Report of the Board of Directors

In 2004, Telenor consolidated its position as an international mobile operator while simultaneously retaining its strong position in the Norwegian market. Growth in operating revenues and in numbers of subscriptions during the year has provided the company with a solid basis for continued increase in profits and value creation.

The work of the Board is based on a strategy of developing Telenor as an international mobile company, with a strong Nordic position in the mobile and fixed network services markets, as well as continued development of Broadcast’s TV activities.

Telenor’s financial situation at the beginning of 2005 is strong. Revenues in 2004 amounted to NOK 61.3 billion, representing a growth of NOK 8.2 billion, or approximately 15%, compared to 2003.

Telenor’s share performance in 2004 was stronger than the average for the sector, but weaker, however, than the main index on the Oslo Stock Exchange.

In line with Telenor’s strategy, the company’s international mobile portfolio was extended in 2004. Telenor acquired the remaining shares in the Danish mobile operator Sonofon in February 2004, thereby acquiring sole ownership of the company. During the year, Telenor’s remaining 9% shareholding in the Greek mobile operator Cosmote was sold. At an auction held in April 2004, Telenor acquired one of two new nationwide licences for mobile telephony in Pakistan. In addition, Telenor has on two occasions increased its ownership share in GrameenPhone in Bangladesh, now standing at 62%. In August 2004, Telenor purchased the remaining shares in the mobile operator ProMonte GSM in Montenegro, thereby acquiring sole ownership of the company. In Hungary, Pannon GSM, a wholly owned subsidiary of Telenor, acquired a UMTS licence on 8 December 2004.

Throughout 2004, Telenor has focused on promoting customer growth in its international mobile portfolio. At year-end, the total number of subscriptions in companies in which Telenor has ownership interests amounted to 52.7 million, an increase of 17.9 million compared to year-end 2003. This makes Telenor the twelfth largest mobile company in the world.

During 2004, Telenor continued the work of strengthening and coordinating its Nordic mobile operations. In order to improve its position in the Danish market, Telenor has, in addition to acquiring full ownership of Sonofon, also acquired the service provider CBB. A considerable effort has been made with respect to creating synergies in the Nordic mobile portfolio, which is a requirement to secure a satisfactory development in the region.

As regards the Norwegian mobile market, much has been done to improve customer satisfaction and to stabilise Telenor’s market share. At year-end, Telenor had a 56% market share, measured in terms of subscriptions, which is approximately the same as at the beginning of 2003. In December 2004, Telenor Mobil opened its UMTS network for commercial operations.

Telenor continued to pursue its strategy of improving operational efficiency. In the first quarter of 2004 the company entered into an agreement to concentrate the Telenor Group’s IT operations and transfer them to EDB Business Partner.

Fixed network operations suffered a fall in revenues. Underlying developments reveal a migration from fixed telephony and Internet dial-up to mobile telephony and ADSL. There is a significant demand for broadband (ADSL) in Norway, and the number of Telenor ADSL subscribers in the end-user market increased by 149,000 during 2004.

Activities at Broadcast were profitable, with growth in profits and improved margins. Broadcast retained its strong position in the Nordic market.

Telenor ASA’s goal is to create value for its owners. On the basis of Telenor’s financial situation and anticipated capital requirements, the Board has proposed an annual dividend to be paid to the company’s shareholders equivalent to 40–60% of normalised annual profit. In addition, the company aims to ensure a relatively even growth in annual ordinary dividend per share.

The Board proposes to the Annual General Meeting (AGM) that a dividend of NOK 1.50 per share be paid for the 2004 financial year, compared to NOK 1.00 per share for 2003. The dividend determined at the AGM will be paid on 6 June 2005, to the company’s shareholders on the date of the AGM. The company’s shares will be listed on the Oslo Stock Exchange exclusive of dividend as of Monday 23 May.

The Board has also taken the initiative for the company to repurchase shares in the open market. At the AGM held 6 May 2004 a repurchase authority was granted. Since then and until 31 March 2005 the company has acquired 20,559,900 shares in the open market. The Norwegian State, in its capacity as Telenor’s largest shareholder, remains committed to participate in this repurchase scheme by cancelling a proportionate part of its shares so that the State’s shareholding remains unchanged.

At the forthcoming AGM on 20 May 2005, the Board will propose that Telenor shares owned by Telenor itself be cancelled, and, furthermore, request that a renewed authority to purchase own shares is given.

The Norwegian State reduced its shareholding in Telenor from 62.6% to 54% by selling 170 million shares on 30 March 2004 and a further 695,000 shares on 14 April 2004.

At year-end, Telenor ASA had 46,380 shareholders. The company’s ten largest owners represented 71.4% of the shares. The company’s share capital amounted to NOK 10.5 billion, distributed between 1,749,697,047 shares. Telenor’s shares are listed on the Oslo Stock Exchange and Nasdaq.

As at 31 December 2004, Telenor’s shares were quoted at NOK 55.00 per share on the Oslo Stock Exchange, compared to NOK 43.40 at year-end 2003 (an increase of 27%). Telenor’s market value was NOK 96.2 billion at year-end 2004, compared to NOK 78.5 billion at the end of 2003.

During the same period, the Dow Jones European Telecom Index was up by 10%, and the OSE Benchmark Index by 36%. In 2004, Telenor shares were among the most traded on the Oslo Stock Exchange.

During 2004, Telenor communicated actively with the financial market, providing accurate information to shareholders, thus ensuring that all essential information relevant to the external evaluation of the company was published in accordance with current rules and guidelines.

Throughout 2004, the Board closely monitored Telenor’s strategic development. The Board also placed particular emphasis on follow-up of results, cost-reduction work and investment issues. Previous investments were followed up in separate evaluation reports.

Results
Key figures
The Telenor Group’s net income for 2004 amounted to NOK 5,358 million, equalling NOK 3.07 per share. The corresponding figure for 2003 was NOK 4,560 million, equalling NOK 2.57 per share.

Profit before taxes and minority interests for 2004 amounted to NOK 8,846 million, compared to NOK 7,426 million in 2003, and was adversely affected by special items (gains and losses on disposals, write-downs, expenses relating to workforce reductions and loss contracts) amounting to a total of NOK 0.4 billion. The profit in 2003, on the other hand, was positively affected by a total of NOK 1.1 billion. Adjusted for special items, the profit before taxes and minority interests increased by NOK 3.0 billion compared to 2003, to NOK 9.3 billion in 2004. This increase was largely attributable to increased revenues without corresponding increases in expenses and reductions in depreciation. In 2004, write-downs of around NOK 2.6 billion were undertaken, mainly relating to Sonofon in Denmark. Also in 2004, a gain of NOK 2.6 billion before taxes was realized as a result of the sale of Telenor’s remaining 9% shareholding in the previously associated mobile company Cosmote. In 2003, a gain of NOK 1.5 billion before taxes was realized, also from the disposal of a 9% shareholding in Cosmote.

Telenor’s operating profit for 2004 amounted to NOK 6,602 million, compared to NOK 7,560 million in 2003. Compared to 2003, the operating profit in 2004 was adversely affected by write-downs. The result from associated companies amounted to a profit of NOK 781 million, compared to NOK 1,231 million in 2003. The drop in profit was mainly due to sales gains in 2003. This was partly offset by increased net income at VimpelCom in Russia, reduced losses at Bravida and lower depreciation and write-downs of excess values compared to 2003, following Sonofon’s consolidation as a subsidiary, effective from 12 February 2004. Net financial items increased by NOK 2,891 million to NOK 1,526 million in 2004. This improvement was mainly due to a realized gain of NOK 2.6 billion before taxes from the sale of the remaining 9% of the shares in Cosmote.

Current and deferred income taxes totalled NOK 2,244 million in 2004, equal to 25.4% of the result before taxes and minority interests. An increased tax rate relating to the depreciation and write-down of goodwill, where deferred tax assets were not entered in the accounts, was offset by the realization of tax losses and reduced deferred tax on retained earnings in international companies. As a result of tax losses carried forward in Norway, current taxes in 2004 were related to foreign subsidiaries.

The minority interest share of net income was NOK 1,244 million in 2004, compared to NOK 490 million in 2003. The results in 2003 and 2004 were mainly related to Kyivstar and GrameenPhone.

Cash flow from operational activities increased by NOK 5.3 billion in 2004 to NOK 19.0 billion, mainly as a result of increased revenues. The consolidation of Sonofon also contributed positively. This increase was also due to lower payments on financial items and taxes in international subsidiaries and accrual items. In 2004, Telenor invested NOK 18.5 billion, of which NOK 12.7 billion was capital expenditure. Investments outside Norway amounted to NOK 13.9 billion. Capital expenditure increased by NOK 6.3 billion, mainly related to international mobile operations where network capacity has increased as a result of a substantial subscriber growth. Capital expenditure also included the acquisition of a mobile licence in Pakistan and a UMTS licence in Hungary at a total cost of NOK 2.4 billion, and a NOK 0.6 billion investment in a stake in a new satellite.

At year-end 2004, Telenor’s total assets amounted to NOK 88.1 billion and its equity ratio (including minority interests) was 47.3%, compared to NOK 86.1 billion and 47.5% respectively in 2003. Net interest-bearing liabilities totalled NOK 19.2 billion, an increase of NOK 1.4 billion during the year. In the opinion of the Board, Telenor’s financial position is satisfactory.

Pursuant to Section 3-3 of the Norwegian Accounting Act, we confirm that the accounts have been prepared on the basis of a going concern assumption.

Key figures 2002–2004, Telenor Group
(in NOK millions) 2004 2003 2002 Revenues 61,302 53,121 48,826 EBITDA 20,821 18,302 13,469 Operating profit (loss) 6,602 7,560 (320) Associated companies 718 1,231 (2,450) Investments 18,554 7,017 21,300 No. of man-years 20,900 19,450 22,100

Comments relating to the operations
Mobile operations
In 2004, total revenues increased by NOK 9,142 million to NOK 32,952 million. This was mainly due to the consolidation of Sonofon and ProMonte GSM, as well as favourable growth in other operations as a result of an increase in the number of subscriptions. The operating profit was reduced by NOK 2,197 million in 2004, to NOK 3,027 million. The 2004 operating profit was adversely affected by the consolidation and write-down of Sonofon and a loss contract at Telenor Mobile Sweden. The remaining activities showed positive results. The results from associated companies and jointly controlled activities showed a profit of NOK 694 million in 2004, compared to NOK 1,639 million in 2003. The 2003 profits included a gain from the sale of shares in Cosmote. This was partly offset by an increase in net income at VimpelCom in Russia, as well as lower depreciation and write-downs of excess values compared to 2003 as a result of the consolidation of Sonofon.

Fixed
Total revenues were reduced by NOK 1,243 million, to NOK 19,266 million in 2004. This reduction was partly due to Telenor’s sale of shares in Comincom/Combellga on 1 December 2003, and the fact that part of Managed Services was transferred to EDB Business Partner on 1 May 2004. Furthermore, the increase in wholesale revenues and revenues from DSL failed to compensate for the reduced income from PSTN/ISDN.

Following the migration to mobile traffic and the increased use of ADSL (where traffic volumes are not measured), the number of traffic minutes in the fixed network in the Norwegian market fell by approximately 15% in 2004. Fixed Norway’s market share measured in traffic minutes has, however, remained stable at 69% since year-end 2003.

The increased operating profit at Fixed in 2004 compared to 2003 was mainly generated in Norway, and was related to reduced write-downs, partly offset by reduced EBITDA.

Broadcast
Total revenues increased by NOK 527 million to NOK 5,347 million in 2004, primarily as a result of increased prices and an increase in subscriber numbers. The overall number of subscribers with satellite dish and cable TV increased by 81,000, reaching a total of 1,448,000. Subscribers in households with small antenna TV networks increased by 114,000, reaching 1,212,000.

In 2004, the operating profit amounted to NOK 589 million, compared to NOK 181 million in 2003. This improvement was due to increased operating revenues attributable to subscriber growth, an increase in prices and reduced depreciation. Furthermore, rental costs for satellite capacity were reduced as previously leased satellite capacity was being replaced by own capacity.

Other Activities
Total revenues were reduced by NOK 493 million, to NOK 10,318 million. The reduction in revenues was mainly due to the disposal of units in 2003 and 2004. Total operating profits for Other Activities amounted to NOK 169 million in 2004, compared to an operating loss of NOK 488 million in 2003. This improvement was primarily attributable to sales gains and the winding up of activities.

Allocations
Following the receipt of Group contributions of NOK 2,000 million before taxes, the parent company Telenor ASA’s net income for the year amounted to NOK 4,656 million.

The Board of Directors proposes to the AGM that a dividend of NOK 1.50 per share before taxes be paid out.

The Board proposes the following allocations (in NOK millions):

Provisions for dividends	2,603
Transferred to other equity	2,053
Total	4,656

After these allocations, Telenor’s distributable equity as at 31 December 2004 totalled NOK 14,038 million.

Non-financial information
Working environment
Throughout 2004 Telenor has been working persistently and systematically with such issues as sickness absence, ergonomics, fire prevention and follow-up of subcontractors, making continuous improvements to the working environment at all levels within the Group. A total of 72 Health, Security and Environment (HSE) reviews were carried out in order to monitor these factors at the Group’s companies. During 2004, 1,715 employees completed training programmes relating to the working environment.

Together with a number of major enterprises in Norway, Telenor signed an agreement in April 2003 to promote a more inclusive working life (an IA agreement). This agreement is designed to help reduce sickness absence, ensure better adaptation of the working environment for employees with special requirements and raise the retirement age in the Group. Improvements in these areas continued in 2004. A sickness absence rate of 4.5% was registered at Telenor’s Norwegian activities, which is a reduction of 0.5 percentage points compared to 2003. In 2004, 14 injuries resulting in absence from work were recorded, none of which were serious. A further 16 injuries, which did not result in absence from work, and 8 near accidents, were also recorded.

External environment
The direct impact of Telenor’s activities on the environment is low, although by virtue of the Group’s size and its extensive activities in a number of countries, an active effort is made to reduce the environmental impact caused by such factors as energy consumption, travel and installations.

Telenor’s environmental accounting is an integral part of its management system and the accounts show that the amount of energy consumed at Telenor’s activities was reduced during 2004. The work of implementing this environmental management system throughout Telenor’s international portfolio is underway.

Ethical indexes
Telenor’s work and involvement with respect to ethics, the environment and social issues – our social responsibilities – ensured that in 2004, Telenor was once again classified among the best companies in Europe on the Dow Jones Sustainability Indexes and the FTSE4Good index. Telenor was also awarded the Storebrand ‘Best in Class’ distinction.

For further information about Telenor’s work on the environment and social responsibilities in 2004, please refer to Telenor’s Social Responsibility website at www.telenor.com/csr/

Expertise and training
Telenor aims to attract and retain highly skilled and motivated employees and managers who display a strong passion for business and who act in accordance with Telenor’s Codes of Conduct. Telenor has therefore introduced two global processes, the Telenor Leadership Development Process (TLDP) and Internal Value Creation (IVS). TLDP is a tool for systematic evaluation, development and remuneration of managers, while IVS monitors human capital, process resources and the quality of management.

Regulatory matters
Telenor’s activities are adapted to suit current regulatory frameworks which the Group is subject to in different markets. The development of level playing fields is a major challenge for the authorities in all countries, and Telenor actively seeks to contribute to the development of healthy competition in the markets.

At the same time, market intervention and altered framework conditions represent a regulatory risk, and could affect Telenor’s revenues and profitability.

The Board recognises the importance of taking advantage of the opportunities afforded by the Act relating to Electronic Communications (the Electronic Communications Act) in the Norwegian market. This is essential to ensure the harmonisation of regulatory measures in the EEA area through the ongoing process of analysing and adopting future regulatory requirements. It is difficult to develop a well-functioning telecommunications market if individual players in Norway are subject to regulations more extensive and detailed than those applicable in other European countries. The fact that players with similar market positions have been subject to different regulations, as evident from fixed and mobile interconnections in the Norwegian market, remains an obstacle to achieve a healthy development in the market.

Certain aspects of the current regulatory regime subject Telenor to controls that do not appear to promote reorganisation and innovation in the telecommunications markets. Such regulations represent elements of uncertainty with respect to the profitability of Telenor’s investments in networks and service development. They also involve considerable socio-economic costs. In the longer term this could serve to weaken incentives to make future investments in Norwegian infrastructure and service development. However, Telenor looks favourably upon the signals from the Norwegian parliament (Storting) and the telecommunications authorities with respect to securing long-term incentives for investing in infrastructure in the Norwegian market. Telenor’s Board and management expect that this will be followed up in the detailed formulation of the Norwegian Post and Telecommunications Authority’s new regulations, due to appear in 2005.

Norway has low telecommunications rates, and Norway is a pioneer in developing fixed and mobile communications services. In December 2004, Telenor opened its UMTS network for commercial operation, and the company has accepted the Norwegian Ministry of Transport and Communications’ offer to renew its GSM900 licence with appurtenant conditions. Under an agreement with the Ministry of Transport and Communications, Telenor is committed to providing offers for stipulated services throughout the country.

Telenor has highlighted the importance of regulatory matters in its international portfolio. Of particular interest with respect to achieving more stable framework conditions is the adaptation of the EU’s legal framework to accommodate the new member states in Eastern Europe. Regulatory developments in other countries seeking closer integration with Europe are also being affected, although in an indirect way. Outside Europe, WTO membership and adjustments thereto are important with respect to acquiring stable framework conditions in Telenor’s international portfolio.

Increased regulation of mobile operators is expected both within and outside Europe, e.g. with regard to contributions to the USO Fund, the introduction of mobile number portability and terms for interconnections. Telenor will therefore continue to work actively to achieve optimal regulatory framework conditions for its portfolio of companies outside Norway.

Good corporate governance
The Board makes a considerable effort to ensure that Telenor has a good corporate governance system and refers to a separate chapter on this issue.

Composition and work of the Board
None of the shareholder-elected Board members or members of the Corporate Assembly were up for election in 2004. Einar Førde died on 26 September 2004. A new Board member will be elected by the Corporate Assembly on 7 April 2005. None of the Board members, other than those members elected by the employees, are employed by Telenor or engaged in work on behalf of Telenor. The Board of Telenor works in accordance with guidelines for its work and procedures. The Board undertook an assessment of its activity and competence in 2004. Thirteen Board meetings were held in 2004.

Organisation and personnel
At the end of 2004, Telenor had 21,750 employees (20,900 man-years), whereof 12,000 were employed in Norway and 9,750 outside Norway. This is an increase of 1,450 man-years compared to year-end 2003.

Telenor has in 2004, as in recent years, implemented a number of changes designed to ensure optimal efficiency in its activities. A major reorganisation was undertaken of Telenor’s IT activities, including a concentration of the Group’s IT operations under EDB Business Partner. Measures designed to coordinate functions in Telenor’s mobile activities in the Nordic region were also introduced.

Telenor has set aside significant resources in order to provide for employees affected by the organisational restructuring. Whenever workforce reductions have been required, suitable financial support schemes and advisory services have been employed. In January 2004, Telenor was admitted to the employers’ organisation NHO (the Confederation of Norwegian Business and Industry) and the trade association Abelia. Telenor has thereby joined an organisation that includes other international companies and companies exposed to competition. By switching from NAVO (the Norwegian Association of Publicly Owned Companies) to the NHO, Telenor is now comprised i.a. by the collective wage agreement applicable to the NHO and its contractual parties. During 2004, Telenor’s Norwegian companies entered into new collective wage agreements with our personnel organisations.

At the beginning of 2005, Telenor made an organisational restructuring in order to strengthen and develop its activities in the Nordic region, and at the same time ensure continued international growth in its mobile operations. To simplify and reinforce Telenor’s position in the Nordic market, a separate management area was established, effective from 26 January 2005, for mobile and fixed network operations in the Nordic region.

Equal opportunities
At the end of 2004, 39% of Telenor’s employees in Norway were women and 61% men. As at 31 December 2004, 24% of the positions in Telenor’s top four management levels were held by women. This is an improvement of 5 percentage points compared to 2003, representing a positive development in the Group’s efforts to secure equal opportunities.

The average annual salary for women is lower than the salary for men, primarily due to differences in respect of qualifications, job types, part-time employment and overtime.

Achieving a good balance with respect to cultural background, age and gender is important to the effort of attaining as much skilled diversity as possible within the organisation and among managers. This is set out in the Group’s Codes of Conduct, which emphasise that Telenor should be an attractive and professional workplace with an inclusive working environment where employees conduct themselves with integrity and respect.

In 2004, nine women from Telenor participated in the NHO’s Female Future programme. In 2005, eight new women from different parts of the organisation will participate in this programme.

In 2004, 40% of the members of the Board of Telenor ASA were women, and 60% men. In accordance with the principles of equal opportunity on which the Board bases its work, measures have been implemented to improve the composition of the Board with respect to gender and expertise in the Group’s own companies. Representatives who are appointed to our boards are offered training relating to board work.

Risk factors
Telenor’s activities are exposed to a number of regulatory, legal, financial and political risks. If Telenor’s growth strategy in emerging markets in Eastern Europe and Asia is to be successful and inspire the necessary confidence of shareholders and investors, then risk assessment and management must form part of the Group’s core expertise. As far as the Board is concerned, it is important to ensure that the Group implements the measures required to manage and reduce risk factors, so that the overall risk picture is always confined within acceptable business limits.

The Board and management assess such risk factors thoroughly in connection with new investments, and continuously in respect of existing investments. The Group has gradually built up considerable practical experience relating to the establishment and management of activities in less economically developed areas. In addition to an extensive contact network, which includes the Norwegian authorities at home and abroad, the Board believes that this provides a good basis for undertaking proper risk assessment. The Board has also subsequently undertaken a systematic review and evaluation of the company’s investments in order to assess the development of individual projects in the light of an updated risk picture.

Telenor continues to address issues relating to personal safety in the light of changes in the political threats presented in the different countries in which Telenor operates.

A major challenge and element of uncertainty in the Norwegian market is made up of new and amended rules and resolutions adopted by the regulatory authorities, as well as civil actions based on alleged breaches of telecommunications regulations. The international markets are exposed to particular risk factors in certain countries, such as political developments, currency changes, legal issues, regulatory matters, partner risks in joint venture projects, etc.

When making international commitments, the company has made an effort to balance the risk picture with respect to investments outside Norway by dividing its portfolio between mature and emerging markets.

Telenor is exposed to financial market risks relating to changes in interest and foreign exchange rates. Financial instruments are employed in order to reduce such risks. The Group has implemented the necessary measures to maintain adequate financial flexibility.

Outlook for 2005
In 2004, Telenor has taken a further step on the road from being a Norwegian operation with international ambitions, to becoming a truly international mobile company. This has been done through the consolidation of Sonofon and ProMonte GSM, the greenfield operation in Pakistan as well as through substantial growth at Kyivstar, DiGi.Com and GrameenPhone. We expect this substantial growth to continue, and an increasing percentage of Telenor’s operating revenues and financial profits are expected to come from our mobile operations outside the Nordic region. This development will be of decisive importance to the priorities and choices we make in the future.

Strong growth in operating revenues and subscriptions in 2004 has provided Telenor with a good basis for continued growth in operating revenues and EBITDA, driven by the company’s international mobile operations. Overall, Telenor expects a positive profit development in 2005, compared to 2004, exclusive of special items.

The Board will continue its efforts to defend the company’s position in Norway, obtaining synergies, especially in the Nordic activities, and create value through continued growth in the international mobile operations.

High levels of capital expenditure are expected in 2005, due to substantial network investments at Kyivstar, Telenor Pakistan, GrameenPhone and DiGi.Com. Increased investments relating to UMTS are also expected.

A growing share of Telenor’s operating revenues and profits are generated by operations outside Norway. Fluctuations in the exchange rate of the Norwegian krone vis-à-vis other currencies will to an increasing extent affect the figures reported in NOK. Political risks, including regulatory risks, may also affect the Group’s results. The Board will remain particularly vigilant with respect to these issues.