As filed with the Securities and Exchange Commission on March 20, 2008.

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2007

 

Commission file number 1-13202

 

 

 

 

Nokia Corporation

(Exact name of Registrant as specified in its charter)

 

 

 

 

Republic of Finland

(Jurisdiction of incorporation)

 

Keilalahdentie 4, P.O. Box 226, FI-00045 NOKIA GROUP, Espoo, Finland

(Address of principal executive offices)

 

Kaarina Ståhlberg, Vice President, Assistant General Counsel

Telephone: +358 (0) 7 1800-8000, Facsimile: +358 (0) 7 1803-8503

Keilalahdentie 4, P.O. Box 226, FI-00045 NOKIA GROUP, Espoo, Finland

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“the Exchange Act”):

 

 

 

 

Securities registered pursuant to Section 12(g) of the Exchange Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Exchange Act: None

 

Indicate the number of outstanding shares of each of the registrant’s classes of capital or common stock as of the close of the period covered by the annual report.

 

Shares: 3 982 811 957

 

Indicate by check mark if 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 Exchange Act.

Yes o  No x

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.

 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

International Financial Reporting Standards as issued by the International Accounting Standards Board  x

Other o

 

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

Item 17 o  Item 18 x

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o  Item 18 o

 

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

 

 

TABLE OF CONTENTS

 

 

Nokia Corporation is a public limited liability company incorporated under the laws of the Republic of Finland. In this document, any reference to “we,” “us,” “the Group” or “Nokia” means Nokia Corporation and its subsidiaries on a consolidated basis, except where we make clear that the term means Nokia Corporation or a particular subsidiary or business group only, and except that references to “our shares,” matters relating to our shares or matters of corporate governance refer to the shares and corporate governance of Nokia Corporation. Nokia Corporation has published its consolidated financial statements in euro for periods beginning on or after January 1, 1999. In this annual report on Form 20-F, references to “EUR,” “euro” or “€” are to the common currency of the European Economic and Monetary Union, or EMU, and references to “dollars,” “US dollars,” “USD” or “$” are to the currency of the United States. Solely for the convenience of the reader, this annual report contains conversions of selected euro amounts into US dollars at specified rates, or, if not so specified, at the rate of 1.4603 US dollars per euro, which was the noon buying rate in New York City for cable transfers in euro as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2007. No representation is made that the amounts have been, could have been or could be converted into US dollars at the rates indicated or at any other rates.

 

Our principal executive office is currently located at Keilalahdentie 4, P.O. Box 226, FI-00045 Nokia Group, Espoo, Finland and our telephone number is +358 (0) 7 1800-8000.

 

Nokia Corporation furnishes Citibank, N.A., as Depositary, with consolidated financial statements and a related audit opinion of our independent auditors annually. These financial statements are prepared on the basis of International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with IFRS as adopted by the European Union (“IFRS”). In accordance with the rules and regulations of the US Securities and Exchange Commission, we no longer provide a reconciliation of net income and shareholders’ equity in our consolidated financial statements to accounting principles generally accepted in the United States, or US GAAP. We also furnish the Depositary with quarterly reports containing unaudited financial information prepared on the basis of IFRS, as well as all notices of shareholders’ meetings and other reports and communications that are made available generally to our shareholders. The Depositary makes these notices, reports and communications available for inspection by record holders of American Depositary Receipts, or ADRs, evidencing American Depositary Shares, or ADSs (one ADS represents one share), and distributes to all record holders of ADRs notices of shareholders’ meetings received by the Depositary.

 

In addition to the materials delivered to holders of ADRs by the Depositary, holders can access our consolidated financial statements, and other information previously included in our printed annual reports and proxy materials, at www.nokia.com. This annual report on Form 20-F is also available at www.nokia.com as well as on Citibank’s website at http://citibank.ar.wilink.com (enter “Nokia” in the Company Name Search). Holders may also request a hard copy of this annual report by calling the toll-free number 1-877-NOKIA-ADR (1-877-665-4223), or by directing a written request to Citibank, N.A., Shareholder Services, PO Box 43124, Providence, RI 02940-5140, or by calling Nokia Investor Relations US Main Office at 1-914-368-0555. With each annual distribution of our proxy materials, we offer our record holders of ADRs the option of receiving all of these documents electronically in the future.

 

It should be noted that certain statements herein which are not historical facts, including, without limitation, those regarding:

 

 

are forward-looking statements.

 

These statements are based on management’s best assumptions and beliefs in light of the information currently available to it. Because they involve risks and uncertainties, actual results may differ materially from the results that we currently expect. Factors that could cause these differences include, but are not limited to:

 

 

 

as well as the risk factors specified in this annual report under “Item 3.D Risk Factors.”

 

Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Nokia does not undertake any obligation to update publicly or revise forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required.

 

Not applicable.

 

Not applicable.

 

The financial data set forth below at December 31, 2006 and 2007 and for each of the years in the three-year period ended December 31, 2007 have been derived from our audited consolidated financial statements included in Item 18 of this annual report. Financial data at December 31, 2003, 2004, and 2005 and for each of the years in the two-year period ended December 31, 2004 have been derived from our previously published audited consolidated financial statements not included in this document.

 

The financial data at December 31, 2006 and 2007 and for each of the years in the three-year period ended December 31, 2007 should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements.

 

The audited consolidated financial statements from which the selected consolidated financial data set forth below have been derived were prepared in accordance with IFRS.

 

 

 

 

Distribution of Earnings

 

We distribute retained earnings, if any, within the limits set by the Finnish Companies Act. We make and calculate the distribution, if any, either in the form of cash dividends, share buy-backs, or in some other form or a combination of these. There is no specific formula by which the amount of a distribution is determined, although some limits set by law are discussed below. The timing and amount of future distributions of retained earnings, if any, will depend on our future results and financial condition.

 

Under the Finnish Companies Act, we may distribute retained earnings on our shares only upon a shareholders’ resolution and subject to limited exceptions, in the amount proposed by our Board of Directors. The amount of any distribution is limited to the amount of distributable earnings of the parent company pursuant to the last annual accounts approved by our shareholders, taking into account the material changes in the financial situation of the company after the end of the last financial period and a statutory requirement that the distribution of earnings must not result in insolvency of the company. Subject to exceptions relating to the right of minority shareholders to

request for a certain minimum distribution, the distribution may not exceed the amount proposed by the Board of Directors.

 

Share Buy-backs

 

Under the Finnish Companies Act, Nokia Corporation may repurchase its own shares pursuant to either a shareholders’ resolution or an authorization to the Board of Directors approved by the company’s shareholders. The authorization may amount to a maximum of 10% of all the shares of the company (up to 5% until 2005) and its maximum duration is 18 months (up to 12 months until 2006). Our Board of Directors has been regularly authorized by our shareholders at the Annual General Meetings to repurchase Nokia’s own shares since 2001, and during the past three years the authorization covered 443.2 million shares in 2005, 405 million shares in 2006 and 380 million shares in 2007. The amount authorized each year has been at or slightly under the maximum limit provided by the Finnish Companies Act.

 

On January 24, 2008, we announced that the Board of Directors will propose for shareholders’ approval at the Annual General Meeting convening on May 8, 2008 a new authorization to repurchase a maximum of 370 million shares. The maximum amount corresponds to less than 10% of Nokia’s share capital and total voting rights. The authorization would be effective until June 30, 2009.

 

The table below sets forth actual share buy-backs by the Group in respect of each fiscal year indicated.

 

 

For more information about share buy-backs during 2007, see “Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers.”

 

Dividends

 

On January 24, 2008, we announced that the Board of Directors will propose for shareholders’ approval at the Annual General Meeting convening on May 8, 2008 a dividend of EUR 0.53 per share in respect of 2007.

 

The table below sets forth the amounts of total cash dividends per share and per ADS paid in respect of each fiscal year indicated. For the purposes of showing the US dollar amounts per ADS for 2003 through 2007, the dividend per share amounts have been translated into US dollars at the noon buying rate in New York City for cable transfers in euro as certified for customs purposes by the Federal Reserve Bank of New York (the “noon buying rate”) on the respective dividend payment dates.

 

 

 

 

 

We make our cash dividend payments in euro. As a result, exchange rate fluctuations will affect the US dollar amount received by holders of ADSs on conversion of these dividends. Moreover, fluctuations in the exchange rates between the euro and the US dollar will affect the dollar equivalent of the euro price of the shares on the Helsinki Stock Exchange and, as a result, are likely to affect the market price of the ADSs in the United States. See also “Item 3.D Risk Factors—Our sales, costs and results of operations are affected by exchange rate fluctuations, particularly between the euro, which is our reporting currency, and the US dollar, the Chinese yuan, the UK pound sterling and the Japanese yen, as well as certain other currencies.”

 

Exchange Rate Data

 

The following table sets forth information concerning the noon buying rate for the years 2003 through 2007 and for each of the months in the six-month period ended February 29, 2008, expressed in US dollars per euro. The average rate for a year means the average of the exchange rates on the last day of each month during a year. The average rate for a month means the average of the daily exchange rates during that month.

 

 

On February 29, 2008, the noon buying rate was USD 1.5187 per EUR 1.00.

 

Not applicable.

 

Not applicable.

 

Set forth below is a description of factors that may adversely affect our business, sales, results of operations, financial condition and share price from time to time.

 

We need to have a competitive portfolio of products, services and solutions that are preferred by our current and potential customers to those of our competitors. If we fail to achieve or maintain a competitive portfolio, our business, market share and results of operations may be materially adversely affected.

We serve a diverse range of mobile device and network infrastructure customers across a variety of markets with different characteristics, dynamics and stages of development. In order to meet our customers’ needs, we need to have a competitive portfolio with products, services and solutions that are preferred to those of our competitors. For our devices business, including services, a competitive portfolio means a broad and balanced offering of commercially appealing mobile devices with attractive aesthetics, design and combination of value-adding functionalities and services for all major consumer segments and price points designed, as appropriate, for the local requirements of different markets and supported by the Nokia brand, quality and competitive cost structure. In Nokia Siemens Networks’ business, a competitive portfolio means a high-quality offering of products, services and solutions designed to meet the requirements of our customers and local markets, supported by a competitive cost structure and cost-effectiveness to our customers. If we fail to achieve or maintain a competitive portfolio and balance successfully the global portfolio with the local requirements of our customers in the different markets in a cost-effective manner, our business, market share, and results of operations may be materially adversely affected.

 

In order to have a competitive portfolio of products, services and solutions and to establish and maintain good relationships with our customers, we need to identify and understand the key market trends and user segments and address our customers’ needs in the different markets proactively and on a timely basis. To achieve that, we must constantly obtain and evaluate a complex array of feedback and other data in an efficient manner. In addition, the competitiveness of our portfolio depends on our ability to introduce on a continuing and timely basis ahead of our competitors new innovative and appealing products, services, solutions and related business models and designed to create new or address yet unidentified needs among our current and potential customers. If we fail to analyze correctly or respond timely and appropriately to key market trends, customer feedback and other data or to introduce new innovative and commercially appealing products, services and solutions and to adapt our business accordingly, our ability to retain our current customers and attract new customers may be impaired and our market share, business and results of operations may be materially adversely affected.

 

Certain mobile network operators require mobile devices to be customized to their specifications with certain preferred features, functionalities or design and co-branding with the mobile network operator’s brand. Currently, this is particularly the case in North America and in certain individual markets in the Asia-Pacific region where sales to mobile network operators represent the major percentage of our sales. As a result, we produce mobile devices for certain operators in smaller lot sizes, which may impact our economies of scale, profitability and after-sales service capabilities. In addition, customization could possibly erode the Nokia brand.

 

The competitiveness of our product, services and solutions portfolio is also influenced by our capability to communicate about our mobile devices, including services, effectively through consistent and focused marketing messages to the target audience, and the value of the Nokia brand. A number of factors, including actual or even alleged quality issues or defects in our products, services and solutions, may have a negative effect on our reputation and erode the value of the Nokia brand. Any impairment of our reputation or erosion of the value of the Nokia brand could have a material adverse effect on our capacity to retain our current customers and attract new customers and on our business, market share, and results of operations.

 

Our sales and profitability depend materially on the continued growth of the mobile communications industry in terms of the number of new mobile subscribers, number of existing subscribers who upgrade and/or replace their devices, and increased usage and demand for value-added services as well as on general economic conditions globally and regionally. If the mobile communications industry does not grow as we expect or general economic conditions deteriorate, our business and results of operations may be materially adversely affected.

 

Our sales and profitability depend materially on the continued growth of the mobile communications industry in terms of the number of new mobile subscribers and increased usage and, to an increasing

degree, the number of existing subscribers who upgrade or simply replace their existing mobile devices. Our sales and profitability are also affected by the extent to which there is increasing demand for, and development of, value-added services, leading to opportunities for us to successfully market mobile devices that feature those services. These developments in our industry are both within and outside of our control. In certain low penetration markets, in order to support a continued increase in mobile subscribers, we are dependent both on our own and mobile network operators’ and distributors’ ability to increase the sales volumes of lower cost mobile devices and on mobile network operators to offer affordable tariffs and to offer tailored mobile network solutions designed for a low total cost of ownership. In highly penetrated markets, we are dependent both on our own and mobile network operators’ ability to successfully introduce services that drive the upgrade and replacement of devices, as well as ownership of multiple devices. Nokia Siemens Networks is dependent on the growth of the investments made by mobile network operators and service providers.

 

If we and the mobile network operators and distributors are not successful in our attempts to increase subscriber numbers, stimulate increased usage or drive upgrade and replacement sales of mobile devices and develop and increase demand for value-added services, or if investments by mobile network operators and service providers in the related infrastructure grow at a slower pace than anticipated, our business and results of operations could be materially adversely affected.

 

As we are a global company and have sales in most countries of the world, our sales and profitability are also somewhat dependent on general economic conditions globally and regionally. Historically, we have not seen a strong correlation between sales of mobile devices and changes in macroeconomic activity as measured by gross domestic product. While mobile devices are increasingly considered essential value-adding personal items, rather than luxury items, deteriorating general economic conditions and their possible impact on the financial position of our current and potential customers could have a material adverse effect on our business.

 

The mobile communications industry continues to undergo significant changes and new market segments within our industry have been introduced and are still being introduced. Our sales and profitability are significantly affected by the growth and profitability of the new market segments that we target and our ability to successfully develop or acquire and market products, services and solutions in those segments. If the new market segments we target and invest in grow less or are less profitable than expected, or if new faster growing market segments emerge in which we have not invested, our business, results of operations and financial condition may be materially adversely affected.

 

The mobile communications industry continues to undergo significant changes. Traditional mobile voice communications, the Internet, information technology, media, entertainment, music, and consumer electronics industries are converging in some areas into one broader industry. As a result, new market segments within the mobile communications industry have been introduced and are still being introduced by both traditional and new industry participants leading to the creation of new mobile devices, services and ways to use those devices. Companies that seek to enter new market segments may also need to revise their business models in order to compete effectively. As well, while participants in the mobile communications industry once provided complete products and solutions, industry players are increasingly providing specific hardware and software layers and various services for products and solutions.

 

In our devices business, we have made significant investments during the past several years in certain of these devices market segments, such as smartphones, multimedia computers, enterprise applications, navigation, music, video, TV, imaging, games and solutions and software for business mobility. With the increasing availability of high speed wireless Internet access and progressively more of our devices featuring advance multimedia-type capabilities, we see new business opportunities to increase our offering of consumer Internet services and to deliver these services in an easily accessible manner through our devices, and we expect to make further investments in this market segment. We also expect to continue our investments in enterprise solutions and software. In

our network infrastructure business, we expect to continue making investments in enterprise mobility infrastructure as well as managed services, systems integration and consulting businesses.

 

We have made, and may also make in the future, a significant portion of these investments through strategic acquisitions. We may, however, fail to successfully complete or integrate the acquired businesses; the acquired businesses may carry higher valuations than Nokia, which may have a dilutive effect on our profits; the future valuations of acquired businesses may decrease from the purchase price we have paid and result in impairment charges related to goodwill or other acquired assets; and as a result of all or a portion of a purchase price being paid in cash, the acquisitions may have a potential adverse effect on our cash position.

 

New market segments in the mobile communications industry are in different stages of development. Accordingly, it may be difficult for us to accurately predict which new market segments are the most advantageous for us to focus on, or we may fail to timely identify new market segments emerging in the mobile communications industry. If the new market segments which we target and invest in grow less than expected, we may not receive a return on our investment as soon as we expect, or at all. We may also forego growth opportunities in new market segments of the mobile communications industry which we choose not to focus on or fail to timely identify. Moreover, the market segments that we target may be less profitable than we currently foresee. We may also incur short-term operating losses in certain of these new market segments if we are not able to generate sufficient net sales to cover the early stage investments required to pursue these new business opportunities.

 

Our past performance in our established market segments does not guarantee our success in these new market segments, particularly where significant changes to the way we do business are required to enter or effectively compete in these segments. We may have less experience and technological skills in the new market segments, such as consumer Internet services, compared with our established market segments, or we may fail to reach adequate scale in these new segments, and some of our competitors in these new segments may have more scale and experience and a stronger market presence. Further, our success in the consumer Internet services segment also depends on the acceptance by the market, including our mobile network operator customers, of our expanding consumer Internet services and on the network operators’ strategies regarding their own offering of consumer Internet services. Any of these events could materially adversely affect our results of operations, financial condition and share price.

 

Our business and results of operations, particularly our profitability, may be materially adversely affected if we are not able to successfully manage costs related to our products, services, solutions and operations.

 

The products, services and solutions we offer are subject to natural price erosion over their life cycle. In addition, the average selling price of our devices has declined during recent years and it may continue to decline in the future. The factors impacting our average selling price include the extent to which our product mix is weighted towards lower-priced products and our regional mix is weighted towards emerging markets where lower-priced products predominate. Further, there is continuing demand for mobile devices with new or enhanced functionalities and services while the prices of those products must remain competitive.

 

In order to be profitable, we need to be able to lower our costs at the same rate or faster than the price erosion and declining average selling price of our devices. We also need to introduce cost-efficient devices with new or enhanced functionalities and services with higher prices in a timely manner and proactively manage the costs related to our products, services and solutions, manufacturing, logistics and other operations and related licensing. If we are unable to do this, this will have a material adverse effect on our business and results of operations, particularly our profitability. We believe that our market share results in economies of scale and, therefore, in a cost advantage for our devices when compared to our competitors. If we fail to maintain or increase our market share and scale compared to our competitors as well as leverage our scale to the fullest

extent, our cost advantage may be eroded, which could materially adversely affect our competitive position, business and our results of operations, particularly our profitability.

 

Competition in our industry is intense. Our failure to maintain or improve our market position or respond successfully to changes in the competitive landscape may have a material adverse effect on our business and results of operations.

 

The markets for our products, services and solutions are intensely competitive. Industry participants compete with each other mainly on the basis of the breadth and depth of their product, service and solutions portfolio, design, price, operational and manufacturing efficiency, technical performance, distribution, quality, customer support and brand. The competition continues to be intense from both our traditional competitors in the mobile and fixed communications industry as well as a number of new competitors. Some of our competitors have used, and we expect will continue to use, more aggressive pricing strategies, different design approaches and alternative technologies. In addition, some competitors have chosen to focus on building products based on commercially available components, which may enable them to introduce these products faster and with lower levels of research and development expenditures than Nokia. Additionally, because mobile network operators are increasingly offering mobile devices under their own brand, we face increasing competition from non-branded mobile device manufacturers. Due to the intensity of the competition overall, the competitive landscape in our industry or in specific industry segments can change very rapidly.

 

As a result of developments in our industry, including convergence of mobile device technology with the Internet, we also face new competition from companies in related industries, such as Internet-based products and services, consumer electronics manufacturers, network operators and business device and solution providers, some of which have more scale and experience and a stronger market presence in certain segments such as Internet services. In addition, new companies, primarily consumer electronics manufacturers, are entering the mobile device business. The competitive environment, including the competitive means, of these new converged market segments differ from the more established segments within our industry. Some of the new market segments that we target are still in early stages of development and it may be difficult to predict the main competitors and competitive environment in these market segments. Further, as the industry now includes increasing numbers of participants that provide specific hardware and software layers within products, services and solutions, we also face competition at the level of these layers rather than solely at the level of complete products, services and solutions. In some of these layers, we may have more limited experience and scale than our competitors. If we cannot respond successfully to these competitive developments, our business and results of operations may be materially adversely affected.

 

Consolidation among the industry participants, including further concentration of the market on fewer industry participants, could potentially result in stronger competitors that are better able to compete as end-to-end suppliers as well as competitors who are more specialized in particular areas. Moreover, the increased concentration among the mobile network operators, particularly in North America where sales of mobile devices to operators represent the major percentage of our sales, is resulting in fewer customers whose purchase preferences may differ from our current product portfolio. In addition to mergers, the consolidation among the industry participants may take place in form of various types of joint ventures, partnerships and other cooperation targeted to obtain potential economies of scale, such as increased bargaining power and price visibility. These developments could have a material adverse effect on our business and results of operations.

 

See “Item 4.B Business Overview—Mobile Devices—Competition—Devices” and “—Nokia Siemens Networks—Competition” for a more detailed discussion of competition in our industry.

 

We must develop or otherwise acquire complex, evolving technologies to use in our business. If we fail to develop or otherwise acquire these complex technologies as required by the market, with full rights needed to use in our business, or to protect them, or to successfully commercialize such technologies as new advanced products, services and solutions that meet

customer demand, or fail to do so on a timely basis, this may have a material adverse effect on our business and results of operations.

 

In order to succeed in our markets, we believe that we must develop or otherwise acquire complex, evolving technologies to use in our business. However, the development and use of new technologies, applications and technology platforms for our mobile devices, services and software and networks infrastructure products involve time, substantial costs and risks, both within and outside of our control. We must also be able to convert these complex technologies into affordable and usable products, services and solutions. This is true regardless of whether we develop these technologies internally, acquire or invest in other companies with these technologies or collaborate with third parties on the development of these technologies. In addition, we seek to protect our technology investments with intellectual property rights. When doing this, our business is influenced by the regulatory and legal environments’ approach to intellectual property rights, including the scope and degree of patent and copyright protection as well as copyright levies which vary country by country.

 

The technologies, functionalities, features and services on which we choose to focus may not achieve as broad or timely customer acceptance as we expect. This may result from numerous factors, including the availability of more attractive alternatives and a lack of sufficient compatibility with other existing technologies, products, services and solutions or regulators’ decisions. Additionally, even if we do select the technologies, functionalities, features and services that customers ultimately want, we or the companies that work with us may not be able to bring them to the market at the right time. We may also face difficulties accessing the technologies preferred by our current and potential customers, or at prices acceptable to them.

 

Our products, services and solutions include increasingly complex technology involving numerous new Nokia and Nokia Siemens Networks patented, standardized, or proprietary technologies, as well as some developed or licensed to us by third parties. There can be no assurance that the technologies, with full rights needed to be used in our business, will be available or available on commercially acceptable terms, on a timely basis.

 

Furthermore, as a result of ongoing technological developments, our products, services and solutions are increasingly used together with hardware, software or service components that have been developed by third parties, whether or not we have authorized their use with our products, services and solutions. However, such components, such as batteries or software applications, may not be compatible with our products, services and solutions and may not meet our and our customers’ quality, safety, security or other standards. As well, certain components or layers that may be used with our products may enable our products, services and solutions to be used for objectionable purposes, such as to transfer content that might be illegal, hateful or derogatory. The use of our products, services and solutions with incompatible or otherwise substandard hardware, software or software components, or for purposes that are inappropriate, is largely outside of our control and could harm the Nokia brand.

 

Our products, services and solutions include increasingly complex technologies, some of which have been developed by us or licensed to us by certain third parties. As a consequence, evaluating the rights related to the technologies we use or intend to use is more and more challenging, and we expect increasingly to face claims that we have infringed third parties’ intellectual property rights. The use of these technologies may also result in increased licensing costs for us, restrictions on our ability to use certain technologies in our products, services and solution offerings, and/or costly and time-consuming litigation, which could have a material adverse effect on our business and results of operations.

 

Our products, services and solutions include increasingly complex technologies, some of which have been developed by us or licensed to us by third parties. As the amount of such proprietary technologies and the number of parties claiming intellectual property rights continues to increase, even within individual products, as the range of our products, services and solutions becomes more diversified and we enter new businesses, and as the complexity of the technology increases, the

possibility of alleged infringement and related intellectual property claims against us continues to rise. The holders of patents and other intellectual property rights potentially relevant to our products and solutions may be unknown to us, may have different business models, or may otherwise make it difficult for us to acquire a license on commercially acceptable terms. There may also be technologies licensed to and relied on by us that are subject to infringement or other corresponding allegations or claims by others which could impair our ability to rely on such technologies. In addition, although we endeavor to ensure that companies that work with us possess appropriate intellectual property rights or licenses, we cannot fully avoid risks of intellectual property rights infringement created by suppliers of components and various layers in our products, services and solutions or by companies with which we work in cooperative research and development activities. Similarly, we and our customers may face claims of infringement in connection with our customers’ use of our products, services and solutions.

 

In many aspects, the business models for mobile services have not yet been established. The lack of availability of licenses for copyrighted content, delayed negotiations, or restrictive copyright licensing terms may have a material adverse effect on the cost or timing of content related services offered by us, mobile network operators or third-party service providers, and may also indirectly affect the sales of our mobile devices.

 

Since all technology standards, including those used and relied on by us, include some intellectual property rights, we cannot fully avoid risks of a claim for infringement of such rights due to our reliance on such standards. We believe that the number of third parties declaring their intellectual property to be relevant to these standards, for example, the standards related to so-called 3G mobile communication technologies, including 3GPP and 3GPP2, as well as other advanced mobile communications standards, is increasing, which may increase the likelihood that we will be subject to such claims in the future. While we believe that any such intellectual property rights declared and found to be essential to a given standard carry with them an obligation to be licensed on fair, reasonable and non-discriminatory terms, not all intellectual property owners agree on the meaning of that obligation and thus costly and time-consuming litigation over such issues has resulted and may continue to result in the future. While the rules of many standard setting bodies, such as the European Telecommunication Standardization Institute, or ETSI, often apply on a global basis, the enforcement of those rules may involve national courts, which means that there may be a risk of different interpretation of those rules.

 

From time to time, some existing patent licenses may expire or otherwise become subject to renegotiation. The inability to renew or finalize such arrangements with acceptable commercial terms may result in costly and time-consuming litigation, and any adverse result in any such litigation may lead to restrictions on our ability to sell certain products, services or solutions, and could result in payments that potentially could have a material adverse effect on our operating results. Most notably, we are party to numerous legal proceedings with Qualcomm Incorporated (“Qualcomm” including its affiliates). For more information about these legal proceedings with Qualcomm, see “Item 8.A.7 Litigation—Intellectual property rights litigation.” These legal proceedings may continue to be expensive and time-consuming and divert the efforts of our management and technical personnel from our business, and, if decided against us, could result in restrictions on our ability to sell our products, services and solutions, require us to pay increased licensing fees, substantial judgments, settlements or other penalties and incur expenses that could have a material adverse effect on our business and results of operations.

 

We recognize accruals and provisions to cover our estimated total direct IPR costs for our products, services and solutions. The total direct IPR cost consists of actual payments to licensors, accrued expenses under existing agreements and provisions for potential liabilities. We believe that our accruals and provisions are appropriate for all technologies licensed from others. The ultimate outcome, however, may differ from the provided level which could have a positive or negative impact on our results of operations and financial position.

 

Any restrictions on our ability to sell our products, services and solutions due to expected or alleged

infringements of third-party intellectual property rights and any intellectual property rights claims, regardless of merit, could result in material losses of profits, costly litigation, the payment of damages and other compensation, the diversion of the attention of our personnel, product shipment delays or the need for us to develop non-infringing technology or to enter into royalty or licensing agreements. If royalty or licensing agreements were not available or available on commercially acceptable terms, we could be precluded from making and selling the affected products, services and solutions or could face increased licensing costs. As new features are added to our products, services and solutions, we may need to acquire further licenses, including from new and sometimes unidentified owners of intellectual property. The cumulative costs of obtaining any necessary licenses are difficult to predict and may over time have a negative effect on our operating results. See “Item 4.B Business Overview—Mobile Devices—Patents and Licenses” and “—Nokia Siemens Networks—Patents and Licences” for a more detailed discussion of our intellectual property activities.

 

Our products, services and solutions include numerous new Nokia and Nokia Siemens Networks patented, standardized or proprietary technologies on which we depend. Third parties may use without a license or unlawfully infringe our intellectual property or commence actions seeking to establish the invalidity of the intellectual property rights of these technologies. This may have a material adverse effect on our business and results of operations.

 

Our products, services and solutions include numerous new Nokia and Nokia Siemens Networks patented, standardized and proprietary technologies on which we depend. Despite the steps that we have taken to protect our technology investment with intellectual property rights, we cannot be certain that any rights or pending applications will be granted or that the rights granted in connection with any future patents or other intellectual property rights will be sufficiently broad to protect our technology. Third parties may infringe our intellectual property relating to our non-licensable proprietary features or by ignoring their obligation to seek a license.

 

Any patents or other intellectual property rights that are granted to us may be challenged, invalidated or circumvented, and any right granted under our patents may not provide competitive advantages for us. Other companies have commenced and may continue to commence actions seeking to establish the invalidity of our intellectual property, for example, patent rights. In the event that one or more of our patents are challenged, a court may invalidate the patent or determine that the patent is not enforceable, which could harm our competitive position. Also, if any of our key patents are invalidated, or if the scope of the claims in any of these patents is limited by a court decision, we could be prevented from using such patent as a basis for product differentiation or from licensing the invalidated or limited portion of our intellectual property rights, or we could lose part or all of the leverage we have in terms of our own intellectual property rights portfolio. Even if such a patent challenge is not successful, it could be expensive and time-consuming, divert attention of our management and technical personnel from our business and harm our reputation. Any diminution of the protection that our own intellectual property rights enjoy could cause us to lose some of the benefits of our investments in research and development, which may have a negative effect on our business and results of operations. See “Item 4.B Business Overview—Mobile Devices—Patents and Licenses” and “—Nokia Siemens Networks—Patents and Licences” for a more detailed discussion of our intellectual property activities.

 

Currently expected benefits and synergies from forming Nokia Siemens Networks may not be achieved to the extent or within the time period that is currently anticipated or the currently expected benefits or synergies may not be sufficient to achieve the objectives for the formation of Nokia Siemens Networks. We may also encounter costs and difficulties related to the integration of Nokia Siemens Networks which could reduce or delay the realization of anticipated net sales, cost savings and operational benefits.

 

On April 1, 2007, our Networks business group was combined with the carrier-related operations for fixed and mobile networks of Siemens to form Nokia Siemens Networks, jointly owned by Nokia and

Siemens and consolidated by Nokia. See “Item 4.B Business Overview—Nokia Siemens Networks” for a more detailed discussion of Nokia Siemens Networks.

 

Achieving the expected benefits and synergies of Nokia Siemens Networks will depend, in part, upon whether the operations, personnel and supporting activities can be integrated in an efficient manner. The process of effectively integrating these businesses into one company has required and will continue to require significant managerial and financial resources and may divert management’s attention from other business activities. The failure to successfully integrate Nokia Siemens Networks within the expected time frame could have a material adverse effect on our business, financial condition and results of operations. In addition to all the applicable other risks included in this “Item 3.D Risk Factors”, Nokia Siemens Networks may also expose us to certain additional risks, including difficulties arising from operating a significantly larger and more complex organization. Further, unexpected costs and challenges may arise whenever businesses with different operations, management and culture are combined.

 

Nokia and Nokia Siemens Networks have announced a cost synergy target for Nokia Siemens Networks of EUR 2 billion in annual cost synergies, substantially all of which are targeted to be achieved by the end of 2008. Nokia and Nokia Siemens Networks have also announced that they estimate the total charges associated with these cost synergies to be slightly above EUR 2 billion. However, for a variety of reasons, Nokia Siemens Networks may not be able to realize the full cost synergy target or the total charges associated with these cost synergies may be greater than estimated. In addition, the synergy targets and estimates of the associated charges are based on conditions at the time of the related announcements and do not necessarily reflect future developments that may result from changes in the industry or Nokia Siemens Networks’ operations. Any failure of Nokia and Nokia Siemens Networks to identify and implement the necessary cost reductions and profitability improvement measures within the expected time frame or the potential that these efforts may not generate the currently expected level of cost synergies going forward, could result in lower than targeted annual cost synergies for Nokia Siemens Networks. Furthermore, as a result of developments in the market for mobile and fixed networks infrastructure and related services, including slower than anticipated industry growth and intensifying competition, the currently expected benefits and synergies may not be sufficient to achieve the objectives for the formation of Nokia Siemens Networks. Any of these events could have a material adverse effect on our financial condition and results of operations.

 

The Siemens carrier-related operations transferred to Nokia Siemens Networks are the subject of various ongoing criminal and other governmental investigations related to whether certain transactions and payments arranged by some former employees of Siemens’ Com business group were unlawful. As a result of those investigations, government authorities and others have taken and may take further actions against Siemens and/or its employees that may involve and affect the assets and employees transferred by Siemens to Nokia Siemens Networks, or there may be undetected additional violations that may have occurred prior to the transfer or violations that may have occurred after the transfer, of such assets and employees that could have a material adverse effect on Nokia Siemens Networks and our reputation, business, results of operations and financial condition.

 

Public prosecutors and other government authorities in jurisdictions around the world, including the US Securities and Exchange Commission (the “SEC”) and the US Department of Justice, are conducting criminal and other investigations with respect to whether certain transactions and payments arranged by some current or former employees of Siemens’ Com business group, covering the carrier-related operations for fixed and mobile networks that have been transferred to Nokia Siemens Networks, were unlawful. Substantial transactions and payments involving Siemens’ former Com business group are under investigation.

 

In addition to the ongoing investigations, there could be additional investigations launched in the future by governmental authorities in these or other jurisdictions and existing investigations may be expanded. These governmental authorities may take action against Siemens and/or some of its

employees. These actions could include criminal and civil fines, in addition to the EUR 201 million fine already imposed on Siemens by German authorities for irregularities in the Siemens’ former Com business group, as well as penalties, sanctions, injunctions against future conduct, profit disgorgement, disqualifications from engaging in certain types of business, the loss of business licenses or permits, the appointment of a monitor to review future business and ensure compliance or other restrictions. To date, none of the fines imposed on Siemens has applied to Nokia Siemens Networks or Nokia. It is not possible at this time to predict whether these or other government authorities will take further actions and if they do what they might be and the extent to which such actions might apply to or affect Nokia Siemens Networks or Nokia.

 

The government investigations and Siemens’ own investigation are ongoing. Also, certain aspects of the internal review by Nokia Siemens Networks and Nokia are ongoing. Accordingly, it is not possible to ensure that Siemens employees who may have been involved in the alleged violations of law were not transferred to Nokia Siemens Networks. Nor is it possible to predict the extent to which there may be undetected additional violations of law that may have occurred prior to the transfer that could result in additional actions by government authorities. It is also not possible to predict whether there have been any ongoing violations of law after the formation of Nokia Siemens Networks involving the assets and employees of the Siemens carrier-related operations that could result in additional actions by government authorities. The development of any of these situations could have a material adverse effect on Nokia Siemens Networks and our reputation, business, results of operations and financial condition. In addition, detecting, investigating and resolving such situations have been and may continue to be expensive and consume significant time, attention and resources of Nokia Siemens Networks and our management, which could harm our business and that of Nokia Siemens Networks.

 

The government investigations may also harm Nokia Siemens Networks’ relationships with existing customers, impair its ability to obtain new customers, business partners and public procurement contracts, affect its ability to pursue strategic projects and transactions or result in the cancellation or renegotiation of existing contracts on terms less favorable than currently exist or affect its reputation. Nokia Siemens Networks has terminated relationships, originated in the Siemens carrier-related operations, with certain business consultants and other third party intermediaries in some countries as their business terms and practices were contrary to Nokia Siemens Networks’ Code of Conduct, thus foregoing business opportunities. It is not possible to predict the extent to which other customer relationships and potential business will be affected by Nokia Siemens Networks legally compliant business terms and practices. Third-party civil litigation may also be instigated against the Siemens carrier-related operations and/or employees transferred to Nokia Siemens Networks.

 

Siemens has agreed to indemnify Nokia and Nokia Siemens Networks for any government fines or penalties and damages from civil law suits incurred by either, as well as in certain instances for loss of business through terminated or renegotiated contracts, based on violations of law in the Siemens carrier-related operations that occurred prior to the transfer to Nokia Siemens Networks.

 

We cannot predict with any certainty the final outcome of the ongoing investigations related to this matter, when and the terms upon which such investigations will be resolved, which could be a number of years, or the consequences of the actual or alleged violations of law on the business of Nokia Siemens Networks, including its relationships with customers.

 

Any actual or even alleged defects or other quality issues in our products, services and solutions could materially adversely affect our sales, results of operations, reputation and the value of the Nokia brand.

 

Our products are highly complex and defects in their design and manufacture have occurred and may occur in the future. Quality issues are emphasized in our device business due to very high production volumes of many of our devices, as a result of which even a single defect in their design or manufacture may have material adverse effect on our business. In the network infrastructure

business, the undisturbed functioning of large mobile and fixed telecommunications networks may depend on the proper functioning of our products.

 

Defects and other quality issues may result from, among other things, failures in our own product creation and manufacturing processes or failures of our suppliers to comply with our supplier requirements. Prior to the shipment, quality issues may cause delays in shipping products to customers and related additional costs or even cancellation of orders by customers. After shipment, products may fail to meet marketing expectations set for them, may malfunction or may contain security vulnerabilities, and thus cause additional repair, product replacement, recall or warranty costs to us and harm our reputation. Although we endeavor to develop products that meet the appropriate security standards, including privacy protection, for each product segment, we or our products may, due to our market position, be subject to hacking or other unauthorized modifications or illegal activities that may cause potential security risks to our customers or end-users of our products. In case of issues affecting a product’s safety or regulatory compliance or product security, we may be subject to damages due to product liability, or defective products or components may need to be replaced or recalled. Any actual or alleged defects or other quality issues in our products, services and solutions, or even in their unlawful copies, could materially adversely affect our sales, results of operations, reputation and the value of the Nokia brand.

 

Our sales and results of operations could be materially adversely affected if we fail to efficiently manage our manufacturing and logistics without interruption, or fail to ensure that our products, services and solutions meet our and our customers’ quality, safety, security and other requirements and are delivered on time and in sufficient volumes.

 

Our manufacturing and logistics are complex, require advanced and costly equipment and include outsourcing to third parties. These operations are continuously modified in an effort to improve efficiency and flexibility of our manufacturing and logistics and to produce and distribute continuously increased volumes. We may experience difficulties in adapting our supply to meet the demand for our products, ramping up or down production at our facilities as needed, maintaining an optimal inventory level, adopting new manufacturing processes, finding the most timely way to develop the best technical solutions for new products, managing the increasingly complex manufacturing process for our high-end products, particularly the software for these high-end products, or achieving manufacturing efficiency and flexibility, whether we manufacture our products and solutions ourselves or outsource to third parties. We may also experience challenges caused by third parties or other external difficulties in connection with our efforts to modify our operations to improve the efficiency and flexibility of our manufacturing and logistics, including, but not limited to, strikes, purchasing boycotts, public harm to the Nokia brand and claims for compensation resulting from our decisions on where to locate our manufacturing facilities and business. Such difficulties may have a material adverse effect on our business and results of operations and may result from, among other things, delays in adjusting or upgrading production at our facilities, delays in expanding production capacity, failure in our manufacturing and logistics processes, failures in the activities we have outsourced, and interruptions in the data communication systems that run our operations. Such failures or interruptions could result in our products, services and solutions not meeting our and our customers’ quality, safety, security and other requirements, or being delivered late or in insufficient volumes compared to our own estimates or customer requirements, which could have a material adverse effect on our sales, our results of operations, reputation and the value of the Nokia brand.

 

We depend on a limited number of suppliers for the timely delivery of sufficient amounts of fully functional components and sub-assemblies and for their compliance with our supplier requirements, such as our and our customers’ product quality, safety, security and other standards. Their failure to do so could materially adversely affect our ability to deliver our products, services and solutions successfully and on time.

 

Our manufacturing operations depend to a certain extent on obtaining sufficient amounts of adequate supplies of fully functional components and sub-assemblies on a timely basis. In mobile devices, our principal supply requirements are for electronic components, mechanical components and

software, which all have a wide range of applications in our products. Electronic components include chipsets, integrated circuits, microprocessors, standard components, memory devices, cameras, displays, batteries and chargers, while mechanical components include covers, connectors, key mats and antennas. Software includes various third-party software that enables various features and applications, like location based services, to be added into our products. Nokia Siemens Networks’ components and sub-assemblies sourced and manufactured by third-party suppliers include Nokia Siemens Networks-specific integrated circuits and radio frequency components; servers; sub-assemblies such as printed wire board assemblies, filters, combiners and power units; and cabinets.

 

In addition, a particular component may be available only from a limited number of suppliers. Suppliers may from time to time extend lead times, limit supplies, increase prices or be unable to increase supplies to meet increased demand due to capacity constraints or other factors, which could adversely affect our ability to deliver our products, services and solutions on a timely basis. Moreover, a component supplier may fail to meet our supplier requirements, such as, most notably, our and our customers’ product quality, safety, security and other standards, and consequently some of our products may be unacceptable to us and our customers, or may fail to meet our own quality controls. In case of issues affecting a product’s safety or regulatory compliance, we may be subject to damages due to product liability, or defective products or components may need to be replaced or recalled. In addition, a component supplier may experience delays or disruption to its manufacturing processes or financial difficulties. Due to our high volumes, any of these events, or mere allegation of failures in our products, services and solutions, could delay our successful and timely delivery of products, services and solutions that meet our and our customers’ quality, safety, security and other requirements, or otherwise materially adversely affect our sales and results of operations or our reputation and brand value. See “Item 4.B Business Overview—Mobile Devices—Production” and “Nokia Siemens Networks—Production” for a more detailed discussion of our production activities.

 

Possible consolidation among our suppliers could potentially result in larger suppliers with stronger bargaining power and limit the choice of alternative suppliers, which could lead to an increase in the cost, or limit the availability, of components that may materially adversely affect our sales and results of operations.

 

Many of the production sites of our suppliers are geographically concentrated. In the event that any of these geographic areas is generally affected by adverse conditions that disrupt production and/or deliveries from any of our suppliers, this could adversely affect our ability to deliver our products, services and solutions on a timely basis, which may materially adversely affect our business and results of operations.

 

Our operations rely on complex and centralized information technology systems and networks. If any system or network disruption occurs, this could have a material adverse effect on our business and results of operations.

 

Our operations rely to a significant degree on the efficient and uninterrupted operation of complex and centralized information technology systems and networks, which are integrated with those of third parties. All information technology systems are potentially vulnerable to damage or interruption from a variety of sources. We pursue various measures in order to manage our risks related to system and network disruptions, including the use of multiple suppliers and available information technology security. However, despite precautions taken by us, any failure or disruption of our current or future systems or networks such as an outage in a telecommunications network utilized by any of our information technology systems, attack by a virus or other event that leads to an unanticipated interruption of our information technology systems or networks could have a material adverse effect on our business and results of operations. Furthermore, any data leakages resulting from information technology security breaches could also materially adversely affect us.

 

The global networks business relies on a limited number of customers and large multi-year contracts. Unfavorable developments under such a contract or in relation to a major customer may adversely and materially affect our sales, results of operations and financial position.

Large multi-year contracts, which are typical in the networks industry, include a risk that the timing of sales and results of operations associated with these contracts will differ from what was expected when the contracts were entered into. Moreover, such contracts usually require the dedication of substantial amounts of working capital and other resources, which affects our cash flow negatively, or may require Nokia Siemens Networks to sell products, services and solutions in the future that would otherwise be discontinued, thereby diverting resources from developing more profitable or strategically important products. Any non-performance by Nokia Siemens Networks under these contracts may have significant adverse consequences for us because network operators have demanded and may continue to demand stringent contract undertakings, such as penalties for contract violations.

 

Furthermore, the number of Nokia Siemens Networks’ customers may diminish due to operator consolidation. This could increase reliance on fewer larger customers, which may have a material adverse effect on Nokia Siemens Networks’ bargaining position, and, in turn, our sales and results of operations.

 

Our sales derived from, and assets located in, emerging market countries may be materially adversely affected by economic, regulatory and political developments in those countries or by other countries imposing regulations against imports to such countries. As sales from these countries represent a significant portion of our total sales, economic or political turmoil in these countries could materially adversely affect our sales and results of operations. Our investments in emerging market countries may also be subject to other risks and uncertainties.

 

We generate sales from and have manufacturing facilities located in various emerging market countries. Sales from these countries represent a significant portion of our total sales and these countries represent a significant portion of the expected industry growth. Accordingly, economic or political turmoil in these countries could materially adversely affect our sales and results of operations and the supply of devices and network infrastructure equipment manufactured in these countries. Our investments in emerging market countries may also be subject to risks and uncertainties, including unfavorable taxation treatment, exchange controls, challenges in protecting our intellectual property rights, nationalization, inflation, currency fluctuations, or the absence of, or unexpected changes in, regulation as well as other unforeseeable operational risks. See Note 2 to our consolidated financial statements included in Item 18 of this annual report for more detailed information on geographic location of net sales to external customers, segment assets and capital expenditures.

 

We are developing a number of our new products, services and solutions together with other companies. If any of these companies were to fail to perform as planned, we may not be able to bring our products, services and solutions to market successfully or in a timely way and this could have a material adverse effect on our sales and results of operations.

 

We invite the providers of technology, components or software to work with us to develop technologies or new products, services and solutions. These arrangements involve the commitment by each company of various resources, including technology, research and development efforts, and personnel. Although the objective of these arrangements is a mutually beneficial outcome for each party, our ability to introduce new products, services and solutions that meet our and our customers’ quality, safety, security and other standards successfully and on schedule could be hampered if, for example, any of the following risks were to materialize: the arrangements with the companies that work with us do not develop as expected; the technologies provided by the companies that work with us are not sufficiently protected or infringe third parties’ intellectual property rights in a way that we cannot foresee or prevent; the technologies, products, services or solutions supplied by the companies that work with us do not meet the required quality, safety, security and other standards or customer needs; our own quality controls fail; or the financial condition of the companies that work with us deteriorates. Any of these events could materially adversely affect our sales and results of operations.

Our sales, costs and results of operations are affected by exchange rate fluctuations, particularly between the euro, which is our reporting currency, and the US dollar, the Chinese yuan, the UK pound sterling and the Japanese yen, as well as certain other currencies.

 

We operate globally and are therefore exposed to foreign exchange risks in the form of both transaction risks and translation risks. Our policy is to monitor and hedge exchange rate exposure, and we manage our operations to mitigate, but not to eliminate, the impacts of exchange rate fluctuations. Our sales, costs and results of operations may be materially affected by exchange rate fluctuations. Similarly, exchange rate fluctuations may also materially affect the US dollar value of any dividends or other distributions that are paid in euro. For a more detailed discussion of exchange risks, see “Item 5.A Operating Results—Certain Other Factors—United States Dollar,” “Item 5.A Operating Results—Results of Operations—Exchange Rates” and Note 35 of our consolidated financial statements included in Item 18 of this annual report.

 

Providing customer financing or extending payment terms to customers can be a competitive requirement and could have a material adverse effect on our results of operations and financial condition.

 

Customers in some markets sometimes require their suppliers, including us, to arrange or provide financing in order to obtain sales or business. Moreover, they may require extended payment terms. In some cases, the amounts and duration of these financings and trade credits, and the associated impact on our working capital, may be significant. Defaults under these financings have occurred in the past and may also occur in the future.

 

Customer financing continues to be requested by some of our customers in some markets, but to a considerably lesser extent and with considerably lower importance than in the late 1990s and early 2000s. As a strategic market requirement, we plan to continue to arrange and facilitate financing to our customers, and provide financing and extended payment terms to a small number of selected customers. Extended payment terms may continue to result in a material aggregate amount of trade credits, but the associated risk is mitigated by the fact that the portfolio relates to a variety of customers. We cannot guarantee that we will be successful in providing needed financing to customers. Also, our ability to manage our total customer finance and trade credit exposure depends on a number of factors, including our capital structure, market conditions affecting our customers, the level of credit available to us and our ability to mitigate exposure on acceptable terms. We cannot guarantee that we will be successful in managing the challenges connected with the total customer financing and trade credit exposure that we may have from time to time. See “Item 5.B Liquidity and Capital Resources—Structured Finance,” and Note 35(b) to our consolidated financial statements included in Item 18 of this annual report for a more detailed discussion of issues relating to customer financing, trade credits and related commercial credit risk.

 

Allegations of possible health risks from the electromagnetic fields generated by base stations and mobile devices, and the lawsuits and publicity relating to them, regardless of merit, could have a material adverse effect on our sales, results of operations and share price by leading consumers to reduce their use of mobile devices, or by leading regulatory bodies to set arbitrary use restrictions and exposure limits, or by causing us to allocate additional monetary and personnel resources to these issues.

 

There has been public speculation about possible health risks to individuals from exposure to electromagnetic fields from base stations and from the use of mobile devices. A substantial amount of scientific research conducted to date by various independent research bodies has indicated that these radio signals, at levels within the limits prescribed by safety standards set by, and recommendations of, public health authorities, present no adverse effect on human health. We cannot, however, be certain that future studies, irrespective of their scientific basis, will not suggest a link between electromagnetic fields and adverse health effects that would have a material adverse effect on our sales, results of operations and share price. Research into these issues is ongoing by

government agencies, international health organizations and other scientific bodies in order to develop a better scientific and public understanding of these issues.

 

Over the past seven years Nokia has been involved in several class action matters alleging that Nokia and other manufacturers and cellular service providers failed to properly warn consumers of alleged potential adverse health effects and failed to package headsets with every handset to reduce the potential for alleged adverse health effects. All but two of these cases have been withdrawn or dismissed. The remaining pending cases are before the United States Federal District Court for the Eastern District of Pennsylvania, currently subject to a plaintiffs’ motion to remand the case to the Pennsylvania state courts, and the District of Columbia Superior Court, currently the subject of a motion to dismiss. In addition, Nokia and other mobile device manufacturers and cellular service providers were named in five lawsuits by individual plaintiffs who allege that radio emissions from mobile phones caused or contributed to each plaintiff’s brain tumor. Those cases were dismissed in August 2007. The plaintiffs appealed those dismissals to the District of Columbia Court of Appeals which are currently pending.

 

Although Nokia products, services and solutions are designed to meet all relevant safety standards and recommendations globally, even a perceived risk of adverse health effects of mobile communications devices could have a material adverse effect on us through a reduction in sales of mobile devices or increased difficulty in obtaining sites for base stations, and could have a material adverse effect on our reputation and brand value, results of operations as well as share price.

 

An unfavorable outcome of litigation could have a material adverse effect on our business, results of operations and financial condition.

 

We are a party to lawsuits in the normal course of our business. Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, results of operations and financial condition.

 

See “Item 8.A.7 Litigation” for a more detailed discussion about litigation that we are party to.

 

If we are unable to recruit, retain and develop appropriately skilled employees, our ability to implement our strategies may be hampered and, consequently, that may have a material adverse effect on our business and results of operations.

 

We must continue to recruit, retain and, through constant competence training, develop appropriately skilled employees with a comprehensive understanding of our current businesses and technologies and the new market segments that we target. As competition for skilled personnel remains keen, we seek to create a corporate culture that encourages creativity and continuous learning. We are also continuously developing our compensation and benefits policies and taking other measures to attract and motivate skilled personnel. Nevertheless, we have encountered in the past, and may encounter in the future, shortages of appropriately skilled personnel, which may hamper our ability to implement our strategies and materially harm our business and results of operations.

 

Changes in various types of regulation and trade policies in countries around the world could have a material adverse effect on our business.

 

Our business is subject to direct and indirect regulation in each of the countries in which we, the companies with which we work or our customers do business. As a result, changes in various types of regulations and trade policies applicable to current or new technologies, products or services could affect our business adversely. For example, it is in our interest that the Federal Communications Commission maintains a regulatory environment that ensures the continued growth of the wireless sector in the United States. In addition, changes in regulation affecting the construction of base stations and other network infrastructure could adversely affect the timing and costs of new network construction or expansion and the commercial launch and ultimate commercial success of these networks.

 

Moreover, the implementation of technological or legal requirements, such as the requirement in the

United States that all handsets must be able to indicate their physical location, could affect our products, services and solutions, manufacturing or distribution processes, as well as the timing of product, services and solution introductions, the cost of our production, products, services or solutions and their commercial success. Export control, tariffs or other fees or levies imposed on our products, environmental, product safety and security and other regulations that adversely affect the export, import, pricing or costs of our products, services and solutions, as well as new services related to our products, could also adversely affect our sales and results of operations.

 

The impact of these changes in regulation and trade policies could affect our business adversely even though the specific regulations do not always directly apply to us or our products, services and solutions. In addition to changes in regulation and trade policies, our business may be adversely affected by local business culture and general practices in some regions that are contrary to our code of conduct.

 

See “Item 4.B Business Overview—Government Regulation—Devices and Nokia Siemens Networks” for a more detailed discussion about the impact of various regulations.

 

If we are unable to effectively and smoothly implement the new organizational structure effective January 1, 2008, we may experience a material adverse effect on our business, sales and results of operations.

 

Under our new organizational structure effective January 1, 2008, our three mobile device business groups—Mobile Phones, Multimedia and Enterprise Solutions—and the supporting horizontal groups were replaced by an integrated business segment, Devices & Services. This reorganization is aimed at creating a structure aligned with the opportunities we see for future growth in devices and services and to increase efficient ways of working across the company. Should we fail to implement the new organizational structure effectively and smoothly, the efficiency of our operations and performance may be affected, which may have a material adverse effect on our business, sales and results of operations during 2008, and possibly also thereafter.

 

See “Item 4.A History and Development of the Company—Organizational Structure” for a more detailed discussion about our new organizational structure.

 

Nokia is the world leader in mobility, driving the transformation and growth of the converging Internet and communications industries. We make a wide range of mobile devices with services and software that enable people to experience music, navigation, video, television, imaging, games, business mobility and more. Developing and growing our offering of consumer Internet services, as well as our enterprise solutions and software, is a key area of focus. We also provide equipment, solutions and services for communications networks through Nokia Siemens Networks.

 

For 2007, our net sales totaled EUR 51.1 billion (USD 74.6 billion) and net profit was EUR 7.2 billion (USD 10.5 billion). At the end of 2007, we employed 112 262 people; had production facilities for mobile devices and network infrastructure around the world; sales in more than 150 countries; and a global network of sales, customer service and other operational units.

 

History

 

During our 141 year history, Nokia has evolved from its origins in the paper industry to become the world leader in mobile communications. Today, approximately a billion people from virtually every demographic segment of the population use Nokia mobile devices for communications, business, entertainment and as luxury items.

 

The key milestones in our history are as follows:

 

 

 

Organizational structure

 

From January 1, 2004 through March 31, 2007, we had four business groups—Mobile Phones, Multimedia, Enterprise Solutions and Networks—supported and serviced by two horizontal groups, Customer and Market Operations and Technology Platforms, in addition to various Corporate Functions. On April 1, 2007, Nokia’s Networks business group was combined with Siemens’ carrier-related operations for fixed and mobile networks to form Nokia Siemens Networks, jointly owned by Nokia and Siemens and consolidated by Nokia.

 

As of January 1, 2008, our three mobile device business groups and the supporting horizontal groups have been replaced by an integrated business segment, Devices & Services. This reorganization is aimed at creating a structure aligned with the opportunities we see for future growth in devices and services and to increase efficient ways of working across the company. Under this new structure we conduct and manage our devices and services business in an integrated manner through:

 

 

Based on our revised organizational structure and the way we manage and allocate resources, from January 1, 2008, we have two reportable segments for financial reporting purposes: Devices & Services and Nokia Siemens Networks. Effective from the closing date of the pending acquisition of NAVTEQ Corporation (“NAVTEQ”), NAVTEQ’s current map data business will operate organizationally as a wholly-owned subsidiary of Nokia and will be a separate reportable segment.

 

The following business overview continues to describe our business prior to this reorganization in order to align with the financial segment reporting and discussion through December 31, 2007 contained in this annual report. Through December 31, 2007, Nokia reported on the following three device business segments: Mobile Phones, Multimedia and Enterprise Solutions. Until March 31, 2007, we also reported on a networks business segment, which was replaced from April 1, 2007 by Nokia Siemens Networks.

 

For a breakdown of our net sales and other operating results by category of activity and geographical location, see Note 2 to our consolidated financial statements included in Item 18 of this annual report.

 

Other

 

We primarily invest in research and development, marketing and building the Nokia brand. However, over the past few years we have increased our investment in services and software by acquiring a number of companies with specific technology assets. We expect the amount of capital expenditure (excluding acquisitions) during 2008 to be approximately EUR 900 million, and to be funded from our cash flow from operations. During 2007, our capital expenditures (excluding acquisitions) totaled EUR 715 million, compared with EUR 650 million in 2006. For further information regarding capital expenditures see “Item 5.A Operating Results” and for a description of capital expenditures by business segment see Note 2 to our consolidated financial statements included in Item 18 of this annual report.

 

We maintain listings on three major securities exchanges. The principal trading markets for the shares are the Helsinki Stock Exchange, in the form of shares, and the New York Stock Exchange, in the form of American Depositary Shares. In addition, shares are listed on the Frankfurt Stock Exchange.

 

Our principal executive office is located at Keilalahdentie 4, P.O. Box 226, FI-00045 Nokia Group, Espoo, Finland and our telephone number is +358 (0) 7 1800-8000.

 

Strategy

 

We seek to grow, transform and build the Nokia business based on our business strategies and strategic capabilities.

 

Our business strategies reflect the primary focus of each of Nokia’s business areas as follows:

 

 

Our strategic capabilities are the priority areas where we are investing with the aim of gaining a competitive advantage. The following capabilities can be shared among our several business areas:

 

 

Mobile Devices

 

Devices

 

The mobile communications industry has evolved rapidly during the past 15 to 20 years. While today mobile devices are still used primarily for voice and text message communication, people increasingly also use them to take and send pictures, listen to music, record video, watch TV, play games, surf the Internet, check e-mail, navigate, manage their schedules, browse and create documents, and more. This trend—where mobile devices increasingly support the features of single-purposed product categories such as music players, cameras, pocketable computers and gaming consoles—is often referred to as digital convergence. Multifunctional mobile devices, which are often called converged devices, smartphones, or multimedia computers, typically feature computer-like and consumer electronics-like hardware and software.

 

A person’s choice of mobile device is influenced by a number of factors, including their purchasing power, brand awareness, technological skills, fashion consciousness and lifestyle. The global market for mobile devices is comprised of many different consumer groups and markets with different characteristics, dynamics and stages of development. We believe that in order to meet our customers’ needs, we need to have a broad and balanced offering of commercially appealing mobile devices with attractive aesthetics, design and combination of value-adding functionalities and services for all major consumer segments and price points designed, as appropriate, for the local requirements of different markets. Our device and services portfolio is supported by the Nokia brand, including the Nokia Nseries, the Nokia Eseries and Vertu sub-brands, as well as by the quality of our products and our competitive cost structure.

 

In 2007, Nokia mobile devices were produced by our Mobile Phones and Multimedia business groups, as well as by the Mobile Devices unit of our Enterprise Solutions business group.

 

Our total mobile device volume for 2007 was 437 million units, representing growth of 26% compared with 2006. Based on an estimated global market volume for mobile devices of 1.14 billion units for 2007, our estimated full-year global market share was 38%, compared with an estimated 36% for 2006. This further strengthened our leadership of the global device market—a position Nokia has held since 1998.

 

Nokia devices are primarily based on the GSM/EDGE, 3G/WCDMA and CDMA global cellular standards, and also increasingly feature non-cellular technologies such as Bluetooth, WLAN and GPS. Our higher-end converged devices, such as those in the Nokia Nseries and Nokia Eseries, typically offer the functionalities of many portable single-purpose devices—such as megapixel cameras, music players, computers, gaming consoles and navigation devices—in a single, converged device. In 2007, we shipped a total of 60.5 million converged devices.

 

Services & Software

 

Over the past few years we have increased our research and development efforts in services and software. This area continued to be primarily in an investment phase in 2007, and we anticipate this will continue to be the case for 2008 and 2009. Some incremental net sales were generated and reported in 2007 as part of our devices business.

By the end of 2007, we had started to offer initial services and software in the areas of advertising, business, entertainment, navigation, and social communities, including:

 

 

With progressively more of our devices featuring advanced multimedia-type capabilities, we see new business opportunities to increase our offering of consumer Internet services and to deliver these services in an easily accessible manner to a market that we estimate will be worth approximately 100 billion euros in 2010. Our strategy in competing in this market is for Nokia’s Internet services to support our device average selling price, extend and enhance the Nokia brand, generate incremental net sales and profit streams, and create value and choice for consumers. Our overall longer-term goal is to become the global leader in “Internet on mobile”.

 

Ovi

 

In 2007, we introduced Ovi, our Internet services brand. Ovi.com will be designed to enable people to easily access their existing social network, communities and content, as well as gain access to services from Nokia and other service providers through a single access point. Our plan is for people to be able to combine Ovi services as they want to, customize their view and experience of Ovi, and use the service to store their photos and videos online. By integrating our individual services under the Ovi brand, we aim to simplify the consumer experience and differentiate ourselves from competitors in the Internet services market.

 

Openness is at the core of our Internet services strategy and the Ovi services environment. Thus, we are providing open application programming interfaces, or “APIs”, to the Ovi environment, and we plan to use other online communities’ APIs to enable people to link their various services to Ovi as they wish. With this, we intend for Ovi users to be able to access services and social networks that are not necessarily created by Nokia.

 

In line with our belief in the co-existence of Nokia and operator services in our devices, we are partnering with mobile operators in Ovi services. In 2007, Vodafone, Telefonicá and TIM became the first operators to announce cooperation agreements with Nokia around Ovi services. As part of these cooperation agreements, we aim to customize our device user interface to ensure easy access to services from both the operator and from Nokia. In February 2008, we also signed a memorandum of understanding with operator Orange in order to partner on value-added services such as location based services, maps, mobile advertising and gaming.

Acquisitions

 

During the past few years, we have made a number of strategic acquisitions to bring us the knowledge and technology that we believe we need to compete effectively in consumer Internet services and enterprise solutions and software:

 

 

Partnering

 

In December 2007, we announced Nokia Comes With Music, a program that will enable people to buy a Nokia device with access to millions of tracks from a range of artists. Nokia Comes With Music is expected to become commercially available in the second half of 2008.

 

 

 

Through December 31, 2007, Nokia reported on the following three device business segments: Mobile Phones, Multimedia and Enterprise Solutions, each of which is described below. As of January 1, 2008, these three segments have been replaced by an integrated business segment: Devices & Services. For a description of our organizational structure, see “Item 4A—History and Development of the Company—Organizational structure.”

 

Mobile Phones

 

Mobile Phones provides voice and data capabilities across a wide range of mobile devices. We primarily target high-volume sales of mainstream mobile devices where we believe that design, brand, ease of use and price are our customers’ most important considerations. Increasingly, our products include new features with mass market appeal, such as megapixel cameras, music players and navigation functionality.

 

Mobile Phones has five business units: Entry, Broad Appeal, Lifestyle Products, CDMA and Vertu.

Entry addresses markets where there has been and we believe there continues to be significant potential for growth. Our aim is to provide affordable mobile phones while cooperating with local mobile operators to offer solutions designed for a low total cost of ownership. Entry devices, which are in the Nokia 1000 and 2000 product families, have voice capability, basic messaging and calendar features, and, increasingly, color displays, radios, basic cameras and Bluetooth functionality. Highlights from 2007 included:

 

 

Broad Appeal focuses on the Nokia 3000 and 6000 families of mid-range products where the balance between price, functionality and style is key. Broad Appeal devices typically have mainstream features, including megapixel cameras, music players and navigation functionality. Highlights from 2007 included:

 

 

Lifestyle Products concentrates on devices with distinct designs and features targeted at specified fashion and music-driven consumer segments. These devices are in the Nokia 5000, 7000 and 8000 product families. Highlights from 2007 included:

 

 

CDMA works together with co-development partners to support operators that use CDMA technology, with a particular focus on the United States. Nokia’s own CDMA research, development and production ceased from April 2007. Highlights in 2007 included:

 

 

Vertu has pioneered and leads the luxury mobile phones sector. In 2007, Vertu products were sold in approximately 50 countries at approximately 410 points of sale. Highlights from 2007 included:

 

 

 

Multimedia

 

The Multimedia business group gives people the ability to create, access, experience and share multimedia in the form of advanced multimedia computers and applications with connectivity over multiple technology standards. Multimedia aims to take advantage of device convergence by capturing value from traditional single-purposed product categories—including music players, cameras, pocketable computers, gaming consoles and navigation devices—by bringing combinations of their various functionalities into Nokia devices. An integral part of our strategy is for our multimedia computers to be the devices of choice for people participating in the Web 2.0 phenomenon, where people can create and share their experiences through online communities.

 

In 2007, we continued to build the Nokia Nseries sub-brand and multimedia computer category by bringing new products and applications to market. Nokia Nseries multimedia computers offer consumers the ability to record video and still pictures, print-quality images, watch TV, listen to music, access the web and e-mail, use mapping services and make phone calls. In addition to supporting 3G/WCDMA connectivity, certain Nokia Nseries multimedia computers also feature non-cellular connectivity, including WLAN, FM radio, Digital Video Broadcasting-Handheld (DVB-H), GPS and Bluetooth.

 

Multimedia highlights from 2007 included:

 

 

Multimedia has two main entities responsible for the development of its products and related experiences: Multimedia Computers and Multimedia Experiences. In addition, Multimedia has one business program, Convergence Products.

 

Multimedia Computers focuses on managing, delivering and expanding the Nokia Nseries multimedia computer portfolio, as well as developing accessory products and car communications solutions.

Multimedia Experiences develops multimedia applications and solutions in the following areas:

 

 

Convergence Products develops and drives products based on the Linux Maemo platform that are optimized for Internet communications. With the launch of the Nokia N810 Internet Tablet in October 2007, we have moved to the third generation of the Internet Tablet product category, targeted at broader consumer segments.

 

Enterprise Solutions

 

Enterprise Solutions drives the adoption of business mobility by addressing the needs of business managers, users and IT departments. Enterprise Solutions offers businesses and institutions a broad range of products and solutions, including enterprise-grade mobile devices, underlying security infrastructure, software and services. Enterprise Solutions collaborates with a range of companies to provide fixed IP network security, mobilize corporate e-mail and other IT applications and extend corporate telephony systems to Nokia’s mobile devices through our Mobile Unified Communications strategy.

 

Enterprise Solutions highlights from 2007 included:

 

 

Enterprise Solutions has four business units: Mobile Devices; Mobility Solutions; Security and Mobile Connectivity; and Sales, Marketing and Services.

 

Mobile Devices produces Nokia Eseries mobile devices specifically for business use that address companies’ security, manageability, cost and ease-of-use concerns. The Nokia Eseries portfolio includes the Nokia E50, Nokia E51, Nokia E60, Nokia E61, Nokia E61i, Nokia E62, Nokia E65, Nokia E70, and Nokia E90 Communicator, as well as the Nokia 9300 and Nokia 9500.

 

Nokia Eseries devices typically feature both cellular connectivity, such as GSM and 3G/WCDMA, and non-cellular connectivity, such as WLAN. They also support network connectivity, personal information management, e-mail and corporate telephony (PBX) system access, device management and security solutions, as well as Nokia Intellisync Wireless E-mail and third party software such as BlackBerry Connect, Mail for Exchange and Visto Mobile mail.

 

Mobility Solutions develops software solutions for mobile e-mail, device management and other mobile data services. One of our key products, Nokia Intellisync Wireless E-mail, supports a wide range of device platforms, including Symbian, Palm, BREW and Windows Mobile, and is compatible with a wide range of e-mail servers and groupware applications, including Microsoft Exchange, IBM Lotus Domino, IMAP and POP3.

 

We also work with external vendors such as IBM, Microsoft, Research in Motion, Seven and Visto to make Nokia’s mobile devices compatible with their solutions.

 

Security and Mobile Connectivity offers a full range of security appliances and associated software and peripheral offerings designed to help companies grant their employees access to corporate information and establish secure remote connections between their corporate network, their offices and their employees’ mobile devices and computers. Offerings consist primarily of firewall gateways and software-based tools that operate with both Nokia and non-Nokia devices, as well as with existing IT infrastructures.

 

Nokia’s security appliances run software from Checkpoint Corporation and SourceFire. Nokia and Checkpoint have common distributors, integrators and Value Added Resellers, or VARs, that integrate Nokia gateways with Checkpoint software for customers. We also provide end-user and reseller support for these security products. In addition, we work with leading vendors like Alcatel-Lucent, Avaya and Cisco to connect our mobile devices to corporate fixed line telephone networks, or PBXs, over cellular and WLAN technologies.

 

Sales, Marketing and Services is responsible for sales to business users and corporate customers; the management of relationships with IT distributors, systems integrators and VARs through the Nokia for Business Channel Program; and specialized sales resources for selling Enterprise Solutions products to operator customers. We manage the Enterprise Solutions services business, which includes support

services for corporate customers and resellers, as well as professional services to help corporate customers with more complex mobility solutions.

 

Sales and Marketing—Devices

 

Sales

 

The Customer and Market Operations horizontal group is responsible for the sales of Nokia mobile devices from the Mobile Phones, Multimedia and Enterprise Solutions business groups. Most of Nokia’s mobile device business derives from sales to operators, distributors, independent retailers, corporate customers and consumers. However, the percentage of our total device volume that goes through each channel varies by region. In 2007, distributors accounted for approximately 90% of our device volumes in the Asia-Pacific region, approximately 90% in the Middle East & Africa and approximately 75% in China. In Europe, distributors and operators each accounted for approximately 40% of our volumes during 2007. And in Latin America and North America, operators accounted for more than 80% of our 2007 volumes in each region.

 

Each of our active operator and distributor customers is supported by a dedicated Nokia account team. In addition, customer executive teams led by Nokia Group Executive Board members focus on both our devices business and Nokia Siemens Networks for the largest operator groups.

 

We also have specialized sales channels for certain device business groups in order to reach customers in segments where we are introducing mobility. Each of these channels is specific to, and managed by, an individual device business group. For example, Enterprise Solutions manages sales of its products and solutions to certain resellers or systems integrators who contribute value, such as consulting services or additional software, before distribution.

 

Marketing

 

The Business Week and Interbrand annual rating of 2007 Best Global Brands positioned Nokia as the fifth most-valued brand in the world, up from sixth place in 2006. Other highlights from 2007 included:

 

 

Production—Devices

 

The Customer and Market Operations horizontal group is responsible for production and logistics for devices from Mobile Phones, Multimedia and Enterprise Solutions, including management of the mobile device factories. The Customer and Market Operations horizontal group is also responsible for process development in the demand-supply network.

Nokia operated ten manufacturing facilities in nine countries around the world as of December 31, 2007, for the production of mobile devices. Our Mexican and Brazilian plants primarily supply the North and South American markets; our three European plants, located in Finland, Germany and Hungary, principally supply Europe and the Middle East & Africa; and our two plants in China, our plant in India and our plant in South Korea principally supply China and the Asia-Pacific market. In addition, we have a manufacturing plant in the United Kingdom serving Vertu.

 

Each of our plants employs state-of-the-art technology and is highly automated. During 2007, we made a significant capital investment in order to increase our production capacity, including opening a plant in Chennai, India. In March 2007, we announced plans to set up a new mobile device manufacturing plant in Romania, where production started in February 2008.

 

We continually assess the efficiency and competitiveness of our manufacturing facilities. As a result, in January 2008, we announced plans to discontinue the production of mobile devices in Germany and to close our Bochum site there by mid-2008. We plan to move the production from the Bochum site to our other, more cost-competitive sites in Europe.

 

In July 2007, our Operations & Logistics organization introduced a new operational mode, moving from a model based around three time zones to a model made up of four global units. This new operational mode is aimed at strengthening customer logistics and further improving the economies of scale in our operations. We believe that it positions us even better to respond rapidly to the needs of different geographic markets and to take advantage of the flexibility of our global manufacturing network.

 

Our mobile device manufacturing and logistics—which we consider to be a core competence and competitive advantage—are complex, require advanced and costly equipment and involve outsourcing to third parties. During 2007, outsourcing covered approximately 20% of our manufacturing volume of mobile device engines, which include the hardware and software that enable the basic operation of a mobile device.

 

In line with industry practice, we source our components for our mobile devices from a global network of suppliers. These components include electronic components, such as chipsets, integrated circuits, microprocessors, memory devices, cameras, displays, batteries and chargers, and mechanical components, such as covers, connectors, key mats and antennas. Our products also incorporate software provided by third parties. We and our contract manufacturers assemble components and activate devices with our own and third-party software. Final assembly typically takes place only for firm customer orders.

 

Certain of the components we source may experience some price volatility from time to time. Management believes that our business relationships with our suppliers are stable, and they typically involve a high degree of cooperation in research and development, product design and manufacturing. See “Item 3.D Risk Factors—We depend on a limited number of suppliers for the timely delivery of sufficient amounts of fully functional components and sub-assemblies and for their compliance with our supplier requirements, such as our and our customers’ product quality, safety, security and other standards. Their failure to do so could materially adversely affect our ability to deliver our products, services and solutions successfully and on time.”

 

Overall, we aim to manage our inventories to ensure that production meets demand for our products, while minimizing inventory-carrying costs. The inventory level we maintain is a function of a number of factors, including estimates of demand for each product category, product price levels, the availability of raw materials, supply-chain integration with suppliers and the rate of technological change. From time to time, our inventory levels may differ from actual requirements. See “Item 3.D Risk Factors—Our sales and results of operations could be materially adversely affected if we fail to efficiently manage our manufacturing and logistics without interruption, or fail to ensure that our products, services and solutions meet our and our customers’ quality, safety, security and other requirements and are delivered on time and in sufficient volumes.”

Design—Devices

 

We take a human approach to designing mobile devices, with the goal of creating stylish products that work just the way people like them to. This ethos is central to our design work and brand.

 

Our design process is influenced by the consumer and their behavior—how they want a mobile device to look, function and fit into their lifestyle. We focus on beautiful simplicity—sleek design and ease of use, relevance for specific consumers and local tastes and creating a joy of use.

 

We have a multi-disciplinary design team of approximately 300 psychologists, researchers, anthropologists and technology specialists representing more than 30 different nationalities. Based in China, Europe, Latin America, Japan, India, the US and elsewhere, the team conducts in-depth research and analysis of consumer trends and behavior, as well as studies new technologies, materials, shapes and styles.

 

Technology, Research and Development—Devices

 

Our devices business research and development takes place within the Technology Platforms horizontal group and within the three device business groups. Our technology strategy for our devices business is also supported by the Nokia Research Center and other Nokia-wide horizontal units under the leadership of Nokia’s Chief Technology Officer.

 

Technology Platforms

 

Technology Platforms is responsible for the competitiveness of Nokia technology assets for our devices business. It supports our overall technology management and development by delivering leading technologies and platforms to our device business groups as well as to external customers. Technology Platforms achieves this through deployment of our own R&D resources, as well as close cooperation with leading software and technology companies.

 

The two major areas in our technology development are chipset platforms and software.

 

Chipset platforms

 

A chipset platform comprises integrated circuits designed to work as a unit and perform specific functions in a mobile device. A key component of the chipset is the modem, responsible for converting the digital language of a chip to the analog language of radio. This allows one device to communicate with another over radio signals.

 

In August 2007, we announced that we were revising our chipset strategy and introducing a multisourcing model for our chipsets. Until then, our chipset R&D and design work had mainly been carried out in-house, while chipset manufacturing had been concentrated with one external supplier. Under the revised strategy, we have discontinued parts of our own chipset R&D and have expanded our use of commercially available chipsets. We are now working with four chipset suppliers: Texas Instruments continues to be a broad-scope supplier across all product tiers; in addition, Infineon Technologies is a supplier at the entry level; Broadcom in the mid-range; and STMicroelectronics at the high-end.

 

We are, however, continuing to develop our leading modem technology, which includes protocol software and related digital design for multi-protocol modems. Modem technology is an area where we believe we have a competitive advantage through our strong experience, execution capability and intellectual property rights position. Under our revised chipset strategy, we will license our modem technology to chipset manufacturers who will use it in the chipsets they develop and produce for Nokia and—if they so decide—in the chipsets they produce for the open market.

 

The revised chipset strategy is aimed at increasing the efficiency of our research and development efforts by allowing Nokia to leverage external innovation through working with the best partner in a specific chipset development area, and by freeing our own R&D resources to focus on our core competencies in modem development and other areas central to Nokia’s growth strategy, such as

consumer Internet services and enterprise software. We also believe this strategy will foster beneficial competition in the chipset industry.

 

Software

 

Software refers to both the platforms that enable the implementation of radio technologies and applications in mobile devices, and the applications or services that run on a mobile device.

 

The software platforms that Nokia deploys—Series 30, Series 40, S60 on Symbian OS and Maemo—allow us to balance usability, features and cost in a flexible manner. We provide mobile devices for a wide range of market segments, price points and user groups, and by having different software platforms we are able to choose the right one for each Nokia device.

 

S60 on Symbian OS, which we use in our own devices and license to other device manufacturers, is the world’s leading smartphone software platform. In 2007, we announced plans to expand the S60 user interface to support touch screen functionality, introduce general support for sensor technologies and provide new tools for manufacturers to create S60 applications.

 

Cross-platform development environments, or layers of software that run across different device operating systems, are key to our software strategy. These layers enable developers with experience in a variety of software environments to create applications for the mobile market. Nokia’s own application development work focuses on software for servers, personal computers and mobile devices that enable the delivery of Internet services on a variety of platforms.

 

We also actively participate in the open source community, aiming to innovate and leverage on existing work and share knowledge. We are a member of the Linux Foundation, the Advisory Board to the GNOME Foundation, and a Corporate Patron to the Free Software Foundation. Through these and other activities we contribute to the healthiness of the open source environment. In 2007, we participated in one of the discussion committees for the creation of the new version of the GNU General Public License, a project by the Free Software Foundation to provide a freely distributable replacement for Unix.

 

Research and Development

 

Each of our mobile device business groups takes into account its own customer segment needs in its own product-focused research and development. The groups’ products, services and solutions feature technologies from their own research and development, from Technology Platforms and from external vendors.

 

Our devices business groups seek to improve research and development efficiency and time to market by often basing their products on the same platforms and technology modules. For example, Mobile Phones, Multimedia and Enterprise Solutions all develop devices based on S60, on top of which they develop applications specific to their business. Multimedia develops mobile music, imaging and video applications for S60, while the Enterprise Solutions business group offers a variety of e-mail solutions as well as other Internet based services that run on S60. In addition, all Nokia device business groups aim to maximize the use of common technology modules developed by Technology Platforms, often in cooperation with our suppliers. Examples of common technology modules are chipsets, modems, camera modules and memory modules. This brings economies of scale and allows flexibility both in research and development, and in the management of demand and supply networks.

 

Nokia Research Center

 

Looking beyond the development of current products, platforms and technologies, our corporate research center creates assets and competencies in technology areas that we believe will be vital to our future success. Almost half of Nokia’s essential patents are generated by the Nokia Research Center, which works closely with our three devices business groups, Nokia Siemens Networks and Technology Platforms.

Our global network of relationships with universities and other industry research and development parties expands the scope of our long-term technology development. Highlights from 2007 included the establishment of a new Nokia Research Center site in Cambridge, UK, together with collaboration with the University of Cambridge; the establishment of the Nokia Innovation Center in Tampere, Finland, together with collaboration with the Tampere University of Technology; and collaborations with the Helsinki University of Technology, Finland, and Tsinghua University, China.

 

Patents and Licenses—Devices

 

A high level of investment in research and development and rapid technological development have meant that the role of Intellectual Property Rights, or IPR, in our industry has always been important. Digital convergence, multiradio solutions, alternative radio technologies, and differing business models combined with large volumes are further increasing the complexity and importance of IPR.

 

The detailed designs of our products are based primarily on our own research and development work and design efforts, and generally comply with all relevant and applicable public standards. We seek to safeguard our investments in technology through adequate intellectual property protection, including patents, design registrations, trade secrets, trademark registrations and copyrights. In addition to safeguarding our technology advantage, they protect the unique Nokia features, look and feel, and brand.

 

We have built our IPR portfolio since the early 1990s, investing over EUR 30 billion in research and development, and we now own more than 11 000 patent families. As a leading innovator in the wireless space, we have built what we believe to be one of the strongest and broadest patent portfolios in the industry, extending across all major cellular and mobile communications standards, data applications, user interface features and functions and many other areas. We receive royalties from certain handset and other vendors under our patent portfolio.

 

We are a world leader in the development of the wireless technologies of GSM/EDGE, 3G/WCDMA, HSPA, OFDM, WiMax, LTE and TD-SCDMA, and we have a robust patent portfolio in all of those technology areas, as well as for CDMA2000. We believe our standards-related essential patent portfolio is one of the strongest in the industry. In GSM, we have declared close to 300 GSM essential patents with a particular stronghold in codec technologies and in mobile packet data. Our major contribution to WCDMA development is demonstrated by approximately 360 essential patent declarations to date. The number of essential patents is expected to increase further due to the rapid development of higher data rate technologies, an area where we are a particularly strong contributor.

 

We are a holder of numerous essential patents for various mobile communications standards. An essential patent covers a feature or function that is incorporated into an open standard which is deployed by manufacturers in order to comply with the standard. In accordance with the declarations we have made and the legal obligations created under the applicable rules of various standardization bodies, such as the European Telecommunication Standardization Institute (ETSI), we are committed to promoting open standards, and to offering and agreeing upon license terms for our essential patents in compliance with the IPR policies of applicable standardization bodies. We believe that a company should be compensated for its IPR based on the fundamentals of reasonable cumulative royalty terms and proportionality: proportionality in terms of the number of essential patents that a company contributes to a technology, and proportionality in terms of how important the technology is to the overall product. Nokia has agreed upon terms of several license agreements with other companies relating to both essential and other patents. Many of these agreements are cross-license agreements with major telecommunications companies that cover broad product areas and provide Nokia with access to relevant technologies.

 

Our products and solutions include increasingly complex technology involving numerous patented, standardized or proprietary technologies. A 3G/WCDMA mobile device, for example, may incorporate three times as many components, including substantially more complex software, as our 2G/GSM mobile devices. As the number of entrants in the market grows, as the Nokia product range becomes more diversified, as our products and solutions are increasingly used together with hardware,

software or service components that have been developed by third parties, as Nokia enters new businesses, and as the complexity of technology increases, the possibility of alleged infringement and related intellectual property claims against us continues to rise. As new features are added to our products, services and solutions, we are also agreeing upon licensing terms with a number of new companies in the field of new evolving technologies. We believe companies like Nokia with a strong IPR position, cumulative know-how and IPR expertise can have a competitive advantage in the converging industry, and in the increasingly competitive marketplace.

 

In many aspects, the business models for mobile services have not yet been established. The lack of availability of licenses for copyrighted content, delayed negotiations, or restrictive copyright licensing terms may have a material adverse effect on the cost or timing of content related services by us, mobile network operators or third-party service providers, and may also indirectly affect the sales of our mobile devices.

 

From time to time we are subject to patent infringement claims from third parties. We believe that, based on industry practice and applicable legal obligations, any necessary licenses or rights under patents that we may require can be agreed upon on terms that would not have a material adverse effect on our business, results of operations or financial condition. Nevertheless, in some situations, necessary licenses may not be available on acceptable commercial terms, if at all. The inability to obtain necessary licenses on agreed upon terms or other rights, or the need to engage in litigation, could have a material adverse effect on our business, results of operations and financial condition.

 

See “Item 3.D Risk Factors—We must develop or otherwise acquire complex, evolving technologies to use in our business. If we fail to develop or otherwise acquire these complex technologies as required by the market, with full rights needed to use in our business, or to protect them, or to successfully commercialize such technologies as new advanced products, services and solutions that meet customer demand, or fail to do so on a timely basis, this may have a material adverse effect on our business and results of operations.” See also “Item 3.D Risk Factors—Our products, services and solutions include increasingly complex technologies some of which have been developed by us or licensed to us by certain third parties. As a consequence, evaluating the rights related to the technologies we use or intend to use is more and more challenging, and we expect increasingly to face claims that we have infringed third parties’ intellectual property rights. The use of these technologies may also result in increased licensing costs for us, restrictions on our ability to use certain technologies in our products, services and solution offerings, and/or costly and time-consuming litigation, which could have a material adverse effect on our business and results of operations” and “Item 3.D Risk Factors—Our products, services and solutions include numerous new Nokia and Nokia Siemens Networks patented, standardized, or proprietary technologies on which we depend. Third parties may use without a license or unlawfully infringe our intellectual property or commence actions seeking to establish the invalidity of the intellectual property rights of these technologies. This may have a material adverse effect on our business and results of operations.”

 

Competition—Devices

 

Mobile device market participants compete with each other mainly on the basis of the breadth and depth of their product and services portfolio, design, price, operational and manufacturing efficiency, technical performance, distribution, quality, customer support and brand.

 

The competition in the market for our products, services and solutions continues to be intense from both our traditional competitors in the mobile device industry, as well as from a number of new competitors. Some of our competitors have used, and we expect will continue to use, more aggressive pricing strategies, different design approaches and alternative technologies. In addition, some competitors have chosen to focus on building products based on commercially available components, which may enable them to introduce these products faster and with lower levels of research and development expenditures than Nokia.

 

Historically, our principal competitors in mobile devices have been other mobile device manufacturers such as LG, Motorola, Samsung and Sony Ericsson. In addition, mobile network operators are

increasingly offering mobile phones under their own brand, which increases competition from non-branded mobile device manufacturers. We also face competition from smaller mobile device manufacturers, such as ZTE, in certain markets.

 

As a result of developments in our industry, including the convergence of mobile device technology with the Internet, we also face new competition from companies in related industries, such as Internet-based products and services, consumer electronics manufacturers, network operators and business device and solution providers, some of which have more scale and experience and a stronger market presence in certain market segments, such as Internet services. In addition, new companies, primarily consumer electronics manufacturers, are entering the mobile device business. These competitors include, but are not limited to Apple, Garmin, Google, Palm, Research in Motion, Sony and TomTom. Further, some of our traditional competitors have also expanded into the areas of Internet services and enterprise software, and mobile network operators are also seeking to provide services to consumers for their own branded devices, including both Nokia devices and devices from other manufacturers.

 

Further, as the industry now includes increasing numbers of participants that provide specific hardware and software layers within products and solutions, we face competition at the level of these layers rather than solely at the level of complete products and solutions. An example of such a layer is operating system software, with competitors including, but not limited to, Apple, Google, HP, Microsoft, Palm and Research in Motion.

 

The industry is increasingly complex and challenging, and is driving a continuing trend towards various types of consolidation among industry participants. However, it is difficult to predict how the competitive landscape of the mobile device industry will develop in the future, as the parameters of competition are less firmly established than in mature, low-growth industries where the competitive landscape does not change greatly from year to year.

 

See “Item 3.D Risk Factors—Competition in our industry is intense. Our failure to maintain or improve our market position or respond successfully to changes in the competitive landscape may have a material adverse effect on our business and results of operations.”

 

Nokia Siemens Networks

 

This section describes the business of Nokia Siemens Networks, a new company jointly owned by Nokia and Siemens and consolidated by Nokia, which started operations on April 1, 2007. Nokia Siemens Networks combined Nokia’s former Networks business with Siemens’ carrier-related operations for fixed and mobile networks. Its operational headquarters is in Espoo, Finland, along with two of its six business units. Nokia Siemens Networks has a strong regional presence in Munich, Germany, where three of its business units are based. The Services business unit is based in New Delhi, India. The Board of Directors of Nokia Siemens Networks is comprised of seven directors, four appointed by Nokia and three by Siemens, and Nokia appoints the CEO.

 

Nokia Siemens Networks provides wireless and fixed network infrastructure, communications and networks service platforms, as well as professional services to operators and service providers. Nokia Siemens Networks has a broad product and services portfolio that can address the converging mobile and fixed infrastructure markets, a global base of customers, a presence in both developed and emerging markets, and one of the largest service organizations in the industry. Nokia Siemens Networks focuses primarily on the GSM family of radio technologies and aims at leadership in: GSM, EDGE and WCDMA/HSPA networks; core networks with increasing IP and multi-access capabilities; fixed broadband access, transport, operations and billing support systems; and professional services such as managed services and consulting. Nokia Siemens Networks is also a vendor of mobile WiMAX solutions.

 

In 2007, Nokia Siemens Networks started implementing a strategy aimed at moving the company towards a solutions-driven approach for its customers. This approach focuses on the specific business needs of an operator and the day-to-day running of its networks, rather than on solely providing

network equipment. As global mobile subscriptions increase and data traffic rises, operators are increasingly focused on marketing and differentiating their service offering, rather than on traditional areas such as billing. This provides new business opportunities for Nokia Siemens Network with its solutions-driven approach to its operator customers.

 

At December 31, 2007, Nokia Siemens Networks had approximately 58 500 employees, 1 400 customers in 150 countries, and systems serving in excess of one billion subscribers. Highlights from 2007 included:

 

 

Nokia Siemens Networks Business Units

 

Nokia Siemens Networks has six business units: Radio Access; Converged Core; IP Transport; Operations and Business Software; Broadband Access; and Services. These are supported by Operations; Research, Technology & Platforms; and Customer and Market Operations.

 

Radio Access develops GSM, EDGE and 3G/WCDMA/HSPA radio access networks and cellular transmission for operators and network providers. It also develops new technologies such as I-HSPA, LTE and mobile WiMAX to support the uptake of mobile data services and introduce flat architecture for wireless and mobile broadband applications. The main products offered by Radio Access are base stations, base station controllers and cellular transmission equipment. As data speeds evolve, these products are increasingly used for data traffic in addition to traditional wireless voice traffic.

 

Converged Core develops core network solutions for mobile and fixed network operators. The main products are switches, different kinds of network servers and media gateways. Nokia Siemens Networks circuit-switched network solutions are aimed at helping operators reduce the cost of providing voice minutes to subscribers. Its packet-switched and Internet Protocol-based core network solutions bring new functionality to the networks and are designed to enable operators to more efficiently offer advanced services such as Voice over IP, or VoIP, calls; video sharing; IPTV; Presence;

Internet access; and other IP-based services. Many of Nokia Siemens Networks core network products are used in both fixed and mobile networks as part of so-called fixed-mobile convergence.

 

IP Transport focuses on transport networks, which are the underlying infrastructure for all fixed and mobile networks. Consumer applications, the growth of the Internet and new services have resulted in strong growth in bandwidth demand over these networks. IP Transport provides key elements for high-speed next generation network connectivity including transmission systems for dense wavelength division multiplexers, or DWDM; and synchronous digital hierarchy, or SDH; IP routers; carrier ethernet switches; and microwave radio equipment.

 

Operations and Business Software provides operations and business support systems software. Operations support systems seek to improve the operational efficiency of operators and reduce network complexity, while business support systems let operators differentiate themselves from the competition by enabling flexible pricing and charging of services and calling plans. Operations and Business Software has five business lines:

 

 

Broadband Access produces digital subscriber line access multiplexers, passive optical network and narrowband/multi-service equipment, as well as access switches for the fixed-line telecommunications industry. The business unit aims to provide cost-efficient high bandwidth for access networks, enabling high quality “triple play” services such as high-speed Internet, VoIP and IPTV. It has a comprehensive portfolio of fiber and copper line access equipment.

 

Services offers operators a broad range of operation services, from consultancy to outsourced operations; systems integration to hosting; and from network design to full turnkey solutions including network care. Services has the capability to integrate software from virtually all vendors, helping operators and service providers to achieve a higher quality of service with lower operating and capital expenditure.

 

Compliance Program—Nokia Siemens Networks

 

Due to the ongoing criminal and other governmental investigations at Siemens, related to allegedly unlawful transactions and payments, which include such activities within Siemens’ carrier-related operations transferred to Nokia Siemens Networks, the new company has placed the highest importance on its compliance program.

 

In addition to a strong finance and control organization with internal financial controls designed to ensure high standards of reporting and compliance with all applicable laws, Nokia Siemens Networks is implementing an expanded compliance program. This program includes training programs and defined, specialized approval processes for entering into business transactions with the potential for corruption risks and for engaging third-party consultants in the sales process. Nokia Siemens Networks has zero tolerance for financial or other business misconduct.

 

Nokia Siemens Networks’ Code of Conduct, based on the Nokia Code of Conduct, defines boundaries between appropriate and inappropriate business behavior. According to the Code of Conduct, Nokia Siemens Networks employees must not engage in activities that may lead to conflicts of interest, such as any agreement or understanding regarding gifts, hospitality, favors, benefits or bribes in exchange for gaining or maintaining business. The Code of Conduct is supported by the company’s anti-corruption compliance program, which includes, among other things, a detailed handbook, training, and monthly reporting from key business personnel.

Following the launch of the Code of Conduct on April 1, 2007, Nokia Siemens Networks commenced a significant e-learning and communication campaign to ’bring the Code to life’ and reinforce commitment across the organization. By the end of 2007, the Code of Conduct was available in 18 languages and over 17 000 employees had already successfully completed the company’s online Code of Conduct test, showing their understanding of the contents and application of the code.

 

For further information regarding the investigations at Siemens, see “Item 3.D Risk Factors—The Siemens carrier-related operations transferred to Nokia Siemens Networks are the subject of various ongoing criminal and other governmental investigations related to whether certain transactions and payments arranged by some current or former employees of Siemens’ Com business group were unlawful. As a result of those investigations, government authorities and others have taken and may take further actions against Siemens and/or its employees that may involve and affect the assets and employees transferred by Siemens to Nokia Siemens Networks, or there may be undetected additional violations that may have occurred prior to the transfer or violations that may have occurred after the transfer, of such assets and employees that could have a material adverse effect on Nokia Siemens Networks and our reputation, business, results of operations and financial condition.”

 

Sales and Marketing—Nokia Siemens Networks

 

Sales

 

The Customer and Market Operations organization oversees sales and marketing at Nokia Siemens Networks. Customer teams and customer business teams, which handle larger, multinational customers, act as the company’s main customer interfaces to create and capture sales opportunities by developing solutions together with their customers. Sales of infrastructure equipment and software to customers are done either directly or through approved Nokia Siemens Networks reseller companies.

 

Nokia Siemens Networks has organized its customer business teams on a regional basis. For the biggest global customers, dedicated account units beyond this regional structure are in place. Each of Nokia Siemens Networks’ customers is supported by a dedicated account team. In addition, customer executive teams led by Nokia Group Executive Board members focus on both Nokia’s devices business and Nokia Siemens Networks for the largest operator groups.

 

Solution Sales Management and Marketing supports the sales process by managing bids and pricing for products and services, as well as positioning the Nokia Siemens Networks brand through marketing events and communication.

 

Marketing

 

Nokia Siemens Networks has introduced its own brand and during 2007 sought to position the brand with customers, media, and analysts through opening events, brand engagement activities and customer-focused activities around the company’s broad product, services and solution portfolio.

 

Nokia Siemens Networks also began to build a solutions-driven company that seeks a deeper partnership with its customers by focusing on the specific business needs of an operator and the day-to-day running of its networks, rather than on solely providing network equipment to meet technology-specific needs. An example of this solutions-driven approach is the company’s “Fit4Business” tool, an interactive program that allows service providers to analyze their strategic options, market position, growth opportunities and ways to improve profitability together with Nokia Siemens Networks.

 

Production—Nokia Siemens Networks

 

Operations is responsible for the supply chain management of all Nokia Siemens Networks’ hardware, software and original equipment manufacturer, or OEM, products. This includes supply planning, manufacturing, distribution, procurement, logistics, demand/supply network design and delivery capability creation in product programs.

At December 31, 2007, Nokia Siemens Networks had production facilities in nine major plants globally: three in China, two in Finland, three in Germany, and one in India.

 

Nokia Siemens Networks works with best-in-class manufacturing service suppliers to increase its flexibility and optimize costs. Approximately 20% of Nokia Siemens Networks production is outsourced.

 

Certain components and sub-assemblies for Nokia Siemens Networks products, including company-specific integrated circuits and radio frequency components, servers, sub-assemblies such as printed wire-board assemblies, filters, combiners and power units, and cabinets, are sourced and manufactured by third-party suppliers. Nokia Siemens Networks then assembles components and sub-assemblies into final products and solutions. For selected products and solutions, third-party suppliers deliver final goods directly to our customers. Consistent with industry practice, Nokia Siemens Networks manufactures telecommunications systems on a contract-by-contract basis.

 

Nokia Siemens Networks generally prefers to have multiple sources for its components, but it sources some components from a single or a small number of selected suppliers. As is the case with suppliers to Nokia’s device business groups, management believes that these business relationships are stable and typically involve a high degree of cooperation in research and development, product design and manufacturing. This is necessary in order to ensure optimal product interoperability. See “Item 3.D Risk Factors—We depend on a limited number of suppliers for the timely delivery of sufficient amounts of fully functional components and sub-assemblies and for their compliance with our supplier requirements, such as our and our customers’ product quality, safety, security and other standards. Their failure to do so could materially adversely affect our ability to deliver our products, services and solutions successfully and on time.”

 

Technology—Nokia Siemens Networks

 

Research, Technology & Platforms focuses on technology research, standardization teams, intellectual property rights, or IPR, R&D services and platform development. It supports all business units in their efforts to serve fixed, mobile and integrated operators, and other service providers around the globe. Research, Technology & Platforms cooperates with universities, the IT industry, and IPR standardization and other industry cooperation bodies worldwide.

 

Nokia Siemens Networks research and development work focuses on wireless and wireline communication solutions that enable communication services for people and businesses. These include wireless connectivity solutions like GSM, EDGE, WCDMA, TD-SCDMA, HSPA, WiMAX and LTE for operators with or without 3G spectrum and wireline connectivity solutions based on copper (ADSL, VDSL) and fiber (PON, NG-PON) access.

 

In the transport and aggregation domain, Carrier Ethernet, IP Routing, IP traffic analysis and multi-access mobility are among the key focus areas. Within the applications domain, research and development focuses on the service delivery framework (SDF), common service, subscriber and device profile data storage. It also focuses on peer-to-peer, or person-to-person, IP connectivity session control (IMS), network/service/subscriber/device management, online and offline charging for post- and pre-paid subscribers. Nokia Siemens Networks also works to improve technologies like VoIP, IP Centrex, messaging, browsing, downloading and streaming to allow consumer and business users to share and collaborate.

 

Where appropriate, Nokia Siemens Networks seeks to provide support for technologies that it does not produce itself.

 

Patents and Licenses—Nokia Siemens Networks

 

Nokia Siemens Networks seeks to safeguard its investments in technology through adequate intellectual property protection, including patents, design registrations, trade secrets, trademark registrations and copyrights.

 

Nokia Siemens Networks owns a significant portfolio comprising IPRs that have been transferred from its parent companies and IPRs filed since its start of operations on April 1, 2007 resulting from strong investment in research and development. Nokia Siemens Networks is a world leader in the development of wireless technologies such as GSM/EDGE, 3G/WCDMA, HSPA, OFDM, WiMax, LTE and TD-SCDMA, as well as of transport and broadband technologies, and it has robust patent portfolios in a broad range of technology areas. The portfolio includes standards-related essential patents that have been declared by Nokia and Siemens. Nokia Siemens Networks will declare its own essential patents based on evaluation of pending patent applications with respect to standards. Nokia Siemens Networks receives and pays certain patent royalties based on existing licensing contracts with telecommunication vendors.

 

See “Item 3.D Risk Factors — We must develop or otherwise acquire complex, evolving technologies to use in our business. If we fail to develop or otherwise acquire these complex technologies as required by the market, with full rights needed to use in our business, or to protect them, or to successfully commercialize such technologies as new advanced products, services and solutions that meet customer demand, or fail to do so on a timely basis, this may have a material adverse effect on our business and results of operations.” See also “Item 3.D Risk Factors — Our products, services and solutions include increasingly complex technologies some of which have been developed by us or licensed to us by certain third parties. As a consequence, evaluating the rights related to the technologies we use or intend to use is more and more challenging, and we expect increasingly to face claims that we have infringed third parties’ intellectual property rights. The use of these technologies may also result in increased licensing costs for us, restrictions on our ability to use certain technologies in our products, services and solution offerings, and/or costly and time-consuming litigation, which could have a material adverse effect on our business and results of operations” and “Item 3.D Risk Factors — Our products, services and solutions include numerous new Nokia and Nokia Siemens Networks patented, standardized, or proprietary technologies on which we depend. Third parties may use without a license or unlawfully infringe our intellectual property or commence actions seeking to establish the invalidity of the intellectual property rights of these technologies. This may have a material adverse effect on our business and results of operations.”

 

Competition—Nokia Siemens Networks

 

In 2007, the competitive environment changed significantly in the market for mobile and fixed networks infrastructure and related services with the emergence of the merged Alcatel-Lucent and the formation of Nokia Siemens Networks. As a result, together with Ericsson and Huawei, there are now four major global players leading the network infrastructure market that offer a portfolio covering both equipment and services.

 

Our principal competitors in network infrastructure include Alcatel-Lucent, Cisco, Ericsson, Huawei, Motorola, NEC, Nortel and ZTE. In services, competition is from both traditional as well as non-traditional telecommunications players such as Accenture, HP and IBM. HP is active in the service delivery platform market and IBM is active, for example, in the billing and data center businesses. In addition to these companies, there are many other companies such as Fujitsu, Juniper, Samsung and Tellabs, which have a narrower scope in terms of served regions and business areas.

 

Conditions in the market for mobile and fixed networks infrastructure and related services remain challenging. Despite strong volume growth globally in infrastructure equipment in 2007, volume growth was significantly offset by equipment price erosion, a maturing of industry technology and intense price competition. In addition, consolidation among network operators has increased the need for scale, which is continuing on a regional basis. The increasing demand for data communication has heightened the need for a broader business scope, with companies trying to differentiate themselves through innovations such as reduced energy consumption.

 

In the fastest-growing part of our business, services, which include managed services (outsourcing), consulting, systems integration and hosting, vendors are judged upon their ability to identify and

solve customer problems rather than their ability to supply equipment at a competitive price. Competition comes from both established and non-traditional companies, including Ericsson and IBM.

 

In businesses such as radio networks, the 2G (GSM) segment is facing intense price competition in emerging countries, where operators need to make large investments in networks but generally receive low revenues per customer. In mature markets, there has been a slowdown in operator investments. Within the 3G segment, leading vendors are competing based on factors including technology innovation, such as lower energy consumption equipment, and less complex network architectures.

 

The fixed line market continues to be characterized by intense price pressure, both in terms of equipment price erosion due to heavy competition, especially from Asian vendors, and from declining tariffs, which are expected to continue to fall. Decreasing fixed line revenues combined with rising voice and data network traffic are expected to force network operators to invest in new business opportunities and continue their network evolution to converged IP/Ethernet- and wavelength-division multiplexing- based transport architectures. The global trend of subscribers moving to mobile communications from fixed communications is expected to accelerate, especially with the sharp growth in the number of mobile subscribers in markets where it is not economically feasible to build a fixed network.

 

See “Item 3.D Risk Factors—Competition in our industry is intense. Our failure to maintain or improve our market position or respond successfully to changes in the competitive landscape may have a material adverse effect on our business and results of operations.”

 

The following sections describe matters related to both Nokia’s devices business and Nokia Siemens Networks.

 

Seasonality—Devices and Nokia Siemens Networks

 

For information on the seasonality of Nokia’s devices business and Nokia Siemens Networks business, see “Item 5.A Operating Results—Overview—Certain Other Factors—Seasonality.”

 

Sales in sanctioned countries—Devices and Nokia Siemens Networks

 

We are a global company and have sales in most countries of the world. We sold mobile devices and network equipment, through Nokia Siemens Networks, to customers in Iran, Sudan and Syria in 2007. Our aggregate sales to customers in these countries in 2007 accounted for approximately 1.1% of Nokia’s total net sales, or EUR 573 million. Iran, Sudan and Syria are subject to US economic sanctions that are primarily designed to implement US foreign policy and the US government has designated these countries as “state sponsors of terrorism.”

 

Government Regulation—Devices and Nokia Siemens Networks

 

Our business is subject to direct and indirect regulation in each of the countries in which we, the companies with which we work or our customers do business. As a result, changes in various types of regulations applicable to current or new technologies, products or services could affect our business adversely. Moreover, the implementation of technological or legal requirements, such as the requirement in the United States that all handsets must be able to indicate their physical location, could impact our products, services and solutions, manufacturing or distribution processes, and could affect the timing of product, services and solution introductions, the cost of our production, products, services or solutions, as well as their commercial success. Export control, tariffs or other fees or levies imposed on our products; environmental, product safety and security and other regulations that adversely affect the export, import, pricing or costs of our products, services and solutions; as well as new services related to our products, could adversely affect our net sales and results of operations.

 

In the United States, our products and solutions are subject to a wide range of government regulations that might have a direct impact on our business, including, but not limited to, regulation related to product certification, standards, spectrum management, access networks, competition and

environment. For example, it is in our interest that the Federal Communications Commission maintains a regulatory environment that ensures the continued growth of our industry sector in the United States. In addition, changes in regulation affecting the construction of base stations and other network infrastructure could adversely affect the timing and costs of new network construction or expansion and the commercial launch and ultimate commercial success of these networks. We are in continuous dialogue with relevant United States agencies, regulators and the Congress through our experts, industry associations and our office in Washington, D.C.

 

EU regulation has in many areas a direct effect on our business and customers within the single market of the European Union. For example, in the telecommunications sector the EU has adopted a set of rules that harmonizes the EU Member States’ regulatory framework for electronic communication networks and services, and aims to encourage competition in the internal electronic communications markets. Also, other regulatory measures have been taken in recent years in order to address competitiveness, innovation, intellectual property rights, consumer protection and environmental policy issues relating to the sector. These legal requirements influence, for example, the conditions for innovation and investment in fixed and wireless broadband communication infrastructure. We interact continuously with the EU institutions through our experts, industry associations and our office in Brussels.

 

Corporate Responsibility—Devices and Nokia Siemens Networks

 

Customers

 

Accessibility of Nokia devices

 

Accessibility is about making Nokia devices and services usable and accessible to the greatest possible number of people, including customers with disabilities. We have been working on accessibility concerns for more than 10 years, and by the end of 2007 we offered more than 60 device features or applications aimed at providing greater accessibility for people with limitations in hearing, speech, vision, mobility and cognition. During the year, we also held an innovation summit that brought together representatives from disability organizations, regulators and academia to discuss accessibility priorities and initiatives.

 

During 2007, we offered several features for accessibility, including:

 

 

Employees

 

Values renewal at Nokia’s devices business

 

During 2007, we reviewed and refined our Nokia values in order to engage employees and reflect changes to our devices business and the way we work. More than 2 500 employees from around the world took part in 16 regional events to help us develop the key themes for our new values. Involving employees at every stage of the process ensured that the values are relevant to them and helped to embed a strong values culture throughout the business. In addition, approximately 13 000 employees took part in the Nokia Way Jam, a 72-hour online discussion to share ideas about Nokia’s direction, business, culture and values.

The values we agreed upon are an evolution of the previous Nokia values:

 

 

Nokia Siemens Networks values defined

 

In 2007, Nokia Siemens Networks set out to create a fresh culture for the new company that would reflect its business objectives and the values of its people. Approximately 10 000 employees joined in an online discussion to say what they believe matters most to the company. Nokia Siemens Networks then picked some key topics and invited all its employees to join a 72-hour online forum in June 2007 to refine those ideas. Some 250 volunteers then formed working groups to develop Nokia Siemens Networks values, which are:

 

 

Nokia’s devices business Code of Conduct

 

Efforts at expanding the knowledge among employees of Nokia’s Code of Conduct continued in 2007. By the end of the year, approximately 98% of Nokia employees had completed the Nokia Code of Conduct training provided by the company. Information on the Nokia Code of Conduct is available in 19 languages, and we have also introduced a web training tool and online test for employees to confirm they understand the issues covered in the Nokia Code of Conduct.

 

Nokia Siemens Networks’ Code of Conduct

 

In 2007, Nokia Siemens Networks launched its Code of Conduct as part of a broader compliance program which it is implementing. See “Item 4.B Business Overview—Nokia Siemens Networks—Compliance Program.”

 

Labor conditions at Nokia device plants

 

Following assessments in 2006 of labor conditions at our mobile device manufacturing plants, in 2007 we distributed a new, clearer assessment framework covering the International Labor Organization’s conventions and other recognized international labor standards. Our aim is that more straightforward assessments and clearer measurement systems will make it easier for factory managers to implement changes, and will help to improve communication with external stakeholders. We also expect that they will make it easier to follow up after an assessment.

 

Labor conditions at Nokia Siemens Networks infrastructure plants

 

During 2007, Nokia Siemens Networks continued to review the status of labor conditions at infrastructure plants with a view towards creating company-wide guidelines by the end of 2008.

 

Awards and recognition for Nokia’s devices business

 

Our mobile device manufacturing plant in Manaus, Brazil was awarded the Quality of Work Environment Award in 2007 by Sesi Amazones, the Brazilian Social Service of Industry program. Our plant in

Chennai, India, received the Environmental Management System (ISO 14001) and Occupational Health and Safety Assessment series (OHSAS 18001) certification.

 

In June 2007, we became the first company to announce its support of a project aimed at driving environmental and social policy to protect the Amazon rainforest. The project has been developed by Suframa, the federal agency responsible for managing the social and economic development model in the Manaus Free Zone and Western Amazon states.

 

Compensation and benefits—Nokia’s devices business

 

In 2007, we revised the way employee bonuses are structured in order to ensure transparency and consistency across our devices business. We held several focus groups bringing together managers, human resources experts and employee representatives. We also benchmarked our incentive systems against those offered by other companies.

 

Compensation and benefits—Nokia Siemens Networks

 

In 2007, Nokia Siemens Networks began the process of harmonizing the compensation and benefits policies and practices of the two entities that formed the new company. Issues covered include job grading, compensation processes, incentives, benefits and relocation policies.

 

Suppliers

 

Nokia’s devices business

 

In 2007, we rolled out our updated Nokia Supplier Requirements for our mobile device suppliers. This latest version of our requirements includes an increased focus on labor, health and safety, ethics and environmental issues consistent with our own internal guidelines and policies. During the year, we continued to monitor device supplier performance and build capabilities through supplier assessments and development activities.

 

Our device suppliers were subject to 80 Nokia Supplier Requirements assessments and six in-depth labor, health & safety and environmental assessments in 2007, conducted by our internal assessors. We also participated in an industry joint supplier audit pilot as part of Nokia’s participation in the Global e-Sustainability Initiative (GeSI). Assessment and development plans have now been put in place with the assessed device suppliers. We also participated in a multi-stakeholder project in China to drive corporate responsibility improvements in the device supply chain in a sustainable manner.

 

In 2007, we worked on setting energy efficiency and emission targets for certain contract manufacturers and component suppliers in line with Nokia’s own targets. We also started to communicate with our device suppliers regarding the EU regulation on Registration, Evaluation, Authorization and Restriction of Chemical substances (REACH).

 

Nokia Siemens Networks

 

All Nokia Siemens Networks suppliers must meet Nokia Siemens Networks global Supplier Requirements, which set standards for the management of ethical, environmental and social issues. During 2007, five in-depth internal audits were carried out, with recommendations given for improvements in several areas, including employment contracts, overtime, trade unions, health and safety, and young workers on night shifts. All the issues identified were relatively minor and we have confirmed that improvements have been made. From its inception, Nokia Siemens Networks has joined the Global e-Sustainability Initiative (GeSI) which is developing, for example, tools and management processes to help members deal with supply chain issues.

 

Society

 

Nokia’s devices business

 

During 2007, Nokia commissioned The Centre for Knowledge Studies to carry out a study of the effect

of mobile devices on economic and social life in rural areas. The study identified several service areas which could be transformed by mobile technology to improve people’s quality of life, including transport, micro-commerce, healthcare, governance, education and infotainment. Also, Nokia has been developing mobile data-gathering software aimed at enabling organizations such as government departments to replace paper forms, reduce costs and improve efficiency. We have also developed channels to deliver educational materials over mobile networks.

 

Other activities in 2007 included building on the success of Village Phone through the establishment by Nokia and the Grameen Foundation of a new initiative called Village Phone Direct. It is an innovative, micro-franchise approach to Village Phone that allows any microfinance institution or other organization to work independently with their local operator to develop a Village Phone program for their clients. Village Phone Direct initiatives were implemented in Haiti and the Philippines in 2007.

 

In 2007, we continued with our efforts in youth development and by the end of the year had activities underway in approximately 40 countries. These projects address important local issues, such as employability and health, and encourage young people to contribute to their local communities.

 

Nokia employees continued to give their time to community projects they care about through the Nokia Helping Hands employee volunteering program. In 2007, more than 5 900 employees in some 30 countries volunteered more than 32 000 hours of service.

 

Nokia Siemens Networks

 

During 2007, Nokia Siemens Networks defined the strategic direction for its corporate social responsibility activities, including such areas as rural connectivity, disaster relief, and education programs in schools and universities supported by a volunteer program. Nokia Siemens Networks launched the Village Connection solution, which is aimed at providing low-cost connectivity in rural areas and enabling local entrepreneurs to provide community connectivity. In South Africa, Nokia Siemens Networks participated in initiatives relating to Broad-Based Black Economic Empowerment. In France, the company joined the initiative Cercle Passeport Telecom, which supports young teens from disadvantaged socio-economic backgrounds. In Oman, Nokia Siemens Networks provided support for victims of the flood of Cyclone Gonu, and in Greece, together with Nokia, the company supported projects to help students go back to school after the devastating forest fires.

 

Environment

 

In 2007, we continued to look for possibilities to reduce the environmental impact of our devices and operations at each stage of the product life cycle. Focus areas include materials used, energy efficiency, the manufacturing process and recycling. In 2007, we also started to look at mobile services advocating more sustainable lifestyles, by offering environmental content in our devices. For example, in China, the mobile educational service Mobiledu includes environmental elements.

 

Recycling Nokia devices

 

Between 65% and 80% of a Nokia mobile device can be recycled. We participate in collective recycling schemes with other equipment manufacturers; have our own collection points for recycling used mobile devices and accessories in approximately 85 countries; and engage in collection campaigns with retailers, operators, other manufacturers and local authorities around the world. Campaigns aim at increasing consumer awareness of their responsibility for bringing back their used devices for recycling. Additionally, we work with qualified recyclers around the world to ensure proper end-of-life treatment for used devices.

 

One of our most successful recycling initiatives is the Green Box campaign in China, which was initiated in cooperation with China Mobile and Motorola in 2006. Collection volumes from the Green Box campaign had exceeded one million pieces of equipment by the end of 2007.

 

In 2007, Nokia continued to finance the collection and treatment of electronic waste in different EU

countries in accordance with European Union WEEE directive 2002/96/EC (Waste Electrical and Electronic Equipment). The WEEE directive specifies that the costs of collecting and treating electronic waste in the EU are split among manufacturers according to their market share per product category in a given EU country.

 

Energy saving in Nokia’s device business

 

Over the last nine years, we have reduced the average no-load energy used by our chargers by over 50%, and our best-in-class charger needs just one tenth of the power used by our most common chargers. In May 2007, we became the first mobile manufacturer to put alerts into devices encouraging people to unplug their chargers. We have committed to include these alerts across the Nokia product range during 2008.

 

In 2007, we committed to all Nokia chargers being compliant with the US Environmental Protection Agency’s Energy Star requirements by the end of 2008. Our newest chargers, such as that used with the Nokia 3110 Evolve, launched in December 2007, use up to 94% less energy than Energy Star requirements and also meet the highest European Union standards.

 

At the end of 2007, we joined the Climate Savers program with the WWF. As part of the program, we confirmed our targets for reducing the average no-load stand-by energy use of chargers and committed to further energy saving projects in Nokia facilities and to increasing the use of green electricity.

 

Materials in Nokia devices and packaging

 

As of the beginning of 2007, all Nokia mobile devices worldwide are fully compliant with EU RoHS (Restriction of Hazardous Substances). We have also phased out PVC from all Nokia’s mobile devices and enhancements.

 

In December 2007, we introduced the Nokia 3110 Evolve, the first mobile device whose bio-covers use more than 50% renewable materials, reducing the amount of fossil fuels used to manufacture it. The packaging for the Nokia 3110 Evolve contains 60% recycled materials, which doubles the amount of recycled content typically used. The packaging is also smaller in size, which means substantially less cardboard used and energy consumed during transportation.

 

Nokia Siemens Networks

 

Nokia Siemens Networks aims to exceed mandatory requirements for environmental stewardship and to set the pace for our industry, based on lifecycle thinking, by:

 

4.C Nokia Organizational Structure

 

The following is a list of Nokia’s significant subsidiaries as of December 31, 2007. See, also, “Item 4.A—History and Development of the Company—Organizational structure.’’

 

 

 

4.D Property, Plants and Equipment

 

At December 31, 2007, Nokia operated 10 manufacturing facilities in nine countries for the production of mobile devices, and Nokia Siemens Networks had nine major production facilities in four countries. We continually assess the efficiency and competitiveness of our manufacturing facilities. In March 2007, we announced plans to set up a new mobile device manufacturing facility in Romania, where production started in February 2008. In January 2008, we announced plans to discontinue the production of mobile devices in Germany and to close our Bochum facility there by mid-2008. We plan to move the production from the Bochum site to our other, more cost-competitive sites in Europe.

 

We consider the productive capacity of our manufacturing facilities to be sufficient to meet the requirements of our devices and networks infrastructure businesses. The extent of utilization of our manufacturing facilities varies from plant to plant and from time to time during the year. None of these facilities is subject to a material encumbrance. See, also, “Item 4.B Business Overview—Mobile Devices—Production” and “—Nokia Siemens Networks—Production.”

The following is a list of the location, use and capacity of manufacturing facilities for Nokia devices and Nokia Siemens Networks infrastructure equipment.

 

 

 

 

Not applicable.

 

5.A Operating Results

 

This section begins with an overview of the principal factors and trends affecting our results of operations. The overview is followed by a discussion of our critical accounting policies and estimates that we believe are important to understanding the assumptions and judgments reflected in our reported financial results. We then present a detailed analysis of our results of operations for the last three fiscal years.

 

As of April 1, 2007, Nokia results include those of Nokia Siemens Networks on a fully consolidated basis. Nokia Siemens Networks, a company jointly owned by Nokia and Siemens, is comprised of our former Networks business group and Siemens’ carrier-related operations for fixed and mobile networks. Accordingly, the results of the Nokia Group and Nokia Siemens Networks for the year ended December 31, 2007 are not directly comparable to the results for the years ended December 31, 2006 and 2005, respectively. Nokia’s 2006 and 2005 results included our former Networks business group only.

 

The following discussion should be read in conjunction with our consolidated financial statements

included in Item 18 of this annual report and “Item 3.D Risk Factors.” Our financial statements and the financial information discussed below have been prepared in accordance with IFRS.

 

For the purposes of the discussion under “—Principal Factors Affecting our Results of Operations—Mobile Devices” and “Item 5.C Research and Development, Patents and Licenses”, our mobile device net sales and costs include the total net sales and costs of the Mobile Phones and Multimedia business groups, as well as the Mobile Devices business unit of the Enterprise Solutions business group.

 

Through December 31, 2007, Nokia reported on the following three device business segments: Mobile Phones, Multimedia and Enterprise Solutions. As of January 1, 2008, the three device business segments were replaced by an integrated business segment: Devices & Services. Through March 31, 2007, we also reported on a networks business segment, which was replaced from April 1, 2007 by Nokia Siemens Networks. For a description of our organizational structure see “Item 4.A—History and Development of the Company—Organizational Structure.” Business segment data in the following discussion is prior to inter-segment eliminations. See Note 2 to our consolidated financial statements included in Item 18 of this annual report.

 

Overview

 

The following table sets forth the net sales and operating profit for our business groups for the three years ended December 31, 2007.

 

Net Sales and Operating Profit by Business Group*

 

 

 

 

For 2007, our net sales increased 24% to EUR 51 058 million, compared to EUR 41 121 million in 2006. Our net sales in 2006 increased 20% compared with EUR 34 191 million in 2005. At constant currency, net sales would have grown 28% between 2006 and 2007 and 17% between 2005 and 2006. Our gross margin in 2007 was 33.9%, compared with 32.5% in 2006 and 35.0% in 2005. Our operating profit for 2007 increased 46% to EUR 7 985 million, which included a EUR 1 879 million non-taxable gain on the formation of Nokia Siemens Networks and EUR 1 110 million of restructuring charges and other items in Nokia Siemens Networks. Operating profit in 2006 was EUR 5 488 million. Our operating profit in 2006 increased by 18% from EUR 4 639 million in 2005. Our operating margin was 15.6% in 2007, compared with 13.3% in 2006 and 13.6% in 2005.

The following table sets forth the distribution by geographical area of our net sales for the three years ended December 31, 2007.

 

Percentage of Nokia Net Sales by Geographical Area*

 

 

 

 

The 10 markets in which we generated the greatest net sales in 2007 were, in descending order of magnitude, China, India, Germany, the UK, the US, Russia, Spain, Italy, Indonesia and Brazil, together representing approximately 50% of our total net sales in 2007. In comparison, the 10 markets in which we generated the greatest net sales in 2006 were China, the US, India, the UK, Germany, Russia, Italy, Spain, Indonesia and Brazil, together representing approximately 51% of our total net sales in 2006.

 

Principal Factors Affecting our Results of Operations

 

Mobile Devices

 

Our mobile device sales are derived from the sale of mobile devices by our Mobile Phones and Multimedia business groups and by the Mobile Devices business unit of our Enterprise Solutions business group. Our principal customers are mobile network operators, distributors, independent retailers, corporate customers and consumers. Our product portfolio covers all major user segments and price points from entry-level to mid-range and high-end devices offering voice, data, multimedia and business applications.

The following table sets forth our estimates for the global mobile device market volumes and year-on-year growth rate by geographic area for the three years ended December 31, 2007.

 

Global Mobile Device Market Volume by Geographic Area
(Based on Nokia Estimates)

 

 

According to our estimates, in 2007 the global device market volume grew by 16% to 1 137 million units, compared with an estimated 978 million units in 2006. This growth was driven primarily by the strong growth in both replacement sales and sales from new subscribers in emerging markets, particularly China, Middle East & Africa and emerging countries in Asia-Pacific. Developed market device volumes were driven primarily by replacement sales. In those markets, replacement was driven primarily by device features such as color screens, cameras, music players, e-mail, WCDMA and overall aesthetics. We estimate that emerging markets accounted for almost 60% of industry device volumes in 2007, compared with approximately 55% in 2006. The entry-level device market has been an important growth driver for the industry over the last few years, specifically the portion of that market for devices priced at under 50 euros. This was particularly the case in 2007 where we estimate this part of the market represented over 35% of the total industry volumes. We estimate the converged device (smartphones) market was approximately 122 million units globally in 2007, growing strongly from approximately 80 million units in 2006.

 

At the end of 2007, we estimate that there were approximately 3.3 billion mobile subscriptions globally, representing approximately 43% global penetration. This is compared to approximately 2.7 billion mobile subscribers in 2006 and approximately 40% penetration.

 

The following table sets forth our mobile device volumes and year-on-year growth rate by geographic area for the three years ended December 31, 2007.

 

Nokia Mobile Device Volume by Geographic Area

 

 

In our Mobile Phones, Multimedia and Enterprise Solutions business groups, mobile device volumes

were up 26% in 2007 compared with 2006, reaching 437 million units. Based on our market estimate, our volume market share grew to 38% in 2007, compared with 36% in 2006. In 2007, we estimate that Nokia was the market leader in Europe, Asia-Pacific and Latin America. We further estimate that we were also the market leader in the fastest growing markets of the world, including China, Middle East & Africa, South East Asia-Pacific and India, as well as in WCDMA technology. In one of the fastest growing segments of the market, converged devices (smartphones), our estimated market share was approximately 50% in 2007. We continued to be the market share leader in the fast growing entry-level market, specifically the portion of that market for devices priced at under 50 euros. In 2007, we estimate this part of the market represented over 35% of the total industry volumes and Nokia’s market share in this entry-level segment was over 50%.

 

We believe that successfully competing in the mobile device industry is increasingly challenging, as industry participants need to master many elements in order to win. The increasing industry complexity and challenges of mastering the essential elements efficiently are driving a continuing trend of consolidation, both in terms of share of industry volumes and profit. As a demonstration of this consolidation, we estimate the market share of the top five competitors increased to 82% by the end of 2007 from less than 70% in 2000. We also estimate that the share of operating profit of the top five competitors in 2007 grew to 69% from 51% in 2006.

 

During 2007, we gained device market share in all regions except North America and Latin America, where our market share declined. In Middle East & Africa, we had excellent market share gains in 2007. We continued to benefit in Middle East & Africa from our brand, broad product portfolio and extensive distribution system.

 

Our significant market share gains in Asia-Pacific were primarily driven by our strong position in the fastest growing markets, such as India. In Asia-Pacific, we continued to benefit from our brand, broad product portfolio and extensive distribution system.

 

In Europe, our market share was up significantly in 2007, increasing in most European markets, including France, Germany, Italy, Russia, Spain and the United Kingdom. In Europe, we benefited from a strengthened and broad product portfolio.

 

In China, we gained market share in 2007 driven by our firmly established and extensive distribution system, broad product portfolio, brand and strong market share in the entry level.

 

In Latin America, our 2007 market share was down slightly. Strong share gains in markets such as Brazil were more than offset by a lower market share in Mexico. Our strengths in Latin America continued to be our strong entry-level product portfolio and improving mid-range offering.

 

In North America, our market share declined in 2007. The lower market share in North America in 2007 was primarily driven by our much lower CDMA device volumes compared to 2006, as we effectively ramped down our existing CDMA business during 2007.

 

Our device ASP in 2007 was EUR 86, declining 10% from EUR 96 in 2006. According to our estimates, industry ASPs also declined in 2007. Our lower ASP in 2007 compared with 2006 was primarily the result of a significantly higher proportion of entry level device sales where the industry growth has been strong and where we have a leading share, and to a lesser extent by the negative effect of the weaker US dollar on our net sales.

 

Ongoing factors affecting our performance in mobile devices

 

Our performance in the mobile device business is determined by our ability to satisfy the competitive and complex requirements of the market and our current and potential customers. We will need to continue to leverage and, in some cases, improve our competitive advantages of scale, brand, manufacturing and logistics, technology, broad product portfolio, cost structure, quality and intellectual property rights, or IPR. Our huge scale contributes to our low cost structure. As the devices business is a consumer business, brand is a major differentiating factor, having broad effects

on market share and pricing. The Business Week and Interbrand annual rating of 2007 Best Global Brands positioned Nokia as the fifth most-valued brand in the world.

 

At the end of 2007, we made over 1.5 million devices per day in our 10 main device manufacturing facilities globally. We also enjoy a world-class logistics and distribution system and in 2007, we were ranked the number one company in the world in supply chain management by AMR Research. In terms of technology, we believe we need to develop, master, integrate and own relevant technology. This allows us to drive down manufacturing costs and also benefit from technology evolutions and discontinuities in terms of margin and market share.

 

In August 2007, we announced that we were introducing a multisourcing model for our chipsets. Under the revised strategy, we are discontinuing parts of our own chipset R&D and have expanded our use of commercially available chipsets to four suppliers. We are, however, continuing to develop our leading modem technology, which includes protocol software and related digital design for multi-protocol modems. The revised strategy is aimed at increasing the efficiency of our R&D efforts by allowing us to leverage external innovation through working with the best partners in a specific chipset development area, and by freeing our own R&D resources to focus on our core competencies in modem development and other areas central to our growth strategy, mainly consumer Internet services and enterprise software.

 

Our broad product portfolio allows us to serve all the relevant segments of the market. Quality is extremely important to consumers and to Nokia. Having high quality products is important because it is one of the key determinants for consumer purchasing behavior and also a critical element in managing costs effectively. Finally, of critical importance, competitiveness in our industry requires significant R&D investments, with IPRs filed to protect those investments and related inventions.

 

Our device net sales are driven by factors such as the global mobile device market volumes, the value of the mobile device market, our market share development and our ASP.

 

The global mobile device market volume is driven by the number of new subscribers (net adds) and the degree to which existing mobile subscribers replace their mobile devices with new devices. New subscriber growth, particularly in emerging markets, is impacted primarily by lower cost of ownership, driven by lower priced tariffs and lower cost mobile devices. The replacement market is driven by the introduction of devices that are attractive to end-users in terms of design, features, functionality and aesthetics. We estimate that the replacement market will continue to represent over 70% of the device industry volumes in 2008, compared with just under 70% in 2007. In 2008, we expect the most important drivers of the replacement market will continue to be purchases of devices with color screens, cameras, music players, converged multimedia applications, WCDMA and other general aesthetic features. We also expect that e-mail and navigation capability will be increasingly significant drivers of the replacement market in 2008. Replacement volumes in the emerging markets are having an increasingly significant impact on the global market. We estimate in emerging markets, replacements accounted for over 50% of total mobile device volumes in 2007, and we expect it to be over 60% in 2008. We are also seeing anecdotal evidence that some consumers in the emerging markets are upgrading to higher-priced devices when they replace their devices.

 

Industry volume growth is also influenced by, among other factors, global and regional economic factors, regional political environment, consumer spending patterns, competitive pressures, regulatory environments, the timing and success of product and service introductions by various market participants, including mobile network operators, the commercial acceptance of new mobile devices, technologies and services, the convergence of technologies in mobile devices and operators’ and distributors’ financial situations. Industry volumes are also affected by the level of mobile device subsidies that mobile network operators are willing to offer to end-users in the markets where subsidies are prevalent.

 

We expect industry mobile device volumes in 2008 to grow by approximately 10% from the approximately 1.14 billion units we estimate for 2007. We expect the volume growth in 2008 to be above 15% in Asia-Pacific, China and Middle East & Africa, and below 10% in Europe, Latin America

and North America. We forecast that the four billion mobile subscriptions mark will be reached in 2009. We expect the device industry to experience value growth in 2008, but expect some decline in industry ASPs, primarily reflecting the increasing impact of the emerging markets and competitive factors in general.

 

Our device net sales growth is impacted by our market share development. Market share is driven by our ability to have a competitive product portfolio with attractive aesthetics, design and combination of value-adding functionalities and services for all major consumer segments and price points. Market share is also impacted by our brand, quality, distribution, ability to deliver, competitive cost structure and how we differentiate our products from those of our competitors. Our market share is also impacted by the growth of our accessible market and mix of the global markets. In 2007, for example, our global device market share benefited from our strong share in the fastest growing segments of the global market, such as India, Middle & East Africa, South East Asia Pacific, the entry-level market, WCDMA/GSM technologies and the converged device market.

 

We are targeting device volume market share gains in 2008. We believe that our global share should again benefit in 2008, as it did in 2007, from our strong, leading position in the fastest growing markets globally, discussed above. We also see growth opportunities in capturing value from new market segments in the mobile communications industry resulting from the continuing convergence of traditional mobile voice communications, the Internet, information technology, media, entertainment, music and consumer electronics industries into one broad industry.

 

In our devices business, we have made significant investments during the past several years in certain of these market segments, such as smartphones, multimedia computers, enterprise applications, navigation, music, video, TV, imaging, games and solutions and software for business mobility. With the increasing availability of high-speed wireless internet access and progressively more of our devices featuring advanced multimedia-type capabilities, we see new business opportunities to increase our offering of consumer Internet services and to deliver these services in an easily accessible manner through our devices to a market that we estimate will be worth approximately EUR 100 billion in 2010. We expect to make further investments in this market segment. We also expect to continue our investments in enterprise solutions and software. Our strategy in competing in this market is for our consumer Internet services to support our device ASPs, extend and enhance the Nokia brand, generate incremental net sales and profit streams, and create value and choice for consumers. Our overall longer-term goal is to become the global leader in “Internet on mobile”.

 

Over the past few years we have increased our research and development efforts in Internet services and software. This area continued to be primarily in an investment phase in 2007, and we anticipate this will continue for 2008 and 2009. Some incremental net sales were generated and were reported in 2007 as part of our devices business.

 

Device ASPs are impacted by overall industry dynamics, in particular the growth of the emerging markets as previously discussed, and competitive factors in general. Our ASPs are also impacted by our own product mix, for example the proportion of low-end, mid-range and high-end devices, as well as the overall competitiveness of our product portfolio.

 

There are several factors that drive our profitability in devices, beyond the drivers of device net sales already discussed. Scale, operational efficiency and cost control have been and are expected to continue to be important factors affecting our profitability and competitiveness. Our mobile device product costs are comprised of the cost of components, manufacturing labor and overhead, royalties and license fees, the depreciation of product machinery, logistics costs, cost of excess and obsolete inventory, as well as warranty and other quality costs.

 

Efficiency of operating expense is also an important driver of our device profitability. In 2007, our research and development expenses related to mobile devices were EUR 2.6 billion compared with EUR 2.4 billion in 2006. For 2007 and 2006, research and development expenses represented approximately 7% of mobile device net sales. In 2007, our sales and marketing costs related to

mobile devices were EUR 2.9 billion compared with EUR 2.7 billion in 2006. For 2007 and 2006, sales and marketing costs represented approximately 8% of mobile device net sales. In an effort to continue to improve our efficiency, we are targeting an improvement in the ratio of Nokia Group gross margin to R&D expenses and an improvement in the ratio of Nokia Group gross margin to sales and marketing expenses in 2008, compared to 2007.

 

Infrastructure—Nokia Siemens Networks

 

Nokia Networks business was one of our business groups in the first quarter of 2007. On April 1, 2007, our Networks business group was combined with Siemens carrier-related operations for fixed and mobile networks to form Nokia Siemens Networks, a company jointly owned by Nokia and Siemens and consolidated by Nokia. Accordingly, the results of Nokia Group and Nokia Siemens Networks for periods from April 1, 2007 are not directly comparable to any prior period results. The prior periods included our former Networks business group only.

 

Nokia Siemens Networks provides wireless and fixed network infrastructure, communications and networks service platforms, as well as professional services, to operators and service providers. At the end of 2007, Nokia Siemens Networks had approximately 58 500 employees, 1 400 customers in 150 countries, and systems serving in excess of one billion subscribers.

 

The following table sets forth the global mobile and fixed infrastructure and related services market by geographic area, based on Nokia and Nokia Siemens Networks estimates, for the three years ended December 31, 2007.

 

Global Mobile and Fixed Infrastructure and Related Services Market Size by Geographic Area
(Based on Nokia Estimate)

 

 

In 2007, according to our estimates, the size of the mobile infrastructure market increased 1% from 2006, while in 2006 it increased by approximately 6% from 2005 in euro terms. Subscriber growth combined with increased voice usage in some markets were the main drivers for the 2007 market growth. Growth in developed markets was driven by 2G capacity increases, and investments in 3G also contributed positively to market growth in Western Europe, Asia-Pacific and the US. Growth in emerging markets was impacted by rapid subscriber growth, resulting in capacity increases and new network build-outs. Globally strong volume growth in networks infrastructure equipment was significantly offset by equipment price erosion, largely as a result of a maturing of industry technology, and intense price competition. The fixed line market continued to be characterized by intense price competition in 2007, both in terms of equipment price erosion due to heavy competition, especially from Asian vendors, and from declining tariffs, which are expected to continue to fall.

The following table sets forth Nokia Siemens Networks net sales by geographic area for the three years ended December 31, 2007.

 

Nokia Siemens Networks Net Sales by Geographic Area*

 

 

 

 

Ongoing factors affecting Nokia Siemens Networks performance in infrastructure

 

Nokia Siemens Networks performance in the infrastructure business is determined by its ability to satisfy the competitive and complex requirements of the market and its current and potential customers. Nokia Siemens Networks will need to continue to leverage and, in some cases, improve its scale, technology and product portfolio to maintain or improve its position in the market. Nokia Siemens Networks will also need to achieve the estimated EUR 2 billion in annual cost synergies it is targeting in order to maintain a competitive cost structure, substantially all of which are targeted to be achieved by the end of 2008.

 

Nokia Siemens Networks net sales depend on various developments in the mobile and fixed infrastructure market, such as network operator investments, the pricing environment, Nokia Siemens Networks market share and product mix. In developed markets, operator investments are primarily driven by capacity upgrades—which are driven by greater usage of the networks—both for voice calls and increasingly for data usage. Also, in developed markets, operator investments are driven by 3G/WCDMA deployments. The initial deployments of 3G/WCDMA have been largely completed and additional deployments in 2008 will occur where there is a need for greater capacity. In emerging markets, the principal factors influencing operator investments are the growth in mobile usage and the growth in the number of subscribers.

 

Nokia expects very slight growth in the mobile and fixed infrastructure and related services market in euro terms in 2008. The market is expected to be driven by continuing subscriber growth, growing minutes of use and the growth of the services market. Nokia and Nokia Siemens Networks are targeting that Nokia Siemens Networks will grow faster than the market in 2008.

 

Nokia Siemens Networks net sales are also impacted by pricing developments. Like our mobile devices business, the products and solutions offered by Nokia Siemens Networks business are subject to price erosion over time, largely as a result of technology maturation and competitive forces in the market. Nokia Siemens Networks net sales are also affected by the product mix—the mix of hardware

sales, software sales and services sales. Net sales are also impacted by regional mix—the mix of developed and emerging markets sales.

 

There are several factors that drive the profitability at Nokia Siemens Networks. First, are the drivers of net sales as already discussed. Scale, operational efficiency and cost control have been and will continue to be important factors affecting Nokia Siemens Networks profitability and competitiveness. Nokia Siemens Networks product costs are comprised of the cost of components, manufacturing, labor and overhead, royalties and license fees, the depreciation of product machinery, logistics costs as well as warranty and other quality costs. Nokia Siemens Networks profitability is also impacted by the pricing environment, product mix and regional mix. The pricing environment in the markets where Nokia Siemens Networks competes continued to be intense in 2007, and we expect that these general market conditions will continue in 2008.

 

Nokia Siemens Networks profitability in 2007 was negatively impacted by several factors. Delays in the formation of Nokia Siemens Networks, caused primarily by the ongoing criminal and other investigations at Siemens, caused disruption internally but also likely with customers. Certain customers, which were customers of both our former Networks business group and Siemens’ carrier-related operations for fixed and mobile networks and due to the formation of Nokia Siemens Networks then had Nokia Siemens Networks as their sole supplier, have sought to diversify their supplier risk which also negatively impacted Nokia Siemens Networks’ profitability in 2007. Nokia Siemens Networks also terminated relationships, originated in the Siemens carrier-related operations, with certain business consultants and other third party intermediaries in some countries as their business terms and practices were contrary to Nokia Siemens Networks’ Code of Conduct. These factors may have caused a certain amount of lost sales and business opportunities generally. Nokia Siemens Networks’ margins were also negatively impacted by the continued aggressive price competition in the market and a higher proportion of net sales from the emerging markets and services sales, both of which have lower margins.

 

We believe the current and continuing dynamics in the infrastructure market provide further validation for the creation of Nokia Siemens Networks. The formation of Nokia Siemens Networks is designed to provide the new company with needed scale and a more competitive convergence portfolio. The scale advantages, together with the significant ongoing restructuring program, are expected to deliver margin benefits leading to improved profitability.

 

Efficiency of operating expense is also an important driver for Nokia Siemens Networks profitability. For 2007, the research and development expenses related to Nokia Siemens Networks were EUR 2.7 billion and represented approximately 21% of Nokia Siemens Networks net sales. In 2007, the sales and marketing costs related to Nokia Siemens Networks were EUR 1.4 billion and represented approximately 10% of Nokia Siemens Networks net sales. In 2007, R&D and sales and marketing expenses for Nokia Siemens Networks included a total of EUR 588 million of costs associated with restructuring. Nokia’s first quarter 2007 results included our former Networks business group only.

 

Subsequent Events

 

Transfer of statutory pension liability in Finland to Ilmarinen and Varma

 

On December 20, 2007, we announced our decision to transfer the Finnish statutory pension liability of Nokia and Nokia Siemens Networks to the pension insurance companies Ilmarinen and Varma, respectively, as of March 1, 2008. The transfer did not affect the number of employees covered by the plan nor will it affect the current employees’ entitlement to pension benefits. At the transfer date, we have retained no direct or indirect obligation to pay employee benefits relating to employee service in current, prior or future periods. We are currently evaluating the accounting impact of the transfer including the recognition of unrecognized actuarial gains and losses.

 

Closure of Bochum site in Germany

 

On January 15, 2008, we announced plans to discontinue the production of mobile devices in

Germany and close our Bochum site by mid-2008. We plan to move the production to our other, more cost-competitive sites in Europe. We also intend to discontinue other non-production activities at the Bochum site. We also announced plans to sell our Bochum-based line fit automotive business, and we are in negotiations to sell the adaptation software R&D entity also located in Bochum. The planned closure of the site in Bochum is estimated to affect approximately 2 300 Nokia employees. We are currently evaluating the accounting impact of the closure of the Bochum site and expect to recognize restructuring and other charges in 2008.

 

Acquisition of NAVTEQ

 

On October 1, 2007, Nokia and NAVTEQ announced a definitive agreement for Nokia to acquire NAVTEQ, a leading provider of comprehensive digital map information for automotive navigation systems, mobile navigation devices, Internet-based mapping applications, and government and business solutions. The NAVTEQ acquisition is still pending and subject to customary closing conditions, including regulatory approvals. For the year ended December 31, 2007, NAVTEQ reported revenues of USD 853 million (EUR 591 million), net profit of USD 173 million (EUR 120 million), total assets of USD 1 322 million (EUR 916 million) and shareholders’ equity of USD 1 007 million (EUR 697 million).

 

Acquisition of Apertio

 

On January 2, 2008, Nokia Siemens Networks announced the acquisition of the UK-based Subscriber-centric network specialist Apertio Ltd (“Apertio”) for approximately EUR 140 million. Apertio is a leading provider of open real-time subscriber data platforms and applications built specifically for mobile, fixed and converged telecommunications operators. The acquisition closed on February 11, 2008.

 

Acquisition of Trolltech

 

On January 28, 2008, Nokia and Norway-based software provider Trolltech ASA (“Trolltech”) announced that they have entered into an agreement that Nokia will make a public voluntary offer to acquire Trolltech which offer has thereafter commenced. Trolltech is a recognized software provider with world-class software development platforms and frameworks. Completion of the acquisition is subject to customary closing conditions, including acceptance by shareholders of Trolltech representing more than 90% of the fully diluted share capital and the necessary regulatory approvals.

 

For year ended December 31, 2007, Trolltech reported unaudited revenues 218 million Norwegian kroner (EUR 27 million) net loss of 38 million Norwegian kroner (EUR 5 million), total assets of 210 million Norwegian kroner (EUR 26 million) and shareholders’ equity of 120 million Norwegian kroner (EUR 15 million).

 

See Note 33 to our consolidated financial statements included in Item 18 of this annual report for further information relating to these subsequent events.

 

Certain Other Factors

 

United States Dollar

 

In 2007, the US dollar depreciated against the euro by 10.0% (when measured by the year-end rate compared to the year-end rate for the previous year). When measured by the average rate used to record transactions in foreign currency for accounting purposes for the year compared with the corresponding rate for the previous year, the US dollar depreciated against the euro by 9.1% in 2007. The weaker US dollar on average had a negative impact on our net sales expressed in euros because approximately 50% of our net sales are generated in US dollars and currencies closely following the US dollar. However, the depreciation of the US dollar also contributed to a lower average product cost as approximately 50% of the components we use are sourced in US dollars. To mitigate the impact of changes in exchange rates on net sales as well as average product cost, we hedge all material

transaction exposures on a gross basis. All in all, the average depreciation of the US dollar had a negative impact on our operating profit in 2007. For more information, see “—Results of Operations—Exchange Rates” below.

 

Seasonality

 

Our device sales are somewhat affected by seasonality. Historically, the first quarter of the year was the lowest quarter of the year. The second quarter was up from the first quarter and the third was also up from the second quarter. The fourth quarter was the strongest quarter, mainly due to the effect of fourth quarter holiday sales.

 

However, over time we have seen a trend towards less seasonality. We still continue to see the fourth quarter as our strongest quarter in volumes. However, the difference between the sequential holiday seasonal increase in the Western hemisphere in fourth quarter and subsequent decrease in first quarter sequential volumes has moderated. The moderation in seasonality has been caused by shifts in the regional make up of the overall market. Specifically, there has been a larger mix of industry volumes coming from markets where the fourth quarter holiday seasonality is much less prevalent.

 

Our infrastructure business has also experienced some seasonality during the last few years. Sales have been higher in the last quarter of the year compared with the first quarter of the following year due to operators’ planning, budgeting and spending cycle.

 

Accounting developments

 

The International Accounting Standards Board, or IASB, has and will continue to critically examine current International Financial Reporting Standards, or IFRS, with a view toward increasing international harmonization of accounting rules. This process of amendment and convergence of worldwide accounting rules continued in 2007 resulting in amendments to the existing rules effective from January 1, 2008 and additional amendments effective the following year. These are discussed in more detail under “New accounting pronouncements under IFRS” in Note 1 to our consolidated financial statements included in Item 18 of this annual report. There were no material IFRS accounting developments adopted in 2007 that have a material impact on our results of operations or financial position.

 

Critical Accounting Policies

 

Our accounting policies affecting our financial condition and results of operations are more fully described in Note 1 to our consolidated financial statements included in Item 18 of this annual report. Certain of our accounting policies require the application of judgment by management in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the reported carrying values of assets and liabilities and the reported amounts of revenues and expenses that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following are the critical accounting policies and related judgments and estimates used in the preparation of our consolidated financial statements. We have discussed the application of these critical accounting estimates with our Board of Directors and Audit Committee.

 

Revenue recognition

 

Sales from the majority of the Group are recognized when the significant risks and rewards of ownership have transferred to the buyer, continuing managerial involvement usually associated with ownership and effective control have ceased, the amount of revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the Group and the costs

incurred or to be incurred in respect of the transaction can be measured reliably. The remainder of revenue is recorded under the percentage of completion method.

 

Mobile Phones, Multimedia and certain Enterprise Solutions and Nokia Siemens Networks revenue is generally recognized when the significant risks and rewards of ownership have transferred to the buyer, continuing managerial involvement usually associated with ownership and effective control have ceased, the amount of revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably. This requires us to assess at the point of delivery whether these criteria have been met. When management determines that such criteria have been met, revenue is recognized. We record estimated reductions to revenue for special pricing agreements, price protection and other volume based discounts at the time of sale, mainly in the mobile device business. Sales adjustments for volume based discount programs are estimated based largely on historical activity under similar programs. Price protection adjustments are based on estimates of future price reductions and certain agreed customer inventories at the date of the price adjustment. An immaterial part of the revenue from products sold through distribution channels is recognized when the reseller or distributor sells the product to the end-user. Mobile Phones, Multimedia and certain Enterprise Solutions and Nokia Siemens Networks service revenue is generally recognized on a straight line basis over the service period unless there is evidence that some other method better represents the stage of completion.

 

Multimedia, Enterprise Solutions and Nokia Siemens Networks may enter into multiple component transactions consisting of any combination of hardware, services and software. The commercial effect of each separately identifiable element of the transaction is evaluated in order to reflect the substance of the transaction. The consideration from these transactions is allocated to each separately identifiable component based on the relative fair value of each component. The consideration allocated to each component is recognized as revenue when the revenue recognition criteria for that element have been met. If the Group is unable to reliably determine the fair value attributable to the separately identifiable components, the Group defers revenue until all components are delivered and services have been performed. The Group determines the fair value of each component by taking into consideration factors such as the price when the component is sold separately by the Group, the price when a similar component is sold separately by the Group or a third party and cost plus a reasonable margin.

 

Nokia Siemens Networks revenue and cost of sales from contracts involving solutions achieved through modification of complex telecommunications equipment is recognized on the percentage of completion basis when the outcome of the contract can be estimated reliably. This occurs when total contract revenue and the cost to complete the contract can be estimated reliably, it is probable that economic benefits associated with the contract will flow to the Group, and the stage of contract completion can be measured. When we are not able to meet those conditions, the policy is to recognize revenues only equal to costs incurred to date, to the extent that such costs are expected to be recovered. Completion is measured by reference to costs incurred to date as a percentage of estimated total project costs using the cost-to-cost method.

 

The percentage of completion method relies on estimates of total expected contract revenue and costs, as well as the dependable measurement of the progress made towards completing the particular project. Recognized revenues and profit are subject to revisions during the project in the event that the assumptions regarding the overall project outcome are revised. The cumulative impact of a revision in estimates is recorded in the period such revisions become likely and estimable. Losses on projects in progress are recognized in the period they become likely and estimable.

 

Nokia Siemens Networks’ current sales and profit estimates for projects may change due to the early stage of a long-term project, new technology, changes in the project scope, changes in costs, changes in timing, changes in customers’ plans, realization of penalties, and other corresponding factors.

Customer financing

 

We have provided a limited amount of customer financing and agreed extended payment terms with selected customers. In establishing credit arrangements, management must assess the creditworthiness of the customer and the timing of cash flows expected to be received under the arrangement. However, should the actual financial position of our customers or general economic conditions differ from our assumptions, we may be required to re-assess the ultimate collectibility of such financings and trade credits, which could result in a write-off of these balances in future periods and thus negatively impact our profits in future periods. Our assessment of the net recoverable value considers the collateral and security arrangements of the receivable as well as the likelihood and timing of estimated collections. See also Note 35(b) to our consolidated financial statements for a further discussion of long-term loans to customers and other parties.

 

Allowances for doubtful accounts

 

We maintain allowances for doubtful accounts for estimated losses resulting from the subsequent inability of our customers to make required payments. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required in future periods. Management specifically analyzes accounts receivables and historical bad debt, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

 

Inventory-related allowances

 

We periodically review our inventory for excess, obsolescence and declines in market value below cost and record an allowance against the inventory balance for any such declines. These reviews require management to estimate future demand for our products. Possible changes in these estimates could result in revisions to the valuation of inventory in future periods.

 

Warranty provisions

 

We provide for the estimated cost of product warranties at the time revenue is recognized. Our products are covered by product warranty plans of varying periods, depending on local practices and regulations. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligations are affected by actual product failure rates (field failure rates) and by material usage and service delivery costs incurred in correcting a product failure. Our warranty provision is established based upon our best estimates of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. As we continuously introduce new products which incorporate complex technology, and as local laws, regulations and practices may change, it will be increasingly difficult to anticipate our failure rates, the length of warranty periods and repair costs. While we believe that our warranty provisions are adequate and that the judgments applied are appropriate, the ultimate cost of product warranty could differ materially from our estimates. When the actual cost of quality of our products is lower than we originally anticipated, we release an appropriate proportion of the provision, and if the cost of quality is higher than anticipated, we increase the provision.

 

Provision for intellectual property rights, or IPR, infringements

 

We provide for the estimated future settlements related to asserted and unasserted past IPR infringements based on the probable outcome of each potential infringement.

 

Our products and solutions include increasingly complex technologies involving numerous patented and other proprietary technologies. Although we proactively try to ensure that we are aware of any patents and other intellectual property rights related to our products and solutions under development and thereby avoid inadvertent infringement of proprietary technologies, the nature of our business is such that patent and other intellectual property right infringements may and do occur.

Through contact with parties claiming infringement of their patented or otherwise exclusive technology, or through our own monitoring of developments in patent and other intellectual property right cases involving our competitors, we identify potential IPR infringements.

 

We estimate the outcome of all potential IPR infringements made known to us through assertion by third parties, or through our own monitoring of patent- and other IPR-related cases in the relevant legal systems. To the extent that we determine that an identified potential infringement will result in a probable outflow of resources, we record a liability based on our best estimate of the expenditure required to settle infringement proceedings.

 

Our experience with claims of IPR infringement is that there is typically a discussion period with the accusing party, which can last from several months to years. In cases where a settlement is not reached, the discovery and ensuing legal process typically lasts a minimum of one year. For this reason, IPR infringement claims can last for varying periods of time, resulting in irregular movements in the IPR infringement provision. In addition, the ultimate outcome or actual cost of settling an individual infringement may materially vary from our estimates.

 

Legal contingencies

 

As discussed in “Item 8.A.7 Litigation” and in Note 29 to the consolidated financial statements, legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against the Group. We record provisions for pending litigation when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates.

 

Capitalized development costs

 

We capitalize certain development costs when it is probable that a development project will be a success and certain criteria, including commercial and technical feasibility, have been met. These costs are then amortized on a systematic basis over their expected useful lives, which due to the constant development of new technologies is between two to five years. During the development stage, management must estimate the commercial and technical feasibility of these projects as well as their expected useful lives. Should a product fail to substantiate its estimated feasibility or life cycle, we may be required to write off excess development costs in future periods.

 

Whenever there is an indicator that development costs capitalized for a specific project may be impaired, the recoverable amount of the asset is estimated. An asset is impaired when the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is defined as the higher of an asset’s net selling price and value in use. Value in use is the present value of discounted estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. For projects still in development, these estimates include the future cash outflows that are expected to occur before the asset is ready for use. See Note 8 to our consolidated financial statements.

 

Impairment reviews are based upon our projections of anticipated discounted future cash flows. The most significant variables in determining cash flows are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. While we believe that our assumptions are appropriate, such amounts estimated could differ materially from what will actually occur in the future.

 

Business combinations

 

We apply the purchase method of accounting to account for acquisitions of businesses. The cost of an

acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities assumed or incurred, equity instruments issued and costs directly attributable to the acquisition. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date. The excess of the cost of the acquisition over our interest in the fair value of the identifiable net assets acquired is recorded as goodwill.

 

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

 

Valuation of long-lived and intangible assets and goodwill

 

We assess the carrying value of identifiable intangible assets, long-lived assets and goodwill annually, or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review, include the following:

 

 

When we determine that the carrying value of intangible assets, long-lived assets or goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on discounted projected cash flows.

 

This review is based upon our projections of anticipated discounted future cash flows. The most significant variables in determining cash flows are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. While we believe that our assumptions are appropriate, such amounts estimated could differ materially from what will actually occur in the future. In assessing goodwill, these discounted cash flows are prepared at a cash generating unit level. Amounts estimated could differ materially from what will actually occur in the future.

 

Fair value of derivatives and other financial instruments

 

The fair value of financial instruments that are not traded in an active market (for example, unlisted equities, currency options and embedded derivatives) are determined using valuation techniques. We use judgment to select an appropriate valuation methodology and underlying assumptions based principally on existing market conditions. Changes in these assumptions may cause the Group to recognize impairments or losses in the future periods.

 

Income taxes

 

The Group is subject to income taxes both in Finland and in numerous foreign jurisdictions. Significant judgment is required in determining the provision for income taxes and deferred tax assets and liabilities recognized in the consolidated financial statements. We recognize deferred tax assets to the extent that it is probable that sufficient taxable income will be available in the future against which the temporary differences and unused tax losses can be utilized. We have considered future taxable income and tax planning strategies in making this assessment. We recognize tax provisions based on estimates and assumptions when, despite our belief that tax return positions are

supportable, it is more likely than not that certain positions will be challenged and may not be fully sustained upon review by tax authorities.

 

If the final outcome of these matters differs from the amounts initially recorded, differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

 

Pensions

 

The determination of our pension benefit obligation and expense for defined benefit pension plans is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 5 to our consolidated financial statements and include, among others, the discount rate, expected long-term rate of return on plan assets and annual rate of increase in future compensation levels. A portion of our plan assets is invested in equity securities. The equity markets have experienced volatility, which has affected the value of our pension plan assets. This volatility may make it difficult to estimate the long-term rate of return on plan assets. Actual results that differ from our assumptions are accumulated and amortized over future periods and therefore generally affect our recognized expense and recorded obligation in such future periods. Our assumptions are based on actual historical experience and external data regarding compensation and discount rate trends. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension obligation and our future expense.

 

Share-based compensation

 

We have various types of equity settled share-based compensation schemes for employees. Employee services received, and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments as at the date of grant, excluding the impact of any non-market vesting conditions. Fair value of stock options is estimated by using the Black Scholes model on the date of grant based on certain assumptions. Those assumptions are described in Note 22 to the consolidated financial statements and include, among others, the dividend yield, expected volatility and expected life of stock options. The expected life of stock options is estimated by observing general option holder behavior and actual historical terms of Nokia stock option programs, whereas the assumption of the expected volatility has been set by reference to the implied volatility of stock options available on Nokia shares in the open market and in light of historical patterns of volatility. These variables make estimation of fair value of stock options difficult.

 

Non-market vesting conditions attached to the performance shares are included in assumptions about the number of shares that the employee will ultimately receive relating to projections of sales and earnings per share. On a regular basis we review the assumptions made and revise the estimates of the number of performance shares that are expected to be settled, where necessary. At the date of grant the number of performance shares granted to employees that are expected to be settled is assumed to be the target amount. Any subsequent revisions to the estimates of the number of performance shares expected to be settled may increase or decrease total compensation expense. Such increase or decrease adjusts the prior period compensation expense in the period of the review on a cumulative basis for unvested performance shares for which compensation expense has already been recognized in the profit and loss account, and in subsequent periods for unvested performance shares for which the expense has not yet been recognized in the profit and loss account. Significant differences in employee option activity, equity market performance and our projected and actual sales and earnings per share performance may materially affect future expense. In addition, the value, if any, an employee ultimately receives from share-based payment awards may not correspond to the expense amounts recorded by the Group.

Results of Operations

 

2007 compared with 2006

 

Nokia Group

 

The following table sets forth selective line items and the percentage of net sales that they represent for the fiscal years 2007 and 2006.