spurred by the diversification of access devices and networks. In addition to PCs, people can now use wireless phones to connect to the Net, soon to be joined by TV sets and games consoles. Wireless Internet access is already available on GSM systems with the WAP protocol and high-speed service will shortly be rolled out with GPRS and third-generation UMTS systems. France Telecom is also a leader in high-speed Internet access. In addition to cable and satellite services, the company has spearheaded ADSL access and initiated an ambitious program to make ADSL available to 80 percent of the French population in 2003. The Group is constantly enriching its offer of communications services (messaging, newsgroups, etc.), information solutions (practical, finance, entertainment, directories, etc.) and transaction services (electronic commerce, online gaming, etc.). At the same time, new media-rich services are being readied to take advantage of broadband connections.
data networks and IP solutions to hosting. These solutions are based on France Telecoms European Backbone Network (EBN). This veryhigh-speed infrastructure operated end-to-end by the Group will connect 40 European cities in 16 countries by the end of 2001. Across the Atlantic, France Telecom will open a high-speed network in 2001-2002 connecting 24 cities across North America, consolidating its international position in the corporate services market.

Networking services

Fresh Opportunities
Myriad new ways to use telecommunications resources continually emerge, prompted by the abundance of access solutions and multimedia services. More and more, these systems figure at the very core of enterprise processes, as e-business spawns new models of production, and business flows rely on the speed and efficiency of networks. Consumers are also using telecommunications in new ways, whether to buy goods, interface with government services, or simply discover local entertainment choices. France Telecom is engaged in the high value-added market for information and communications services, including corporate intranets and extranets, integration services and outsourcing.
A Global Leader in Corporate Services
With Equant/Global One, the Group will become the first player to offer a truly global portfolio of solutions for multinationals, with dense international coverage. The new companys offer will comprise all the advanced telecommunications solutions required to meet the needs of large corporate customers, from
Number Two in Internet in Europe
Already the leader in France in Internet access and audience with Wanadoo, Voila and Oleane, France Telecom is now the number two ISP in Europe following the acquisition of Freeserve. Internet usage is expected to continue to increase,

KEY FIGURES

Consolidated Financial Data *

u Revenues

(in billions of euros)

u International revenues

u EBITDA **

u Operating income

33.7 24.6 27.2

8.7 8.9 9.6

10.8 4.5 4.0

3.5 2.3

Consolidated revenues rose by 23.7 percent from 1999 to 2000, compared with a 10.5-percent increase in the preceding year. Excluding changes in scope and exchange rates, annual growth was 8.1 percent.
Revenues from business outside of France were up 149.7 percent over the previous year. International business accounted for 25.8 percent of consolidated revenues, up from 12.8 percent in 1999.
EBITDA rose 12.4 percent from 1999 to 2000.
Operating income increased by 8.2 percent compared to the previous year.
u Income before goodwill and minority interests

u Net income

u Net earnings per share

(in euros)

4.7 2.8 2.7 2.2 2.3

3.7 2.7 2.3

Income before goodwill and minority interests grew by 73.7 percent from 1999 to 2000, reflecting exceptional gains made on the disposal of nonstrategic assets.
Consolidated net income increased by 32.2 percent over 1999. This increase was 20.3 percent between 1998 and 1999.
Net earnings per share increased 27.4 percent from 1999 to 2000.
* See pages 60 to 64 for financial statements. ** Earnings before interest, taxes, depreciation and amortization
u Breakdown of revenues by business segment

(in millions of euros)

2,550 4,5,310 8,653 1,054 19,153 18,657
Orange Wanadoo Fixed-line, Voice and Data Services in France Fixed-line, Voice and Data Services outside France
* Segments on pro forma basis

Operating Highlights

s Wireless Communications (thousands of customers) France Europe (outside France) Rest of the world s Fixed-line Telephony (thousands of customers) France Europe (outside France) Rest of the world s Internet Access (thousands of customers) France Europe (outside France) Rest of the world s Cable networks (thousands of customers) France Europe (outside France)

10,051 2,752 1,253

14,311 15,832 2,927

42% 475% 134%

34,056 1,168 2,457

34,114 1,937 3,167

66% 29%

80% 82% 128%

709 1,076

769 1,328

8% 23%

Employees

s Full-time equivalent Total Group of which France

174,262 152,346

1188,866 148,846

+ 8.4% 2.3%

2000 HIGHLIGHTS

JANUARY

s GLOBAL ONE France Telecom becomes the sole owner of Global One by acquiring the interests held by Sprint and Deutsche Telekom s JORDAN France Telecom acquires 40 percent of
Jordans national telecommunications operator Jordan Telecommunications Company (JTC).

s WAP SERVICES

Roll-out of consumer wireless Internet services: France Telecom becomes the first operator to propose Wap services via two portals, I-Services and Voila Mobile.
s BRITTANY Deployment of a broadband network serving the Brittany region begins. The network will service 24 cities and support innovative services developed by France Telecom R&D.

FEBRUARY

s WANADOO INITIAL PUBLIC OFFERING
France Telecom floats approximately 10 percent of Wanadoo, which groups its consumer and smallbusiness Internet activities. The IPO gives the consumer Internet business segment fresh resources to fuel its future development.
s LABOR AGREEMENT France Telecom and employee representatives sign an agreement on the reduced work week in France. The agreement applies to 149,000 France Telecom employees.

s MOBILCOM

France Telecom acquires 28.5 percent of MobilCom. The companies will join forces to accelerate their development in the German telecommunications market. In August they won a UMTS license in Germany through their joint venture MobilCom Multimedia GmbH.

s WIND

France Telecom and Enel acquire the 24.5 percent of Wind held by Deutsche Telekom. The transaction increases France Telecoms equity interest in Wind to 43.4 percent while Enel has 56.6 percent.
s TP SA France Telecom acquires 35 percent of the
Polish telecommunications operator TP SA through a consortium following the incumbent operators privatization by the Polish government.
s NEW IDENTITY France Telcom adopts a new
visual identity and logo that reflects its transition from a phone company to a leading Internet enterprise.

Acquisition of Orange

s France Telecom announces the acquisition of 100 percent of Orange, the number three wireless operator in the U.K. Itineris, Orange U.K. and the majority of the Groups other wireless activities are combined within a new company, branded Orange. Orange already held a UMTS thirdgeneration wireless license in the U.K.

AUGUST

OCTOBER

s ANNUAL GENERAL MEETING

The Annual General Meeting of France Telecom shareholders on August 22 approves the acquisition of Orange. The majority of the wireless activities controlled directly by France Telecom will be transferred to the new company, which will continue to be named Orange.

s ITALY

France Telecom and Enel announce plans to merge their Italian subsidiary, Wind, with the Italian fixed-line operator Infostrada.

s SALE OF CABLE BUSINESS

France Telecom agrees to sell NTL Inc. and Morgan Stanley Dean Witter its 49.9-percent stake in Noos, the cable operation of Suez Lyonnaise des Eaux.

SEPTEMBER

s RESIDENTIAL PHONE SERVICE
France Telecom introduces its first "all-inclusive" residential phone service packages, comprising connection, call minutes and services, all for a single flat rate.

s NEW SERVICES

Three innovative services are introduced for residential customers: malicious call blocking, automatic callback to a busy number ("5") and the "3000" number for automatic service activation and management (in addition to the 1014 and 1016 services).

NOVEMBER

s HIGH-SPEED NETWORKS
France Telecom begins building a seamless, high-speed network serving 24 major cities in North America. The North American Backbone Network will be interconnected with the Groups European Backbone Network (EBN).

s EQUANT

France Telecom and Equant announce plans to create the worlds leading provider of data services for businesses through the merger of Global One and Equant, which is expected to be completed in mid 2001.

DECEMBER

Wanadoo goes international

s FREESERVE

Wanadoo launches an offer to acquire Freeserve, the leading ISP in the U.K. and the number three portal in the country. This makes Wanadoo one of the top three ISPs in Europe.

s INDICE MULTIMEDIA

Alongside its ISP development, Wanadoo strengthens its presence in directories by acquiring a controlling interest in Indice Multimedia, the second-largest directory publisher in Spain.

convince

create value

bring together

mobilize
CORPORATE GOVERNANCE EXECUTIVE OFFICERS BOARD OF DIRECTORS Pg. 14 EMPLOYEES Pg. 16 INVESTOR INFORMATION Pg. 18 AN ENTERPRISE COMMITTED TO THE COMMUNITY Pg. 20

MEMBERS APPOINTED BY DECREE OF THE FRENCH STATE

Jean-Paul BECHAT

Chairman and Chief Executive Officer, Snecma

BOARD OF DIRECTORS

as of January 1, 2001
MEMBERS ELECTED BY THE ANNUAL SHAREHOLDERS MEETING

S S S S S S S S

Alain COSTES
Director of Technology, Ministry of Research

Pierre-Franois COUTURE

Chairman of the Management Board of Entreprise Minire et Chimique (EMC)

Yannick dESCATHA

Executive Vice President, Industrial Affairs, Electricit de France

S S S S

Michel BON
Chairman and Chief Executive Officer, France Telecom

Roger FAUROUX

Honorary Chairman of Saint-Gobain

Franois GRAPPOTTE

Chairman and Chief Executive Officer, Legrand

Pierre GADONNEIX

President, Gaz de France

Michael LIKIERMAN

Co-Chairman and Chief Executive Officer, GrandVision SA

Nicolas JACHIET

Head of Investment Monitoring Division, Treasury Department, Ministry of the Economy, Finance and Industry

Jean SIMONIN

Managing Director, Residential Agency of Toulouse

Jacques de LAROSIERE

Advisor to Chairman of BNP Paribas

Sophie MAHIEUX

Budget Director, Ministry of the Economy, Finance and Industry
MEMBERS ELECTED BY EMPLOYEES

Jacques RIGAUD

former Chairman and Chief Executive Officer of Ediradio (RTL), Honorary Member of the Council of State.

S S S S S S S

Alain BARON Jean-Yves BASSUEL Monique BIOT Michel BONNEAU Michelle BRISSON-AUTRET Jean-Claude DESRAYAUD Michel GAVEAU
OBSERVERS APPOINTED BY THE BOARD OF DIRECTORS

S Eric HAYAT

Vice-President, Steria

Didier LOMBARD

Vice-President of State Council on Information Technologies

Gilles MORTIER

Director of Federation of Rural Families
France Telecom is committed to serving the interests of its shareholders through a proactive focus on sound corporate governance.
Since its transformation into a corporation on December 31, 1996, France Telecom has embraced the recommendations of the Vinot report on corporate governance of French listed companies. At its meeting on January 15, 1997, the Board of Directors approved the creation of an Audit Committee and a Compensation Committee. These advisory committees present their recommendations on specific issues to the Board of Directors. The members of the Board of Directors and of both committees were reappointed in 2000. The Board of Directors met nine times in 2000 and in particular approved the main strategic growth initiatives pursued by France Telecom.

April and were deployed on a larger scale in the fall in the run-up to planned market launch in mid-2001. The Internet creates opportunities to foster closer customer relationships too, and France Telecom opened the markets first e-care center. Offers designed to secure loyalty proved successful, and France Telecom now has one of the lowest churn rates in the country, despite tight control over service cancellations by prepaid customers. Already the wireless leader in the French West Indies with its Ameris network, the Group launched its Itineris network in Runion, the islands second GSM service.
Growth Champion in The U.K.
Despite arriving in the market several years later than the three other wireless operators in the U.K., Orange U.K. had nearly reached second place at the end of 2000, with 9.8 million customers. Orange U.K. posted the highest growth rate in the market in 2000, increasing its customer base by over 80 percent. This tremendous expansion is the fruit of highly innovative marketing and an extremely strong brand.
Rene and Jean Salmon, nomadic retirees
"We have an Ola service plan, but sometimes I think its mainly so our son Alain and daughter Monique (although she calls less!) can reach us. We told them that the cellphone was like a new umbilical cord! I think they worry about us. Since Jean retired weve been traveling a lot and they just arent used to us not being at home. But then theres no reason we should be sitting around just getting old, is there!"
Pay-as-you-go plans like Orange Just Talk and greatvalue inclusive talk time plans have enabled Orange UK to win nearly 25 percent of the market. For the third consecutive year, surveys commissioned by British regulator Oftel show that Orange has the best network and service quality in the UK, which explains why the company is number one in brand recognition. Orange also has the best coverage, reaching 99 percent of the countrys population. Orange UK launched WAP services in December 1999, paving the way to third-generation services. It already has over 160,000 WAP customers. An HSCSD high-speed data service for business customers was introduced in August 2000. This service provides wireless access to email, faxes and the Internet. This technology enabled the introduction of the Orange Videophone at the beginning of 2001. Orange UK has also opened its Orange.net Internet service, where customers can manage their subscription, customer profile and personal diary. Orange U. has a UMTS license and plans to introduce 3G services as of 2002.

Networks

A World-Class Phone Network
A subscription to France Telecom's phone service brings customers access to one of the most reliable and digitized networks in the world. France Telecom is continually enhancing this network to offer an ever-broader range of innovative new services for customers. Telephone switches, the nodes of this network, continue to evolve too. The last analog switches were replaced in 2000. The total number of switches will be reduced from 900 to 570, resulting in a stable network infrastructure. Another key to France Telecoms superior service is 24by-7 fault signaling and customer assistance. A total of 2,500 agents provide customer support, primarily through the 1013 and 1015 call centers. Ten Customer Support platforms are dedicated exclusively to business customers. Efficient functioning of the network which counts more than 34 million lines is ensured by 30,000 agents and technicians who have time and
NETANOO: PUBLIC INTERNET ACCESS
In addition to public payphones, France Telecom is now offering public Internet terminals. Several thousand Netanoo terminals will enter service by the end of 2001 in a variety of public places. People will be able to connect to the Internet and use their email just as they would use a payphone. France Telecom is providing network connections (Numeris-ISDN), the terminal (I-Macs with access to Wanadoo) and a range of services. The manager of the public location (train stations, shopping centers, etc.) takes care of the installation and proposes merchant or free services via the Netanoo portal. Customers pay for access using France Telecom phone cards.
s ADSL, the High-Bandwidth Revolution
ADSL technology transforms a regular phone line into a high-speed pipeline that makes the Internet and multimedia easier and more convenient than ever for both residential and business users. What's more, ADSL lets people continue to use their phone line while connected to the Net, and provides unlimited, "always-on" access for a single flat fee. Through Wanadoo, France Telecom aims to aggressively develop this high-speed offer for both business and residential customers. The objective is to have 30 percent of the customer base connected to the Internet via ADSL by 2003.
again demonstrated their ability to maintain or restore communications even under the most difficult circumstances. Network operation is being optimized as well. France Telecom will restructure its 300 multi-equipment operating groups into 13 supervision centers. These centers will be staffed by teams with multiple skills, thus further enhancing quality of service while boosting the competitiveness of the network.
Affiliate Networks in Europe
A more unified Europe creates a new domestic market for France Telecom, thus fueling business development. Aside from Poland, where France Telecom acquired an equity interest in the countrys incumbent operator, the Group has established positions as an alternative operator in almost all the other countries where it has entered the market. The objective is to offer a complete range of converged voice, data, fixed, wireless and Internet solutions, addressing the expectations of one of the most competitive and promising markets in the world. Many of the Groups operations across Europe are linked with Wanadoo and above all Orange, even when their offering extends beyond Internet and wireless services. France Telecom has operations in virtually every country in Europe, with the exception of the former Yugoslavia, Belarus, Ukraine and the Baltic nations. In Poland, France Telecom last year acquired a 25percent stake in TP SA, the partially privatized incumbent operator. The Groups local partner Kulczyk Holding has 10 percent of TP SA, which is the dominant carrier in the market with 96 percent of the fixed lines (over 10 million customers at yearend 2000) and 80 percent of the Internet access connections. TP SA also has a dense distribution network throughout the

country. France Telecom has been present in Poland since the early 1990s when it built the PTK Centertel analog cellular network as part of a consortium that included the future TP SA. France Telecom currently owns 34 percent of PTK Centertel, which has since developed GSM services and acquired a UMTS license at the end of 2000. In the rest of Europe, Group affiliates are positioned as new entrants. Several of them have rapidly gained very strong positions in the fixed-line telephone market. Their objective is to provide customers with a complete range of telecommunications services. In Spain, France Telecom controls 69 percent of Uni2, which holds the third fixed-line license in the country. Uni2 has built a fiberoptic backbone network that provided service for 1.7 million customers at the end of 2000. This network will provide direct links to all cities with over 100,000 inhabitants as of 2002. Uni2 also purchased a 75-percent stake in al-pi, the first alternative operator in Catalonia and launched the www.wanadoo.es Internet service, which had 320,000 active customers at the end of 2000, making it the number three ISP in Spain. In Italy, the merger of wireless operator Wind with Infostrada will enable it to offer a complete range of fixed, wireless and Internet services. The company had 2.3 million fixed telephone customers (residential and businesses) at the end of 2000, putting it second in Italy.
s European Backbone Network

40 CITIES 16 COUNTRIES

SERVED IN BY END 2001
European Backbone Network Landing point Planned

Dublin

Oslo Stockholm
Copenhagen Manchester Amsterdam Hamburg London Rotterdam Antwerp Berlin Dsseldorf Lille Brussels Frankfurt Prague Paris Stuttgart Basel Vienna Geneva Zurich Munich Budapest Toulouse Lyon Nice ARIANE (Mediterranean Sea) Milan
TAT-14 (USA) TAT-13 (USA) SEAMEWE3

Porto Lisbon

Marseilles Barcelona Madrid

SAT3/SAFE (Africa-Asia)

SEAMEWE2 (Middle-East Asia) SEAMEWE3 (Middle-East Asia)
In Germany, France Telecom owns 28.5 percent of MobilCom, which has 892,000 fixed-line customers in addition to its Internet and wireless businesses. The Group is also growing its cable network businesses in Europe. In the United Kingdom, NTL aims to create the countrys first alternative broadband network. France Telecom owns approximately 18.6 percent of NTL, which has become the leading cable operator in both the UK and Ireland. NTL has 3.2 million customers for its telephone and cable TV services and 1.8 million Internet subscribers. In the Netherlands, cable operator Casemas 1.3 million customers also use its fixed telephone services.

Submarine Cable Links

France Telecoms international activities benefit from its high-quality intercontinental wireline infrastructure. France Telecom is one of the few carriers involved in designing, building and operating submarine cable systems. The Group owns shares in dozens of submarine cable systems, of which 17 have landing points in France. On January 1, 2000, these operations were grouped within a new subsidiary, France Telecom Marine. This structure addresses the expectations of customersmaintenance authorities and system suppliersand will facilitate partnerships, which are indispensable to achieving critical mass. As network architect, France Telecom Marine is involved in the construction of two submarine cable systems that entered service in 2000. The 13,000kilometer Atlantis 2 system links Europe, Africa and Latin America. The Group played a major role in project engineering and management for this system, which deploys ultra-modern fiberoptic cable with wavelength division multiplexing (WDM).The Americas 2 cable stretches 8,300 kilometers with landing points in Florida, St. Croix, Puerto Rico, Martinique, Curacao, Venezuela, Trinidad, French Guiana and Brazil. The system has terrestrial extensions to Surinam and Guiana. With bandwidth of 40 gigabits per second, the fiberoptic WDM Americas 2 system is capable of transporting 300,000 simultaneous calls. France Telecom has a 9-percent share of the cable, for which 2,000 kilometers were laid by the Groups cableship Fresnel. On June 17, 2000 a construction and maintenance agreement was signed for the SAT-3/WASC/SAFE
system (South Africa Telecommunications/West African Submarine Cable/South Africa-Far East). France Telecom Marine also signed a contract for construction of a new ultra-modern cableship, to be delivered in December 2001. This vessel will join the existing fleet of four ships, making France Telecom the worlds third-largest cableship operator for submarine cable laying and maintenance operations.
unit. GlobeCast provides end-to-end transmission and production services for video, audio and multimedia broadcasts, from and to any point on the globe. GlobeCast entered a new dimension in 2000 by integrating satellitebased Internet and multimedia in its portfolio of solutions. Satellite links feed ISP platforms and also enable direct connection of customers to the Internet. Satellite capacity also supports Internet broadcasting services such as streaming video and audio, push mode and theme channels. France Telecom believes that satellites will play an ever-growing role in this segment and approved plans for a 2002 launch of a new satellite to provide broadcasting and high-speed Internet capacity. The Stellat program will be developed in partnership with satellite operator Europe*Star. A new international broadcast contribution network (a network dedicated to video and IP signal transport) was developed in 2000, based on France Telecoms terrestrial and submarine fiberoptic infrastructure. s

A Trans-European Network

France Telecoms international expansion is backed by very-high-speed networks capable of delivering the performance needed by customers of the new Equant/Global One entity. These networks also transport the data, voice and multimedia solutions of France Telecom and other operators and Internet service providers. Launched in October 1999, the European Backbone Network (EBN) provides direct, seamless access across the continent. This network supports all protocols and can be used by other operators and ISPs. Each of its loops can transport 80 gigabits per second, with a total capacity of up to 1.2 terabits per second. A supervision center for all of Europe has been set up in Toulouse. In 2001 the EBN will link 40 cities in 16 countries, stretching over 20,000 kilometers from Helsinki to Lisbon and from Dublin to Katowice.
business segments U business services NO STOPPING PROGRESS FOR FIBEROPTIC LINKS
France Telecom has 84,000 kilometers of fiberoptic circuits across France, representing 2.4 million kilometers of fiber. Thanks in particular to Wave Division Multiplexing (WDM) technology, the bandwidth that a single fiber can transport has doubled each year for the past five years. In 1997, Frances first WDM circuit, between Nantes and Penmarch, had four wavelengths per fiber. Todays fibers support 80 and even 100 wavelengths. And although there is a theoretical limit, it remains far from being reached.
ships and end-to-end server solutions, covering everything from access to audience building. The Global Hosting offer from Global One provides large enterprises with managed hosting of their websites, enabling secure access from anywhere in the world. This offer is based on the 100 Global One IP points of presence and a network of ten global hosting centers. Global Intranet brings businesses the simplicity of the Internet plus the quality and security of a corporate network thanks to Global Ones International IP virtual private network (VPN). Global IP VPN is an all-IP solution now available in 36 countries and already provides connections for over 2,500 sites. More than 20 customers have chosen this service, which has won two prestigious awards from trade magazines.

MAN (Metropolitan Area Network) A high-speed fiberoptic intra-city network used to provide businesses with very-high-speed links Marketplace: A website that acts
as an intermediary between businesses, proposing services such as identification of potential partners, bids, e-commerce or Internet payment.
Resources Division Shareholders Tel. : (33 1) BP 1010 - 75721 Paris Cedex 15 France Design and Production Altdia Communication - Paris
WAP (Wireless Application Protocol) A new wireless telephony protocol that transforms a wireless handset into a mobile Internet and multimedia device. WDM/DWDM (Wavelength Division Multiplexing / Dense Wavelength Division Multiplexing) A technique that lets a single optical fiber simultaneously carry multiple channels of digital information. WEB Abbreviation of World Wide
Web, the multimedia interconnected networks that make up the Internet.
NGN (Next Generation Network): A
future network that is expected to offer converged Internet and telephony services.
ADSL (Asymmetric Digital Subscriber Line) A transmission technology that transforms existing copper wires from the subscribers premises to the central office switch into an "always on" high-bandwidth line for high-speed Internet access while leaving the line available for conventional voice telephone calls. ATM (Asynchronous Transfer Mode) A very high-speed transmission technology for transporting voice, data and video in digital format. Bit (Binary digit) The smallest unit of information (data) a computer can process. One kilobit per second (kbps) = 1,000 bits transmitted per second. One megabit (Mbit) = 1,000 kilobits. One gigabit (Gbit) = 1,000 megabits. One terabit (Tbit) = 1,000 gigabits. Chat Messaging via Internet forums enabling real-time exchanges with other users. A chat room is an online space where two or more people can meet. DAB (Digital Audio Broadcasting)
Radio broadcasting using digital modulation, significantly increasing frequency band capacity while enhancing reception quality.
Ethernet The most widely used
standard for local area networks (networks that link the workstations within a company). Fast Ethernet and Giga Ethernet are very-high-speed versions of Ethernet.
Extranet An Intranet-like network that a company makes available to employees, customers and suppliers. These networks are an indispensable part of e-business. GPRS (General Packet Radio Service) A second-generation wireless telephone standard that supports direct mobile Internet access and data rates that are 18 times greater than GSM, and enables volume-based rate structures. GPS (Global Positioning System) A system that enables a vehicle or a person to locate their position anywhere on the earth to within 50 meters. The system functions using a constellation of 24 satellites operated by the U.S. government. GSM (Global System for Mobile Communications) The digital cellular telephone standard used across Europe which operates in the 900 MHz and 1800 MHz frequency bands. Intelligent Network (IN) With an IN, telephone services (toll-free numbers, for example) are implemented by dedicated computers, as opposed to phone switches. Interconnection Connection of two independent networks, such as the networks of other telecommunications operators in France and the France Telecom network.

Digital Unlike analog representations, digital information sound, text or video is coded in binary form, in a series of 1s and 0s. It is easier to transmit information in digital format
EBN (European Backbone Network) France Telecoms seamless high-speed pan-European network. The backbone network is the central infrastructure which interconnects with the access network.
e-commerce Abbreviation of electronic commerce. Transactions (ordering and payment) that are either completely or partially carried out online.

Glossary

France Telecoms ability to pursue its strategy with respect to certain subsidiaries and joint ventures in which it shares control or does not own a controlling interest, may be limited. Some of France Telecoms international activities are conducted through subsidiaries and joint ventures. Under the governing documents for certain of these entities, certain key matters such as the approval of business plans and decisions as to the timing and amount of cash distributions require the agreement of France Telecoms partners. The risk of disagreement or deadlock is inherent in jointly controlled entities. France Telecoms partners may have different approaches with respect to the joint ventures and the markets in which they operate and France Telecom may be unable to reach agreement with its joint venture partners. In some cases, strategic or joint venture partners may choose not to continue their partnership. In addition, France Telecoms arrangements with its joint venture partners may expose France Telecom to additional investment, capital expenditure or financing requirements. See Item 5. Operating and Financial Review and Prospects Overview and Item 4. Information on France Telecom Business Overview. In a limited number of cases, France Telecom does not participate in the control of, or does not own a controlling interest in, these joint ventures. Where this is the case, France Telecoms partners may have the right to make decisions on certain key business matters with which France Telecom does not agree. This could impact France Telecoms ability to pursue its stated strategies with respect to those entities and the markets in which they operate. System failures may result in reduced user traffic, reduced revenue and harm to France Telecoms reputation. France Telecoms technical infrastructure is vulnerable to damage or interruption from floods, windstorms, fires, power loss, telecommunication failures, intentional wrongdoing and similar events. The occurrence of a natural disaster such as the major winds that affected service in France in 2000 or other unanticipated problems at its facilities or any other damage to or failure of its systems could result in interruptions in its service. System failures, hardware or software failures, or computer viruses, could also affect the quality of its services and cause temporary service interruptions. Any of these occurrences could result in customer dissatisfaction and reduced traffic and revenues. Risk Factors Relating to the Telecommunications and Wireless Industries France Telecom may be unable to obtain future financing at favorable rates to fund the development of its business. In recent months, French and British bank regulators have issued warnings to banks relating to telecommunications industry-specific risks in their lending portfolios. These regulators cited the large expenditures by European telecommunications companies on the acquisition of UMTS licenses and related investments. As a result, banks may be unwilling to lend money to France Telecom at rates it considers favorable, or at all. Furthermore, spreads on recent debt issuances by telecommunications operators have risen considerably as a result of the increased risk associated with debt securities in the telecommunications sector. If France Telecom is unable to borrow the amounts it needs at affordable rates, it may be unable to pursue its planned strategy. France Telecom cannot assure you that future conditions in the financial markets, particularly as France Telecom and other telecommunications companies seek increasingly large amounts of capital financing, will not adversely affect its ability to finance its operations. The profound and continuing transformation of the telecommunications industry in Europe may strain France Telecoms resources. The telecommunications industry in Europe has experienced profound changes in recent years, and France Telecom expects these changes to continue. If it fails to rapidly adapt its business to meet the developments within the industry, it may be unable to compete effectively and its business, financial

In 1991, Microtel Communications Ltd., Orange plcs predecessor company, which had been formed by a consortium led and ultimately wholly owned by British Aerospace, was awarded a license to operate a GSM1800 digital network in the United Kingdom. In July 1991, a subsidiary of Hutchison Whampoa purchased Microtel Ltd. from British Aerospace in exchange for 30% of that subsidiarys shares. Microtel was renamed Orange Personal Communications Services Ltd. in 1994, prior to the launch of its Orange network in the United Kingdom on April 28, 1994. As a result of a corporate reorganization, Orange plc became the holding company for the Orange group. Orange plc was incorporated on October 5, 1995. In October 1999, Mannesmann AG announced its offer to acquire all the issued share capital in Orange plc. On December 23, 1999, while Mannesmanns offer for Orange plc was still pending, Vodafone AirTouch plc made a formal offer to acquire the entire issued share capital of Mannesmann. On April 12, 2000, the European Commission approved the acquisition of Mannesmann by Vodafone subject to commitments by Vodafone to divest Orange plc and all of its subsidiaries. On May 30, 2000, France Telecom announced that it had agreed to acquire 100% of the outstanding shares of Orange plc for 25.1 billion, 13.8 billion of which was in cash and 11.3 billion of which was in new France Telecom shares. For information on France Telecoms obligation to repurchase these shares, see Item 7. Major Shareholders and Related Party Transactions Related Party Transactions. In addition, France Telecom agreed to assume 1.8 billion of Orange plcs indebtedness, as well as the debt incurred by Orange 3G Limited, a wholly owned subsidiary of Orange plc, in connection with its successful bid for a UMTS license in the United Kingdom. On August 11, 2000, the European Commission delivered its decision approving the transaction subject to certain conditions, including France Telecoms undertaking to divest Orange plcs interest in KPN Orange (Belgium) NV, in a manner to be approved by the European Commission. France Telecoms agreement to acquire Orange plc was also subject to confirmation that Orange 3G Limited would be granted its UK UMTS license. The acquisition was consummated on August 22, 2000. France Telecom has since divested KPN Orange (Belgium) NV. As a result of the issuance of new France Telecom shares, the French governments interest in France Telecom has decreased from approximately 61% to 55.5%. Wireless Restructuring In order to combine the large majority of France Telecoms wireless operations with those of Orange plc, France Telecom has restructured its holdings to form a new group. On August 22, 2000, France Telecom transferred its domestic wireless operation to France Telecom Mobiles SA, a wholly owned subsidiary formed from its former France Telecom Mobiles wireless division. At the same time, France Telecom began the process of transferring, directly or indirectly, certain other subsidiaries and interests, including Orange plc, to Orange SA, a holding company for the new Orange group. These transfers were effected by a contribution by France Telecom or France Telecoms subsidiaries of the holdings in or shares of the relevant subsidiaries to Orange SA. In addition, certain of France Telecoms other wireless activities that are expected to be included within the Orange group could not be transferred to Orange SA before the February 2001 offering of Orange shares, either for economic or regulatory reasons. These transfers are expected to occur in the future once the necessary conditions are met. These activities will be transferred, directly or indirectly, to Orange SA, at market value. These activities include: France Telecoms 71.25% interest in MobiNil, the holding company which owns 51% of Egyptian Company for Mobile Services, or ECMS, which at December 31, 2000 had 1.2 million customers; France Telecoms 34.0% interest in the Polish network operator PTK Centertel, which at December 31, 2000 had approximately 1.5 million customers; and

Wireless operations outside Europe Orange SA also provides wireless services through controlled operations in the Ivory Coast, the Dominican Republic, Cameroon, Botswana, Madagascar, and through minority-owned operations in Thailand and India. Licensing Agreements Orange UK has licensed the Orange brand to network operators in Australia and Hong Kong to Hutchison Telecom, in India to Hutchison Telecom Max and in Israel to Partner Communications. Under the brand license agreements, Orange UK assists the licensees in developing the brand in the local market. Orange UK retains the intellectual property rights and the licensees are registered as permitted users only. The licenses are exclusive, non-revenue-generating and non-terminable, except in the event of default, including in case of misuse of the brand. Roaming Roaming allows wireless services customers to place and to receive calls while in the coverage area of a network to which they do not subscribe and to be billed for such service by their home network. Roamers can expect to enjoy substantially the same services, features and security while traveling as they do on their home network. The roaming services offered by the Orange SA network operators were created entirely within the framework of the GSM technical standard and the policies and procedures set by the GSM Association. A bilateral relationship is created between two GSM operators by signing a roaming agreement based on the GSM Associations general template, modified as appropriate for the particular circumstances. As a general matter, these agreements are for unlimited terms and each party can terminate without notice. At present, roaming agreements are generally concluded between network operators in different countries, although they can also be concluded between operators in the same country. After technical and billing tests are successfully concluded, the connection is opened commercially and each partys customers may use the other partys network. Most Orange SA customers can roam in approximately 100 countries due to the roaming agreements that its network operators have concluded with almost 200 different networks. Orange SA intends to take advantage of its increasingly global footprint to reduce, or even eliminate, roaming charges by allowing its customers to use its products and services in each market in which it operates without using the networks of other operators. Wanadoo Overview Unless otherwise indicated, the information below and elsewhere in the document with respect to market data for Internet services (e.g. population, size, market share) is based on studies made by Wanadoo. Wanadoo is Frances leading Internet media and directories company, and one of the leading Internet companies in Europe. Since France Telecom launched Wanadoos Internet services in May 1996, it has become Frances leading Internet access provider for residential and small to mediumsized businesses, with over 2.04 million active users in France at March 1, 2001. Wanadoo also has a significant user base outside France, with approximately 647,000 active users in Belgium, The Netherlands, Spain and Morocco at March 1, 2001. France Telecom also provides Internet access in the United Kingdom following its acquisition of Freeserve plc. Wanadoos current scope of operations

geographic coverage, high capacity and technological strength of its Transpac network leave it well positioned to face competition in this market. The data transmission services market is experiencing strong growth as businesses adopt new data-intensive business applications, such as electronic commerce, corporate intranets and virtual private networks, voice communication over the Internet, video streaming, broadcast multimedia, application hosting services and other products and services based on Internet Protocol data transmission. These new applications are driving the demand for bandwidth and for value-added services, such as LAN-interconnect services and Frame Relay, which give France Telecoms business customers greater flexibility in the transmission of data and higher bandwidth capacity. The same factors are also driving demand for integration and management of applications and private networks that connect workstations within a building or connect a number of business sites. Fixed Line, Voice and Data Services Outside France France Telecom believes that the trends in the data transmission services market are international in scope and that its success in the international data transmission market will depend on the ability of its new Equant/Global One global operations and existing Transpac activities to compete with a variety of other telecommunications providers, specialized IP/data providers and new market entrants, including those providing competing networks and those providing competing Internet connectivity and value-added services. France Telecom expects that the number of competitors and vertical and horizontal integration in the industry, pricing pressure and competition for market share will all intensify in the future. Global One operates in a highly competitive market. Global Ones direct competitors include both global alliances and independent operators such as Concert, the joint venture between AT&T and British Telecommunications, Infonet, Cable & Wireless, MCI/Worldcom, and newer entrants such as Global Crossing, Colt and KPN/Qwest in certain product and geographic areas. Global One also competes with incumbent providers, some of which still have special regulatory status and the exclusive rights to provide certain services, and virtually all of which have historically dominated their local telecommunications markets. These competitors offer data network services, but, with limited exceptions, their data businesses are small compared to their voice services business. Global Ones management believes that additional telecommunications and data companies and new competitors such as computer hardware, software, media and communications enterprises and other technology developers, will enter the market for global data communications services. Global Ones management expects the competition it faces to intensify as telecommunications regimes are further liberalized, new technologies emerge and domestic and international transmission capacity becomes increasingly available. Research and Development France Telecom has long considered research and development to be of paramount strategic importance and it continuously strives to shorten the time-to-market for newly developed products through its customer-focused research and development activities. Research teams work together with business units to develop targeted research projects. France Telecoms emphasis on research and development is reflected in its historical level of research and development expenditure. During 1999 and 2000, investments in research and development, together with the personnel costs and other operating expenses related to research and development, amounted to A 593 million and A 449 million, respectively (before depreciation). In light of the increasingly competitive and rapidly evolving French, European and global telecommunications markets, France Telecom will continue to emphasize research and development of new products, services and technologies. France Telecom continuously strengthens its involvement with

Synchronous Digital Hierarchy (SDH) At December 31, 2000, France Telecom had installed more than 600 links of 2.5-Gbps synchronous digital hierarchy, or SDH, transmission systems on its national network, of which 19 were cross-border and approximately 1,700 self-healing SDH rings in regional, national and international networks. SDH, which is a relatively inexpensive technology, allows for a simpler and more easily managed network with enhanced reliability. Through the use of a stand-by national network and self-healing rings, the SDH optical network is fully protected against single cable failures. France Telecom is developing further its SDH networks by installing other SDH rings within its national and regional networks. Asynchronous Transfer Mode (ATM) France Telecom is one of the principal developers of asynchronous transfer mode, or ATM, technology and has been developing trial networks since 1991. ATM technology permits data, text, voice, video and multimedia signals to be transmitted simultaneously between network access points at speeds of more than 155 Mbps. ATM technology allows France Telecom to provide better local area network, or LAN, interconnections, data transmission and flexible bandwidth delivery. Since 1994, France Telecom has deployed an ATM backbone network able to carry high-rate services. At December 31, 2000, this network was composed of 131 nodes. It is currently used to support the business service Multiservice ATM (see Principal Activities Services to business customers), the video transmission service Videodyn, which provides temporary television hook-ups, and ADSL access for France Telecoms interconnection services. France Telecom continues to develop new ATM network functions in order to offer new services and extend the network. Internet-related Networks In order to provide high-quality and high-volume transmission capacity, France Telecom uses its IP 2000 network, a high-performance network that was developed for bandwidth scalability and broadband (principally ADSL) compatibility and that is continually upgraded to enhance its capacity and capabilities. France Telecoms analog and digital telephone network users are connected using network access servers located throughout France that offer modem speeds of up to 56 Kbps for analog access and up to 128 Kbps for digital access. France Telecoms IP network is multi-access and can be scaled for increased traffic volume and new technological standards, such as the very high bandwidth transmission technology currently being developed by France Telecom Recherche et Dveloppement. The current IP network, which was e designed as of mid-1998 and introduced in February 1999, was significantly reinforced in the first half of 2000 to carry all national IP transport and connect with the World Wide Web. The Wanadoo access service platform is based on a segmented, secure and modular architecture that uses proven market technology. The production platform is organized into different levels, with each component part consisting of Ethernet switches handling separate aspects of France Telecoms service, such as network access, online services, the operating support system and the business support system. These component parts are linked by firewalls designed to offer protection from attack. The production platform consists of approximately 500 servers and is connected to the analog and digital telephone access network and the ADSL network through France Telecoms IP transport network. This design enables it to rapidly increase capacity and to handle anticipated increases in user numbers. The Voila portal is hosted at two web hosting centers located in France and the United States, containing similar servers, technology and Internet connectivity and providing technology appropriate for the various markets served. France Telecom intends to add new web hosting centers in the coming months. Each server is mirrored to provide redundant capacity and to ensure continuity of service.

According to IDATE, current trends continue, the number of wireless customers could surpass the number of fixed line customers in the world by 2004, with over 1.217 billion wireless customers (591 million customers in 2000), compared with 1.150 billion fixed line subscribers. The aggregate European market is growing at 8% per year, outpacing the 4% growth rate in North America. Europe is expected to surpass North America (26% of total value) in terms of value in 2004, making it the number two market in the world (27%), behind the Asia-Pacific region (29%). In the European Union, Germany has the largest market value (20%), followed by the UK (18%), France (14%) and Italy (13%) according to IDATE. Wireless services continue to drive the accelerated transformation of the telecommunications market in the 15 countries of the European Union. In 2000, fixed telephony accounted for 45% of the market. The wireless market growth, with market value increasing 13% between 1999 and 2000, could be reinvigorated by the progressive introduction of GPRS and UMTS technologies between 2001 and 2002. Significant growth in the wireless customer base, covering approximately 50% of the French population at the end of 2000, makes wireless telephony a fundamental source of continued expansion, with growing potential for Internet access services (information, e-commerce, business applications). In the data services market, IDATE expects growth in Europe to be 10% per year through 2004. Internet services comprise another significant factor for development of telecommunications services in Europe. The number of Internet accesses is expected to rise from 41 million in 2000 to 129 million in 2004. At this time the market will be worth an estimated A 26 billion according to the International Data Corporation (IDC), Le Barom`tre Trimestriel Internet/Tlcoms (February 2001). e ee France had nine million Internet connected devices at the end of 2000. According to forecasts, the total number of devices may triple by 2004, totaling approximately 27 million Internet users in France, of which more than half is expected to be residential customers (source: IDC). The Internet has ushered in an era of electronic commerce. Consumers and businesses alike will carry out a growing proportion of their transactions on line. In the medium term, this volume could reach 3 to 10% of purchases, representing a potential market of A 10 billion to A 45 billion in technical services (not including the value of the goods and services sold). Finally, the deployment of digital terrestrial TV will spark ongoing expansion in the broadcasting market. The pay TV market (cable and satellite) continues to experience strong growth in Europe (A 12 billion in 1999, up 18% over 1998) and in France (A 2.6 billion in 1999), for a projected annual growth rate of 12% from 1999 through 2005 according to the Bureau dInformation et Prvision Economiques (BIPE), Biens et Services Culturels, e Vol. 8, Perspectives sectorielles Horizon 2005 (July 2000). This discussion of anticipated market trends contains forward-looking statements. Actual events may differ materially from those described above, due, in particular, to the failure of market demand to develop. See Cautionary Statement Regarding Forward-Looking Statements. Item 5. Operating and Financial Review and Prospects The following discussion should be read in conjunction with the Consolidated Financial Statements, including the Notes thereto, included elsewhere in this annual report. Such financial statements have been prepared in accordance with French GAAP, which differ in certain significant respects from US GAAP. For a discussion of the principal differences between French GAAP and US GAAP as they relate to France Telecom and a reconciliation of net income and total net shareholders equity to US GAAP, see Summary of Significant Differences between French GAAP and US GAAP and Note 25 to the Consolidated Financial Statements. Certain of the statements contained in this section, particularly under Overview and Outlook, are statements of future expectations and other forward looking statements that are based on managements current views and assumptions and involve known and unknown risks and

The negative impact of these factors was partially offset by the positive EBITDA effect of directories activities, which are currently either in transition due to the development of Internet interfaces or growing due to the demand generated by exporting their accumulated know-how. Investments in tangible and intangible assets increased nearly 120% in 2000 due, on the one hand, to external growth following the consolidation of FIT Productions, Euronet Internet (The Netherlands) and Kompass France, and, on the other hand, to investments required for strong growth in Internet activities, notably for portals, servers, platforms, electronic messaging, search engines and computer infrastructure. Fixed Line, Voice and Data Services France The Fixed line, voice and data services France segment includes France Telecoms activities as a network operator for fixed line telephony and data transmission services as well as a provider of broadcasting and cable TV services in France. The following table sets forth information concerning this segments activities for the years ending December 31, 1999 and 2000, and percentage changes between these periods.

20,704 8,427 4,716 2,550

20,793 8,142 4,626 2,363

0.4 (3.4) (1.9) (7.3)

The increase in revenues from corporate networks, which includes both leased lines and data networks, and from online services products, which includes, in particular, increased telephone traffic communications to access the Internet, was almost completely offset by the decrease in fixed line telephony revenues. This decrease was due to both the effects of (i) successive tariff reductions, particularly for domestic long distance and international calls, and (ii) the steady growth in competition from other fixed line service operators especially in the long distance market. EBITDA decreased slightly in 2000 due to both (i) tariff reductions for domestic and international calls, which were implemented during the year and were applicable to residential and business customers, and (ii) increased distribution, marketing and sales activities in market sectors where competition has increased significantly. The 7.3% reduction in purchases of tangible and intangible assets in 2000 followed the trend which began in 1999, and mainly reflected decreased investment in the domestic fixed line network, in particular the regional and long distance networks. Fixed Line, Voice and Data Services Outside France The Fixed Line, Voice and Data Services Outside France segment includes France Telecoms activities as a network operator for fixed line telephony and data transmission services as well as provider of broadcasting and cable TV services outside France. This segment also includes France Telecoms wireless operations not yet integrated into its subsidiary Orange SA (in particular FTML in

Costs of services and products sold (excluding depreciation and amortization). Selling, general and administrative expenses (excluding depreciation and amortization). Research and development expenses (excluding depreciation and amortization). Total operating costs and expenses before depreciation and amortization and special items, net. Depreciation and amortization (excluding goodwill). Special items, net. Total.

9,686 7,17,620 4,22,743

35.6% 27.0 2.2 64.7 17.9 0.9 83.5%

12,733 9,22,867 5,28,818

37.8% 28.8 1.3 67.9 17.0 0.7 85.6%
Total operating costs and expenses (before depreciation and amortization and special items, net), expressed as a percentage of revenues, increased 3.2 points in 2000. The evolution of operating costs and their structure reflects France Telecoms strategy of focusing on sales and marketing, acquisition of new wireless telephone and Internet customers, and productivity improvements in network and administrative functions. Using a constant scope of consolidation and exchange rates, total operating costs as a percentage of revenues increased by only 0.8 points. Excluding other costs of materials and other external charges, the two main components of operating costs and expenses were personnel costs (A 8,399 million in 2000 compared to A 7,289 million in 1999), and depreciation and amortization excluding goodwill (A 5,726 million in 2000 compared to A 4,885 million in 1999).
Nearly half of France Telecoms personnel costs were included in Costs of services and products sold with the balance included in Selling, general and administrative expenses and Research and development expenses except for expenses that were capitalized on the balance sheet as related to Property, plant and equipment. For a description of personnel costs taken as a whole, see Personnel. Costs of Services and Products Sold (excluding depreciation and amortization) The cost of services and products sold, excluding depreciation and amortization, consists of all direct and indirect production costs incurred to provide and maintain services rendered to customers, including connection, carrying, supervision and maintenance, and costs of goods and services purchased for resale, including amounts paid to other international telecommunications operators. The following table sets forth information concerning costs of services and products sold during the years ended December 31, 1999 and 2000, and percentage changes between these periods.
Personnel costs. Costs of materials and other external charges. Other costs. Total.

Following the tariff decrease for calls from fixed line telephones to third party wireless networks at the end of September 1999, other services associated with these calls are no longer billed separately, and are now included in the fees paid to France Telecom and included in revenues from domestic calling. For the first nine months of 1999, revenues from these services were equal to the amounts recorded for the full year 1998, and represented about 14% of total revenues from interconnection fees in 1999. Other revenues from interconnection principally interconnection products, doubled in 1999, representing about 10% of revenues from interconnection fees. Business Networks (7.8% of consolidated revenues for 1999) The following table sets forth information concerning France Telecoms business networks business for the years ended December 31, 1998 and 1999, and percentage changes between these periods.
Leased lines (A millions). Data transmission services(1) (A millions). Total revenues (E millions). Number of analog leased lines (at period-end) (in thousands) Number of digital leased lines (at period-end) (in thousands). Of which Low capacity lines (less than or equal to 19.2 kbits/s). Medium and high capacity lines (more than or equal to 64 kbits/s). Digital capacity of total leased digital lines (Gigabytes/s). Data transmission traffic (in trillions of characters): X.25 and Frame Relay. Internet/Intranet.
1,2,007 153.2 142.9 34.9 108.1 72.586
0.2 13.5 6.1 (16.1) 20.3 (25.4) 35.0 70.6 131.5 191.0
Including for 1998 and 1999 data transmission by France Telecoms subsidiary Olane. e
Leased Lines Revenues from leased lines remained stable in 1999. The increase in the number of medium and high capacity digital leased lines and the increased penetration of new data transmission services such as the High Speed Multisite Service were partially offset by: (i) rate reductions of up to 30% since October 1, 1998 for international lines, (ii) rate reductions averaging 15% on domestic digital medium and high capacity lines since January 1, 1999, (iii) regular growth of volume price reductions for lines leased to business clients, and (iv) decreased revenues from analog leased lines and low capacity digital lines. Data Transmission Services Revenues from data transmission services increased 13.5% due to increased revenues from local business network interconnections, the Frame Relay, and turnkey Internet and Extranet solutions for business customers. At the same time, Internet data transmission services grew significantly (transported volume increased threefold in 1999 compared to the previous year). The impact of these revenues, however, remained limited, because clients pay a one time subscriber fee. Revenues from traditional data transmission services decreased steadily; revenues from the X.25 standard packet switching, for example, decreased 19% in 1999.

France Telecom may also fund some of its captial expenditures through vendor financing. MobilCom is already finalizing vendor financing to purchase UMTS equipment. France Telecom believes that its cash generated by operations, its bond issuances in the first quarter of 2001, its existing credit facilities and its liquid assets are more than sufficient to meet its current cash requirements. Furthermore, France Telecoms available cash will be supplemented by its active strategy to divest its non-core assets. Capital Expenditures and Investments The table below sets forth information concerning expenditures and investments for the years ended December 31, 1998, 1999 and 2000.
Year ended December 31, 2000 (E millions)
Capital expenditures. Investments. Capital Expenditures

4,660 2,057

5,001 2,804

14,313 40,561

Capital expenditures increased 186% in 2000, approximately three quarters of which was due to investments made outside France. The significant increase in capital expenditures mainly reflected the acquisition of UMTS licenses. The effect of the acquisition of the UMTS licenses in the United Kingdom by Orange was compounded by the simultaneous consolidation of the new subsidiary, which acquired the license. UMTS licenses were also acquired without a change in consolidation, as was the case with the license acquired by Dutchtone. The increase was also due to variations in the scope of consolidation resulting from an increased holding in Global One, and the acquisitions of Orange Communications SA in Switzerland, Stellat, France Telecom Dominicana in the Dominican Republic, and Socit Camerounaise de Mobiles, ee as well as Telecom Argentinas proportional consolidation as of September 1, 1999 which generated a full year effect for 2000. Increased expenditures for internal development of subsidiaries, principally Uni2 in Spain and Casema in The Netherlands further explain the increase between 1999 and 2000. Capital expenditures in France represented approximately one quarter of total capital expenditures and increased 7.9% in 2000 reflecting efforts to develop wireless networks partially offset by decreased investment in fixed line networks. At December 31, 2000, commitments for capital expenditures were approximately A 3 billion, of which nearly A 2 billion relates to wireless activities. France Telecom expects continued investment growth in its wireless telephony and satellite activities in 2001. In addition, France Telecom plans to set aside A 24 billion over the next three years, 50% of which will be directed to wireless activities. France Telecom intends to finance these capital expenditures through working capital and vendor financing from France Telecoms principal suppliers. In addition, France Telecom has applied for one of four UMTS licenses in France. The French government announced a price of A 4,955 billion for each UMTS concession, with 25% payable when the license is awarded, 25% one year later and the remainder over the following 13 years. France Telecom is currently reviewing several options to finance its capital expenditure requirements for UMTS license fees and build out. In October 2000, France Telecom reached a framework agreement with its equipment suppliers for the build out of its UMTS networks. France Telecom anticipates capital expenditures to acquire UMTS licenses and to build-out UMTS networks will lead to further depreciation and amortization charges.

In addition, the following investments will be paid out in 2001: acquisition of 18.87% of Wind, the Italian telecommunications operator, from Deutsche Telekom in July 2000 for A 2,082 million, raising France Telecoms total holding in the Company to 43.4% and which is expected to be paid in June 2001; and acquisition of 25.15% of the shares held by Motorola in ECMS/MobiNil for A 170 million. Financial investments for 1999 corresponded essentially to the following operations: 6.4% participation in the capital of NTL, a British telephone service operator, Internet access provider, and cable television operator, amounting to A 1,167 million and the purchase of $230 million of convertible bonds; additional participation amounting to $265 million (A 249 million) in Nortel Inversora, a holding company retaining 58.3% of Telecom Argentinas capital, which increases France Telecoms share of voting rights in Nortel Inversora, parent company of Telecom Argentina, from 32.5% to 50%; additional participation in Crown Castle International Corporation in the United States for $204 million (A 195 million) in the framework of preemptive rights held by France Telecom; additional investment in Sprint in the United States for A 155 million, of which A 112 million in Sprint PCS wireless telephony and A 43 million in Sprint FON fixed line long distance services, maintaining France Telecoms voting rights at approximately 10%; 100% acquisition of the Dutch cable operator Remu for A 106 million; 75% participation in Catalana, Fixed Line services in Catalan, for A 80 million; additional investments in Wind for A 146 million and in Intelig (Brazil) for A 130 million; acquisition of an additional equity interest in Mobil Rom, the Romanian mobile telephony operator, for A 84 million, increasing France Telecoms shareholding from 51% to 67.8%; and the purchase of Alapage.com the French e-merchant site for A 49 million. In 1998, the main agreements and financial investments were as follows: acquisition of the Havas Groups participation in Oda, a company that advertises directories in France and other countries and which has been renamed Pages Jaunes, France Telecom also sold its interests in Havas for A 219 million; 75.5% acquisition by the consortium Estel of France Telecoms 51% ownership in CTE, the largest telephone operator in Salvador for A 245 million, the deal included a 20 year mobile telephone license; acquisition of 9% additional participation in Sonatels capital, a Senegalese telecommunications operator; 23.5% acquisition of ECMSs capital, an Egyptian mobile telephone operator; 33.9% acquisition of EITeleOsts capital, a Norwegian telecommunications operator (to be completed in 1999); and sale of Cellway, a wireless services marketing company in Germany and The Netherlands to MobilCom for German activities and Debitel for Dutch activities. Seasonality Generally, France Telecoms business experiences the following seasonal variations. Revenues during the third fiscal quarter (ending September 30) are generally lower than for other fiscal quarters,

6,472 2,768 (193) 1 (1,025)
168 6,629 17,599 8,023 3,660 129,216,153
Balance at December 31, 1999. 1,024,615,901 4,098
(4,335) (1,025) (94) 85 24,228 22,746 6,408 6,55
Balance at December 31, 2000. 1,153,831,943 4,615 Balance at December 31, 2000 (in millions of US $). 1,153,831,943 4,333
FRANCE TELECOM CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in millions) (All amounts have been translated from the prior reporting currency, the French franc, to euro, using the December 31, 1998 fixed rate)
OPERATING ACTIVITIES Net income. Adjustments to reconcile net income to funds generated from operations Depreciation & amortization of property, plant and equipment and intangible assets. Gain on disposal of assets. Changes in valuation allowances and other provisions. Undistributed earnings of affiliates. Deferred income taxes. Minority interest. Other items. Decrease (increase) in inventories. Decrease (increase) in trade accounts receivable. Decrease (increase) in other receivables. Increase (decrease) in trade accounts payable. Increase (decrease) in accrued expenses and other payables.
4,666 (657) 544 (182) 177 (133) (3) 6,712 (20) (217) 614 (7) 7,132
5,021 (596) 297 (198) 29 7,482 (176) (780) (668) 1,084 1,8,109
6,818 (7,700) 4,(277) (52) 25 6,863 (329) (978) (1,372) 936 1,493 (250) 6,613
6,401 (7,229) 3,(260) (49) 23 6,442 (309) (918) (1,288) 879 1,402 (235) 6,208
Funds generated from operations.
Change in other operating assets and liabilities. Net cash provided by operating activities. INVESTING ACTIVITIES Purchase of property, plant and equipment and intangible assets. Cash paid for Orange plc. Cash paid for investments securities and acquired businesses, net of cash acquired. Investments in affiliates. Proceeds from sale of investment securities and businesses, net of cash sold. Proceeds from sale of assets. Decrease (increase) in marketable securities and other long-term assets.
(4,660) (5,001) (14,313) (13,437) (21,693) (20,365) (1,906) (2,502) (10,899) (10,232) (151) (302) (7,969) (7,481) 1,7,(218) 7,(205)
Net cash used in investing activities.

FRANCE TELECOM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 Summary of significant accounting policies (Continued) The Other non-operating income/(expense), net relates mainly to gains and losses on the disposal of subsidiaries and investment securities and the change in provisions against investment securities and marketable securities, as well as dividends received. The goodwill amortization charge relates to the goodwill of fully and proportionally consolidated companies as well as investments accounted for under the equity method. The balance sheet classifies assets and liabilities based on liquidity or maturity dates, and presents short-term balances (due within one year) separately from long-term balances. The statement of cash flows excludes from changes in cash changes in bank overdrafts and marketable securities having maturities in excess of three months at the time of purchase, which are presented as financing and investing activities. Principles of consolidation The main consolidation principles are as follows: Companies which are wholly owned or which France Telecom controls, either directly or indirectly, are consolidated; Companies in which France Telecom and a limited number of other shareholders exercise joint control are accounted for using the proportionate consolidation method; Companies over which France Telecom exercises significant influence but does not control (generally a 20% to 50% controlling interest) are accounted for under the equity method of accounting; All material inter-company balances and transactions are eliminated. Translation of financial statements of foreign subsidiaries The financial statements of foreign subsidiaries in local currency, except for those in countries with hyper-inflationary economies, are translated into Euros as follows: assets and liabilities are translated at the year-end rate; items in the statement of income are translated at the average rate for the year; the translation adjustment resulting from the use of these different rates is included as a separate component of shareholders equity. Translation adjustments relating to subsidiaries within the Euro zone have been fixed based on the parities announced on December 31, 1998. The local currency financial statements of foreign subsidiaries operating in countries with hyperinflationary economies are remeasured into their functional currency, prior to converting to Euro, using the following method: monetary elements of the balance sheet are translated at the closing rate; non-monetary elements are converted at the historical rate; items in the statement of income are translated at the average rate for the year except for depreciation and amortization charges which are translated at the historical rate;