costs. In addition, retail revenues should cover the total integral costs on each of the relevant markets on a yearly basis, while the resulting retail return on sales in each market is required to be at least 5%. OPTA has introduced a new procedural system (‘traffic light model’) where new tariffs do not need to be approved ex ante by OPTA but will remain subject to ex post price control. Flat fee offers will be possible in the new system. OPTA also introduced a specific price floor regime for bundles of fixed telephony services with unregulated services.

We have appealed to all of the above market review decisions of OPTA (except for the decision on the Wholesale Broadband Access market), as have other market parties. We have put forward grounds of appeal against OPTA’s market definitions, OPTA’s conclusion that we have significant market power, and/or the remedies imposed on us. On November 30, 2006, the Trade and Industry Appeals Tribunal (College van Beroep voor het bedrijfsleven or CBb) allowed our appeal against the decision on Wholesale Line Rental, but only in respect of some minor aspects (such as the obligation to publish financial reports related to accounting separation and the obligation to report annually on the application of the cost allocation system). All major remedies remain in force. The other appeal cases are still pending.

In the market review decisions OPTA announced that it would take a separate decision on the wholesale price cap, distinguishing four alternatives depending on the specific market conditions. Alternative 1 will be applied to our call termination services (where no competition is foreseen at all), alternative 4 will be applied to inter‑tandem transit services (where competition exists but needs to be protected), and alternative 2 will be applied to most of our other wholesale services (where sustainable competition is expected for the medium term). Alternative 3 (meant for services where sustainable competition is expected for the short term) will not be applied to any of our services at present. The difference between alternatives 1 and 2 would be expressed in an adjustment factor setting an efficiency objective based on a benchmark of our costs and the costs of the ten most efficient local exchange carriers in the USA. It was established however, that we are more efficient than that. Therefore, the adjustment factor has been set at 0.0% for both alternatives. In its wholesale price cap decision of September 27, 2006, OPTA set the price cap for our wholesale services on the basis of our EDC cost allocation reporting. The price caps for our call origination and call termination services show a rise as a result of the increasing underutilization of our switched telephone network. However, we have undertaken vis-à-vis OPTA and the market parties to keep these rates at the current level. We have not appealed to this decision, nor have any of the other market parties.

Market analysis decisions mobile markets

In The Netherlands, the regulator OPTA decided on November 14, 2005, to designate all mobile operators as having ‘significant market power’ on the markets for call termination on their mobile networks. As a result all operators would have to decrease termination rates in three equal steps, starting July 2006, towards fully cost oriented tariffs by July 2008. On August 29, 2006, however the Trade and Industry Appeals Tribunal (in first and highest instance) annulled these decisions of OPTA, based on an insufficient analysis of the relevant markets. As a result OPTA has to re-decide on these markets. OPTA announced it expects a new decision by July 1, 2007. Until such decision no specific regulation applies for mobile call termination services. Also on November 14, 2005, OPTA decided not to designate any mobile operator on the market for call origination and access, thereby deciding that KPN was no longer required to offer special access to other service providers. In an appeal by Orange and Venus & Mercury (both claiming that KPN/Telfort should have been designated), the Trade and Industry Appeals Tribunal upheld OPTA’s decision.

On August 11, 2006, the Belgian regulator (BiPT) issued its final decision in relation to the termination on mobile networks. As in earlier proposals, BiPT maintained its position that all three mobile operators are considered dominant and that they should be subject to gradual MTA tariff reductions to approximately 50% of the current level between November 2006 and July 2008. In relation to the August announcement both the Belgian Competition Council and the European Commission advised BiPT that the proposed asymmetry between the MTA tariffs of Proximus, Mobistar and BASE is too large. In its final decision, BiPT indicated that it will review the proposed 2008 MTA tariff reductions in the course of 2007 in order to create symmetry between Proximus and Mobistar as well as to reduce the asymmetry between BASE and its competitors. In September 2006, all three mobile operators launched suspension and annulment proceedings against BiPT’s decision on call termination on individual mobile networks. On October 27, 2006, the Court dismissed the operators’ claim for the suspension of BiPT’s decision. The annulment procedure is ongoing.

Fixed telecommunications - The Netherlands

Legal proceedings

In July 2006, we started summary injunction proceedings against the State, claiming that the State should forthwith cease unequal regulatory treatment between the cable operators and the

telecom operators. Both cable and telecom offer television, Internet and telephony services. Whilst the telecom sector is subject to stringent regulation, the cable sector is hardly regulated. In our opinion the multiple administrative proceedings with NMa, OPTA and the administrative courts do not offer an opportunity to submit the inequality issue to one single court, so that is why we started summary injunction proceedings against the State. The president of the Hague District Court has partly declared our claims inadmissible and has rejected our other claims. An appeal is pending.

On July 16, 2004, OPTA imposed a EUR 225,000 fine on us for knowingly violating the non‑discrimination principle by allowing CPS providers access to less telephone number information and at a higher price than our own retail organisation. This decision was quashed by the Rotterdam District Court on July 8, 2005, whereupon OPTA brought an appeal to the CBb. The CBb has dismissed the appeal on April 19, 2006. The CBb confirmed the Court’s judgment that KPN’s WPS Number Information Service cannot be considered as special access within the meaning of article 6.9 of the (old) Telecommunications Act (Tw), nor as an associated facility. Therefore, the prohibition on discrimination contained in article 6.5 of the old Tw is not applicable to the WPS Number Information Service and OPTA had no power to impose the fine on KPN.

On April 6, 2006, the CBb decided on the appeals against the Rotterdam District Court decision of December 23, 2004 regarding the cost allocation systems for our wholesale tariffs for the periods 1999/2000, 2000/2001, 2001/2002 and 2002/2003. The CBb upheld the Court’s decision that, although OPTA has discretionary power to distinguish between different cost allocation systems tailored to certain market characteristics, OPTA had no power to exempt us from the obligation to submit for approval a cost allocation system for transit and inter‑region connect services given the fact that these services are to be regarded as interconnection within the meaning of article 6.6 of the old Tw. The CBb referred this matter back to OPTA for further judgment within ten weeks of the decision. As a result of this, it became inevitable that our transit tariffs need to be reviewed with retrospective effect from 1999 on the basis of a cost allocation methodology yet to be decided by OPTA. However, all of the market parties that had objected to the non‑regulation of our transit tariffs at the time have withdrawn their objections after we concluded settlement agreements with each of them, so we expect there will be no further OPTA decision.

As regards the wholesale tariffs that apply for the period starting on July 1, 2003, OPTA decided on a transitional regime based on the cost allocation systems (EDC VI en BU‑LRIC III) approved by OPTA. This transitional regime was in force until the new legal framework took effect. The outcome of this transitional regime was acceptable to us, but not to Tele2 and ACT who have filed objections. Most of their arguments, such as the non‑regulation of our tariffs for transit services, had been put forward on earlier occasions (and dismissed by OPTA), but new objections have been raised against the fact that OPTA has not distinguished between terminating/originating access to/from PSTN/ISDN connections and terminating/originating access to/from VoDSL connections, as well as against the fact that OPTA has not applied cost orientation to the tariffs for Bitstream access. All of these objections have been dismissed by OPTA. Tele2 and ACT have appealed this decision. On November 28, 2006, the Rotterdam District Court allowed the claims regarding VoDSL connections and the non‑regulation of our tariffs for transit services, and ordered OPTA to take a new decision. Now that Tele2 has withdrawn its objections against the non‑regulation of our transit tariffs, there will be no further OPTA judgement on that issue. OPTA’s judgment on the other issues will be deferred pending the outcome of the appeal that we and OPTA have submitted to the CBb against the Court’s decision.

We are required to provide our competitors (on the same basis as our own services and our associated companies) with full and shared unbundled access to our local copper loops on fair, transparent and non‑discriminatory terms and at cost‑oriented prices. We must also allow a new entrant to co‑locate its own network equipment. We are engaged in legal proceedings against OPTA’s interventions in our recurring co‑location charges (rent and electricity). In August 2005, the Rotterdam District Court dismissed our appeal that argued that tariffs determined by OPTA are not cost‑oriented because they are not based on a cost allocation system. As regards the rent per square meter the Court decided, however, that OPTA had wrongfully failed to distinguish between industrial premises in business and residential areas. KPN successfully appealed the decision on the role of cost allocation systems to the CBb. On July 13, 2006 the CBb decided that OPTA should have observed our cost accounting system rather than use its own criterion in the form of a benchmark, and ordered OPTA to take a new decision. OPTA has not taken a new decision yet.

In its December 2003 decision, OPTA imposed a EUR 90,000 and a EUR 180,000 fine on us for allegedly violating the obligation to charge cost‑oriented prices and the prohibition on discrimination in providing unbundled access to competing providers of DSL services, respectively. We have appealed this decision before the Rotterdam District Court, but without success. We brought appeal proceedings to the CBb. The CBb dismissed our appeal, however, on May 17, 2006.

In July 2005, the Rotterdam District reversed OPTA’s March 2003 decision to impose a EUR 375,000 fine on us for allegedly violating the prohibition on discrimination in providing unbundled access to our business unit that offers DSL services and to competing providers of DSL services. The business unit allegedly had access to information on our subscribers that

allowed it to place orders for unbundled access lines easier and more accurately. OPTA held this to be at the disadvantage of competing operators because they lacked the same details. According to the Court, however, the helpdesk facilities offered by us to our competitors to help them to “clean” rejected orders is sufficiently equivalent to the facilities used internally, provided the information is made available within a reasonable period of time. If the required information is made available within one day – as we stated during the court session – then there is no undue advantage for our internal business units. The Court referred the case back to OPTA, instructing OPTA to investigate the helpdesk facilities offer by us and to take a new decision taking the court’s judgment into account. OPTA has lodged an appeal with the CBb. The hearing took place on October 16, 2006. The CBb decision is still pending. OPTA informed us that it will defer a new decision on this matter pending the outcome of the appeal proceedings.

Mobile telecommunications – international roaming

The market for international roaming has been under investigation by the European Commission since 1999 with an initial sector inquiry resulting in a working document in December 2000 and unannounced inspections of the offices of mobile network operators in the United Kingdom and Germany, including E-Plus, in July 2001. The Commission said it was seeking evidence of collusion and/or excessive prices in relation to both retail and wholesale roaming charges, and the Commission has subsequently sought, or been provided with, additional information about roaming charges.

In September 2005, BASE and E-Plus joined the roaming complaint of Bouygues Telecom before the European Commission against Vodafone group and Freemove Alliance, alleging that both entities engage in anti-competitive practices in the international wholesale roaming market.

One of the markets defined in the Recommendation under the new European regulatory framework to be investigated by NRAs is the wholesale international roaming market. The NRAs of Member States will evaluate the national markets based on this common position, but it is still very uncertain if any of the NRAs will impose obligations upon their national operators.

At the beginning of 2006 the European Commission announced that it would investigate the possibility of directly regulating the international roaming tariffs. A draft regulation, directly binding in member states, was published on July 12, 2006. It is the intention to let the regulation come into effect by the summer of 2007. Under the proposed regulation wholesale roaming charges would be capped. The caps would be set by defining an EU averaged mobile termination tariff, with a multiplier of two or three depending on the destination of the traffic (same country traffic or international traffic). For retail tariffs, including calls received abroad, a cap would be set a mark-up of up to 30% on the wholesale rates. The Commission finally proposed to enhance the transparency of roaming charges for consumers, by requiring operators to provide customers with full information on applicable roaming charges when subscriptions are taken out and to update consumers regularly about these charges. The draft regulation has to be approved by the EU Counsel and the EU Parliament before it can become effective.

Mobile telecommunications – Germany

On May 19, 2004, 01081 Telecom AG submitted a formal request to the telecommunications regulator for interconnection with E-Plus’ GSM network, because it was not prepared to accept the MTA tariffs offered by E-Plus (EUR 0.149 as of December 15, 2004 and EUR 0.124 as of December 15, 2005). On September 20, 2004, the regulator decided that E-Plus is obliged to interconnect 01081 Telecom AG’s network. On December 28, 2004, the regulator determined in a separate procedure the 2005 MTA tariffs to be EUR 0.149 in line with E-Plus’ tariffs, which decision is being challenged by 01081 Telecom AG. On September 21, 2005, the administrative court in Cologne dismissed the action of 01081 Telecom AG. 01081 Telecom AG appealed before the Federal Administrative Court which suspended the procedure and at the same time initiated a procedure at the European Court of Justice.

In the spring of 2005, the German telecommunications regulator Bundesnetzagentur (BNetzA) started a consultation on E-GSM frequencies. Until the end of 2004, military services had exclusive use of those frequencies. E-Plus was involved in the consultation procedure. On November 30, 2005, the Bundesnetzagentur published its adopted GSM concept. The concept foresees that E-Plus and O₂ should be allocated E-GSM frequencies (of 5 MHz each). Furthermore, in exchange for these E-GSM frequencies, E-Plus and O₂ will be required to return 5 MHz of the already allocated 1800 MHz spectrum. In addition, T-Mobile, Vodafone and E-Plus will in 2007 have the option to request an extension of their GSM licenses. There is no legal appeals process against this GSM concept. The GSM concept has been politically challenged by Deutsche Bahn. Deutsche Bahn requests the frequencies to deploy its GSM-R network. On December 21, 2005, a high-level meeting with the Bundesnetzagentur, Deutsche Bahn, the Ministry of Economic Affairs, the German railways regulator Eisenbahnbundesamt, O₂ and E-Plus took place. The regulator urged all interested parties to seek for a compromise in order to avoid court proceedings. E-Plus stated that according to the information provided by Deutsche Bahn, an additional demand for frequencies could not be justified. Bundesnetzagentur informed all parties that it would allocate the frequencies in early 2006. On February 3, 2006, Bundesnetzagentur allocated 5 MHz bandwidth of the E-GSM band to E-Plus. The assignment is linked to a provision to reallocate these frequencies to Deutsche Bahn, if the latter can prove the need for those frequencies. The provision expires by the end of 2009. As a result, E-Plus is now able to deploy a GSM 900 network and enhance the quality of its GSM network. Deutsche Bahn and some other companies (e.g. Netcologne, Airdata, Inquam and O₂) have challenged the assignment. E-Plus is going to challenge the provision which gives Deutsche Bahn the right to ask under strict conditions for

frequencies. The appeal has no suspensive effect. Meanwhile the protests of Deutsche Bahn and Airdata were rejected by BNetzA. Both Deutsche Bahn and Airdata sued BNetzA and brought an action to the Administrative Court of Cologne. Decisions are expected at the end of 2007 or beginning 2008.

The German regulator has completed its analysis of the termination market. According to the decision, all four GSM mobile operators are considered to have significant market power (SMP) on the call termination market. On August 30, 2006, the German regulator published its regulatory order on mobile termination. According to the regulatory order the mobile termination rates will be set by the regulator (ex-ante regulation). All four MNOs filed lawsuits against the respective regulatory orders. On August 30, 2006, the procedure started to set the MTA tariffs. According to the German telecommunications act, cost information to be provided by the operators must be the primary source for price regulation. Although the regulator is legally obliged to take utmost account of what the European Commission is proposing (e.g. the Commission recommended to base the regulation on a cost model), the German regulator based its decision on an international benchmark. The cost information which was provided by E-Plus was considered to be insufficient. On November 8, 2006, the German regulator ordered to lower the MTA tariffs of all four mobile operators. E-Plus and O₂ had to reduce the MTA tariffs from EUR 0.124 to EUR 0.0994 per minute by November 23, 2006 and T-Mobile and Vodafone were forced to lower their MTA tariff from EUR 0.11 to EUR 0.0878 per minute. All four mobile operators started proceedings against the respective MTA tariff decisions.

Mobile telecommunications – The Netherlands

Licenses

With the acquisition of Telfort, KPN now holds licenses for KPN Mobile The Netherlands (GSM 900, DCS 1800 and UMTS) and Telfort (DCS/ E-GSM and UMTS). The GSM 900 licenses of KPN Mobile The Netherlands and Vodafone will expire on April 1, 2010, unless extended by the Minister of Economic Affairs. In December 2006, the Minister announced its intention to extend the license of KPN until February 13, 2013 against a yearly payment of EUR 6,356,822. The DCS 1800 licenses of KPN and Telfort will expire on February 26, 2013. Following a potential integration of the networks of KPN Mobile and Telfort, KPN may potentially sell and transfer licenses with the consent of the Minister or return them. Meanwhile, the licenses are available to KPN Mobile and Telfort. On November 21, 2006, KPN announced an agreement in principle with T-Mobile to transfer the E-GSM frequencies that are part of Telfort’s license to T-Mobile as of September 2007, which was finalized on January 29, 2007. The transfer requires approval of the Minister of Economic Affairs.

Orange instituted civil proceedings against the State of The Netherlands claiming damages in relation to the DCS 1800 licensing, for which Orange paid approximately EUR 270 million in an auction. According to Orange, the State allowed the creation of an uneven playing field in the Dutch mobile market, because KPN Mobile and Vodafone were not required to pay fees for their GSM 900 frequencies. These claims were rejected in the first instance in 2001, but Orange has lodged an appeal, which is still pending.

Mobile terminating access

On January 1, 2004, the mobile operators in The Netherlands voluntarily reduced their MTA tariffs, upon which the NMa halted its investigation into a potential abuse of dominant positions in relation to these tariffs. In the many disputes between operators at that time, OPTA decided that the reduced tariffs were reasonable. As from December 1, 2005, these tariffs are EUR 0.11 for KPN Mobile The Netherlands and Vodafone and EUR 0.124 for all the other operators (Orange, Telfort, T-Mobile and the MVNO Tele2).

Versatel, MCI and KPN appealed OPTA’s decisions in pending MTA tariff-related disputes, in which OPTA ruled not to intervene for periods prior to January 1, 2004 and to apply the agreed tariffs as of that date. On September 27, 2006, the Trade and Industries Appeals Tribunal (CBb) annulled the earlier judgment of the Court of Rotterdam that OPTA should re-decide, and judged that OPTA had no jurisdiction if no direct interconnection agreement existed and that in cases where such agreement existed OPTA was not allowed to judge whether (initially) agreed tariffs were reasonable. All outstanding disputes are thereby terminated without any obligation for repayment by mobile operators.

OPTA decided on November 14, 2005, to designate all mobile operators as having ‘significant market power’ on the markets for call termination on their mobile networks. As a result OPTA decided that operators as of July 1, 2008, would have to charge call termination tariffs not higher than tariffs that OPTA would decide, based on a LRIC (Long Run Incremental Costs) cost allocation system, to be developed by OPTA. On August 29, 2006, however, the Trade and Industry Appeals Tribunal (in first and highest instance) annulled these decisions of OPTA, based on an insufficient analysis of the relevant markets. As a result OPTA has to re-decide on these markets, which decision OPTA announced to render by July 2007. Until such decision no specific regulation applies for mobile call termination services.

Mobile telecommunications – Belgium

Peak/off-peak litigation against Proximus

As from October 2003, BASE changed its peak hours for interconnections from 8-19 to 10-22 hours and abolished its low weekend interconnect tariff. BiPT confirmed the reasonableness of BASE’s interconnection request in a decision dated August 29, 2003. Proximus appealed this decision before the Brussels Court of Appeals and BASE intervened in this procedure. In two decisions dated June 18, 2004 and September 15, 2005, the Court annulled the BiPT decision and, consequently, overruled BiPT’s decision to impose an amended interconnection agreement with BASE on Proximus. BiPT and BASE have lodged an appeal with the Supreme Court (Hof van Cassatie) in order to overturn the first

judgment by the Court of Appeals. As a result of the appeal decisions, the Court also ruled in 2006 that BASE is not entitled to claim the interconnect fees that were withheld by Proximus following a refusal of the latter to accept BASE’s new peak/off-peak structure. Due to Proximus’ continuous refusal to accept BASE’s new peak/off-peak structure, BASE was forced to terminate its direct interconnection agreement with Proximus as from the end of October 2005, as far as the termination of Proximus’ voice traffic on BASE’s network is concerned. This traffic is now routed via Belgacom’s network.

Abuse of dominant market position: litigation against Proximus (1)

On June 25, 2003, BASE initiated court proceedings against Proximus for the alleged abuse of its dominant market position. BASE seeks a reduction in Proximus’ interconnection rates as well as a compensation for damages suffered due to this anti-competitive behavior (tentatively estimated at EUR 560 million). On March 1, 2004, Mobistar voluntarily intervened in this procedure, estimating its claim against Proximus to amount to EUR 106 million. The parties are currently exchanging written arguments. Pleadings took place in January 2007. A decision is expected in the course of 2007.

Abuse of dominant market position: litigation against Proximus (2)

On February 18, 2005, BASE launched an additional procedure against Proximus for the latter’s alleged abuse of its dominant position on the Belgian mobile market. This procedure is based on the argument of discrimination and aims at obtaining a ‘cease and desist’ order against the disadvantageous on-net tariffs applied by Proximus. In December 2005, the Commercial Court dismissed BASE’s claim. BASE will appeal this decision.

Abuse of dominant market position: litigation against Belgacom

By not accepting the MTA tariffs set by BASE, Belgacom has in BASE’s view abused its dominant position on the transit market of international incoming traffic over the past several years. Because negotiations to reach an amicable settlement failed, BASE lodged a complaint against Belgacom before the Belgian Competition Council on June 2, 2004. This procedure is currently pending.

Number portability – porting costs: annulment procedure

A specific clause of the royal decree of September 23, 2004 on number portability authorizes BiPT to determine the costs that mobile operators may charge one another for performing the porting-out of a customer to a competitor. The basis for these charges should be the costs ‘of an efficient operator’. Specifically against this clause, BASE has launched an annulment procedure before the State Council. This procedure is currently pending.

Number portability – porting costs: appeal procedure

In a decision of September 16, 2003, BiPT determined the costs that mobile operators may charge one another for performing the porting-out of a customer to a competitor. Following an appeal by Mobistar, the Court of Appeals, by judgment of October 14, 2004, suspended the decision of BiPT, and has asked a number of ‘prejudicial’ questions to the European Court of Justice in relation to the directives 2002/22 (universal service) and 2002/21 (framework directive). This procedure is currently pending.

Operating results

Our Financial Statements are prepared in accordance with IFRS, which varies in certain significant respects from US GAAP. Information relating to the nature and effect of such differences is presented in ‘Information on US GAAP’ in the Notes to the Consolidated Financial Statements. The following discussion includes various forward-looking statements. Please see ‘Forward-Looking Statements’, as well as ‘Risk Factors’ for a description of certain factors, many of them outside our control, that may affect our operating results. For additional information about how we calculate customer data, including ARPU, see ‘Presentation of Financial and Other Information’.

Consolidated Results of Operations

2006

HIGHLIGHTS AND TRENDS

revenues

Total revenues increased by EUR 130 million to EUR 11,941 in 2006. The EUR 259 million decrease in revenues in the Fixed division and EUR 156 million decrease in Other activities were more than compensated by a EUR 675 million increase in the Mobile division.

The improved performance of all our mobile operators in Germany, The Netherlands and Belgium resulted in increased revenues. The consolidation of Telfort since October 4, 2005 contributed EUR 416 million additional revenues in The Netherlands in 2006. MTA tariff reductions negatively influenced mobile revenues in an amount of EUR 191 million.

The Fixed division noted a decrease in revenues of 3.8%, of which 2.3% (EUR 158 million) was due to regulatory MTA reductions. The lower decrease in revenues compared to 2005 (5.2%) was caused by the continuing downward trend in line losses in the traditional market. This was partly compensated by a growth in VoIP-lines during 2006, both in our consumer and in our business market. New acquisitions (such as Narrowcasting, CSS, NewTel, Enertel, Nozema, Demon and Speedlinq) during 2006 contributed an amount of approximately EUR 100 million to our revenues.

The decrease of EUR 156 million for our other activities was mainly the result of the sale of Xantic as of February 14, 2006. The sale resulted in EUR 140 million lower revenues.

Other income

Other income in 2006 includes the gains on the sale of Xantic amounting to EUR 74 million, EUR 8 million on the sale of a part of the activities of SNT Germany and EUR 32 million related to the gains on the sale of property, plant and equipment.

OPERATING EXPENSES

Operating expenses increased by EUR 246 million (2.6%) to EUR 9,834 million. An increase of EUR 545 million is attributable to the Mobile division, a decrease of EUR 122 million (2.3%) attributable to the Fixed division and a decrease of EUR 47 million to our Other activities.

The operating expenses in our Mobile division increased by 10.7% mainly as a result of the consolidation of Telfort resulting in additional operating expenses for Mobile The Netherlands amounting to EUR 498 million. The additional operating expenses include a goodwill adjustment for the acquisition of Telfort amounting to EUR 175 million as a result of a restructuring and accelerated depreciation and amortization charges on the networks of the Mobile group and the Telfort licenses for a total amount of EUR 109 million. Higher operating expenses within Mobile The Netherlands were compensated by EUR 160 million lower expenses for E-Plus mainly resulting from lower cost of materials due to significantly lower handset expenses and lower expenses as a result of MTA tariff reductions for all our mobile operators.

Implementation of the restructuring initiatives announced in the strategy review in March 2005 is well on track. Since year-end 2004, KPN has reduced its workforce in The Netherlands by 17% or 3,673 FTEs (excluding subsequent acquisitions), exceeding the stated objective of a minimum of 1,500 FTE reductions per annum. As a result in 2006 we recognized EUR 71 million for restructuring charges (in 2005: EUR 92 million) of which EUR 7 million related to an outsourcing contract in our Fixed division. EUR 29 million restructuring charges (in 2005: EUR 54 million) related to the Fixed division, EUR 22 million (in 2005: EUR 3 million) to the Mobile division and EUR 20 million to Other activities (in 2005: EUR 35 million).

Our All-IP program may have effect on our operating expenses. Project and integration costs in the first year may increase by an amount which may be slightly higher than the anticipated book gains from the sale of our technical buildings.

Total operating expenses of our Fixed division decreased in line with the decrease in revenues and is mainly caused by MTA tariff reductions (EUR 158 million), continued headcount reduction, lower depreciation charges, and energy tax reimbursement amounting to EUR 20 million partly offset by higher work contracted out and other expenses as a result of increased subscriber acquisition costs with respect to ‘InternetPlusBellen’. 2005 operating expenses included a fine of EUR 17 million to OPTA and a payment of EUR 18 million to competitors (without admitting any liability).

Operating expenses within other activities decreased by EUR 47 million as a result of the sale of Xantic resulting in EUR 116 million lower operating expenses partly offset by the release of EUR 63 million relating to the provision for pension charges in the 2005 income statement.

Operating profit

Operating profit decreased by 5.3% from EUR 2,348 million in 2005 to EUR 2,223 million in 2006. For a further discussion of the factors underlying the developments in operating profits, we refer to the above sections and the discussion on the segmental results of operations.

In summary, the operating profit in 2006 was influenced significantly by, among others, the following elements:

•	accelerated depreciation and amortization charges on the networks of the Mobile group and the Telfort licenses for a total amount of EUR 109 million;
•	regulatory MTA tariff reductions resulting in EUR 84 million lower operating results;
•	a restructuring at Telfort resulting in a goodwill adjustment amounting to EUR 175 million;
•	a gain on the sale of Xantic amounting to EUR 74 million and the sale of property, plant and equipment amounting to EUR 32 million; and
•	an energy tax reimbursement at our Fixed division amounting to EUR 20 million.

Financial income and expense

Net finance costs decreased from EUR 547 million in 2005 to EUR 520 million in 2006 by 4.9%. Compared to last year, financing costs were lower as a result of refinancing transactions in 2005 and 2006 which resulted in improved interest rate profile on our debt portfolio.

Share of the profit of associates and joint ventures

The share of the profit of associates and joint ventures relates to the results of Esprit Telecom (formerly known as Zeus Telecom), Tetraned, Mobirail, Nostalgienet, and Pluk.

Income taxes

The 2006 tax charge amounted to EUR 127 million, the effective tax rate being 7.5% in 2006 (20.0% in 2005).

The decline of the effective tax rate is explained by:

•	the Telfort restructuring, impacting both profit before tax (additional amortization charge of EUR 175 million) and corporate tax (benefit of EUR 100 million);
•	tax-exempted book gains on the 2006 sale of Xantic (EUR 74 million) and the NTT DoCoMo settlement in 2005 (EUR 58 million);
•	positive effects from adjustments of the Dutch statutory tax rate in 2006 of EUR 158 million on deferred taxes (2005: EUR 52 million) (the Dutch corporate tax rate was lowered from 29.6% in 2006 to 25.5% effective January 1, 2007); and
•	EUR 73 million recognition of the deferred tax asset for carry forward losses at BASE in 2005.

After several years of paying no corporate income tax, based on general economic, market and business developments KPN expects to move into a tax paying position in The Netherlands as from 2007. For the medium term KPN’s Dutch tax payments will be affected by the recapture of the E-Plus losses of EUR 11.5 billion, set off against the Dutch Mobile profits since 2002. Pursuant to the recapture method agreed upon with the Dutch tax administration the yearly EBITDA (operating profit adjusted for depreciation, amortization and impairments) amount of E-Plus is included in KPN Mobile’s taxable result and taxed at 25.5% until, in principle, the cumulative EBITDA amounts of 2007 and subsequent years reach the loss still to be recaptured as per December 31, 2006 of EUR 8.5 billion. The excess of the tax payment over the tax charge that will arise in the Netherlands as from 2007 due to the recapture will continue until the EUR 8.5 billion loss has been recaptured.

In Germany and Belgium no material tax payments are expected for the medium term.

2005

HIGHLIGHTS AND TRENDS

revenues

Total revenues increased by EUR 65 million (0.6%) to EUR 11,811 million in 2005. The EUR 519 million increase in revenues of our Mobile division more than offset the EUR 375 million decline experienced by our Fixed division.

The improved revenues in the Mobile division were driven by all our operators in The Netherlands, Germany and Belgium. The increase also includes a EUR 93 million contribution from Telfort (consolidated from October 4, 2005) and a positive effect of the NTT DoCoMo settlement amounting to EUR 26 million with respect to royalties. The total agreement with NTT DoCoMo resulted in total revenues and other income amounting to EUR 110 million. An amount of EUR 84 million with respect to the NTT DoCoMo settlement is recognized as other income (see below) and relates to a settlement for trademark damage (EUR 25 million) and negative goodwill (EUR 59 million). Revenues were negatively affected by EUR 178 million relating to MTA tariff reductions.

Revenues of our Fixed division decreased by 5.2%. More than half (EUR 195 million) of this decrease (2.7%) was due to regulatory MTA tariff reduction. The remainder of the decrease results from an accelerating trend of traditional voice services shifting to ADSL and IP-based platforms and a fiercely competitive market, including mobile operators and cable VoIP offers. Although revenues from new technology-based products and services have increased steadily, the increase did not fully offset the decline from traditional services.

Revenues for 2005 for our other activities amounted to EUR 230 million, down from EUR 333 million in 2004. The difference relates mainly to the sale of PanTel in February 2005.

Other income

Other income in 2005 relates for an amount of EUR 84 million to the NTT DoCoMo settlement, as discussed under revenues. Also included in other income are book gains on the sale of properties amounting to EUR 18 million (in 2004: EUR 17 million), sale of Infonet and Intelsat in 2005 (EUR 21 million) and the sale of PTC and Eutelsat in 2004 (EUR 56 million).

Operating expenses

Group operating expenses increased by EUR 414 million to EUR 9,588 million (4.5%), which is more than the 1.0% increase in revenues and other income. The increased operating expenses are mainly caused by EUR 717 million increased operating expenses within our Mobile division, partly compensated by lower operating expenses within the Fixed division (EUR 73 million) and lower operating expenses ‘other’ (EUR 254 million).

The operating expenses of the Mobile division increased more than proportionally (16.4%) compared to the 9.9% increase in revenues mainly as a result of the first full year amortization of UMTS licenses (impact of EUR 201 million) and as a result of the consolidation of Telfort (EUR 147 million), compensated by lower expenses as a result of MTA tariff reductions.

During 2005, the workforce in The Netherlands was reduced by nearly 10%, or 2,106 FTEs, exceeding the stated objective of a minimum of 1,500 FTE reductions per annum. In 2005 we recognized EUR 92 million for restructuring costs (in 2004: EUR 59 million), of which EUR 54 million (2004: EUR 25 million) related to the Fixed division, EUR 3 million in the Mobile division (2004: 11 million) and EUR 35 million in Other activities (2004: EUR 23 million).

Operating expenses within our Fixed division includes a fine of EUR 17 million to OPTA and a payment of EUR 18 million to competitors (without admitting any liability) following the conclusion of the investigation into discounts given by KPN to certain fixed telephony business customers.

Operating expenses ‘Other’ decreased mainly as a result of the sale of PanTel in February 2005 and due to the fact that EUR 63 million is released from the pension provisions. Following the conclusion of a new Collective Labor Agreement (agreed in principle in December 2005), certain (pre) pension plans were amended and partly abolished resulting in a lower required pension provision.

Operating profit

The operating profit in 2005 decreased by 11.2% (EUR 297 million) compared to 2004. For a further discussion of the factors underlying the developments in operating profits, we refer to the above sections and the discussion on the segmental results of operations.

Summarized, the operating profit in 2005 was influenced significantly by, among others, the following elements:

•	regulatory MTA reductions resulting in EUR 121 million lower operating result;
•	full-year amortization on UMTS licenses in Germany and The Netherlands (impact: EUR 201 million);
•	a fine of EUR 17 million to OPTA and a payment of EUR 18 million to competitors; and
•	a release of the pension provision amounting to EUR 63 million

Financial income and expense

Net financial expenses in 2005 decreased by EUR 42 million to EUR 547 million due to reduced interest charges following early and scheduled debt redemptions in 2004. Costs associated with the early redemptions in 2004 amounted to EUR 50 million.

Share of the profit of associates and joint ventures

The share of the profit of associates and joint ventures relates to the result from Schiphol Telematics, Tetraned, Mobirail and Zeus Telecom.

Income taxes

The 2005 tax charge amounted to EUR 360 million (2004: EUR 300 million), the effective tax rate being 20.0% in 2005 (2004: 14.6%).

The 2004 tax charge was influenced by the 2004 agreement reached with the Dutch tax authorities, the application of thin-capitalization rules in Germany, changed Dutch corporate tax

rates and reduced valuation allowances on deferred tax assets for tax loss carry forwards. These influences continued during 2005. Particularly, the 2005 tax charge showed the effects of further lowered Dutch corporate tax rates as well as further reduced valuation allowances on deferred tax assets for tax loss carry forwards, albeit the effects were smaller than in 2004.

In 2005, the change in the Dutch corporate tax rate resulted in a EUR 24 million (2004: EUR 128 million) downward adjustment of Koninklijke KPN’s deferred tax asset and a EUR 72 million gain (2004: EUR 307 million) resulting from a downward adjustment of KPN Mobile’s and Telfort’s deferred tax liabilities.

In 2005, we reduced the valuation allowance on BASE’s deferred tax asset for corporate tax loss carried forwards by EUR 73 million (2004: EUR 138 million). These reductions were the result of improved profitability outlooks.

Segmental Results of Operations

Fixed division

SEGMENTATION

Traffic revenues, which include:
• traffic revenues with respect to the fixed switched telephony network;
• national and international wholesale services; and
• portal enabling services.

Access revenues such as subscription revenues and one-off connection revenues, which include:

•	monthly subscription revenues and one-off connection revenues for traditional fixed telephony and flat fees for broadband xDSL and IP-VPN connections based on capacity provided;
•	transmission services: include service revenues for fixed-network connections; and
•	local loop services: monthly rental fees and initial fees paid for MDF Access and Co-location.

Other sources of revenue include:

•	inbound and outbound call services and e-mail handling services, as well as sales support services and directory assistance;
•	monthly subscription fees for dial-up Internet, shares in telephony usage revenues, TV-subscription fees, online advertising revenues and the sales of modems, Internet portal services and Internet content;
•	IP services like IP Dial-In Services, billed at local tariffs based on minutes used; and
•	integrated, outsourced and managed solutions.

For a more detailed description of the services we offer and the corresponding sources of revenues, please refer to the section ‘Information about the Company’.

In 2006, total revenues decreased by 3.8% from EUR 6,867 million to EUR 6,608 million.

Operating expenses decreased by 2.3% (EUR 122 million) to EUR 5,245 million. This decrease mainly reflects:

•	EUR 104 million decline in depreciation and amortization charges as a result of a lower fixed assets base due to retirements;
•	lower other operating expenses as a result of a EUR 25 million decrease in restructuring charges from EUR 54 million in 2005 to EUR 29 million in 2006 (including EUR 7 million relating to an outsourcing contract) and the fact that 2005 included a fine of EUR 17 million to OPTA and a payment of EUR 18 million to competitors (without admitting any liability);
•	an energy tax reimbursement amounting to EUR 20 million; and
•	an increase in other operating expenses and work contracted out as a result of increased subscriber acquisition costs with respect to ‘InternetPlusBellen’.

In 2005, total revenues decreased by 5.2% from EUR 7,242 million to EUR 6,867 million.

•	Within the consumer market the decline in fixed voice traffic and subscription revenues accelerated (minus EUR 82 million). This unfavorable trend reflects competition, price reductions and in particular technological and behavioral changes that drive customers away from traditional telephony services towards mobile and IP-based communication solutions. As a result, total revenues decreased by 2.3% to EUR 2,384 million. This decline was partly offset by an increase of Internet related revenues (EUR 16 million).
•	In the Business segment the total revenues decreased by 10.2% from EUR 2,949 million to EUR 2,649 million. These lower revenues were mainly caused by the effect of fierce price competition, as well as the migration from traditional voice traffic, equipment and leased lines towards new, mostly IP-based services. These new services are mostly rendered at lower tariffs and the revenues of these new growth areas did not offset the decrease in the traditional services.
•	In 2005, total revenues from Wholesale and Operations decreased by 5.3% to EUR 4,973 million, mainly as a result of lower national traffic volumes, partly compensated by an increase in international and transit volumes.

Operating expenses decreased by 1.4% from EUR 5,440 million to 5,367 million due to:

•	savings in the infrastructural and IT costs (headcount reduction and other savings);
•	an additional charge to the restructuring provisions amounting to EUR 29 million in 2005 (in 2005 totaling to EUR 54 million, while in 2004 EUR 25 million was charged);
•	increased operational expenses for TV and broadband services;
•	increased purchase cost in wholesale market as a result of increased transit and international wholesale volumes; and
•	other operating expenses, which also includes a fine of EUR 17 million to OPTA and a payment of EUR 18 million to competitors (without admitting any liability) following the conclusion of OPTA’s investigation into discounts given by KPN to certain fixed telephony business customers.

Segment Consumer

Revenues

The Dutch communication market is fast moving towards broadband-centric customers wanting to enjoy the advantages of ‘digital communications’ such as low cost calling, flat-rate pricing and digital entertainment. During 2006 this transformation process reached a new phase, with approximately 1.4 million Dutch households subscribing to VoIP, offered by cable operators, alternative DSL operators or us. As a result, our telephone lines fell sharply but the rapid take-up of ‘InternetPlusBellen’ (our main VoIP product) significantly offset this trend. The sharp increase of these bundled VoIP/DSL packages (an increase of 0.5 million) is in contrast with the decline of traditional voice packages (a decrease of 0.3 million).

In this dynamic market setting we have strengthened our position as the leading provider of voice and broadband services and we continued to be a fast growing provider of digital TV. In VoIP our share in VoIP adds increased significantly during the course of 2006. We continued to grow in broadband, adding more than half a million subscribers and further expanding to a market share of almost 41%. Our KPN TV customer base (during 2006 marketed as ‘Digitenne’) continued to increase and reached 265,000 connections.

The revenue decline in the traditional voice market (in particular as a result of telephone line losses) was not fully offset by a revenue increase in the new services (ADSL, VoIP and TV) and revenue effects from our 2006-acquisitions. Overall, revenues declined by EUR 122 million (5.1%) with further deteriorating margins.

2005 was a year in which the number of broadband and mobile-only households saw a significant increase. Mobile-only usage increased to approximately 16% ¹⁾ of the Dutch households (excluding the Small offices and Home offices market) by the end of 2005. The Dutch penetration rate for residential broadband (including cable) is the highest in Europe. Broadband penetration ¹⁾ has increased from 45 per 100 households in the fourth quarter of 2004 to approximately 58 per 100 households in the fourth quarter of 2005. This growth in broadband connections into a very significant potential market scale in 2005 was also a main reason for the VoIP rollout in the residential market.

Growth in the number of broadband subscribers meant that KPN saw an increase in Internet-related revenues (EUR 16 million). KPN’s decision at the end of 2004 to start a television portfolio is reflected in increased other net sales (EUR 9 million).

These developments did not offset the higher rate of declining fixed voice revenues (EUR 82 million). This decline is mainly due to mobile substitution, a declining number of access lines, emerging VoIP offerings and lower prices for, in particular fixed-to-mobile, calls. As a result, total revenues decreased by 2.3% to EUR 2,384 million.

Operating expenses

Operating expenses increased in 2006 by 1.3% from EUR 2,046 million to EUR 2,073 million compared to a 5.1% decrease in revenues. Overall, the higher marketing costs (including subscriber acquisition costs) for the Internet and TV business lines, reflecting the competitive nature of these markets were not fully offset by the effects of cost-cutting programs and MTA tariff reductions. Work contracted out and other expenses increased by EUR 63 million mainly as a result of increased subscriber acquisition costs with respect to ‘InternetPlusBellen’.

Intercompany expenses decreased by EUR 66 million, mainly as a result of lower purchases from Wholesale Services and Operations following the decline in demand for traditional voice services (traffic and lines).

Operating expenses decreased in 2005 by 0.9% from EUR 2,064 million to EUR 2,046 million as compared to a 2.3% decrease in revenues. Overall, the decrease shows that the effects of cost-cutting programs and MTA tariff reductions were almost fully offset by higher marketing costs for the Internet and TV business lines, reflecting the competitive nature of these markets.

Intercompany expenses decreased by EUR 48 million, mainly as a result of lower purchases from Wholesale Services and Operations following the decrease in voice traffic and fixed lines. Other intercompany expenses for billing, IT and management fees decreased slightly due to cost reduction at these departments.

Voice Consumer

The trend towards more VoIP households had a significant financial impact. Our PSTN/ISDN customer base eroded, with a sharp decline in traffic and subscription revenues. This negative trend reflects competition, price reductions and in particular technological and behavioral changes that drive customers away from traditional telephony services towards IP-based communication solutions.

The massive move to IP is also reflected in a downturn of the number of voice packages sold. In 2006 our range of packages serves about 1.1 million customers, about 275,000 lower than in 2005. This unfavorable trend was partly offset by the rapid spread of innovative terminals (called ‘Telefoon met Belminuten’) that reached a total of approximately 160,000 sold units (the installed base increased to approximately 250,000 units).

Our installed base decreased by almost 1.1 million PSTN and ISDN connections. As a result, subscription and connection revenues declined by almost 11%. Thanks to our success with ‘InternetPlusBellen’ we stemmed net customer line loss considerably.

These trends also contributed to a major and ongoing decline of the (switched) voice traffic market. In 2006, the traditional Dutch voice minute market shrunk by approximately 19% as a consequence of more minutes moving from switched to VoIP. KPN’s number of traditional voice minutes was 15% down compared to 2005. The turnaround in market share development, becoming visible from mid 2005, continued. KPN’s voice market share was in 2006 approximately 3.5% higher than in 2005.

As a result of the above mentioned developments total voice revenues declined by 12.7%, from EUR 1,674 million in 2005 to EUR 1,462 million in 2006.

In 2005, the market for fixed line telephony was marked by an accelerating decrease in traffic and subscription revenues. This unfavorable trend reflects competition, price reductions and in particular technological and behavioral changes that drive customers away from traditional telephony services towards mobile and IP-based communication solutions. The impact of Voice over IP (VoIP) on Business Line Voice’s operations is accelerating. The Dutch fixed voice market is moving towards broadband-centric customers expecting to benefit from the advantages of digital communications such as free calling and flat-rate pricing. In the second half year of 2005, VoIP was especially strong amongst the cable operators. KPN introduced its own VoIP product ‘InternetPlusBellen’ during 2005 at a slow pace. At the end of 2005, ‘InternetPlusBellen’ has reached its point of required quality for a national rollout in 2006.

In 2005, total revenues of Voice consumer decreased by 4.7% to EUR 1,674 million. Net sales from subscriptions (including other revenues) of EUR 1,078 million (2004: EUR 1,095 million), decreased by 1.6% whereas net sales from traffic decreased by 9.8% to EUR 596 million (2004: EUR 661 million).

The trends towards more mobile-only and VoIP-only households is eroding our PSTN/ISDN customer base and by that our revenue base. Our installed base decreased by 360,000 PSTN and ISDN connections. As a result, subscription and connection revenues declined by 1.6%. There was no change in tariffs during 2005.

The decrease in sales from traffic was driven by both a substantial decline in traffic volumes and a decrease in the fixed-to-mobile tariffs as per December 2004 and December 2005 (total impact EUR 27 million). A substitution in communication from switched voice to voice over IP, MSN and peer-to-peer VoIP products such

as Skype also contributed to the decrease in total market of voice minutes. The traffic volumes in billions of minutes dropped by 7.7% to 11.0 billion (2004: 11.9 billion). Minutes in all traffic categories declined except for Fixed-to mobile, which illustrates a mix effect of increased mobile-only usage and decreased fixed-line subscriptions. Domestic traffic volumes decreased, as a result of a declining overall switched telephony market (both lines and traffic) and ongoing competition from Carrier (Pre)Select and direct access operators. The effect of competition in the switched telephony market, however, diminished during 2005 as result of more effective customer retention efforts. This is illustrated by a steadily rising share by the switched minute market.

Internet

In The Netherlands 7 out of every 10 households have Internet access, while penetration of broadband is one of the highest in the world. As a consequence, dial-up Internet services rapidly decreased in significance. Many providers operate in this mature broadband market, including cable operators, alternative DSL operators and other service providers.

As part of our strategy to increase our broadband market share, the aggressive rollout of ‘InternetPlusBellen’, our bundle for VoIP and ADSL, was very important. A large part of these contracts are either new KPN customers or KPN customers that did not yet have an ADSL connection.

As part of our strategy we executed smart acquisitions. In 2006 we acquired Speedlinq and Demon. Compared to 2005, our retail broadband market share increased from 36.1% to 40.9% as of December 31, 2006.

In 2006, total Internet revenues increased by 5.6% to EUR 738 million (2005: EUR 699 million). Higher revenues from increased ADSL connections more than offset lower revenues from dial-up minutes and a negative price effect resulting from an increase in lower priced ADSL packages. The number of ADSL connections from KPN ISPs increased by 38% to 2,044 thousand at the end of 2006 (including approximately 99,000 customers from acquired ISPs and excluding connections from pending acquisitions).

In 2005, total net sales of Internet increased by 2.3% to EUR 699 million (2004: EUR 683 million). Higher revenues from increased ADSL connections more than offset lower revenues from dial-up minutes (a decrease of 48%). The number of ADSL connections increased by 26% to 1,740,000 at the end of 2005 (of which 1,485,000 through our own ISPs and Direct ADSL and 255,000 through third party ISPs). As a result of the aggressive competition in the broadband and Internet market, the KPN market share of the total broadband market decreased slightly to 42.3% (including cable-users). However, due to intensive acquisition programs, takeovers of ISPs Freeler and Hcc!Net, and the takeover of the KPN ADSL Tiscali customers, the retail broadband market share increased from 29.7% to 36.1% in 2005. The KPN ISP customer base increased by 549,000 to approximately 1,485,000 by the end of 2005.

Due to market competition the bandwidth capacity of each broadband package increases at stable price levels. KPN has introduced new packages to accommodate a wider range over bandwidth demand. Bandwidth capacities were also upgraded for all packages during the year. The number of ADSL connections with a relatively low price and corresponding bandwidth increased strongly resulting in a changed customer mix, partly due to migration of dial up customers to the lower end of our ADSL portfolio (e.g. ‘ADSL Tijdsurfen’).

Other

Net sales of ‘Other’ include revenues from TV, media and Hotspots (wireless Internet access points at public locations). The number of Digital TV subscriptions increased from approximately 184,000 (including approximately 60,000 Digitenne subscriptions) in 2005 to approximately 265,000 at the end of 2006.

Segment Business

Revenues

Total revenues of segment Business decreased by 4.5% (EUR 119 million) to EUR 2,530 million compared to 2005 due to lower net sales of Voice Business and Connectivity. This decrease was somewhat offset by higher net sales of EnterCom and IMS as a result of additional acquisitions. The lower revenues are mainly caused by the migration from traditional voice traffic and data to new mostly IP-based services, which are rendered at lower tariffs. Voice experienced an ongoing migration towards broadband and mobile solutions combined with market share loss in the traditional voice market and the MTA tariff decline (EUR 23 million) as a result of OPTA regulation.

Increased broadband penetration caused a decline of fixed line usage, particularly in Internet dial-up airtime usage but also partly in voice airtime usage due to voice-to-data substitution (e.g. Voice over IP, e-mail, MSN-messenger).

More and more (larger) companies are opting for IP-VPN connectivity. As IP-VPN penetration rates increase, spending shifts away from fixed telephony based solutions, e.g. leased lines.

Total revenues of segment Business decreased by 10.2% (EUR 300 million) compared to 2004 to EUR 2,649 million due to lower net sales of Voice, Connectivity, EnterCom and Integrated & Managed Solutions. The lower revenues were mainly caused by the effects of increasing (price) competition, as well as the migration from traditional voice traffic, equipment and leased lines to new mostly IP-based services, which are rendered at lower tariffs. Voice experienced an ongoing migration towards broadband and mobile solutions combined with market share loss in the traditional voice market and the MTA tariff decline (EUR 29 million) as a result of OPTA regulation.

The increase in broadband penetration causes a decline of fixed line usage, particularly in Internet dial-up airtime usage but also partly in voice airtime usage due to voice-to-data substitution (e.g. Voice over IP, e-mail, MSN-messenger). For cable operators and alternate xDSL providers it is increasingly attractive to introduce a low priced first line VoIP service.

More and more (larger) companies are opting for IP-VPN connectivity. As IP-VPN penetration rates increase, spending will shift away from fixed telephony based solutions, e.g. leased lines. This effect worsened in 2005 due to the fact that IP-VPN solutions are offered in the market at lower tariffs. The number of mobile-only sites is growing, particularly in the small offices segment. This resulted in loss of both subscription and traffic revenues.

Operating expenses

Total operating expenses in 2006 compared to 2005 decreased by EUR 101 million (4.3%) to EUR 2,271 million.

The decrease of EUR 133 million in intercompany costs is closely related with the decline in the net sales of the business lines Voice and Connectivity (revenues decreased EUR 190 million). Work contracted out and other expenses increased as a result of increased net sales at IMS and EnterCom.

Other operating expenses decreased by EUR 32 million mainly due to the fact that 2005 included an OPTA fine of EUR 17 million and a payment of EUR 18 million to competitors following the conclusion of OPTA’s investigation into certain discounts offered to certain business customers.

Total operating expenses in 2005 compared to 2004 decreased by EUR 195 million (7.6%) to EUR 2,372 million.

The cost of materials increased by EUR 25 million mainly due to higher purchases for large Managed Services programs (e.g. Porto phones LARA/C2000, NAM and Stork/KVWS). This was partly compensated by lower material costs for equipment due to lower sales.

The cost of work contracted out and other external expenses decreased by EUR 23 million mainly caused by lower sales volumes in traditional voice-equipment deliveries, lower international costs for connections and network maintenance expenses.

The costs of employee benefits decreased by EUR 42 million compared to 2004, mainly caused by increased efficiency and reduction of workforce by 440 FTE and the selling of Application Consultancy (end of 2004) resulting in a reduction of approximately 117 FTEs.

Other operating expenses increased by EUR 10 million mainly caused by a fine of EUR 17 million to OPTA and a payment of EUR 18 million to competitors following the conclusion of OPTA’s investigation into certain discounts offered to certain business customers. This increase was partly offset by a EUR 22 million lower net addition to the reorganization provision compared to 2004.

Total depreciation, amortization and impairments increased by EUR 10 million mainly caused by the fact that 2004 included reversals of impairments on certain fixed assets totaling EUR 8 million.

Intercompany costs decreased by EUR 176 million mainly caused by lower costs for production at Connectivity due to a decreasing Installed Base of Connectivity’s traditional portfolio resulting in EUR 52 million lower intercompany expenses. In addition intercompany expenses at Voice decreased by EUR 102 million due to lower revenues and a decrease in the mobile terminating tariffs.

VOice business

Net sales

In 2006, Voice Business net sales decreased by 12.4% to EUR 1,086 million. Net sales from subscriptions and connection fees decreased by 4.0% to EUR 531 million, whereas net sales from traffic decreased by 19.2% to EUR 555 million (2005: EUR 687 million).

The fixed telephony business is in continuous decline caused by an ongoing migration towards broadband and mobile solutions combined with market share loss in the traditional voice market. Both broadband and mobile services are negatively affecting fixed line revenues from both traffic and subscriptions.

In 2006, the traffic volumes in billions of minutes dropped by 18.6%. Minutes in all traffic categories fell, but the decline was most notable for Internet traffic, as a result of accelerated broadband penetration, which resulted in higher churn of dial-up customers. Domestic traffic volumes declined, as a result of a declining overall telephony market and ongoing competition from traditional fixed-telephony and (cable) VoIP operators. The decrease in the number of connections also contributed to the decline in the number of calls and traffic volumes. In 2006, however, our market share stabilized, due to further improved customer retention efforts and new discount propositions.

The decrease in revenues from subscriptions and connection fees was caused by a 4.2% decrease in the number of connections in 2006. Both the number of PSTN and ISDN connections decreased, although the decrease in PSTN connections was larger. The decrease in the number of connections is the result of both accelerated penetration of mobile-only usage as well as broadband access competition, VoIP offerings in the Small and Medium sized Enterprises (SME) market and direct access offerings in the corporate market.

In 2005, Voice Business net sales decreased by 10.3% to EUR 1.240 million. Net sales from subscriptions, connection fees and other remained stable, whereas net sales from traffic decreased by 17.1% to EUR 687 million (2004: EUR 829 million).

In 2005, total traffic volumes in billions of minutes dropped by 23.4%. Minutes in all traffic categories fell, but the decline was most notable for Internet traffic, as a result of accelerated broadband penetration, which resulted in higher churn of dial-up customers. Domestic traffic volumes declined, as a result of a declining overall telephony market and ongoing competition from Carrier (Pre)Select and direct access operators (e.g. BT, Versatel). The decrease in the number of connections also contributed to the decline in the number of calls and traffic volumes. In 2005, however, our market share declined slower than in 2004, due to improved customer retention efforts. The average tariff per minute for total traffic increased in 2005. This increase is a result of a change in the mix of traffic categories. Traffic volumes of Internet and local calls are declining in relation to fixed-to-mobile and international calls. As a result of OPTA regulation for mobile terminating tariffs (total effect of EUR 29 million in 2005) fixed-to-mobile tariffs declined.

The decrease in revenues from subscriptions and connection fees was caused by a 4.0% decrease in the number of connections in 2005. Both the number of PSTN and ISDN connections decreased, although the decrease in PSTN connections was larger. The decrease in the number of connections is the result of both accelerated penetration of mobile-only usage as well as broadband access competition, VoIP offerings in the Small and Medium sized Enterprises (SME) market and direct access offerings in the corporate market. ISDN2 customers who have opted for ADSL are migrating back to PSTN or to a cheaper variant of ISDN, named ISDN1.

Connectivity

Net sales

Revenues declined primarily for traditional data transmission services (national and international). This is due to customers migrating towards more cost-effective IP and fiber-based network services and other competitors and related severe price erosion. An increase of traditional services is only seen for Managed Private Lines (point-to-point broadband solutions), as a result of the ongoing increase of PIN-payments and demand from the alarm and surveillance sector.

In the new data market our strong IP-VPN and E-VPN propositions have been well received and are stimulating the migration trend from point-to-point (leased lines) to any-to-any (VPN-connections) solutions. The number of IP-VPN connections grew 13% and the number of E-VPN connections grew by approximately 125%. KPN managed to maintain a leading position in the Dutch IP-VPN market. The chosen strategy of cross- and up-sell towards managed solutions has proven to be successful in 2006. Increasing revenues are expected from value added Cybre Centre and Hosting services in 2007 and onwards.

Business DSL connections grew 125% in the last year. With our business proposition we are able to stimulate over 54 thousand small and medium enterprises to do their e-business via KPN providing a solid base for new applications and services.

In 2005, net sales for Connectivity decreased by 7.1% to EUR 732 million. Revenues from transmission services both nationally and internationally decreased by 21.5% mainly due to the continued decrease in the number of leased lines, both analog and digital. Revenues from broadband services showed an increase of 6.4% in 2005 due to growing demand for broadband services.

The decline in revenues from traditional transmission services was partly offset by a growth in revenues from network services. Both IP-VPN and Ethernet VPN revenues increased in 2005 due to the continued migration from traditional services such as leased lines and Frame Relay. Zakelijk (Business) DSL revenues also benefited from migration of ISDN lines to xDSL connections in 2005. As a result total revenues of network services increased by 11.5%.

While revenues decreased in 2005, the market share of Connectivity in traditional services such as leased lines remained stable (according to management estimates) while its market share on new services such as IP-VPN continued to increase. Despite the fact that average prices for new services are much lower than for traditional services (e.g. 100: 33 for digital leased lines versus IP-VPN), Connectivity managed to limit the decrease in revenues.

Integrated & Managed Solutions

Net sales

Total net sales increased by EUR 11 million (2.7%) in 2006. This was mainly due to the increase in number of Customer Programs. The price erosion in the Customer Programs has been compensated by larger volumes per customer and an increasing number of customers.

Total net sales decreased by EUR 13 million (3.1%) in 2005, mainly as a consequence of the sale of Application Consultancy in December 2004 (revenue in 2004: EUR 16 million), which was only partly compensated by Customer Programs. The number of Customer Programs increased by 15, but with a lower average revenue per program due to price erosion.

EnterCom

Net sales

Net sales increased by 7.4% to EUR 436 million mainly due to an increase in projects. The traditional voice deliveries decreased due to the highly competitive market combined with lower revenues as a result of a decrease in the installed base. This was offset by an increase of revenues from data solutions and related services such as Managed IPT.

Net sales decreased by 7.5% to EUR 406 million. The decline in sales was mainly caused by reduced sales volumes in traditional voice deliveries due to a highly competitive market combined with lower service revenues as a result of a decrease in installed base.

Although revenues from data solutions and related services such as Managed IPT increased, this could not offset the aforementioned lower volumes of traditional voice equipment. Outsourcing revenues declined by approximately 3.8% due to lower prices.

Wholesale and Operations

Revenues

Wholesale and Operations total revenues decreased by 4.9% or EUR 244 million (in 2005 by 5.3% or EUR 276 million). A significant part of this decrease (EUR 114 million) is related to MTA tariff reductions (in 2005 EUR 139 million). The remainder mainly arose from lower internal traditional revenues as a result of traffic volumes (as indicated in the table below), partly compensated by increased transit and international traffic volumes. The external revenues decreased by 5.4% (in 2005 by 1.8%) as a result of the migration from traffic related revenues to flat fee solutions for VoIP and xDSL.

National traffic volumes decreased by 5.4% to 31.4 billion in 2006 (in 2005 a decrease of 6.6% to 33.2 billion), mainly due to the decrease in originating voice minutes and in 2005 also due to a decrease in traditional voice services. The decrease in originating Internet minutes of 51.3% (in 2005 49.5%) reflects the migration to ADSL. The reduced volumes in traditional voice and originating voice results from increasing competition as well as migration to VoIP. The increase in transit volumes is partly caused by the increase in ‘mobile only users’.

International traffic volumes increased by 13.9% (in 2005 15.1%) as a result of a continuing growth of mobile traffic services and increased volume by new and existing parties. International call volumes have benefited from the fast developing global market for the trading of minutes, mainly in Africa and the Middle East and in 2005 also in Asia. The average revenue per minute fell as a result of fierce competition in the wholesale carrier market and the impact of MTA regulation mainly in European countries.

Operating expenses

Operating expenses decreased by 6.5% to EUR 3,838 million. The main reasons were lower depreciations due to a reduced asset base and MTA tariff reductions, partly offset by increased purchase cost following increased international and transit wholesale volumes.

The costs of materials, work contracted out and other external expenses decreased as a result of lower interconnect charges to third party mobile operators resulting from MTA tariff reductions (total effect of EUR 114 million) and a EUR 20 million Ecotax refund partly offset by higher purchasing costs because of increased wholesale services.

The charges for employee benefits decreased by 7.3% due to a reduction of the number of employees (approximately 650 FTE).

Depreciation, amortization and impairment charges continued to decrease as a result of a lower asset base.

Other operating expenses included restructuring charges (including EUR 7 million relating to an outsourcing contract) amounting to EUR 25 million (in 2005: EUR 52 million) relating to the restructuring plans announced in March 2005.

Interdivision settlements increased by 3.9% to EUR 608 million reflecting business developments in our retail segments and due to higher mobile terminating and transit volumes.

Operating expenses decreased by 2.6% to EUR 4,104 million. The main reasons were lower depreciations due to a reduced asset base and MTA reductions, partly offset by increased purchase cost following increased international and transit wholesale volumes.

Cost of materials increased by 11 million, mainly resulting from increased energy expenses for infrastructure and real estate.

The costs of work contracted out and other external expenses decreased as a result of lower interconnect charges to third party mobile operators resulting from MTA tariff reductions (total effect of EUR 139 million) partly offset by higher purchasing costs because of increased wholesale services.

The charges for employee benefits decreased by 7.0% due to a reduction of the number of employees (approximately 600 FTE).

Depreciation, amortization and impairment charges continued to decrease due to investment optimization, resulting in a lower asset base. During 2005, we recorded an impairment charge on the SNT goodwill amounting EUR 40 million.

Other operating expenses included an additional restructuring provision amounting to EUR 52 million (in 2004: EUR 1 million) in connection with the implementation of the restructuring initiatives announced in March 2005.

Interdivision settlements decreased by 4.4% to EUR 585 million reflecting business developments in our retail segments and due to lower mobile terminating interconnect charges.

MOBILE division

Mobile division’s revenues are presented as follows:

•	Service revenues, consisting of:
	-	traffic revenues. These are charged at an agreed price for a fixed duration of time or capacity. Airtime rates vary depending on proposition (prepaid vs. postpaid) as well as destination and time of the call. Traffic revenues also include:
		-	traffic bundles, offered in combination with a subscription;
		-	value-added service revenues, charged for our value-added mobile voice and data services (i-mode, messaging services, voice mail and information services);
		-	roaming revenues, received from other network operators for their clients’ calls placed on our networks; and
		-	termination revenues, charged to other telecommunication companies for calls originating on their networks and terminating on our networks.
	-	fixed monthly subscription fees. These are billed monthly to our contract customers for providing them access to our network irrespective of their actual airtime usage. The fees include handset service fees.
•	Hardware and other revenues. These include revenues other than service revenues and comprise primarily hardware revenues – revenues from the sale of SIM cards, handsets and accessories – as well as income from intellectual property rights (IPR) and site sharing.

Due to our acquisition of Telfort in 2005, we currently own two mobile operators in The Netherlands. Telfort is being consolidated as from October 4, 2005 and forms part of The Netherlands’ figures.

In 2005, KPN acquired the remaining 2.16% interest in KPN Mobile held by NTT DoCoMo – then having a carrying value of EUR 115 million – for a net consideration of EUR 5 million and an agreement allowing the use of NTT DoCoMo’s technology by O₂ in Germany, a right previously granted exclusively to KPN. The resulting EUR 110 million gain was recorded for EUR 26 million as revenues and for EUR 84 million as other income. KPN allocated EUR 26 million to IPR income (of which half recorded by KPN Mobile The Netherlands and the other half by E-Plus), EUR 25 million to trademark damages (recorded by E-Plus) and EUR 59 million to negative goodwill (recorded by KPN Mobile Holding).

Germany

Revenues and other income

In 2006, revenues were up 3.5% as higher service revenues, up 9.6%, were to some extent offset by lower hardware and other revenues. Service revenues increased on higher traffic volumes. Hardware and other revenues were lower due to the success of SIM-only offers. The growth of the German mobile market and E-Plus’ increased share thereof were reflected in an enlarged customer base, up to 12.6 million at year-end 2006 (2005: 10.7 million).

While the customer base rose again in 2006, ARPU saw a further decrease to EUR 19 mainly due to regulatory MTA tariff reductions, tariff optimization induced by customers as well as the changed postpaid/prepaid mix due to the high prepaid customer intake during the year.

The estimated 12.9% service revenue market share as of December 31, 2006 (2005: 11.7%) demonstrates the impact hereof on E-Plus’ position in the German market. As of December 2006, E-Plus served 6.0 million postpaid customers, representing 47% of its total customer base (2005: 52%). This decrease is the result of E-Plus’ focus on partnerships, such as with Aldi (offering only prepaid), meaning that a large share of the customer base growth in 2006 related to prepaid customers.

In 2005, revenues increased by 7.7% mainly driven by growth in E-Plus’ customer base. With an 11.7% service revenue market share as of December 31, 2005 (2004: 11.2%), E-Plus further

strengthened its position in the German market. As of December 2005, E-Plus served 5.6 million postpaid customers, constituting 52% of the total customer base (2004: 50%).

Although the number of subscribers rose in 2005, ARPU decreased to EUR 21 mainly due to regulatory MTA tariff reductions and the changed tariff-mix, which more than offset the positive AMPU development. Service revenues increased by 7.4% on higher traffic volumes in 2005, whereas hardware and other revenues (up EUR 29 million) benefited from a EUR 13 million IPR income due to the NTT DoCoMo settlement.

The below tables summarize the developments in customer base, traffic volumes, average revenues and gross churn ratios of E-Plus:

In 2006, postpaid gross churn increased due to the higher volume of contract expirations as well as clearing inactive customers, while in 2005 prepaid gross churn rose due to clearing inactive customers.

Operating expenses

In 2006, operating expenses decreased 5.7%, or EUR 160 million, mainly due to lower cost of materials and lower acquisition costs due to our SIM-only strategy, which means SIM cards are distributed without a handset and cheaper distribution channels such as the Internet are employed.

In 2005, operating expenses increased by 15.5%, or EUR 380 million, primarily due to growth in the customer base, but also as a result of a full year’s amortization of the UMTS license (impact: EUR 132 million). Amortization and depreciation charges rose in 2005 as the amortization of UMTS licenses and network started in September and October 2004 respectively. Cost of materials increased as the number of postpaid handsets sold rose. Work contracted out increased in line with increased traffic volumes. Although E-Plus reduced the dealer commission per new customer in line with its new strategy, the total amount spent on dealer commissions was higher than in 2004 due to the increased number of gross additions. The network costs increased in line with the rollout of new sites. The increase in other operating expenses reflects the fact that E-Plus spent more on marketing and brand communications, rather than focus on dealer commissions and discounts.

The Netherlands

As a result of the acquisition in October 2005, Telfort is being consolidated as from October 4, 2005. The 2005 figures for The Netherlands including and excluding the effects of the Telfort acquisition are shown below.

Revenues

The Netherlands’ 2006 revenues increased by 20.0%, or EUR 497 million, to EUR 2,980 million, representing both stand-alone growth for KPN Mobile The Netherlands and a full-year’s consolidation of Telfort. Service revenue growth for

The Netherlands amounted to 21.1% or EUR 499 million, despite a EUR 68 million adverse impact from regulatory MTA tariff reductions.

The growth in 2006 service revenues resulted from a larger postpaid customer base, despite a slightly lower postpaid AMPU. Lower tariffs and ongoing migration from prepaid to postpaid propositions contributed to the reduction of postpaid ARPU. On the other hand, prepaid ARPU increased due to cleaning up of the prepaid costumer base in the second half 2005 resulting in a lower prepaid costumer base and as a result of the fact that Telfort prepaid costumers generate a higher ARPU. The Netherlands succeeded in further strengthening its leading position in the Dutch market: the service revenue market share amounted to an estimated 46.9% in 2006 (2005: 39.9%).

With four mobile operators and numerous mobile service providers, the Dutch market remains competitive. In this market, KPN remains focused on customer value over customer base by emphasizing its postpaid propositions. Marketing and sales efforts aimed at attracting high-value postpaid customers contributed to an 18.3% growth of KPN’s postpaid customer base in 2006. Furthermore, the reduced level of handset subsidies on prepaid contracts resulted in a 1.0% decrease in prepaid customers.

The Netherlands’ 2005 revenues were up by 9.3% or EUR 212 million, primarily due to the acquisition of Telfort (5.5% or EUR 126 million). Service revenue growth for KPN Mobile The Netherlands (excluding Telfort) amounted to 5.0% or EUR 108 million, despite a EUR 81 million adverse impact from regulatory MTA tariff reductions. KPN Mobile The Netherlands’ hardware and other revenues were EUR 22 million or 16.7% lower, mainly due to reduced handset sales (EUR 15 million) and risen discounts (EUR 16 million), despite a EUR 13 million IPR income from the NTT DoCoMo settlement.

Growth in the Dutch 2005 service revenues was attributable to a larger postpaid customer base, despite a slightly lower postpaid AMPU. Reduced tariffs and migration from prepaid to postpaid propositions reduced the postpaid ARPU. The prepaid ARPU decreased as well due to lower MTA tariffs and the migration of high-end prepaid customers to postpaid propositions. The increased postpaid base and the rising popularity of postpaid bundles caused service revenues to increase by 10.7%.

Increased marketing and sales efforts – aimed at stimulating high-end prepaid customers to migrate to postpaid propositions – contributed to a 20.7% standalone growth of KPN Mobile The Netherlands’ postpaid customer base in 2005. Furthermore, in 2005, KPN reduced the handset subsidies on prepaid contracts and cleared a large number of inactive customers from its customer base, resulting in a 20.3% standalone decrease in prepaid customers.

The tables below summarize the developments in customer bases, traffic volumes, average revenues and gross churn ratios of our mobile operators in The Netherlands. The 2005 figures for The Netherlands including and excluding the effects of the Telfort acquisition are shown below.

KPN Mobile The Netherlands (excluding Telfort) showed a traffic growth in 2006 amounting to 9.8%. This traffic growth was mainly driven by a 16% increase in the number of postpaid customers. Postpaid AMPU of KPN Mobile The Netherlands declined as the increasing number of postpaid customers mainly consisted of migrating prepaid customers. Total traffic increased by 34.2% due to the organic growth and the acquisition of Telfort.

The decrease in churn was caused by a decrease of the prepaid churn, reflecting the cleaning in 2005 of the customer base. This was partly compensated by a higher post-paid churn. The increase in post-paid churn was caused by Telfort having a higher churn rate and KPN Mobile The Netherlands (excluding Telfort) having an increasing churn due to a stronger focus on segments with less loyalty.

KPN Mobile The Netherlands showed a 12.1% standalone growth in traffic volumes in 2005 with strong growth in postpaid traffic volumes offset by a decrease in prepaid traffic volumes, both in line with customer base developments. Weighted monthly AMPU

and total monthly ARPU did not change significantly as a result of the Telfort acquisition.

Operating expenses

Operating expenses were up by 37.5% mainly as a result of the full-year consolidation of Telfort in 2006 contrary to only the fourth quarter of 2005. The operating expenses of Telfort included higher depreciation and amortization charges (EUR 109 million) due to shortened depreciation terms of assets affected by the network integration and the decision to accelerate the amortization of Telfort licenses. Following the 2006 restructuring of Telfort, EUR 175 million in goodwill – recognized in the books of KPN Mobile The Netherlands – was adjusted downward as all tax loss carry forwards available at acquisition date were fully used. This resulted in a higher valuation of the deferred tax asset and lower goodwill.

Operating expenses in 2005 were up by 19.0%, also as a result of the acquisition of Telfort in the fourth quarter (8.3% or EUR 128 million). KPN Mobile The Netherlands’ efforts to acquire and retain postpaid customers resulted in higher dealer commissions and bonuses (4% or EUR 60 million) comprised in costs of work contracted out. Increased costs resulting from the larger customer base and related increase in traffic volumes were almost fully compensated by lower access tariffs, partially by MTA tariff reductions due to OPTA regulation. Moreover, 2005 is the first full year, in which KPN Mobile The Netherlands utilized its UMTS network and licenses; therefore, amortization and depreciation charges related to this 3G network increased by EUR 69 million, or 3.8% of total operating expenses in 2005.

Belgium

Revenues

While our customer base increased from 2.0 million as of December 31, 2005 to 2.4 million in 2006, our blended ARPU remained stable compared to EUR 24 in 2005. The change in the prepaid/postpaid mix, promotions and the effect of the reduced MTA tariffs as of November 1, 2006 were offset by a usage increase in our existing customer base. BASE estimates it has approximately a 15% share of total revenues in the Belgian mobile market (2005: over 13% and 2004 approximately 11%). As of November 1, 2006, BiPT took a first step to reduce the MTA tariffs, with further reductions expected during 2007 and 2008.

BASE’s 2005 revenues showed a 28.0% increase primarily due to growth of its customer base. The number of customers in Belgium increased from 1.6 million to 2.0 million, up 21.5%. BASE also succeeded in reducing both prepaid and postpaid churn, which contributed to the favorable development of its customer base. Blended ARPU was stable throughout 2005: whereas postpaid ARPU decreased by EUR 4 or 6.2% – in spite of a significant increase in postpaid AMPU – due to introduction of flat-fee plans, prepaid ARPU increased to EUR 15 – despite a slightly lower AMPU – due to the reduced amount of free minutes.

The tables below summarize the developments in customer base, traffic volumes, average revenues and gross churn ratios of our mobile operators in Belgium.

Under the current tariffs and conditions introduced by BASE in 2005, prepaid customers are removed from the customer base after one year of inactivity (i.e., customers without incoming or outgoing traffic).

Operating expenses

Operating expenses increased by 2.6% in 2006 compared to 2005. Cost of materials and cost of work contracted out increased by EUR 21 million. This increase can be explained by higher interconnection costs caused by increased traffic volumes, higher external costs resulting from our outsourcing activities, and higher costs for network extension and optimization. This increase was partly offset by lower dealer commissions and roaming costs. Salary-related expenses decreased by EUR 8 million compared to 2005 mainly due to the lower average number of FTEs (2006: 477; 2005: 533). The decrease in FTEs was the result of outsourcing projects in the second half of 2005.

Operating expenses were up 9.5% in 2005; employee benefits were 24.2% lower because of the reduction of the number of employees during the year. BASE is progressively outsourcing non-core activities, reflected in the increased costs of work contracted out. Of the EUR 35 million increase in costs of work contracted out and other external expenses, EUR 19 million represents higher interconnect costs caused by increased traffic volumes, while EUR 9 million relates to risen dealer commissions. Compared to 2004, amortization of licenses increased from EUR 6 million to EUR 19 million, primarily due to the effect of a (partial) UMTS license impairment reversal (EUR 16 million) in 2004.

Other activities

revenues

The decrease in total revenues in 2006 amounting to EUR 156 million or 68% was mainly the result of the sale of Xantic as per February 14, 2006. The sale resulted in EUR 140 million lower revenues. Other income in 2006 includes a gain on the sale of Xantic of EUR 74 million. As per February 14, 2006, KPN and Telstra sold their total holdings in Xantic to the Canadian Stratos Global Corp.

In 2005, total revenues decreased to EUR 230 million mainly as a result of EUR 97 million lower net sales. This decrease was mainly caused by the divestiture of PanTel in February 2005 resulting in EUR 80 million lower sales and EUR 11 million lower sales at Xantic as a result of the restructuring of certain activities in 2004. Other income in 2005 included the book gains on the sale of Intelsat and Infonet amounting in total to EUR 21 million and in 2004 book gains of EUR 36 million on the sale of KPN’s interest in Eutelsat and of EUR 20 million on the sale of PTC.

Operating expenses

The decrease in operating expenses in 2006 amounting to EUR 47 million is the result of the sale of Xantic, resulting in EUR 116 million lower operating expenses which was opposed by a release of EUR 63 million relating to the provision for pension charges in the 2005 income statement.

In 2005 operating expenses decreased by EUR 254 million, mainly as a result of lower operating expenses following the sale of PanTel. In addition an amount of EUR 63 million relating to the provision for pension charges has been released into the income statement. In 2004 we released EUR 18 million relating to a restructuring provision related to revenue guarantees for Atos Origin and an additional goodwill impairment charge of EUR 7 million within Xantic.

Other Consolidated Results of Operations

Sale of activities and assets

During the last three years, we sold various activities and assets. The below table reflects the estimated impact of the asset disposals on our external revenues, operating result and total assets. The figures are based on the last full year of consolidation or the moment of disposal in case of participating interests.

Liquidity and capital resources

Cash flow information

The following table provides a three-year summary of our cash flows for the years ended December 31, 2006, 2005 and 2004:

NET CASH FLOWS

Operating activities

In 2006 our operating cash flow increased by EUR 238 million to EUR 4,071 million. This increase is mainly caused by net received income tax credits amounting to EUR 147 million, while EUR 24 million income taxes were paid in 2005. In addition, our working capital position increased slightly compared to 2005.

In 2005 our net cash flow from operating activities decreased by EUR 124 million compared to 2004. This decrease is mainly caused by a decrease in operating profit, partly compensated by lower interest payments (EUR 139 million) and an increased working capital position.

Net interest payments amounted to EUR 484 million in 2005, a decrease of 22% compared to 2004 due to the refinancing of bonds and renewal of the credit facility in the third quarter of 2004.

Investing activities

The table below is a three-year summary of our investments and additions and reconciliation to the cash flow used in investing activities:

Acquired group companies

In 2006, KPN acquired Group companies (such as Demon, Nozema, Speedlinq, NewTel Essence, Enertel and CSS Telecom) for a cash consideration of EUR 243 million. In addition, a final payment of EUR 132 million was made for the 2005 acquisition of Telfort.

In 2005, investments in Group companies mainly relate to the acquisition of Telfort for EUR 1,131 million (of which EUR 489 million represents goodwill), the acquisition of the 2.16% minority interest in KPN Mobile from NTT DoCoMo for EUR 5 million, additional investments in SNT for EUR 31 million and the acquisitions of Freeler and Hcc!Net.

During 2004, we increased our interest in SNT from 50.78% to 93.7% for an amount of EUR 75 million.

Additions to intangible fixed assets

In 2006, investments in intangible fixed assets totaled EUR 200 million (2005: EUR 223 million, 2004: EUR 134 million). In 2006 these investments mainly relate to software. In 2005, these relate for an amount of EUR 207 million to software (2004: EUR 111 million) as well as to investments in customer bases of Tiscali (EUR 13 million) and Cistron (EUR 3 million).

Non-cash items

Non cash items include deferred earn-out settlements (EUR 37 million) and a non-cash consideration for the acquisition of Narrowcasting (EUR 7 million). In addition, non cash items included asset retirement obligations included as an addition to property, plant and equipment for EUR 22 million (2005: EUR 15 million and 2004: EUR 30 million). 2005 also included an additional investment in SNT through issuance of 3 million shares (EUR 20 million) and a deferred payment amounting to EUR 132 million with respect to the Telfort acquisition. The year 2004 also included a release relating to lease and dismantling obligations amounting to EUR 20 million.

Proceeds from sale of assets

Total proceeds in 2006 included the net proceeds (excluding dividends paid to the minority shareholder amounting to EUR 11 million) from the sale of Xantic for an amount of EUR 72 million, the sale of SNT activities (EUR 8 million) and the proceeds from the sale of property, plant and equipment (EUR 56 million).

During 2005, the total proceeds from sale of assets amounted to EUR 242 million and included Intelsat (EUR 29 million), Infonet (EUR 129 million) and PanTel (EUR 9 million). Additionally, the proceeds included EUR 45 million (GBP 30 million) from a redeemed loan related to the sale of our 15% shareholding in Hutchison 3G UK to Hutchison Whampoa Limited in 2003 as well as the proceeds of property sales (EUR 31 million).

In 2004, total proceeds from sales of assets amounted to EUR 227 million. These included amounts of EUR 73 million from the sale of Eutelsat, EUR 30 million from the sale of PTC, EUR 73 million from the sale of various Property, plant and equipment, EUR 24 million from the sale of Volker Wessels Netwerk Bouw and a EUR 27 million repayment by MobilCom of their loan.

Financing activities

In 2006, total cash flow used in financing activities amounted to EUR 2,024 million, consisting of a cash inflow of EUR 2,970 million, offset by a cash outflow of EUR 4,994 million.

In 2006, we paid a EUR 661 million dividend for 2005 and EUR 321 million as an interim dividend for 2006.

In 2006, we repurchased 162.8 million shares for a total amount of EUR 1.6 billion which included 80 million shares repurchased from the Dutch State. During the completion of the share repurchase program we also repurchased 2.1 million shares for a total amount of EUR 18.4 million to cover share option plans and performance share plans.

For details of our share repurchases in the reporting period see the table included in the Corporate Governance section.

In accordance with our regular redemption schedule we redeemed the EUR 279 million Eurobond 1996-2006, the EUR 564 million Eurobond 2001-2006, EUR 14 million Other loans, EUR 8 million Private loans and we redeemed early EUR 732 million of our EUR 1.5 billion Eurobond 1998-2008.

On March 16, 2006, we issued under the GMTN-program an Eurobond of EUR 850 million maturing in 2013 with a fixed coupon of 4.5%, and an Eurobond GBP 275 million maturing in 2016 with a fixed coupon of 5.75%. In order to limit our foreign currency exposure, on March 16, 2006 we entered into two cross currency swap transactions to change the interest rate profile of the Eurobond 2006-2016 GBP from a GBP fixed rate of 5.75% to an average euro fixed rate of 4.89%. On November 8, 2006, we also issued an Eurobond of EUR 1 billion maturing in 2017 with a fixed coupon of 4.75%.

The remaining proceeds and repayments from borrowings relate to temporary drawings and repayments under our credit facility. As of December 31, 2006, we had temporarily drawn an amount of EUR 250 million under our credit facility and we obtained an additional EUR 5 million from other banks.

2005

In 2005, total cash flow used in financing activities amounted to EUR 2,918 million, consisting of a cash inflow of EUR 1,381 million, offset by a cash outflow of EUR 4,299 million.

In 2005 we paid a EUR 609 million dividend for 2004 and EUR 281 million as an interim dividend for 2005.

In 2005, we repurchased 238.9 million shares. As part of the share repurchase program we also repurchased 5.2 million shares for a total amount of EUR 33 million to cover share option plans. In addition, on December 16, 2005 we repurchased the special share, which was until then held by the State of The Netherlands, for an amount of EUR 0.48.

In accordance with our regular redemption schedule, we redeemed a total amount of EUR 1,662 million, which consisted of the EUR 204 million syndicated loan, the EUR 333 million Global bond 2000 – 2005, the EUR 659 million Global bond 2000 – 2005 and the EUR 327 million Convertible Bond 2000-2005. We redeemed EUR 40 million of our private loans of which EUR 9 million were early redemptions. We also redeemed EUR 99 million of other loans, of which EUR 38 million were early redemptions.

In June 2005, we issued a EUR 1 billion Eurobond with a maturity of ten years and a coupon of 4%. We have drawn temporarily on our credit facility in the fourth quarter of 2005 for an amount of EUR 350 million as per December 31, 2005.

2004

In 2004, total cash flow used in financing activities amounted to EUR 2,639 million, consisting of a cash inflow of EUR 1,148 million, and by a cash outflow of EUR 3,787 million.

In 2004, we repurchased 164 million shares for an initial amount of up to EUR 1,009 million. We also repurchased an amount of EUR 33 million worth of our own shares, with an average purchase price of EUR 6.04 per share, to cover exposure related to share option plans.

In 2004 we paid a EUR 606 million dividend for 2003 and EUR 190 million as an interim dividend for 2004.

In February 2004, we used an interest rate swap to change the interest rate profile of the Eurobond 1998 – 2008 from a fixed rate of 4.75% to a 6 months floating rate with a spread above Euribor of 1.24%. Also in February 2004, we entered into a cross currency swap transaction to change the interest rate profile of the Eurobond 2001 – 2008 GBP from a fixed rate of 7.9% to a 6 months floating rate with a spread above Euribor of 3.14%. This cross currency swap transaction became effective as of April 11, 2004. Because of the negative market value of the original swaps, the new hedge resulted in a cash outflow of EUR 39 million. The lower GBP rate in the new hedge resulted in a decrease of the euro equivalent of the Eurobond 2001 – 2008 GBP, resulting in a gross debt reduction of EUR 22 million. The remaining cash outflow of EUR 17 million represents differences in future interest expenses and is recognized as part of the net cash flow provided by operating activities.

On July 21, 2004, we completed (i) our offer to exchange our Eurobond 2001 – 2006 with a nominal value of EUR 1,005 million for the Eurobond 2004 – 2011; and (ii) our offer to purchase for cash our outstanding Eurobond 1996 – 2006 with a nominal value of EUR 156 million and our outstanding Convertible Bond 2000 – 2005 with a nominal value of EUR 800 million. In total, a nominal amount of EUR 1,961 million was exchanged and repurchased, which was financed through a new issuance of a Floating Rate Note due 2009 for a total amount of EUR 700 million and of a Eurobond due 2011 for a total amount of EUR 1,425 million. The EUR 700 million Floating Rate Notes due 2009 were swapped through an interest rate swap from a floating interest rate into a fixed coupon of 4.02%.

Finally, the category Other in 2004 included, (early) redemptions of EUR 31 million of Private Loans maturing in 2005 and 2006 and EUR 44 million of financial leases of E-Plus. On the other hand, E-Plus contracted EUR 30 million of financial leases in December 2004.

Credit ratings

Our credit ratings on December 31, 2006 were BBB+ with negative outlook (Standard & Poor’s) and Baa2 with stable outlook (Moody’s).

Commitments and contingencies

The following table sets forth our contractual obligations over the coming years:

CONTRACTUAL OBLIGATIONS

On the basis of our current redemption profile and current interest rates, we expect our interest payments to amount to EUR 443 million in 2007, EUR 491 million in 2008, EUR 435 million in 2009, EUR 407 million in 2010 and EUR 267 million in 2011. These amounts are not included in the table above.

Our budgeted 2007 capital expenditures amount to approximately EUR 1.6 billion up to EUR 1.8 billion. For our All-IP program in the Netherlands we expect additional capital expenditures of approximately EUR 900 million during the roll-out period (till 2010). We expect to use significant proceeds from the anticipated sale of our technical buildings in the financing of these capital expenditures. The level and timing of capital expenditures we actually make will depend on the pace of network build-outs and upgrades, product rollouts and acquisitions, among other things.

On February 7, 2007 KPN started a EUR 1 billion share repurchase program, to be executed during 2007 but only at a price which enhances value for the remaining shareholders.

KPN also intends that the total amount of dividend paid over the fiscal year 2007 will at least be equal to the total amount of dividend paid over the fiscal year 2005 (EUR 950 million). For further information, see ‘Financial and Dividend Policy’ below.

There are no off-balance sheet arrangements, other than those disclosed in the section titled ‘Commitments, contingencies and legal proceedings’ in the notes to our Consolidated Financial Statements, that have or are reasonably likely to have a material current or future effect on our financial position and results that is material to investors.

For additional information (also on our debt profile), please refer to the sections titled ‘Financing – and Financial Instruments’ and ‘Commitments, contingencies and legal proceedings’ in our Consolidated Financial Statements.

Available financing sources in 2007

We believe that our working capital and available financing resources will be sufficient to fund our present business requirements, including our budgeted capital expenditures. For more information on our debt profile, please refer to the section titled ‘Financing and Financial Instruments’ in our Consolidated Financial Statements.

Due to German capital maintenance rules, we are required to keep certain funds available at E-Plus. As of December 31, 2006, KPN’s cash position amounted to EUR 803 million (including EUR 374 million in non-netted notional cash pools, of which EUR 314 million relating to E-Plus).

In addition to the available cash and cash equivalents, cash flows from operations and cash flows from any further sales of non-core assets, we have the following financing resources available:

EUR 1.5 billion multi-currency revolving credit facility

In August 2006, we renewed our EUR 1.5 billion multi-currency credit facility, extending its maturity from August 2009 to August 2013. The credit facility can be used for general corporate purposes, working capital and refinancing indebtedness. The interest rate margin amounts to 0.175% over Euribor up to and including the fifth anniversary of the agreement and 0.20% thereafter (and is no longer linked to KPN’s credit ratings). In the event the total drawings exceed 50% of the total commitment under the credit facility, KPN must pay an additional utilization fee of 0.025%. KPN also must pay a commitment fee over undrawn amounts, which is equal to 30% of the interest rate margin applicable at the time.

As of December 31, 2006, we had temporarily drawn an amount of EUR 250 million under the facility for working capital purposes.

Overdraft facilities

During 2006, we had four uncommitted overdraft facilities with four banks, worth EUR 50 million each. The overdraft facilities may be cancelled at any time and do not have a specified maturity date. In 2006 we have drawn on one of the facilities from time to time. As of December 31, 2006 there were no amounts drawn under the overdraft facilities.

Global Medium Term Note Program

In August 2006, we updated our EUR 10 billion Global Medium Term Note (GMTN) program. The available borrowing capacity as of December 31, 2006 under our EUR 10 billion GMTN- program (available since April 1997) amounted to EUR 3,598 million. The GMTN program contains no commitment from investors to provide funding to us. Funding will be available subject to market conditions and other factors at the relevant time.

Capital resources covenants

Our existing capital resources contain the following covenants, which could trigger additional financial obligations or early redemption of the outstanding indebtedness:

Our Eurobond 2006-2013 (EUR), Eurobond 2006-2016 (GBP) and Eurobond 2006-2017 (EUR) contain a change of control clause by means of which we may be required to redeem such outstanding Notes early, in the event that (i) certain changes of control occurs and (ii) within the change of control period a rating downgrade to subinvestment grade occurs in respect of that change of control. The change of control period ends 90 days after the change of control event occurs.

Our Eurobond 2001–2008 (GBP) contains a rating step-up provision which offers each note holder a 0.375% increase in the interest rate for each notch downgrade of our unsecured long-term debt below either Baa2 by Moody’s or BBB by Standard & Poor’s, and a rating step-down provision which results in a 0.375% decrease in the interest rate for each notch upgrade (up to the initial interest rate). Additionally, we may be required to redeem the outstanding notes early, in the event that:

(i) we consolidate with or merge into another entity (other than a merger of a subsidiary into KPN in which KPN is a continuing corporation) or convey, transfer or lease all or substantially all of our properties and assets to another person or entity without the prior approval of a majority of the note holders; and (ii) the rating assigned to the notes after giving effect to any such transaction is lower either than Baa3, in the case of Moody’s, or BBB–, in the case of Standard & Poor’s. As of December 31, 2006, the total outstanding amount under this bond amounted to EUR 258 million.

In addition, many of our capital resources contain a covenant prohibiting us to enter into any amalgamation, demerger, merger, corporate restructuring or reorganization, unless prior written consent has been given by a majority of the lenders or noteholders (e.g., as in the EUR 1.5 billion multi-currency revolving credit facility) or the resulting company assumes all of our rights and obligations with respect to the loans or notes.

Financial and dividend policy

KPN seeks to ensure that its ratio of net debt to operating result plus depreciation, amortization and impairments remains within the range of 2 to 2.5 times. Furthermore, KPN intends to maintain a minimum credit rating of Baa2 (Moody’s) and BBB (S&P). We expect that this financial policy will allow KPN to continue with its policy of accommodating an attractive dividend policy, while maintaining flexibility to grow and invest in its business.

Also, KPN intends to maintain its mid-term dividend policy, according to which KPN expects to pay out a dividend between 35 and 50 percent of its annual free cash flow, defined as net cash flow provided by operating activities minus capital expenditures.

KPN also intends that the total amount of dividend paid over the fiscal year 2007 will at least be equal to the total amount of dividend paid over the fiscal year 2005 (EUR 950 million).

Accordingly, KPN has proposed a cash dividend of EUR 0.50 per share in respect of the year ending December 31, 2006, of which EUR 0.16 was paid out as an interim dividend in August 2006. The proposed dividend will be presented for approval at the Annual General Meeting of Shareholders to be held on April 17 2007 and, upon approval, paid out shortly thereafter.

Within the context of the financial policy KPN started on February 7, 2007 a EUR 1 billion share repurchase program, to be executed during 2007 but only at a price which enhances value for the remaining shareholders.

These policies may change and are based on a number of assumptions concerning future events and are subject to uncertainties and risks that are outside our control.

Information about market risk

As a result of our international operations, we are exposed to various kinds of market risks in the ordinary course of business. These risks include foreign currency exchange rate risks, interest rate risks, credit risks, legal risks and country risks.

We have established policies that deal with the use of derivative financial instruments in order to reduce foreign currency exposure and to manage our interest rate profile. Our centralized Treasury department matches and manages intercompany and external foreign currency reported by our various business operations and group companies. Hedges are applied on a full coverage basis, when economically feasible. With regard to our interest rate risk exposure we review periodically the desired mix of fixed and floating interest rate liabilities. As of December 31, 2006, approximately 74% of our interest-bearing debts were subject to fixed interest rates. We may enter into additional derivative instruments in the future to adjust our mix of fixed and floating interest rate liabilities.

Derivative financial instruments are used solely for the purpose of hedging underlying exposures. We do not enter into derivative financial instruments for speculative purposes.

Given our operating activities, we have a limited exposure to foreign exchange risk of currencies outside the eurozone. This exposure mainly results from settlement of international telecommunications traffic, purchase of goods and equipment and primarily exists of British pound and US dollar exposure. As of December 31, 2006, 99% of our cash and cash equivalents were denominated in euro, with the remainder denominated in US dollar and other currencies.

Credit risk is mitigated by strict policies on client acceptance and counter party limits. Local management and our centralized legal department review legal and country risks on a case-by-case basis.

For more information, please refer to the section titled ‘Financing and Financial Instruments’ in our Consolidated Financial Statements.

Critical Accounting Policies and Estimates

KPN’s significant accounting policies based on IFRS are set out on pages 113 to 120 of the Consolidated Financial Statements. The following discussions are based on IFRS and accounting principles generally accepted in the United States (US GAAP). For differences between our reporting under IFRS and US GAAP we refer to ‘Information on US GAAP’.

The preparation of our financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts in our Consolidated Financial Statements, accompanying Notes and the Information on US GAAP.

We base our estimates about the carrying values of assets and liabilities that are not readily apparent from other sources on historical experience, independent valuations and various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the accounting policies and estimates that are most critical in the preparation of our consolidated financial statements and information on US GAAP and which require subjective or complex judgments from management are the following:

•	impairments of goodwill and other long-lived assets;
•	useful lives of long-lived assets and valuation of acquired assets;
•	income taxes;
•	pensions and other post-retirement benefits;
•	provision for litigation and contingencies; and
•	financial instruments.

Impairments of goodwill and other long-lived assets

The inherent management estimates and assumptions used in determining whether an impairment charge should be recognized are as follows:

•	determining our cash generating units and reporting units;
•	timing of impairments tests;
•	projecting cash flows for determining recoverable amounts or fair values; and
•	determining discount rates.

Determining cash generating units

Goodwill

Goodwill is allocated to cash-generating units (US GAAP reporting unit) for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

At December 31, 2006 our total goodwill under IFRS amounts to EUR 4,569 million (EUR 3,783 million under US GAAP). The allocation to cash generating units (or Reporting units under US GAAP) is shown below.

Other long-lived assets

In accordance with IFRS and US GAAP, we assess the impairment of intangible fixed assets (such as our licenses) and property, plant and equipment on the lowest cash generating unit. For the majority of our assets we determined that the segment level is the lowest cash generating unit, where the mobile activities are divided into the geographical areas Germany, The Netherlands and Belgium. Assets to retire or to sell are tested separately.

Until 2004 we performed separate impairment tests for our GSM and UMTS activities per geographical area. As from 2005, we believe that the cash flows from GSM and UMTS activities can no longer be determined largely independent from each other, while achieving reliable outcomes. Impairment tests for our Mobile activities are performed for our GSM and UMTS activities combined.

Timing OF impairment tests

Goodwill

Goodwill is tested on an annual basis, or in the case of a triggering event (see Other long lived assets).

Other long-lived assets

In accordance with IFRS and US GAAP, we assess the impairment of intangible fixed assets (such as our licenses) and property, plant and equipment. Factors that we consider important, which could trigger an impairment review, include the following:

•	significant declines in the asset market value, more than would be expected as a result of the passage of time or normal usage;
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•	significant changes in the manner of use of the acquired assets or the strategy for our overall business;
•	significant underperformance relative to expected historical or projected future operating results;
•	regulatory developments affecting our business;
•	significant adverse industry or economic trends; and
•	significant obsolescence or physical damage of an asset.

When one or more of the above indicators of impairment exist, we review the recoverability of the carrying value of the assets.

Projecting Cash flows

We believe that estimates of recoverable amounts, being the higher of value in use and fair value less cost to sell, are susceptible to change from one period to the next because they require management to make assumptions about future cash flows from sales, purchases and capital expenditures. In estimating future sales, we use our internal projections, which are developed based on our strategic plan for existing and new product offerings and expected average revenues per user, and customer base growth. Estimates of our future purchases and capital expenditures are developed based on our expected levels of revenue growth, the timing of the building and maintenance of our networks and potential changes in governmental regulations and requirements. The judgments underlying our projections can vary significantly from year to year due to economic or market conditions, technological advances, changes in the business or regulatory environment, or other factors outside our control. If our projections of cash flows change as a result of these factors we may have to recognize additional impairment charges on goodwill, licenses and other long-lived assets. In certain cases we involve a third party valuation specialist (Duff & Phelps) to support us in estimating the underlying fair value taking into account market comparisons and recent transactions. In addition to the use of independent valuation firms, the Company performs internal valuation analysis and considers market information that is publicly available.

If the recoverable amount of the cash generating units is lower than the carrying value of the assets involved an impairment should be recognized.

DETERMINING DISCOUNT RATES

We determine the discount rate based on the time value of money, taking into account the risks specific to the cash generating units. In determining the discount rates we make use of market data for comparable companies and we involve Duff & Phelps as a valuation specialist to support us in estimating the discount rates.

SENSITIVITIES

IFRS

Under IFRS we recognized the following impairment charges (and reversed charges) on our goodwill and other fixed assets in the years 2006, 2005 and 2004:

At December 31, 2006 the carrying value of the E-Plus related assets amounted to EUR 9,214 million (2005: EUR 9,418 million). Based on our impairment analyses using a discount rate of 9.4% before tax, our conclusion was that there is no need for an impairment adjustment.

We also performed sensitivity analyses by using (1) a higher discount rate of 10.6% and by using (2) 10% less cash flows in our projections. Under IFRS each of these scenarios would individually not lead to an impairment.

US GAAP

Under US GAAP, we recognized the following impairment charges on our goodwill and other fixed assets in the years 2006, 2005 and 2004:

The US GAAP method for impairment testing on goodwill differs in some aspects from the IFRS approach. If the fair value is lower than the book value then a hypothetical purchase price allocation is performed to determine the implied fair value of goodwill. This fair value of goodwill is then compared to the carrying value of goodwill. If the implied fair value is lower than the carrying value, an impairment is recorded for the difference.

For long-lived assets with finite lives the first step is to compare the undiscounted cash flows with the carrying value. If the undiscounted cash flows exceed the carrying value no impairment should be recognized. In any other case an impairment is recognized for the difference between the fair value and the carrying value of the asset.

At December 31, 2006, the carrying value of the E-Plus related assets amounted to EUR 9.6 billion (2005: EUR 10.0 billion). Based on our impairment analyses using a discount rate of 9.4% before tax, our conclusion was that there is no need for impairment.

We also performed sensitivity analyses by using (1) a higher discount rate of 10.6% and by using (2) 10% less cash flows in our projections. Under US GAAP each of these scenarios would individually not lead to an impairment.

Useful lives of long-lived assets and valuation of acquired assets

Useful lives of long-lived assets

Long-lived assets, consisting primarily of property, plant and equipment and intangibles, comprise a significant portion of our total assets. Changes in our intended use of these assets, technological development and market conditions may cause the estimated period of use or the value of these assets to change. We perform internal studies on an annual basis to confirm the appropriateness of our estimates of the economic useful lives for each category of current property, plant and equipment and other long-lived assets. In determining the initial and remaining estimated useful life of a fixed asset, management estimates: (1) the physical life of the asset; (2) the technological life of the asset; (3) the lives for similar productive assets; and (4) the expected period that benefits will be derived from the asset. The foregoing estimates and assumptions are inherently uncertain and subject to change, including as a result of factors outside our control. If the estimated useful life is shortened, we depreciate or amortize the remaining value of the asset over the revised remaining life of the asset. Likewise, if the anticipated technological or other changes occur more slowly than expected, the life of the group could be extended based on the life assigned to new assets added to the group. This could result in a reduction of depreciation and amortization expense in future periods. Our estimates of useful lives affect the amount of gains or losses reported on the disposal or retirement of long-lived assets. Under IFRS, we recognized the following results on disposals or retirement of fixed assets:

VALUATION OF ASSETS FOR PURCHASE ACCOUNTING

By performing a purchase price allocation we allocate the cost of acquired companies to tangible and identifiable intangible assets and liabilities acquired by reference to their estimated fair values at the time of acquisition. The remaining amount is recorded as goodwill. Any value assigned to the identifiable assets is determined by reference to an active market, independent appraisal, or estimated by our management based on cash flow projections which include estimates and judgment regarding expectations for the economic useful lives of the products and technology acquired.

VALUATION OF ASSETS AT DEEMED COSTS

KPN elected the exemption (IFRS 1) to revalue certain of its fixed assets at the transition date, to its fair value and use this fair value as its deemed cost. KPN used the depreciated replacement cost method to determine this fair value. This relates to cables, which are part of property, plant and equipment within the Fixed division. At transition date the fair value adjustment amounted to EUR 567 million. At December 31, 2006, the remaining book value of the fair value adjustment amounted to EUR 350 million.

Income taxes

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The estimates are consistently applied under both IFRS and US GAAP. This process involves estimating our actual current tax exposure together with assessing the valuation for carry forward losses and temporary differences resulting from different treatment for tax purposes compared to IFRS, such as the valuation of our tangible fixed assets and provisions. The carry forward losses result in deferred tax assets and temporary differences result in deferred tax assets and liabilities, which are recognized in the Consolidated Balance Sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is more likely than not we recognize a deferred tax asset. To the extent the likelihood of a recovery of deferred tax assets changes, we include an expense or a gain within the tax charge in our Income Statement for the relevant period. Significant management judgment is required in the valuation of our deferred tax assets. We consider future taxable income projections, historical results and ongoing tax planning strategies in assessing the recoverability of deferred tax assets. In the event that actual results differ from these estimates due to future changes in income tax law or results from final review of our tax returns by tax authorities, we may need to adjust the valuation of our deferred tax assets, which could materially impact our financial position and results of operations.

Pensions and other post-retirement benefits

Retirement benefits constitute a current cost of our normal business operations but represent obligations that will not be definitively settled until far in the future. We have two main

pension plans: Stichting Pensioenfonds KPN and Stichting Ondernemingspensioenfonds KPN.

Pension costs are determined by actuarial valuations. These valuations include various assumptions like, employee turnover, discount rate, mortality, retirement age, expected return on plan assets, future wage increases and related indexation of the benefits. These assumptions are normally updated on an annual basis at the beginning of each fiscal year. Actual circumstances may vary from these assumptions, giving rise to a different pension liability, which could result in an additional gain or loss in our Consolidated Income Statement.

Changes in the related pension benefit costs may occur in the future due to changes in assumptions. The key assumptions used in computing our fiscal year 2006 pension benefit cost were a 4.2% discount rate, 6.3% expected return on plan assets and a 2.5% future wage increase. In 2006 our pension costs amounted to EUR 116 million, compared to EUR 95 million in 2005. Our pension benefit cost is expected to decrease to approximately EUR 90 million in 2007, primarily the result of an increase of the discount rate. A decrease in the discount rate of 1.0% point would result in EUR 101 million pension cost for 2007.

Provision for litigation and contingencies

We exercise considerable judgment in recording our accrued liabilities and our exposure to contingent liabilities related to pending litigation or other outstanding claims subject to negotiated settlement, mediation, arbitration or government regulation as well as other contingent liabilities. We are a party to lawsuits, claims, investigations, and proceedings, consisting primarily of commercial matters, which are being handled and defended in the ordinary course of business. We review the current status of any pending proceedings with our legal counsel on a quarterly basis. Judgment is used in assessing the likelihood that a pending claim will succeed or a liability will arise and to quantify the possible range of the final settlement. In determining whether provisions are required with respect to pending or threatened litigations, management reviews the following: (1) period in which the underlying cause of the pending or threatened litigation or of the actual or possible claim or assessment occurred; (2) degree of probability of an unfavorable outcome; and (3) ability to make a reasonable estimate of the amount of loss. Upon considering the above items and other known relevant facts and circumstances, we recognize any loss that we consider more likely than not and reasonably estimable as of the balance sheet date. Actual results may differ materially from estimates.

Financial instruments

We believe the following estimates are critical:

•	allocation of financial instruments to the categories: held to maturity, held for trading, available for sale, loans and receivables;
•	determination of hedge effectiveness; and
•	determination of fair value.

For further details, we refer to the section Financing and Financial Instruments in the Financial Statements.

Recent accounting pronouncements

Following is a short description of new accounting standards becoming effective in 2007.

IFRS 7, Financial Instruments: Disclosures, and the complementary Amendment to IAS 1, Presentation of Financial Statements – Capital Disclosures IFRS 7 introduces new disclosures relating to financial instruments. IFRS 7 requires an entity to disclose:

•	information on the significance of financial instruments to the entity’s financial position and performance;
•	the nature and extent of risk exposures arising from financial instruments (quantitative disclosures); and
•	the approach taken in managing those risks (qualitative disclosures).

KPN will apply these standards in reporting periods beginning January 1, 2007. These standards do not have any impact on the classification and valuation of the Group’s financial instruments.

We believe that other interpretations and standards (such as IFRIC 7 ‘Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies’, IFRIC 8 ‘Scope of IFRS 2’, IFRIC 9 ‘Reassessment of Embedded Derivatives’, IFRIC 10 ‘Interim Financial Reporting and Impairment’) will have no material impact on our financial position as of January 1, 2007 nor on the operating profit.

IFRS 8, ‘Operating Segments’ and IFRIC 11 ‘Group and Treasury Share Transactions’ and IFRIC 12 ‘Service Concession Arrangements’ will become effective for KPN after 2007.

US GAAP accounting pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, ‘Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109’ (“FIN 48”), which clarifies the accounting for uncertainties in income tax positions. FIN 48 requires that a Company recognizes in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for KPN on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to the opening retained earnings. KPN is currently investigating the impact of FIN 48 on its figures.

In September 2006, the FASB issued SFAS No. 157, ‘Fair Value Measurements’ (“FAS 157”), which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. FAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. FAS 157 will be effective for KPN on

January 1, 2008. The adoption of FAS 157 is not expected to have a material impact on KPN’s financial position and result of operations. Under US GAAP, KPN applies fair value for the valuation of assets held for sale and derivatives and in impairment tests.

In February 2007, the FASB issued SFAS No. 159, ‘The Fair Value Option for Financial Assets and Financial Liabilities’ (“FAS 159”) becoming effective from 2008. FAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. KPN will investigate the impact of this standard on its financial position and result of operations.

Corporate Social responsibility

INTRODUCTION

We are conscious of the responsibilities our position in the community brings, which is why we emphasize corporate social responsibility. In the KPN Sustainability Report we give an extensive account of all our activities in this area. The full 2006 report will be published on the KPN website (www.kpn.com) in the spring, but its main aspects are summarized below.

During the year we continued our dialogue with different kinds of stakeholders. In the Sustainability Report 2006 we tried to take the points into account, the stakeholders made in these dialogues about our sustainability policy and our Sustainability Report 2005.

Policy with regard to corporate social responsibility

In 2006, we closely reviewed our activities in connection with corporate social responsibility to increase our focus and coherence in this area. This led to the drafting of a new policy in which we clearly set out how sustainability, social policy and social involvement come together and which choices need to be made with a view to the future. KPN’s new policy in the area of corporate social responsibility has been visualized in a three-level pyramid:

1.	Level 1 (sustainable business) forms the basis of the pyramid. The measures taken by KPN in the area of ethics, environment and social policy belong to this level;
2.	Level 2 (social involvement) comprises the socially responsible initiatives developed by KPN related to our products and services. An example are the Internet filters which we incorporate in some of our products and the ‘Mijn Kind Online’ (‘My Child Online’) Foundation which contributes to more responsible use of new media by young people. Furthermore KPN develops or promotes products and services especially for the education, healthcare and safety sectors; and
3.	At Level 3 (personal involvement) of the pyramid, KPN will adopt an initiative in 2007 which will include personal involvement from KPN employees, helping KPN and the society to resolve the social issue of social cohesion.

1. Sustainable business

Environmental policy

Among other things, KPN chaired the ‘task force on energy’ of the European Telecommunications Network Operators’ Association (ETNO), which endeavors to develop energy-saving measures by exchanging knowledge and experience. These measures will have a positive effect on the environment, not only for KPN but at the European level as well. Furthermore, we sent our technicians on a training course which taught them to drive more economically as well as more safely, and we leased cleaner cars. Altogether, these measures make a substantial contribution to the sustainable business envisaged by KPN.

Social policy

The world around KPN is changing and this means that the relationship between the company and its employees is changing as well. To respond to the new relationship, we drew up a psychological contract in 2006 between KPN and its employees.

Historically, employment contracts between the company and staff comprised the following elements:
• safety;
• security; and
• loyalty.

The starting point of the new psychological contract will be that the remuneration depends on:
• personal responsibility, and
• results.

More than in the past, the appeal of KPN as an employer lies in the aspects of:
• individual freedom, and
• room for personal growth.

The intention of the psychological contract is to recruit people who do not ‘wait and see’ but who ‘go for it’, because those are the people KPN needs to be able to ensure our future competitiveness. The talent of our staff will form the basis for our success. The new contract will be further specified during the coming years, so that it can acquire a permanent place in, among other things, KPN’s conditions of employment, talent development and employee participation.

We face a continuing need to decrease the number of people we employ while, at the same time, retaining and motivating those who will ensure our future competitiveness. The assessment process will be the key aspect of the qualitative assessment required and will therefore receive a lot of attention. KPN’s management will discuss the assessment with its employees and talk to them about their career prospects, with the aim of creating realistic expectations and making clear arrangements regarding personal training and development.

In 2005, TNO ‘Work and Employment’ evaluated our performance rewards scheme. A large majority of our staff qualify for performance-related remuneration. On the basis of the results of the evaluation, the following improvements were implemented in 2006:

•	targets will be set for approximately 50 to 500 employees per business unit;
•	operational management will set the targets on the basis of the annual plan;
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•	the works council will be involved in the formulation of targets at an early stage; and
•	the communication about our targets and about employees’ progress will be improved.

In April 2006, an average performance reward of 3.54% was realized over 2005. We have agreed with the trade unions that all employees will receive a performance reward of at least 2% over 2005 and 1% over 2006.

At year-end 2006, sick leave at KPN in The Netherlands was 4.1% (2005: 4.6%), at E-Plus 3.0% (in 2005: 2.9%) and at BASE 3.7% (2005: 3.3%).

KPN’s workforce decreased by 622 full-time equivalents (FTEs) from 26,598 FTEs at year-end 2005 to 25,976 FTEs per the end of 2006.

Mobility continued to be an important issue in 2006. The new social plan, which became effective on January 1, 2006, allows for a period of mobility before we start the necessary legal procedure to reduce staff levels. Employees selected for severance will receive higher financial compensation if they find employment elsewhere within their mobility period. Staff and managers at KPN will be trained in how to deal with the many changes affecting the company.

In 2006, we outsourced the guidance and outplacement of KPN employees to KPN Perspectief, a collaborative alliance of two external mobility organizations: Randstad HR Solutions and Smart Group.

We fill management positions through executive development programs for talented employees to reach mainstream management positions as well as through recruitment. In 2006, we set up a leadership program for senior managers in order to further develop their leadership qualities. We also developed a leadership program for all other managers at KPN. Our demand for new employees increased strongly in 2006. We organized a great number of successful activities to recruit top talent which recently graduated from university as well as more experienced high-potentials (with at least two years’ work experience). A new advertising campaign in this context was started in November.

2. Socially involved business

As a consequence of the pyramid designed in 2006 to visualize KPN’s activities connected to corporate social responsibility, our activities in the area of social involvement have been further accentuated: we focused more on the bigger projects with a link to new media in education or health care and we finished smaller projects which no direct link to these areas.

New products and services

In the education sector, we made a new Internet offer to all schools in The Netherlands. In 2007, the free provision of Internet which they had been offered for a period of three years will end. The new offer was communicated to the schools at the end of 2006. Furthermore, KPN introduced Klasse TV (‘Class TV’), a unique educational television portal attuned to the educational practice of teachers. This portal contains three-minute videos which are closely linked to the teaching programs and learning methods of primary schools. All primary schools in The Netherlands were offered a free one-year subscription to Klasse TV as of the autumn of 2006. KPN also became a partner of the Cinekid organization and helped establish the Cinekid Studio. This product, which teaches children to create their own film clips, will be distributed to school pupils free of charge via KPN’s infrastructure.

At the request of His Excellence Hans Hoogervorst, Minister of Health, Welfare and Sport, and as part of the Sneller Beter (‘Faster Better’) program, KPN’s CEO Ad Scheepbouwer has initiated a study of how the innovative capacity of the healthcare sector can be improved. Innovation is essential in ensuring the quality, accessibility and affordability of Dutch healthcare in times to come, yet this innovation is obstructed by a great number of barriers. These can only be surmounted by means of an integrated approach characterized by transparency of quality, a regulated free-market system and optimal use of ICT.

Social responsibility for KPN’s products and services

Over the past years, the media has paid increasing attention to young people and the safe use of the Internet. Parents and teachers cannot always properly control the way children use the Internet and as a consequence there is a great demand for information about their Internet usage. On January 1, 2006, we therefore established the Mijn Kind Online (‘My Child Online’) Foundation, which has the following mission:

‘The ‘Mijn Kind Online’ Foundation is an independent centre of excellence offering know how and advice about young people and (new) media. Its objective is to provide more insight into the possibilities of new media and to promote responsible use of these media. The Foundation’s activities are particularly aimed at parents, teachers and children. It was established at KPN’s initiative and collaborates with various external partners.’

Within a year, the Foundation is already regarded as an authority in the field of children and the Internet. It cooperates closely with third parties, such as the Dutch complaints centre for child pornography, the national helpline for children and the Ouders Online (‘Parents Online’) organization. The activities in 2006 were mainly focused on the use of media. For example, information meetings for parents were organized at schools and a study was conducted on sex on the Internet, including an online campaign about sexually transmitted diseases (Internetsoa.nl) especially designed for young people.

KPN and Mijn Kind Online are furthermore actively involved in the nationwide Digibewust (‘Digi-aware’) campaign (www.digibewust.nl) set up by government bodies and businesses. With this campaign, the initiators (KPN, Microsoft, TNT Post,

UPC and the Ministry of Economic Affairs) intend to increase the knowledge of and trust in the possibilities offered by digital tools. This requires knowledge of security and protection. During the first year, the focus of the campaign was on children, parents and teachers. Next year, however, small and medium-sized companies will occupy centre stage. In 2006, the DigiRaad was installed, a council of young people who advise the government and the Digibewust campaign. KPN also introduced Digibox, a toolkit for schools or for parent meetings about safe use of the Internet, and launched Gebouw 13 (‘Building 13’), an online game which playfully teaches children about the possibilities and pitfalls of the worldwide web.

In 2006, KPN became a partner to Meldpunt Kinderporno, the Dutch complaints centre for child pornography. We not only support this organization financially, but we try to contribute to solutions to fight child pornography as well.

We have also demonstrated our social involvement through the development of new products. For instance, in the IPTV product Mine, we have incorporated a finely meshed ‘lock’, which parents or guardians can use to prevent children from viewing certain programs, simply by entering a code.

3. Personal involvement

During a two-year period (2006-2007), KPN is supporting the Ronald McDonald Children’s Fund in the performance of its charitable, idealistic activities. The nature and value of our support have not been determined in advance, but rather depend on activities organized by KPN. In addition to sponsoring efforts, this also includes the deployment of manpower and knowledge, the idea being that the fund will greatly benefit from broad national support. KPN staff and retirees were given the option of donating their new year’s gift last year and a number of employees are working on a new website for the fund. The donations collected by KPN will go to the Ronald McDonald House of the Sophia children’s hospital in Rotterdam and the Ronald McDonald Children’s Valley in the town of Valkenburg aan de Geul.

KPN also supported a number of other organizations in 2006, including the Johan Kooij Fellowship, which promotes the use of ICT in developing countries.

Code of conduct

For details of the KPN Code of Conduct, please refer to the section headed ‘Corporate Governance – Compliance’.

Corporate Governance

Introduction

Developments in 2006

Compliance with the Dutch Corporate Governance Code

We have pursued a consistent policy of compliance with the Dutch Corporate Governance Code (the ‘Dutch Corporate Governance Code’) that was published by the Tabaksblat Committee on December 9, 2003.

The Dutch Corporate Governance Code has its statutory basis in Book 2 of the Dutch Civil Code and applies to companies with their registered office in The Netherlands whose shares are listed on a stock exchange either domestically or abroad. The Dutch Corporate Governance Code is based on the apply-or-explain principle and is a considerable step forward for Dutch standards on corporate governance. The Dutch Corporate Governance Code defines a company as a long-term form of collaboration between the various parties involved. The Board of Management and the Supervisory Board have overall responsibility for considering the interests, generally with a view to ensure the continuity of the enterprise. In doing so, the Company endeavors to create long-term shareholder value and the Board of Management and Supervisory Board should take account of the interests of the different stakeholders.

We support the principles of the Dutch Corporate Governance Code and we are almost fully compliant with its best practice provisions. It should be noted that we do not fully apply provisions II.1.1 (a management board member is appointed for a maximum period of four years. A member may be reappointed for a term of not more than four years at a time), II.2.2 (if the Company, notwithstanding best practice provision II.2.1, grants unconditional options to management board members, it shall apply performance criteria when doing so and the options should, in any event, not be exercised in the first three years after they have been granted), II.2.6 (a management board member shall give periodic notice, but in any event at least once a quarter, of any changes in his holding of securities in Dutch listed companies to the compliance officer or, if the Company has not appointed a compliance officer, to the chairman of the supervisory board), III.7.3 containing a similar rule for Supervisory Board members and II.2.7 (the maximum remuneration in the event of dismissal is one year’s salary (the ‘fixed’ remuneration component)).

We apply provision II.1.1 as of 2004 meaning that Mr. Smits, Mr. Blok, Mr. Miller and Mr. Coopmans were appointed as members of the Board of Management for a term of four years. We endorse the premise that existing agreements should be respected. We respect the indefinite appointment term of Mr. Scheepbouwer, which is also set forth in his employment agreement. Also due to this premise, we do not apply provision II.2.2 in full on the options we grant to Mr. Scheepbouwer. We agreed with him, at the time of his appointment, that our Supervisory Board could annually grant him unconditional options. As contractually agreed at the time of appointment, these stock options are not linked to performance. We do however apply provision II.2.1 (options to acquire shares are a conditional remuneration component, and become unconditional only when the management board members have fulfilled predetermined performance criteria after a period of at least three years from the grant date) to our other members of the Board of Management. Furthermore, under the same premise that existing rights should be respected, Mr. Blok and Mr. Miller will receive more than one year’s (‘fixed’) salary, contrary to provision II.2.7. Mr. Blok will receive one year’s full salary (including short term bonus), whereas Mr. Miller will receive two year’s fixed salary, including insurance and pension allowances. Both agreements correspond to the arrangements that were in place before they joined the Board of Management.

Under provisions II.2.6 and III.7.3, we require our members of the Supervisory Board and Board of Management to inform the compliance officer only once every year of their shareholdings in Dutch listed companies (other than KPN) rather than every quarter. We do not believe that there is any merit in informing the compliance officer on a more regular basis, as it does not address the real issue at stake, being that the members of these boards should dedicate sufficient time to their primary function and should not have conflicting interests. Besides, it only increases the administrative burden on both the members of these boards as well as on the compliance officer. Our position vis-à-vis all best practice provisions is available on our website www.kpn.com under the section Investor Relations, Corporate Governance and Risk Management and Internal Control.

We remain of the opinion that a governance regime should strike the right balance between transparency of rules and avoidance of bureaucracy caused by excessive detail in order for Dutch companies to remain internationally competitive. Application of sound corporate governance principles is important for a company but it should not be an end in itself. The true aim is to achieve and maintain a culture of honesty and integrity. This aim can, ultimately, be achieved only if the culture and behavior in a company are in all respects positive and transparent.

Other corporate governance requirements

We are listed on the New York Stock Exchange (‘NYSE’) and qualify as a foreign private issuer under the NYSE stock exchange rules. As such we need to disclose significant differences between NYSE’s corporate governance requirements for U.S. issuers and our corporate governance practices in The Netherlands. An overview disclosing these differences is

available on our website www.KPN.com under the section Investor Relations, Corporate Governance and Risk Management and Internal Control. In addition, on April 5, 2006, we affirmed to the NYSE without qualification that we have an Audit Committee meeting the requirements of SEC rule 10A-3 under the Securities Exchange Act of 1934, as amended.

We are also listed on Euronext Amsterdam, the London Stock Exchange and the Frankfurt Stock Exchange.

Legal structure of the Company

Under Section 6, Part 4 of Book 2 of the Dutch Civil Code, the rules for large companies are mandatory for us. As such, we have a two-tier management structure with a Board of Management and a Supervisory Board. Among the powers vested in the Supervisory Board is the power to appoint and remove members of the Board of Management. Some of the resolutions of our Board of Management are also subject to the approval of the Supervisory Board. Furthermore, shareholders are entitled to approve decisions of the Board of Management that have a company transforming effect, to approve the remuneration policy and share (option) plans for members of the Board of Management, to appoint members of the Supervisory Board upon proposal by the Supervisory Board, and to dismiss the Supervisory Board.

As of December 31, 2006, listed companies are obliged to incorporate information about the corporate structure of the company. None of our shareholders possess special rights and there are no restrictions applicable to the exercise of voting rights. For further information, please see ‘Shareholders’ rights, share capital and restrictions on non-Dutch shareholders’ rights’.

Our existing capital resources contain covenants, such as change of control clauses or covenants prohibiting us from entering into any amalgamation, demerger, merger, corporate restructuring or reorganization. This could trigger additional financial obligations or early redemption of outstanding indebtedness. For details of our capital resources covenants, please refer to the section entitled ‘Liquidity and capital resources – Capital resources covenants’.

Currently legislation is pending on the improvement of the processes surrounding shareholders’ meetings, such as through electronic voting. Other pending legislation will cover protection mechanisms. KPN closely monitors these developments. Where relevant, changes in legislation are implemented in our Articles of Association. The Articles were last amended on April 19, 2006. Among others, the reference to the special share was deleted.

Management

Supervisory Board

The Supervisory Board oversees strategic and organizational policymaking by the Board of Management and the way in which it manages and directs our operations and affiliated/associated companies. It oversees and supervises the Board of Management. Members of the Supervisory Board are appointed by the Annual General Meeting of Shareholders upon binding nomination by the Supervisory Board. The Central Works Council has an enhanced right of recommendation with respect to one third of the Supervisory Board, meaning that the Supervisory Board must nominate those recommended unless it is of the opinion that (1) any such person would be unsuitable to fulfill the duties of a Supervisory Board member; or (2) such appointment would cause the Supervisory Board to be improperly constituted.

According to our Articles of Association, our Supervisory Board must consist of at least five and not more than nine members. Our Supervisory Board currently consists of seven members. Members of the Supervisory Board resign according to a schedule set by the Supervisory Board. They step down at the first General Meeting of Shareholders following their four-year term of office. Under the by-laws of the Supervisory Board, they can be reappointed twice, leading to a maximum term of office of twelve years. See the ‘Report by the Supervisory Board’ for the rotation schedule.

The Supervisory Board has determined its ‘profile’, defining the basic principles for the composition of the Supervisory Board. All nominees for the election to the Supervisory Board must fit within this profile. According to this profile, the Supervisory Board must be composed in such a way that members of the Supervisory Board are able to operate independently of each other and of the Board of Management.

The by-laws of the Supervisory Board contain, among other things, rules regarding the members’ duties, powers, working methods and decision-making, what decisions by the Board of Management it must approve, training and conflict handling. The by-laws of the Supervisory Board were most recently updated in 2005. The by-laws are available on our website www.KPN.com under the section Investor Relations, Corporate Governance.

Committees of the Supervisory Board

Three committees assist the Supervisory Board: an Audit Committee, a Remuneration & Organization Development Committee and a Nominating & Corporate Governance Committee. The committees, which consist of members of the Supervisory Board, report their findings to the Supervisory Board, which is finally responsible for all decision making. The committees themselves are not empowered to make decisions. The activities of the committees are governed by written charters, available on our website www.kpn.com under the section Investor Relations, Corporate Governance.

Audit Committee

The Audit Committee’s task is to supervise in particular the (quality of the) accounting and financial reporting practices, including quarterly and annual reporting, accounting and financial reporting policies and procedures, the (quality of the) internal control system and internal audit function, the independent external audit of the Financial Statements, the performance and evaluation of the external auditor and the compliance with relevant legislation and regulations. The task of the Audit

Committee in the area of financial reporting and accounting practices is to provide reasonable assurance that the financial disclosures prepared by management adequately reflect KPN’s financial condition, results of operations, cash flows and long-term commitments. All members of the Audit Committee are independent within the meaning of Rule 10A-3 and for purposes of the listing standards of the NYSE as they are applicable to KPN. For a discussion of the activities of the Audit Committee in 2006, see the ‘Report by the Supervisory Board’.

Remuneration & Organization Development Committee

The task of the Remuneration & Organization Development Committee is to assist the Supervisory Board regarding the development and appropriate application of remuneration policies for our Board of Management, including the remuneration of the members of the Board of Management for the coming year; the individual bonuses of members of the Board of Management on the basis of the policy framework for performance related pay, achieved targets and goals; allocation policies for options and shares (to members of the Board of Management and to other KPN senior management) and the conditions under which options and shares are granted; and the remuneration of members of the Supervisory Board for submission to the Supervisory Board and to the General Meeting of Shareholders. For a discussion of the activities of this committee in the year under review, see the ‘Report by the Supervisory Board’.

Nominating & Corporate Governance Committee

The task of the Nominating & Corporate Governance Committee is to assist the Supervisory Board with respect to the nomination of the Board of Management and the Supervisory Board and the oversight of development policies for senior management, as well as the Company’s corporate governance policies. For a discussion of the activities of this committee in the year under review, see the ‘Report by the Supervisory Board’.

Board of Management

The Board of Management, supervised and advised by the Supervisory Board, manages our strategic, financial and organizational matters and appoints senior managers. The Supervisory Board appoints and discharges members of the Board of Management and establishes their individual remuneration within the boundaries of the remuneration policies approved by the Annual General Meeting (see the ‘Remuneration report’ below for more detailed information on remuneration) and the recommendations by the Remuneration & Organization Development Committee. On the basis of the Dutch Civil Code, our articles of association and the by-laws of the Board of Management, certain decisions of the Board of Management require the approval of the Supervisory Board. These decisions include approval of the annual plan and budget, approval of resolutions that exceed certain thresholds, expanding the business materially affecting the existing business and the closing of any business if this results in a material change for a considerable number of employees. A complete overview of such decisions is included in the by-laws of both our Supervisory Board and Board of Management which are available on our website www.KPN-corporate.com under the section Investor Relations, Corporate Governance. The by-laws of the Board of Management were most recently updated in 2005.

Our Board of Management consists of five members: the Chairman of the Board, the Chief Financial Officer, and the Managing Directors of the Fixed and Mobile divisions and Consumer Market.

Mr. A.J. Scheepbouwer was appointed Chairman of our Board of Management and Chief Executive Officer on November 1, 2001. His employment contract terminates on July 1, 2009. From 1976 to 1988, Mr. Scheepbouwer was President of the Airfreight division of Pakhoed Holding N.V. (Pandair Group). In 1988, he was appointed as Managing Director of PTT Post, then part of the Dutch national post and telecommunications operator, Koninklijke PTT Nederland N.V. In 1992, Mr. Scheepbouwer joined the Board of Management of Koninklijke PTT Nederland N.V. In June 1998, the mail, express and logistics activities were demerged from Koninklijke PTT Nederland N.V. and incorporated as a separate company, TPG N.V., of which Mr. Scheepbouwer became Chief Executive Officer. From June 1998 until September 9, 2001, he was a member of our Supervisory Board. He is currently chairman of the Supervisory Board of Havenbedrijf Rotterdam N.V., chairman of the Supervisory Board of Medisch Centrum Rijnmond-Zuid, and a member of the Supervisory Board of, and an investor in, RFS Holland Holding B.V.

Mr. M.H.M. Smits was appointed member of the Board of Management on August 9, 2004 and has been the Chief Financial Officer since September 11, 2004. He is former member of the Board of Management and Chief Financial Officer of Vendex KBB N.V. Before that he had held various (financial) management

positions at Unilever. He is currently a member of the Supervisory Board of Delta Lloyd N.V.

Mr. E. Blok was appointed as a member of the Board of Management on June 1, 2006 and was responsible for our Fixed division until January 1, 2007. Since that date he has been responsible for our Business Market in The Netherlands. Mr. Blok joined KPN in 1983 and had held various management positions, including positions as director of KPN’s departments Carrier Services, Corporate Networks and Fixed Net Operator, and he was responsible for Corporate Strategy & Innovation. Most recently he was Chief Operating Officer for our Fixed division. He was previously, from April until December 2004, a member of our Board of Management. Mr. Blok is a member of the Advisory Board of New Venture and a member of the Board of ICT-Office.

Mr. S.P. Miller was appointed as a member of the Board of Management on June 1, 2006. Until January 1, 2007, he was (as managing director of our Mobile division) responsible for all our mobile activities in The Netherlands, Germany, Belgium and abroad. Since that date he has been responsible for all our international mobile activities (outside The Netherlands), as well as all our mobile wholesale activities. Mr. Miller held various senior management and positions in the (pay)television, media and IT industry in South Africa and Europe, including M-Net (South-Africa), MIH (Netherlands / South-Africa), Nethold (Netherlands), Vesta (South-Africa) and Leaderman (Belgium / Luxembourg). In November 1998, he was appointed CEO of KPN Orange, now BASE. Since then he has held various positions in KPN’s mobile activities, including those of CEO of KPN Mobile The Netherlands and KPN Mobile International, and member of the Board of Management of KPN Mobile N.V. and Hutchison 3G UK Ltd. In May 2005 he was appointed CEO of KPN’s international mobile activities, E-Plus and BASE. He currently is chairman of the Supervisory Board of E-Plus and chairman of the Board of BASE.

Mr. J.B.P. Coopmans was appointed as a member of the Board of Management on September 11, 2006. As of January 1, 2007, he is responsible for our Consumer Market in The Netherlands. Mr. Coopmans has held various (commercial) management positions at Unilever. In 1998 he was appointed Managing Director of DiverseyLever. In September 2000 he was appointed chairman of the Board of IgloMora and as of 2004 he was chairman of the Board of Unilever de Mexico.

The business address of each of the members of the Board of Management is Maanplein 55, 2516 CK, The Hague, The Netherlands.

Managerial matters

Managerial measures

The reporting units in the Fixed and Mobile division report their financial and operational performance on a monthly basis to the Board of Management. Management of the reporting units also provides the director with a letter of representation regarding the accuracy of the reporting and compliance with prescribed policies. The reports are checked and reviewed by the control departments of the respective divisions. The director reviews the performance of the reporting units on a monthly basis. The director, with the assistance of management of the reporting units, discusses (on a monthly basis) the performance of the division with the relevant member of the Board of Management and our CEO and CFO. Our Corporate Control department assists our relevant member of the Board of Management and CEO and CFO in these discussions.

DISCLOSURE COMMITTEE

A Disclosure Committee, established in January 2003, evaluates disclosure and internal control procedures to ensure that relevant information on the Company is brought to the attention of the Board of Management. This Committee also examines reports and other materials that are to be issued externally to ensure that they are correct, timely and complete. The Disclosure Committee advises the Board of Management, the Audit Committee and the Supervisory Board. This committee consisted in 2006 of the directors of Corporate Control, Corporate Treasury & Risk Management, Corporate Legal, Press Department and Investor Relations, the Secretary to the Board of Management and the finance directors of the Fixed division and the Mobile operators. The committee met on 9 occasions in 2006 and reviewed our disclosure controls and procedures, our internal controls and procedures and our proposed public disclosures.

Compliance

In 2006, we pursued a consistent policy to enhance and improve our compliance with relevant legislation.

Code of Conduct

We introduced a new Code of Conduct in April 2005 that sets out our standards and values. We are conscious of our social and ethical responsibilities and we wish to ensure that work practices across the Company are in strict compliance with the law and consistent with social and ethical norms. Our key values are: personal, trust and simplicity. We can be held accountable for our performance in this regard by all of our stakeholders (customers, shareholders, employees, business associates, competitors, environmental organizations, international business relations and the community in the widest sense). The Code of Conduct is available on our website.

To translate the Code of Conduct into practical terms for employees, we have introduced in recent years a number of separate codes to clarify our internal rules. These separate codes, which were updated in 2005, are bundled into four clusters: (1) integrity, (2) competition and telecommunication law, (3) insider trading and (4) information security. The integrity cluster contains rules for all our employees with respect to secondary employment outside KPN and also with respect to business transactions and business gifts. This cluster contains furthermore our Code of Ethics for our financial management, which sets rules to protect the integrity of our financial management. It applies to our Chief Executive Officer, Chief Financial Officer, the director of our Corporate Control Department and all other financial managers. We did not

grant any waivers in 2006 under this code. The competition and telecommunication law cluster contains rules with respect to the use of customer information, anti-trust issues, retail offerings and wholesale issues. The insider trading cluster contains rules to prevent insider trading. These rules were updated during 2006. The information security cluster contains rules with respect to the use of information regarding our Company and the use of information and communication tools provided to our employees.

To complement the rules in the separate codes we have introduced three general guidelines: the whistleblower policy, the fraud policy and the protocol on integrity investigations. Pursuant to the whistleblower policy, employees can report questionable accounting or auditing matters or fraud to the Chairman of the Audit Committee. Any reports or complaints by employees under this code will be dealt with in strictest confidence and investigated promptly by management or the Chairman of the Audit Committee, as the case may be. In order to simplify the reporting process, we have introduced a telephonic reporting system where employees can make reports. As the system is operated by an independent third party, anonymity of the employee is, if desired by the employee, guaranteed.

In 2005, we introduced the KPN fraud policy. We promote consistent organizational behavior by providing guidelines and assigning responsibility for the development of controls that will aid in the detection and prevention of fraud against KPN (financial and telecom fraud and other inappropriate misconduct). Since 2002, the protocol on integrity investigations has been effective. Purpose of this protocol is to create the framework to prove or rule out the involvement of employees and/or third parties connected to KPN in violating internal or legal rules. We encourage our employees to actively report any (suspected) breach of the Code of Conduct or the separate codes. Our internal Security department plays a key role in this by offering support via a helpdesk, where employees can anonymously report such breaches and also obtain information regarding the principles underlying the codes. In the event a breach is reported, our Security department conducts an investigation on a strictly confidential basis. The outcome of the investigation is reported to local management and in relevant cases to the Audit Committee.

We continued our communications efforts regarding our Code of Conduct and compliance during 2006, for example through a booklet containing the basic principles of our internal rules, which was distributed to all our employees, and an easy-to-use leaflet on insider information. We check employee awareness of the codes each year as part of the Annual Employee Satisfaction Survey.

Training

In 2005 and 2006, we organized mandatory trainings regarding competition and telecommunications law for a significant number of our employees. The objective of the training program was to increase the awareness and the knowledge of employees regarding competition and telecommunication law. The training program consisted of workshops, an in-house designed and tailor-made e-learning tool and an e-test. Approximately 3,300 of our employees in The Netherlands participated in these trainings. We also organized mandatory e-learning trainings for approximately 700 employees regarding our Business Control Framework and our policies. We furthermore organized a number of workshops with management and employees to explain the new rules regarding insider training and increased awareness regarding our rules on information security and company assets by a top-down approach in which a substantial part of our management and employees were trained. In January 2006, we organized an Integrity Workshop for our top 25 managers in The Netherlands in which ethical dilemmas were discussed. The workshop was chaired by one of the members of our Supervisory Board.

Organization

During 2006 we further strengthened our compliance organization to reflect the importance of compliance within our company. We appointed Business Compliance Officers in our main businesses in The Netherlands and Country Compliance Officers at E-Plus and BASE. These compliance officers deal with compliance issues within their respective businesses on a day to day basis and report to the Director of that business and the Group Compliance Officer. The Group Compliance Officer, who is assisted by a small staff, reports to the Chairman of the Audit Committee and the CEO.

Internal risk management and Control system

KPN has combined the existing elements of its internal risk management and control system in a Business Control Framework, including the relevant criteria for financial procedures, set forth in COSO (integrated internal control framework by the Committee of Sponsoring Organizations of the Treadway Commission). Some main elements of the Business Control Framework are:

•	policies and procedures, which reporting units must comply with;
•	a Code of Conduct and separate codes such as a Code of Ethics for the financial function and the whistleblower procedure (please refer to Compliance’ for further information);
•	periodic risk analyses of the operational, financial, strategic and compliance objectives of our Company and an assessment of our internal control system to secure its effectiveness (for the most important risks identified, please refer to the section Risk Factors in this Annual Report);
•	a financial planning and control cycle including monthly reviews with the CEO and CFO (please refer to ‘Managerial Measures’ for further information);
•	the Internal Audit department, which plays an important role in assessing the quality and effectiveness of KPN’s internal risk management and control system. The Internal Audit department conducts systematic and ad hoc audits. The audit findings are discussed with management of the related reporting units. Every quarter the main findings are reported to the Board of Management and the Audit Committee; and
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•	a tightening of our compliance procedures. For further information, please see the paragraph ‘Compliance’.

Our internal risk management and control system cannot provide absolute assurance, but aims at a reasonable level of assurance, that realization of strategic and operational objectives is monitored, the financial reporting is reliable and where relevant applicable laws and regulations are complied to.

The Board of Management, to the best of its knowledge, believes that KPN complies with the requirements of recommendation II.1.4 of the Dutch Corporate Governance Code and the recommendations of the Corporate Governance Code Monitoring Committee on the application thereof, by including the following reports:

•	the description of our operational, financial, compliance, strategic and financial reporting risks (see Risk Factors and Corporate Governance);
•	the description of our internal risk management and control system; and
•	management’s report on Internal Control over financial reporting to comply with the requirements of Section 404 of the Sarbanes-Oxley Act.

Our internal risk management and control system was discussed in the Audit Committee and Supervisory Board.

Controls and procedures statement under the Sarbanes-Oxley Act

Evaluation of disclosure controls and procedures

As of the end of the period covered by this report, the Company’s management (with the participation of its Chief Executive Officer and Chief Financial Officer) conducted an evaluation pursuant to Rule 13a-15 promulgated under the US Securities Exchange Act of 1934, as amended of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, such disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports it files or submits under the US Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

Management’s Report on Internal Control Over Financial Reporting

As of the end of 2006, the Company must comply with the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires the Company to include in the annual report an internal control report, containing management’s assessment on the effectiveness of the internal controls over financial reporting.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f)).

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006.

PricewaterhouseCoopers Accountants N.V., the registered public accounting firm that audited the financial statements included in this annual report, has issued an attestation report on the Company’s management’s assessment of the Company’s internal control over financial reporting. The Accountant’s attestation report is presented on pages 105 and 106.

Auditor

Our external auditor is responsible for auditing the financial statements and auditing internal control over financial reporting. Following recommendation by the Audit Committee and upon proposal by the Board of Management and the Supervisory Board, the General Meeting of Shareholders appoints each year the auditor to audit the financial statements of the current financial year. The external auditor reports to our Supervisory Board and Board of Management. The external auditor is present at the meetings of the Audit Committee and the Supervisory Board when our quarterly and annual results are discussed.

At the request of the Board of Management and the Audit Committee, the Internal Audit department reviews in advance each service to be provided by the auditor to identify any possible breaches of the auditor’s independence. The Audit Committee pre-approves every engagement of our external auditor.

In 2006 and 2005, total fees from PricewaterhouseCoopers, our external auditor, amounted to:

The audit fees include the aggregate fees in each of 2006 and 2005 for professional services rendered for the audit of our annual financial statements and annual statutory financial statements of subsidiaries or services that are normally provided by the auditor in connection with the audits and regulatory filings or engagements for those financial years. The 2006 audit fees include fees for the audit of internal control over financial reporting with respect to the Sarbanes-Oxley Act. The audit-related fees include the aggregate fees billed in each of 2006 and 2005 for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under audit services. This includes due diligence and assurance services related to a potential acquisition as well as IT related assurance services in 2006 and services related to Sarbanes-Oxley in 2005. Other fees relate to permitted services not included in the above categories.

Shareholders’ rights

Share capital

Our authorized capital stock totals EUR 1,920,000,000, divided into 4 billion ordinary shares of EUR 0.24 each and 4 billion Class B preferred shares of EUR 0.24 each. As of December 31, 2006, a total of 1.928.551.326 ordinary shares had been issued.

In December 2005, as part of the sale of a large part of its shareholding, the State disposed of the special share it previously held in KPN. We acquired the special share for its nominal value of 48 eurocents, as provided for in the articles of association. The Annual General Meeting of Shareholders on April 11, 2006, approved the proposal to amend our articles of association to, among other things, delete the concept of the special share and to convert the special share into two ordinary shares of EUR 0.24 each.

Dutch laws prohibit us to cast a vote on shares we hold. The ordinary shares and Class B preferred shares carry the right to cast one vote each. For a description of the preferred shares, please refer to the section titled ‘Foundation Preference Shares Class B KPN’. The ordinary shares are registered or payable to bearer. Shareholders may request the Company to convert their registered shares to bearer shares but not vice versa. The General Meeting of Shareholders has authorized the Board of Management to issue new shares. The present authorization of the Board of Management is valid until October 11, 2007. The Board of Management is authorized to issue new shares up to 10% of the issued share capital at the time of issue. Under Dutch law, the holders of ordinary shares generally have preemptive rights on the issue of new ordinary shares.

Purchase of shares in the company’s own capital

The shareholders have authorized our Board of Management (until October 12, 2006) to purchase shares in the Company’s own capital at a price of not less than EUR 0.01 and not more than the stock market price plus 10%. The stock market price is defined as the average of the closing prices in the five days of trading preceding the date of purchase. Any such purchase requires the approval of the Supervisory Board. Votes may not be cast on purchased shares and they do not count towards determining the number of votes required at a General Meeting of Shareholders. We may only purchase shares in our own capital if the shares are fully paid-up and the distributable part of the shareholders’ equity is at least equal to the purchase price. We may not acquire or hold more shares with an aggregate nominal value exceeding 10% of our issued capital.

During 2006, KPN repurchased 164.9 million shares at an average price of EUR 9.59 for a total amount of EUR 1.6 billion, of which 80 million shares repurchased from the Dutch State (for a total amount of EUR 0.8 billion) and of which 2.1 million shares repurchased to cover share and option plans. Following the repurchase from the State on September 22, 2006 the EUR 1 billion share repurchase program announced in February 2006 was completed. During 2006, the shares purchased under our 2006 share repurchase program and from the Dutch State (both repurchased in 2005 and 2006) were cancelled. The number of outstanding shares amount to 1,928,551,326, representing a 23% reduction of outstanding shares since the start of share repurchases in March 2004. During 2006, a total of 223 million ordinary shares which were acquired since December 2005 were cancelled.

Issuer purchaseS of equity securities

Annual General Meeting of Shareholders

Within six months of the end of a fiscal year, an Annual General Meeting of Shareholders is held in The Hague, Amsterdam, Utrecht or Rotterdam, where the discussion of the Annual Report and approval of the Financial Statements are put on the agenda. The Board of Management or the Supervisory Board convenes a meeting subject to advance notice of at least 15 days, which also fulfills the requirements of the NYSE (10 business days). Other General Meetings of Shareholders are held as often as the Supervisory Board or Board of Management deems necessary. One or more shareholders together representing at least 10% of the subscribed capital stock may request the Board of Management and the Supervisory Board, in writing, to convene a General Meeting of Shareholders. If the Boards fail to organize such a meeting within six weeks, the District Court may authorize those shareholders to convene a General Meeting of Shareholders.

The Board of Management and the Supervisory Board determine the agenda of the General Meeting of Shareholders. Shareholders who individually or collectively represent at least 1% of the issued capital, or alone or in the aggregate, at least a value of fifty million euros (EUR 50,000,000) according to the Official Price List, have the right to propose items for the agenda. Such requests will be honored, unless grave interests of the Company dictate otherwise. The request must be submitted in writing at least 60 days prior to the date of the meeting. The Chairman of the Supervisory Board chairs the meeting.

Every shareholder has the right to attend a General Meeting of Shareholders in person or through written or electronic proxy, to address the meeting and to exercise voting rights. To exercise voting rights, holders of ordinary bearer shares must lodge their share certificates in the way specified in the notification convening the General Meeting of Shareholders. The record date stated in the notice convening the General Meeting shall not be earlier than the seventh day before the General Meeting. From the date of the lodging of the share certificates up to and including the record date, the share certificates may be blocked. Holders of ordinary registered shares must inform the Board of Management in writing of their intention to attend the meeting.

All resolutions at a General Meeting of Shareholders are passed on a simple majority of votes cast, with the provision that a majority of at least two-thirds of the votes cast is required for resolutions to reduce capital or restrict or exclude priority rights, or to designate a Company body with authority to do so, if proposed at the meeting at which less than half the issued capital is represented.

Adoption of financial statements and discharge of responsibility

Within five months of the end of every fiscal year, the Board of Management must prepare the Financial Statements accompanied by an Annual Report. The General Meeting of Shareholders may extend this period to a maximum of six months in exceptional circumstances. The Financial Statements are submitted to the Supervisory Board for approval. The Supervisory Board submits the approved Financial Statements to the General Meeting of Shareholders for adoption together with the Annual Report for discussion. At the same time, the Supervisory Board submits the approved Financial Statements to the Central Works Council for information purposes. Adoption of the Financial Statements does not automatically discharge the Board of Management or the Supervisory Board from liability. This requires a separate resolution by the General Meeting of Shareholders.

Dividends

Under the Articles of Association, the Class B preferred shares carry preferred dividend rights. Subject to the approval of the Supervisory Board, the Board of Management will determine what proportion of the profit remaining after satisfaction of these preferred dividend rights will be appropriated to the reserves. The Board of Management may decide to allocate the complete remainder to the reserves. Any remaining profit resulting after this appropriation is available for distribution on the ordinary shares. The decision to pay out dividend is made by the General Meeting of Shareholders, upon proposal by the Board of Management with the approval of the Supervisory Board. In addition, the Board of Management may, subject to approval by the Supervisory Board, decide to pay out the entire dividend on ordinary shares in shares instead of in cash. Subject to Supervisory Board approval and certain legal requirements, the Board of Management may furthermore decide to pay out interim dividends on ordinary shares. Please refer to the section titled ‘Information on the KPN share - Dividend Policy’ for more information.

Amendment of the articles of association; dissolution; legal merger; demerger; reduction of capital

The General Meeting of Shareholders may pass resolutions to effect a merger, split-up or dissolution of the Company or amend its Articles of Association only upon a proposal by the Board of Management. The Supervisory Board must approve such a proposal. An absolute majority of the votes cast is required to adopt such a shareholders’ resolution.

Liquidation

In the event of dissolution or liquidation, the assets remaining after payment of all debts will be divided among shareholders in the following way: the holders of issued and outstanding Class B preferred shares will first receive the par value paid for the shares and any amount owed by way of dividend on the shares, in so far as not already paid out in previous years. Secondly, the remaining amount will be distributed to holders of ordinary shares in proportion to the total number of shares possessed by each holder.

Restrictions on non-Dutch shareholders’ rights

Under our Articles of Association, there are no limitations on the rights of non-resident or foreign shareholders to hold or exercise voting rights in respect of our securities, and there are no such restrictions under Dutch corporate law.

Major shareholders and control of the company

General

The table below sets forth, as of the period indicated, the number of shares of each class of our voting shares held by anyone who owns 5% or more of these shares. The table also sets out the number of shares of each class beneficially owned by the members of our Supervisory Board and our Board of Management.

Furthermore Capital Group International, Inc., Capital Research and Management Company and Barclays Plc have notified The Netherlands Authority for the Financial Markets (‘AFM’) that they hold respectively between 5%-10% (November 1, 2006: 7.4%), 15%-20% (January 8, 2007: 15.07%) and 5%-10% (January 5, 2007: 5.38%) of the ordinary shares of KPN.

As of December 31, 2006, 51 ADR record holders held 14,591,771 ordinary shares in the form of American Depository Shares, representing 0.76% of our outstanding ordinary shares.

As of December 31, 2006, approximately 13% of our outstanding ordinary shares was held by Dutch investors.

The State of the Netherlands

Until September 22, 2006, the State of The Netherlands, referred to hereinafter as the State, represented by the Ministry of Finance, was a large shareholder in our Company. On that date the State sold the remainder of its shareholding in KPN, bringing an end to its long standing relationship with KPN as a shareholder.

The State is a major customer and purchases our services on normal market terms and conditions. The State may further require us by law to provide certain services in connection with national security or the investigation of criminal offences. The services include tapping telephone lines and providing and maintaining a special secure network for emergencies.

THE FOUNDATION PREFERENCE SHARES B KPN (STICHTING PREFERENTE AANDELEN B KPN)

According to its Articles of Association, the statutory goal of the Foundation Preference Shares B KPN (the ‘Foundation’) is to protect our interests (which includes the interests of our stakeholders, such as customers, shareholders and employees), by, among other things, protecting us from influences that may threaten our continuity, independence and identity. Consequently, in the event of any circumstances where the company is subject to influences as described above, the call option (as described below) will be exercised in the company’s interest and where relevant taking public security considerations into account, with a view to enabling the company to determine its position in relation to the circumstances as referred to above, and seek alternatives. The Board of the Foundation is of the opinion that under normal circumstances it should not exercise its voting rights for longer than a limited period. The Board of the Foundation considers it undesirable for the Board of Management to ignore a shift in the balance of power in the general meeting of shareholders over an extended period of time per event. It is furthermore undesirable that the Board of Management should (be able to) use anti-takeover measures to further the personal interests of individuals involved with the company.

The members of the Board of the Foundation are Professor S.C.J.J. Kortmann, Mr. J. den Hoed RA (vice-Chairman), Mr. P. Bouw, Mr. H. Zwarts and Mr. J.H. Schraven. In due course, Mr. Schraven will succeed Professor Kortmann as Chairman. Our Board of Management and the members of the Board of the Foundation share the view that the Foundation is independent from us in accordance with Appendix X to the Listing and Issuing Rules of the Stock Exchange of Amsterdam (Euronext).

The views of the Board of the Foundation, summarised above, have been published at the Foundation’s own web-site (www.prefs-KPN.nl).

We have a put option to place with the Foundation a number of our Class B preference shares, which have the same voting rights as ordinary shares, not exceeding the total issued share capital before such issue, or, subject to prior approval by the General Meeting of Shareholders, such larger number as the parties may agree. In addition, the Foundation has a call option, which is not limited in time, to acquire a number of Class B preference shares from us not exceeding the total issued amount of ordinary shares, minus one share and minus any shares already issued to the Foundation.

Since October 12, 2006, the authority of the Board of Management to issue Class B preference shares under the put option expired. This expiration does not affect the obligation to issue Class B preference shares upon exercise of the call option by the Foundation.

Upon exercise of the call option, 25% of the nominal value of EUR 0.24 per Class B preference share needs to be paid by the Foundation. Our Board of Management can decide to request the Foundation to pay the remainder. Such decision is subject to the approval of the Supervisory Board.

Report by the supervisory board

Organization of the Supervisory Board

For a description of the organization and structure of our Supervisory Board, see the chapter ‘Corporate Governance’.

Composition of the Supervisory Board

In 2006, the composition of the Supervisory Board did not change. At the Annual General Meeting of Shareholders in April 2006, Mr. Jager stepped down, as he had reached the end of his four-year term of office. Upon nomination by the Supervisory Board, the General Meeting of Shareholders reappointed Mr. Jager for a second term of four years.

In 2007, Mr. Halberstadt, Mr. Bischoff and Mr. Streppel are due to step down from the Supervisory Board, as they will reach the end of their four-year term of office. Mr. Halberstadt has served three consecutive terms of four years, and will therefore, in accordance with best practice provision III.3.5 of the Dutch Corporate Governance Code, not be available for re-appointment. The Supervisory Board expresses its warm gratitude for the contribution that Mr. Halberstadt has given to the Supervisory Board and to the company in general, over the past 12 years.

Mr. Bischoff and Mr. Streppel have indicated their availability for reappointment. The vacancy that has arisen following the resignation of Mr. Halberstadt is subject to the enhanced right of recommendation of the Central Works Council. The Central Works Council has informed the Supervisory Board that it will abstain from making such recommendation.

The three vacancies in the Supervisory Board must be filled in line with the Profile of the Supervisory Board. Based on an evaluation of its composition, the Supervisory Board, in consultation with the Board of Management and the Central Works Council, will nominate Mr. Bischoff and Mr. Streppel for reappointment at the Annual General Meeting of Shareholders on April 17, 2007. The nomination of a further candidate will be considered.

Brief résumés of all members of the Supervisory Board are provided at the end of this Chapter. The business address of each of the members of the Supervisory Board is Maanplein 55, 2516 CK, The Hague, The Netherlands.

Meetings of the Supervisory Board

The Supervisory Board met on ten occasions in 2006, of which eight were regularly scheduled meetings and the remaining two were ad hoc meetings (by telephone) on specific topics that required urgent attention. Most meetings were held jointly with

the Board of Management. Throughout the year, the Chairman of the Supervisory Board was in close contact with the Chief Executive Officer, and the Chairman of the Audit Committee was in close contact with the Chief Financial Officer.
The attendance of Supervisory Board meetings was 93% (95% for regularly scheduled meetings, 86% for ad hoc meetings). On certain occasions, in line with the Articles of Association of the Company, the Supervisory Board took resolutions outside of a meeting, if this was required due to urgency or if the matter did not require discussion in a meeting.

Independence

Throughout the year, all members of the Supervisory Board were independent from the Company within the meaning of the Dutch Corporate Governance Code: the composition of the Supervisory Board was such that the members were able to act critically and independently of one another and of the Board of Management and any particular interests. In this respect also refer to the section ‘Related Party Transactions’.

Activities of the Supervisory Board

During its meetings and contacts with the Board of Management, the Supervisory Board discussed such topics as the Company’s strategy, the results achieved and plans for next periods, strategic decisions that required the approval of the Supervisory Board, the functioning and remuneration of the Board of Management and all other relevant matters brought to its attention. In reviewing proposals, the Supervisory Board discussed with the Board of Management the business case for the proposal, the risks involved and possible alternatives to the proposal.

In particular, the Supervisory Board undertook the following activities during 2006:

The financial performance of the Company was extensively discussed at the Supervisory Board meetings preceding the publication of the quarterly and annual results. In this discussion, the Audit Committee, that had already reviewed the financial performance prior to the meeting, advised the full Supervisory Board on the most relevant matters. The Company’s external auditor, as well as relevant members of senior management, attended these discussions. The auditor presented its findings over the preceding quarter.

The Supervisory Board discussed various acquisition opportunities. The acquisitions of Demon and Tiscali, as well as the proposed transaction with iBasis, received Supervisory Board approval.

The move towards integration of the Company’s fixed and mobile activities in The Netherlands, and the restructuring into a Consumer and a Business division, were discussed at several meetings and subsequently approved. In connection with this move, the Supervisory Board decided to appoint Mr. Coopmans to the Board of Management, responsible for the Dutch Consumer business.

The Supervisory Board furthermore discussed various matters related to the financing of the company, such as the tender for and new issuance of bonds in November, the renegotiation of the Company’s credit facility, the granting of both a full year (February) and interim dividend (August), and the buy back of shares, including the repurchase of 80 million shares from the State of The Netherlands.

The strategy of the Company was discussed in a dedicated session in September. In that meeting, the Supervisory Board received the opinions of outside experts, as well as updates on the progress of implementation of the Company’s strategy from the Board of Management. Other strategic matters were discussed throughout the year, whenever these were deemed relevant for discussion.

On the topic of Corporate Governance, the Supervisory Board approved the proposed changes to the Articles of Association to incorporate relevant changes in Dutch company law and the cancellation of the ‘Special Share’. Furthermore, the Supervisory Board discussed with the Board of Management the way in which the company could use the preference shares B, and a proposal was made to the Annual General Meeting of Shareholders.

The Supervisory Board is regularly appraised of important technical, societal and regulatory developments through experts in the relevant topics, and through visits to its operations and other organizations it works with. Members of the Supervisory Board attended meetings of the Central Works Council.

In its December meeting, the Supervisory Board evaluated the performance of the Board of Management. In February 2007, the Supervisory Board evaluated its own performance over 2006.

Committees of the Supervisory Board

As set out in the chapter titled ‘Corporate Governance’, the Supervisory Board has three Committees: the Audit Committee, the Remuneration & Organization Development Committee and the Nominating & Corporate Governance Committee. All three Committees met separately throughout the year. Their main considerations and conclusions were shared with the full Supervisory Board.

Audit committee

In 2006, the Audit Committee consisted of three Supervisory Board Members, Mr. Eustace (Chairman), Mr. Bischoff and Mr. Streppel. Both Mr. Eustace and Mr. Streppel are considered to be financial experts within the meaning of the Dutch Corporate Governance Code and Rule 10 A-3 of the Securities Exchange Act of 1934, as amended. The Audit Committee held six meetings, most of which were also attended by the CFO and the internal and external auditor. The Committee also met separately with the external auditor.
The Audit Committee reviewed and discussed in particular all financially relevant matters that were presented to the Supervisory Board. These items included the 2005 Financial Statement, Annual Report and Form 20-F, the quarterly results,

reports by the internal and external auditor as well as the Disclosure Committee, the Company’s budgets and projections and the Company’s financing policy.

Furthermore, the Audit Committee paid specific attention to the internal control framework and risk management systems of the company, as well as the implementation of the Sarbanes Oxley Act. The progress on this implementation was discussed in each meeting, and in the second half of the year, the Committee was also kept informed in between meetings of the Committee through monthly reports.

The Committee also discussed other topics that were in its scope of attention, most notably compliance, fraud management, taxation and IT. In December, the Audit Committee evaluated its own performance and effectiveness.

Remuneration & Organization development committee

The Remuneration & Organization Development Committee has four members, Mr. Jager (Chairman), Mr. Risseeuw, Mr. Halberstadt and Ms. Van Lier Lels. In 2006, the committee met five times. The committee reviewed the remuneration packages of the Board of Management and established bonus targets for 2006. It reviewed the Board pension plans in the context of broader changes in The Netherlands. The committee prepared changes in the composition of the peer group and the set up of the long term incentive program. It discussed talent development issues for senior management. Further details on the activities of the Remuneration & Organization Development Committee are provided in the ‘Remuneration Report’.

Nominating & Corporate Governance committee

The Nominating and Corporate Governance Committee has four members: Mr. Risseeuw (Chairman), Mr. Halberstadt, Mr. Jager, and Ms. Van Lier Lels. The purpose of the Nominating and Corporate Governance Committee is to recommend individuals to the Supervisory Board for nomination as members of the Board of Management, to support the Supervisory Board in adopting high standards and practices for the corporate governance structure, to lead the Board of Management in its periodic review of its performance, and to oversee the Company’s activities in the areas of environmental and corporate responsibility.

The Nominating and Corporate Governance Committee met six times during 2006. It prepared the appointment of two board members per June 1, 2006, and the recruitment and appointment of a new board member for the Consumer business per September 11, 2006. It discussed compliance and integrity issues with senior management and reviewed the performance of the individual members of the Board of Management.

Changes in the Board of Management

Per June 1, 2006, Mr. Blok and Mr. Miller were appointed as members of the Board of Management. Mr. Blok had previously been a member of the Board of Management in 2004, and had resigned in connection with the investigation into the appropriateness of discounts in the business market. Upon finalization of both the independent investigation by the Audit Committee and the investigation by OPTA, the Supervisory Board was of the opinion that Mr. Blok should be reappointed to the Board of Management. Prior to their appointments, Mr. Blok was Chief Operating Officer of the Fixed division and Mr. Miller was Chief Executive Officer of our international mobile operations. As members of the Board of Management, Mr. Blok had specific responsibility for the Fixed division and Mr. Miller had specific responsibility for the Mobile division. Also per June 1, 2006, Mr. Demuynck, who had previously been responsible for the Mobile division, left the Company.

Per September 11, 2006, Mr. Coopmans was appointed as member of the Board of Management, with particular responsibility for the Dutch Consumer business.
The appointments of Mr. Blok and Mr. Miller were preceded by the required notification at the Annual General Meeting of Shareholders. For the notification of the intended appointment of Mr. Coopmans, an Extraordinary General Meeting of Shareholders was held on August 28, 2006.
For an overview of all members of the Board of Management, refer to the chapter titled ‘Corporate Governance’.

Financial Statements

The Financial Statements for the year ended December 31, 2006 were prepared by the Board of Management and approved by the Supervisory Board. The Report of Independent Auditors of PricewaterhouseCoopers Accountants N.V. is included in the Financial Statements.

The Supervisory Board recommends to the Annual General Meeting of Shareholders to adopt these Financial Statements, including the proposed cash dividend of EUR 0.50 per share.

Finally, the Supervisory Board would like to thank all shareholders for their trust in the Company and all employees and management for their dedication and effort.

Members of the Supervisory Board

A.H.J. Risseeuw (1936)

Mr. Risseeuw was first appointed as member of the Supervisory Board on May 2, 2001, and he is the Chairman of the Supervisory Board since September 10, 2001. His current (second) term expires in 2009. Mr. Risseeuw chairs the Nominating & Corporate Governance Committee and is a member of the Remuneration & Organization Development Committee. He has held various management positions with Dutch international companies and is the former President of Getronics N.V. He is Chairman of the Supervisory Boards of Groeneveld Groep B.V. and Intergamma B.V., a member of the Supervisory Boards of Heineken N.V. and Blokker Holding B.V. and a member of the Advisory Council of Deloitte Netherlands. Mr. Risseeuw is a Dutch citizen.

D.G. Eustace (1936)

Mr. Eustace was first appointed as member of the Supervisory Board on April 27, 2000, and he is the Vice Chairman of the Supervisory Board since September 10, 2001. His current (second) term expires in 2008. Mr. Eustace is the Chairman of the Audit Committee.
Mr. Eustace is the former Vice Chairman of the Board of Management and Chief Financial Officer of Royal Philips Electronics N.V. He currently is the Chairman of the Supervisory Board of AEGON N.V. and VNU Group B.V. (until recent VNU N.V.), Vice Chairman of the Supervisory Board of Hagemeyer N.V. and a member of the Advisory Council of Rothschild. In 2006 he stepped down as Chairman of the Board of Smith & Nephew Plc. Mr. Eustace is a British and Canadian citizen. In January 2007, Mr. Eustace was appointed member of the Supervisory Board of Stork N.V.

M. Bischoff (1942)

Mr. Bischoff was appointed as member of the Supervisory Board on May 12, 2003 and his current (first) term expires in 2007. He is a member of the Audit Committee. Mr. Bischoff, a former member of the Management Board of DaimlerChrysler, is currently Chairman of the Board of Directors of the European Aeronautic Defence and Space Company (EADS) N.V. Furthermore, he is Chairman of the Supervisory Board of DaimlerChrysler Luft- und Raumfahrt Holding AG, a member of the Supervisory Boards of DaimlerChrysler AG, Fraport AG, SMS GmbH and Voith AG and a non-executive member of the Board of Directors of Nortel Networks Corp., Nortel Networks Ltd.,and Unicredit. Mr. Bischoff is a German citizen.

V. Halberstadt (1939)

Mr. Halberstadt was appointed as member of the Supervisory Board on May 12, 2003 and his term expires in 2007. He is a member of the Remuneration & Organization Development Committee, as well as the Nominating & Corporate Governance Committee. Mr. Halberstadt is a professor of Economics at Leiden University. He is a member of the Supervisory Boards of TNT N.V. and Het Concertgebouw N.V., International Advisor of Goldman Sachs Group Inc. and non-executive director of PA Holdings Ltd. and RHJ International S.A. Mr. Halberstadt previously served amongst others as President of the International Institute of Public Finance, Crown-member of the Social and Economic Council and Chairman of the DaimlerChrylser International Advisory Board. Mr. Halberstadt is a Dutch citizen.

D.I. Jager (1943)

Mr. Jager has been a member of the Supervisory Board since April 25, 2002 and his current (second) term expires in 2010. Mr. Jager is the Chairman of the Remuneration & Organization Development Committee, and a member of the Nominating & Corporate Governance Committee. He held various management positions at Procter & Gamble in Europe, Asia and the United States and was Chairman of the Board, President and/or Chief Executive Officer from January 1995 through June 2000. Mr. Jager currently is an independent consultant and private investor. He is Chairman of the Supervisory Board of Royal Wessanen N.V. and serves on the Boards of Eastman Kodak Inc., Chiquita Brands International Inc. and Polycom Inc. as a non-executive board member. Mr. Jager is both a US and Dutch citizen and resides in the United States.

M.E. van Lier Lels (1959)

Ms. Van Lier Lels was first appointed as member of the Supervisory Board on May 2, 2001 and her current (second) term expires in 2009. She is a member of the Remuneration & Organization Development Committee, as well as the Nominating & Corporate Governance Committee. Ms. Van Lier Lels has held various management positions with Dutch international companies and is the former Chief Operating Officer of Schiphol Group. She is a member of the Supervisory Boards of USG People N.V., Connexxion Holding N.V., TKH Group N.V., Nedlloyd N.V. (Maersk Netherlands) and Slavenburg Holdings B.V. She is a member of the Audit Committee of the Algemene Rekenkamer, a member of the Raad voor Verkeer en Waterstaat and a member of the Innovation Platform. Ms. Van Lier Lels is a Dutch citizen.

J.B.M. Streppel (1949)

Mr. Streppel was appointed as member of the Supervisory Board on May 12, 2003 and his current (first) term expires in 2007. He is a member of the Audit Committee.
Mr. Streppel is a member of the Board of Management and Chief Financial Officer of AEGON N.V. and a member of the Supervisory Board of Van Lanschot N.V. He is a member of the Committee of Listed Companies of Euronext (Amsterdam), Chairman of the Shareholders Communication Channel and a member of the Monitoring Committee Corporate Governance Code. Mr. Streppel is a Dutch citizen.

Remuneration Report

Introduction

The Remuneration & Organization Development Committee (‘the Committee’) of the Supervisory Board ensures that Koninklijke KPN’s (‘the Company’) remuneration policy and practices are competitive and reflect the long-term interests of KPN shareholders. The Company’s remuneration policy is compliant with all relevant legal requirements and the Dutch Corporate Governance Code (‘the Code’).

The Committee meets regularly (5 times in 2006) to review KPN’s remuneration policy. The committee reviewed the remuneration packages of the Board of Management and established bonus targets for 2006. It reviewed the board pension plans in the context of broader changes in The Netherlands. The committee approved changes in the TSR peer group and the set up of the long-term incentive program. It discussed talent development issues for senior management.

The existing remuneration policy was adopted by the Annual General Meeting of Shareholders (‘AGM’) in 2004 and confirmed in 2005 and 2006. In 2006, the performance stock option plan was replaced by a performance share plan. This plan was approved by the AGM on April 11, 2006. Furthermore, a new pension plan was implemented for the new members of the Board of Management.

The companies in the TSR peer group have changed during 2006. O₂ and TDC were replaced by Tele2 and Telekom Austria for the 2004 option grant. For the 2005 option grant and 2006 share grant, O₂ and TDC were replaced by Belgacom and Telekom Austria.

In 2007, the Committee intends to review (but not necessarily change) the composition of the TSR peer group. In addition, it plans to review base salary levels and the structure of the total compensation package. Any changes to the remuneration of the (individual) Board members in 2007 will be either in line with the remuneration policy, or will be put up for adoption or approval in accordance with the Dutch Corporate Governance Code or any other relevant legislation.

This report describes the Company’s remuneration policy and actual remuneration as applied in 2006 and provides an overview of the remuneration policy planned for the next financial year and consecutive years.

The report contains three sections:

•	a summary of KPN’s 2006 remuneration policy and structure for the Board of Management, along with audited tables that provide details on all remuneration received per individual;
•	a summary of remuneration received by the Supervisory Board; and
•	an overview of KPN remuneration policy elements that may be reviewed in 2007.

Remuneration Policy 2006

The Company’s remuneration policy is designed to ensure that KPN can attract, motivate and retain highly qualified executives who are critical to the Company’s long-term success. The goals, principles and practices outlined in this report are the same for all members of KPN’s top management. The policy is based on three principles: pay competitively, pay for performance, and align remuneration with individual responsibility, experience and performance.

Pay competitively. We benchmark remuneration levels against a peer group that includes European telecom operators and IT companies as well as AEX-listed companies. The complexity and size of the benchmark companies are taken into account and made comparable to KPN’s size and complexity through a methodology commonly used by independent remuneration experts (the list of companies is included below under ‘Employment market peer group’).

Pay for performance. We place emphasis on incentives designed to the Company’s long-term value-creation strategy.

To align remuneration with individual responsibility, experience and performance. Individual remuneration packages are designed for each member of the Board of Management.

Executive remuneration

The remuneration of the current members of the Board of Management is provided below.

All members of the Board of Management are entitled to a company car, the use of a mobile phone and an expense allowance, needed for the execution of their role and in line with market norms. In addition to the main conditions a number of additional arrangements apply to members of the Board of Management such as reimbursements for tuition costs of children, additional housing expenses, and expenses for private international medical plan expenses.

At target performance the pay mix of the CEO position is 33% fixed versus 67% variable pay. For the other members of the Board of Management, the average pay mix is 45% fixed versus 55% variable pay at target performance. Individual exceptions apply.

The remuneration of the former members of the Board of Management is provided below.

Base salary 2006

There were no base salary increases in 2006, except for the base salary level of Mr. Smits, which was increased to EUR 475,000.

Short-term incentives: Bonus 2006

The CEO and Mr. Miller receive a target bonus opportunity equal to 100% of base salary, and at maximum performance, 150% of base salary. For the other members of the Board of Management, the target bonus is equal to 60% of base salary, and the maximum bonus is 100% of base salary. If performance is below a certain minimum threshold, there is, in principle, no pay-out. However, the Supervisory Board has discretion in establishing the final bonus payment, e.g. by taking into account achievements of management that created value for the company, but which were not reflected in the bonus items. Performance targets are in line with company strategy. Target pay-out will be achieved at target performance. Performance between target and maximum level or between target and the minimum threshold level will result in a pay-out that is determined according to linear formulas. The maximum pay-out is pre-defined.

The short-term bonus is linked to a combination of performance measures at corporate and divisional level. At the corporate level, revenues and other income as per guidance definition and profit before tax is used. At divisional level, customer satisfaction is used for the Fixed division and revenue market share is used for the Mobile division in combination with operating result for the respective divisions. The applicable divisional performance measure depends on each Board member’s specific responsibilities, typically on a 50/50 basis of division versus corporate results, as determined each year by the Supervisory Board.

Performance is determined as follows:

•	revenues, operating result and profit before tax are derived from the audited consolidated financial statements;
•	customer satisfaction is based on independent surveys; and
•	revenue market share is based on publicly available information together with the Company’s own records and calculations.

KPN considers these measures and targets to be adequate, as they are solid indicators of the Company’s financial health and consistent performance, and they are in line with KPN’s strategy

For the 2006 bonus, which will be paid-out in 2007, performance on revenues at corporate level was above target while performance on profit before tax well exceeded the maximum level. The performance on revenue market share for the Mobile division is close to the maximum level. For the Fixed division, customer satisfaction was between the target level and the minimum threshold.

The Supervisory Board ensures each year that the targets set are quantifiable and stretching but realistic. Specific quantitative performance targets cannot be disclosed due to their commercially sensitive nature.

Long-term incentives

KPN introduced a Performance Share Plan (‘PSP’) in 2006, which reflects market developments and is perceived as an attractive remuneration element. This plan replaced the existing Performance Stock Option Plan. The PSP was approved at the Annual General Meeting of Shareholders on April 11, 2006. The value of this element of pay for each individual did not change. KPN will purchase shares to cover any obligations deriving from the plan.

Based on the PSP, shares are awarded to participants, under the condition that, after a three year period:

(i)	a pre-set performance condition is met, and
(ii)	the employee is still employed with KPN.

The conditionally granted shares will vest after three years, subject to whether the Company achieves a pre-set level of Total Shareholder Return (representing stock appreciation plus dividend pay-out) relative to a peer group of telecommunications companies with which we compete for shareholder preference. The companies in the peer group have changed during 2006. For the share grant, O₂ and TDC were replaced by Belgacom and Telekom Austria. The replacement of companies in the performance peer group may influence the vesting percentage of options and shares. The list of companies is included below under ‘Relative Total Shareholder Return peer group’. The PSP design is in line with the Dutch Corporate Governance Code.

The PSP further emphasizes the pay for performance culture at KPN, creates alignment between management and shareholders, and encourages retention of key employees.

As participants will be obliged to hold on to the (net number of) shares obtained upon vesting of the Performance Shares for a period of at least two years, the PSP further increases share ownership, and therefore shareholder alignment among KPN’s top management. An exception to the two-year holding period is made with respect to shares that were sold at vesting to cover the tax obligation on the vested shares.

The relative importance of the long-term incentive, as a part of the total remuneration package, did not change in 2006.

The share grant in 2006 was based on a target grant level equaling 60% of base salary for members of the Board of Management, and the option grant in 2006 was based on a target grant level equaling 106% of base salary for the CEO.

The economic value of the performance shares at grant date is based on the Monte Carlo Simulation model taking market conditions into account. The value was calculated by external specialists and amounted to EUR 11.67 for the performance shares conditionally granted in 2006.

The economic value of the performance options were established using the binomial valuation method. Options vest in three years and expire in eight years, except for the options of the CEO, which expire after 5 years. The use of the binomial valuation method is in line with the requirements of IFRS 2. The value amounted to EUR 1.20 for the options granted in 2006.

The vesting of performance shares is based on KPN’s ranking among peer companies at the end of the performance period. The vesting of performance stock options (under the performance stock option plan that was operated until 2006) is also based on KPN’s ranking among peer companies at the end of the performance period. The following vesting schedule is applied to performance shares and performance options:

As per ultimo 2006, KPN holds the 4th position concerning the 2004 option grant, which leads to a vesting percentage of 200% of the options that vest in April 2007. As per ultimo 2006, KPN holds the 3rd position concerning the 2005 option grant and the 5th position concerning the 2006 share grant.

For Mr. Miller, a separate long-term incentive arrangement applies as agreed in his previous position before joining the Board of Management. The arrangement is based on E-Plus and BASE business plans for the years 2005 to 2008. Mr. Miller would be entitled to a target pay-out of EUR 3.2 million after three years and a maximum pay-out of EUR 5.0 million after three years. In the event of reaching maximum performance earlier, the maximum bonus will be payable after the year end closing and signing of on the accounts by the auditors.

The following tables summarize information about shares and options granted to members of the Board of Management, (un)conditional shares held by them during 2006, granted shares sold during 2006, granted options exercised by them during 2006, and granted (un)conditional shares and unexercised options held by them per December 31, 2006. Options issued in 2006 carry an entitlement to one KPN share.

Refer to the Notes to the Financial Statements for a description of the share plan.

The exercise price of the options equals the market value of KPN’s share on the grant date. These options are performance related; and the numbers mentioned are on the basis of 100% vesting. As contractually agreed at the time of appointment, the stock options for the CEO are not linked to performance. This was disclosed in 2003 and approved by shareholders in 2004.

Refer to the Notes to the Financial Statements for a description of the option plans.

Pensions 2006

Pensions are administered by the KPN pension fund, the Stichting Ondernemingspensioenfonds KPN.

The CEO receives a defined benefit pension based on a final pay structure with the following characteristics:

•	retirement age is 65, but the CEO has the right to retire at 62 upon a 12 month notice period; and
•	attainable pension equals 70% of last fixed salary.

The defined benefit pension of the CEO has been fully funded at the start of his employment in 2001. No service charges to the pension provision are allocated because the fixed salary remains unchanged.

A new pension plan was introduced for the Board of Management in 2006. This plan is effective from January 1, 2006. Future Board of Management members will be eligible for the pension plan as outlined below:

•	retirement age 65;
•	defined contribution, no defined benefit elements;
•	contributions according to a contribution table calculated over pensionable salary: base salary minus social security offset (EUR 11,566 for 2006);
•	the contribution percentage table is based on the fiscal defined contribution table that corresponds with a retirement age of 65, an underlying accrual rate assumption of 2.25% and a survivors pension accrued, but payment deferred; and
•	death in service benefits will be insured separately by means of risk premiums.

The members of the Board of Management that were already part of the Board before January 1, 2006 will continue to participate in the previous pension plan. This was a hybrid pension plan, which combines a base defined benefit career-average component with a supplementary defined contribution component. The following summarizes the main characteristics of the plan in 2006:

•	defined benefit indexed career-average module up to a maximum salary level of EUR 45,378 and age-related defined contribution module for salary levels above EUR 45,378;
•	the deductible to allow for State retirement benefits equals EUR 11,566;
•	the annual accrual rate in the career average module equals 2%;
•	normal retirement age is 62;
•	pensionable earnings consist of base salary, holiday allowance and the variable short-term bonus (limited to 70% of base salary);
•	temporary defined benefit career-average pension between retirement age 62 and age 65. Annual accrual rate of 2% of deductible (EUR 11,566); and
•	spouse’s pension is insured on a risk premium basis. At retirement, the employee may convert part of the accrued retirement benefit into a post-retirement spouse’s benefit.

As a transitional arrangement an adjustment was made to the retirement age, from age 62 to age 65, and consequently:

•	for the defined benefit module an annual accrual rate of 2.25%; and
•	for the defined contribution module a contribution table based upon an underlying accrual assumption of 2.25%.

Mr. Miller’s pension promise is insured in Belgium. The following summarizes the main characteristics of the Belgium pension plan:

•	retirement age 60;
•	defined contribution plan (pure endowment);
•	yearly fixed gross contribution of 20% of salary; and
•	accrued capital at retirement age purchased into pension benefits.

Loans 2006

Employment Contracts

Mr. Blok and Mr. Miller joined the Board of Management on June 1, 2006. Mr. Coopmans joined the Board of Management on September 11, 2006.

Terms of employment

In 2005, we reached an agreement with Mr. Scheepbouwer on the extension of his employment contract until July 1, 2009. The terms of Mr. Scheepbouwer’s extended contract remain unchanged with the exception of the retirement bonus of EUR 2.5 million, which he would receive on departure on July 1, 2006. Under the revised arrangement, this amount will be payable in full on the date of actual termination of his employment. This retirement bonus was partially accrued for in 2005 and 2006.

All members of the Board of Management have entered into an employment contract for an indefinite period of time. New members of the Board will be appointed for a period of four years, which is consistent with the Dutch Corporate Governance Code.

Notice periods

Current members of the Board of Management must provide a three-month notice if they choose to leave the Company. The Company must provide six-months notice when terminating a Board of Management member’s employment.

Severance arrangements

Severance payments for the CEO and members of the Board of Management are aligned with the Dutch Corporate Governance Code, with the exception of Mr. Miller and Mr. Blok. A severance arrangement of two years base salary (plus pension contribution

and medical expenses) was contractually agreed with Mr. Miller. A severance arrangement of one year base salary plus 100% bonus was contractually agreed with Mr. Blok. For the other Board Members, this is one year. The Supervisory Board can in its discretion deviate from the one-year limitation.

Stock ownership 2006

The tables below show the shares held by current members of our Supervisory Board and Board of Management.

Share ownership relates to normal shares, constituting one vote in the AGM per share.

Supervisory Board Remuneration 2006

The Committee has the formal responsibility to review, and if appropriate, recommend changes to remuneration for the Supervisory Board. Any recommended changes to Supervisory Board remuneration must be submitted to the Annual General Meeting of Shareholders for approval.

The Committee decided not to adjust the Supervisory Board remuneration in 2006. It is the company’s policy to pay at the median level of the relevant reference market.

The current annual remuneration for the Chairman of the Supervisory Board is EUR 60,000. Annual remuneration for Supervisory Board members is EUR 45,000. Committee fees are determined on an annual basis.

Shareholdings in the Company held by Supervisory Board members serve as a long-term investment in the Company and help align their interest with those of our other shareholders. No Supervisory Board member is granted stock options or shares as a form of remuneration. No stock options were held by a Supervisory Board member in the Company. As a policy, the Company does not provide loans to its Supervisory Board members.

The table below shows the remuneration payable to current and former Supervisory Board members in 2006 (on an annual basis).

The table below reflects fixed committee fees as from April 12, 2005 on an annual basis.

Actual fees received in 2006 by each member of the Supervisory Board are reflected below.

Members receive an additional fee if a meeting is held in a country other than where the member resides.

Plans for 2007 and beyond

In 2007, the Committee has the intention to review (but not necessarily change) the composition of the TSR peer group. We are currently reviewing base salaries and bonus leverages to ensure that our payment levels stay in line with market practice.

If any, changes to the bonus and long-term incentive plan shall be in line with the company’s remuneration policy, and will be put before the AGM for adoption (bonus) or approval (share-based plans), pursuant to what is required based on the Dutch Corporate Governance Code and legislation.

EMPLOYMENT MARKET PEER GROUP

We benchmark KPN’s remuneration policy and levels against a peer group of European telecom operators and IT companies as well as AEX-listed companies. Changes in the peer group (compared to 2005) were made only on the basis of companies no longer qualifying to serve as a peer group company (e.g. due to a merger or de-listing). The combination of companies in the peer group reflects the reality that KPN’s growth strategy extends beyond the Dutch market. We want to attract and retain the most talented and experienced managers from throughout the European telecom or IT sector. At the same time, we recognize that KPN is a Dutch company headquartered in The Netherlands. Consequently, remuneration decisions also need to reflect developments at other Dutch AEX-listed companies (excluding companies active in the financial industry sector) and the interests of KPN’s stakeholders in The Netherlands.

The European employment market of KPN consists of direct competitors. The Dutch employment market of KPN consists of AEX-listed companies, excluding financial institutions.

RELATIVE TOTAL SHAREHOLDER RETURN PEER GROUP

In case any company should need to be taken out of the TSR peer group, such company will be replaced with a new company. Due to recent developments TDC and O₂ need to be taken out of the TSR peer group. The Remuneration Committee decided to replace TDC and O₂ companies with Tele2 and Telekom Austria for the 2004 grant, and with Belgacom and Telekom Austria for the 2005 and 2006 grant. The Remuneration Committee will ensure that the change in peer group will not make targets easier to achieve.

The Company will be ranked based on its total return to shareholders, relative to the Total Shareholder Return of the peer group. Independent external specialists will analyze KPN’s TSR performance against the peer group to determine vesting after the three-year ‘vesting period’. The final ranking (and thus the vesting of stock options and shares) will be audited by the external auditor at the end of the performance period.

The peer group used for Relative Total Shareholder Return reflects the relevant competitive market in which we compete for investor preference. This peer group is different from the employment market peer group, which is used to determine remuneration levels for the CEO and members of the Board of Management. The reference groups may change if an individual company no longer qualifies to be taken into account.

Financial statements

Koninklijke KPN N.V.

2006 Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

We have completed an integrated audit of Koninklijke KPN N.V.’s 2006 consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 and audits of its 2005 and 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, consolidated cash flow statements and consolidated statements of changes in group equity, as set out on pages 107 to 171, present fairly, in all material respects, the financial position of Koninklijke KPN N.V. and its subsidiaries at December 31, 2006 and December 31, 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with International Financial Reporting Standards as adopted by the EU. These consolidated financial statements are the responsibility of the Board of Management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

International Financial Reporting Standards as adopted by the EU vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and the effect of such differences is presented in the notes to the consolidated financial statements, under the heading ‘Information on US GAAP’.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in management’s report on internal control over financial reporting on page 86 of the Annual Report and Form 20-F, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with the applicable accounting standards. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with applicable accounting standards, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Consolidated Income Statement