During the review period the operational focus was on the improvement of network quality and development of Internet services.

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1 I N T E R I M R E P O R T J a n u a r y - - J u n e 2

2 Operational Darbîbas pårskats Review Company Lattelekom has assessed its operational performance results for the first half of 2. In comparison with the same period of the previous year, revenue has grown by 1% and net profit has increased by 11%. During the review period the operational focus was on the improvement of network quality and development of Internet services. 72,613 or 98% of Lattelekom s subscribers are already able to make international and national calls and access Directory Inquiry services without operator s assistance. During the first half of the year under review the waiting list was reduced by 14%. The waiting list has been reduced by 87% over the last six years. As at June 3, 2 there were only 16,938 people waiting for telephone line installation. During the first six months of 2 Latvian economy showed evident signs of recovering. The economic stabilisation materialised in growing demand for advanced telecommunication services and complex customer solutions. The process is also reflected in the financial results of Lattelekom for the first six months of 2. The company s overall business has considerably improved compared with the previous years. FINANCIAL RESULTS Total revenue for the six months period to June 3, 2 was LVL 67.9 million, an increase of 1% compared to the same period last year. Revenue from domestic telephone services grew by 14% to LVL 44.3 million, while revenue from international telephone services decreased by 9% to LVL 13.6 million as a result of tariff rebalancing. The volume of domestic and internatioanl traffic was essentially the same as during the first six months of the previous year with the exception of traffic to domestic mobile networks which grew by 26% and Internet traffic which more than doubled. Revenue from other services increased by 23% to LVL 9.9 million. Within this figure the fastest growth was achieved in data services and sales of customer telecommunications equipment. EBITDA (earnings before tax, interest, depreciation and losses from disposal of assets) grew by LVL 3.8 million or 14% reaching EBITDA margin of 45%. Operating profit was LVL 12.3 million, an increase by 9% or LVL 1.1 million compared to the same period of. The growth of operating profit was restricted by LVL 5. million or 1% increase of costs which consisted mainly of LVL 2.8 million higher depreciation charge due to capital investments, LVL 1. million more payments to other telecommunications operators and LVL.6 million increase in other operating costs driven by costs of goods sold to customers. Consolidated financial expenses and income for the period resulted in an income of LVL 2. million (LVL 1. million for the same period of ). This includes Lattelekom s 23% ownership interest in Latvijas Mobilais Telefons (LMT), consolidated using equity method. Net profit for the six months period to 3 June 2 was LVL 11.3 million, an increase of 11% compared to the first half of. Net cash flow from operating activities increased by LVL 4.3 million or 22% compared to the same period last year. Lattelekom was able to finance the majority of capital investments projects internally and to considerably reduce the level of borrowings. The financial results for the interim period were prepared in accordance with International Accounting Standards (IAS), and they are unaudited. CAPITAL INVESTMENTS IN NETWORK DEVELOPMENT During the first half of 2 capital investments in the modernisation of telecommunications network and quality improvement were continued. LVL 9.5 million have been invested during the first half of the year under review and the plan for the whole year is a total of LVL 45 million. Major capital investments in 2 involve replacement of the old ATC 27/29 by a new digital exchange Riga-8. The first cut-overs of subscriber lines took place at the end of June 2. Modernisation of telecommunications network in Kuldiga district is drawing to an end and it has been the largest modernisation project across the districts of Latvia. In 2 the expansion of optical fibre cable network will be continued. An optical fibre cable line will be installed from Valmiera to the Estonian border in Valka. The cable line will be 62 km long. In 2 the company plans to make further capital investments in quality improvement, modernisation of telecommunications network, installation of new subscriber lines and further reduction of the waiting list. Due to implementation of new technologies in the business and streamlining of work organisation the company plans to reduce the number of employees by about 4 reaching a total of 4,4 employees by the end of 2. 1

3 Revenue History (million LVL) NETWORK DEVELOPMENT The number of telephone lines installed and maintained by Lattelekom reached 732,719 lines by the end of the period under review. Due to the implementation of modernisation projects of the analogue network and to the expansion of the digital network, the number of subscriber lines ensuring possibilities to make international and national calls without operator s assistance has grown from 715,949 lines in January 2 to 72,613 lines at the end of June. Total capacity of digital exchanges has grown by 2,74 lines during the period of six months reaching 384,31. It is planned to increase the installed capacity of digital exchanges by 39,5 numbers by the end of Net profit from ordinary activities (million LVL) QUALITY IMPROVEMENT Improvement of communications quality is one of the company s top priorities. Decrease in the number of faults gives evidence to it. During the first half of 2 the average number of faults per 1 subscriber lines was 2.48 faults per month while in the corresponding period of the figure was 4.3 faults per 1 subscriber lines per month. One of the major projects in the field of telecommunications quality improvement in the first half of 2 was the installation of radio relay lines (RRL) in Madona Lubana sector. Now the residents in Lubana and its surroundings can enjoy substantially better communications quality and are able to use the Internet dial-up service. In 2 quality improvement projects in Riga and in nine districts of Latvia have been carried out and the work will be continued EBITDA (million LVL) INTERNET AND DATA TRANSMISSION SERVICES The first half of 2 has been an important milestone one for Lattelekom as the new generation data transmission service Ultra DSL (Digital Subscriber Line) was launched during this period. Thanks to Ultra DSL technologies, it has become possible to change ordinary digital subscriber lines to permanent broadband Internet connections with data transmission rate of 1 or 2 megabits per second. In the future it is planned to increase the rate up to even 8 megabits per second. Ultra DSL allows for simultaneous usage of lines for both voice and data transmission. At present the service is available to over 5, Lattelekom subscribers in the central part of Riga, and during this year Ultra DSL coverage zone in Riga will be doubled. Starting from 21 broadband Internet connections will be available to subscribers in district centres and major cities in Latvia. Since February 1 Lattelekom has reduced fault clearance times for data transmission services. Now, instead of the former three working days, faults are cleared within one working day starting from the moment of reporting. In the first half of 2 Lattelekom has concluded two agreements for the implementation of international connections with UUNet network in Stockholm and with 2

4 Capital expenditures (million LVL) Cable & Wireless in London. Lattelekom intends to conclude similar agreements with other operators. Apollo - the Internet service provider of the company operates in the circumstances of competition. Lattelekom Apollo Internet group offers both installation of permanent Internet connections and Internet access using dial-up. The number of customers using permanent Apollo Internet connection has grown by 27% during the period under review, while the number of dial-up users has grown by 35%. Lattelekom Apollo Internet dial-up is being used by 34% of all dial-up users in Latvia. At this point Apollo holds the leading position in this area. The number of Apollo PC service users has also grown during the first six months of 2 currently reaching a total of 298 users. NEW SERVICES In the first half of 2 Lattelekom has implemented a range of new services Total number of telephone lines ( ) Lattelekom s Call Centre has expanded the scope of its services by implementing several new services. The service Telemarketing includes collection of incoming calls and calls made with a certain target on behalf of customers using Lattelekom Call Centre resources. Another novelty is the service 118 Direct Connection available to customers since June. The service involves immediate connection of incoming calls to Inquiry Service 118 with a telephone number required by the customer and registered in the database. During the first half of 2 Lattelekom gradually started to administer customer service provision by telephone. Now customers are able to order and receive telecommunications services by telephone calling Lattelekom Customer Service Waiting list customers ( ) Lattelekom, in co-operation with the firm Interinfo Latvijå, has created 118 information services network providing directory inquiries by phone, telephone books and directory inquiries on the Internet. In the interim period Lattelekom created Customer Premises Equipment showroom which facilitates the company s work with customers offering them a chance to test various types of telecommunications equipment prior to their purchase. Lattelekom enjoys the successful co-operation with LMT (Latvijas Mobilais Telefons), where Lattelekom owns 23% of the share capital. During the review period wider possibilities of the free Voice Mail service became available due to the launch of two additional services Fax Mail and Combined Voice and Fax Mail. A possibility to use individual mailboxes for each family member has been created for the convenience of customers. 86 new pay-phones were installed during the first half of 2, out of them 32 in Riga and 54 in districts across Latvia. It is intended to install another 271 pay-phones by the end of this year. Since June 2 payments for pay-phone services can be made with the help of credit cards (Master Card and Visa). 3

5 Condensed financial statements (Unaudited) Statement of Accounting Policies The interim financial statements of Lattelekom SIA are prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. The accounting policies used in the preparation of the interim financial statements are consistent with those used in the annual financial statements for the year ended 31 December. These interim financial statements should be read in conjunction with the annual financial statements. Condensed Income Statement for 6 Months Ended 3 June 2 January- June January-June January-December 2 LVL LVL LVL Revenue 67,878 61, ,295 Payments to other telecommunications operators (8,55) (7,565) (17,368) Employee costs (14,226) (13,814) (28,622) Depreciation (17,927) (15,136) (32,62) Management and technology transfer fees (1,185) (1,38) (2,593) Other operating expenses (14,729) (14,85) (28,36) Losses on disposal of assets (27) (245) (687) Capitalised to non-current assets 1,275 1,662 3,98 Total operating expenses (55,549) (5,563) (17,98) Operating profit 12,329 11,274 22,197 Net financial income including income from associated undertaking 2, ,829 Profit before tax 14,342 12,239 24,26 Income tax expense (3,25) (2,65) (2,774) Profit 11,317 1,174 21,252 Earnings per share (in LVL) Breakdown of Revenue by Service January- June January-June January-December 2 LVL LVL LVL International telephone services 13,622 14,91 28,724 Domestic telephone services 44,323 38,866 82,429 Other telecommunication services 9,933 8,61 18,142 Total revenues 67,878 61, ,295 4

6 Condensed Balance Sheet as of 3 June 2 January- June January-June January-December 2 LVL LVL LVL ASSETS Non-current assets 225, , ,39 Current assets Inventory 3,929 4,524 2,788 Trade and other receivables 2,97 21,421 2,88 Cash and deposits 3,652 6,99 5,481 28,551 32,854 28,357 Total assets 254, , ,396 EQUITY AND LIABILITIES Capital and reserves Ordinary share capital 146,79 146,79 146,79 Reserves 3,91 Accumulated losses (2,51) (21,569) (9,917) 147, ,51 136,162 Non-current liabilities 82,341 69,238 76,247 Current liabilities Trade and other payables 17,273 22,737 24,62 Short-term borrowings, overdrafts 7,183 4,88 24,925 24,456 62,825 48,987 Total equity and liabilities 254, , ,396 Condensed Statement on Changes in Equity for 6 Months ended 3 June Ordinary share Reserves Accumulated Total capital losses LVL LVL LVL LVL Balance at 1 January 146,79 - (31,743) 114,336 Net profit for the period - - 1,174 1,174 Balance at 3 June 146,79 - (21,569) 124,51 Balance at 1 January 2 146,79 - (9,917) 136,162 Transfers - 3,91 (3,91) - Net profit for the period ,317 11,317 Balance at 3 June 2 146,79 3,91 (2,51) 147,479 5

7 Condensed Cash Flow Statement for 6 Months Ended 3 June 2 January- June January-June January-December 2 LVL LVL LVL Cash flow from operating activities Operating profit 12,329 11,274 22,197 Adjustments for: Depreciation 17,927 15,136 32,62 Loss on disposal of assets Foreign exchange difference 14 (289) (657) Operating profit before working capital changes 3,426 26,248 54,861 Decrease in working capital (3,67) (5,52) (3,757) Tax paid (1,394) - - Cash generated from operations 25,425 21,196 51,14 Net cash interest expenses including dividends received (1,783) (1,815) (4,553) Net cash from operating activities 23,642 19,381 46,551 Net cash used in investing activities (13,478) (24,125) (44,16) Net cash flow from financing activities (11,993) 5,2 (3,543) Net increase/(decrease) in cash and cash equivalents (1,829) 276 (1,152) Cash and cash equivalents at beginning of period 5,481 6,633 6,633 Cash and cash equivalents at end of period 3,652 6,99 5,481 Statistic 3 June 3 June Full year 2 LVL LVL LVL Key financial indicators EBITDA (LVL') 3,463 26,655 55,54 EBITDA margin 45% 43% 43% Operating margin 18% 18% 17% Operational Total number of telephone lines (') Waiting list customers (') Staff at period end 4,818 5,67 4,814 Capital expenditure (LVL') 9,477 23,117 47,843 6

8 I N T E R I M R E P O R T J a n u a r y - - J u n e 2 Izdevéjs: Lattelekom SIA Komunikåcijas da a Dizains un makets: Dizaina Straté ija SIA, Egîls Pårups Iespiests: McÅbols AS Rîga 2 Lattelekom SIA Va ñu iela 3 Rîga LV 15 Latvija Tålrunis: +(371) 755 Telefakss: +(371)