Report of the Board of Directors

2005 was Telenor’s best year ever. Operating revenues amounted to NOK 68.9 billion, representing a growth of NOK 8.3 billion, or around 14%, compared with 2004. With significant growth in the number of net additions, Telenor reinforced its position as an international mobile communications provider. Telenor also strengthened its position in the Nordic market, within mobile and fixed-line services, as well as within TV distribution. The increase in subscriptions during 2005, combined with strong cash flow from the home market, provide a sound basis for future profit performance and value creation.

The Board bases its work on a strategy aimed at further development of Telenor as an international provider of telecommunications services with a strong Nordic base, a firm commitment to mobile communications and prospects of further growth in emerging markets. In the Nordic market, Telenor has consolidated its position through new acquisitions within broadband and mobile. In international mobile, the Board is confident that Telenor will seek to attain its strategic goals by assuming control of operations wherein it holds minority interests, or else seek to dispose of such assets, and by developing new operations in emerging markets.

On this basis, the international mobile portfolio was further developed in 2005. Telenor Pakistan opened its mobile network for commercial operations in March 2005, and at year-end the company had acquired 1.9 million subscriptions. In the fourth quarter of 2005, Telenor increased its ownership in the mobile operator DTAC in Thailand, reaching the current economic exposure of 69.3%.

In October 2005, Pannon in Hungary opened its UMTS network for commercial operations, and in December 2005, Sonofon in Denmark was awarded a UMTS licence.

The international mobile operations have seen considerable customer growth. During 2005, the total number of subscriptions in companies in which Telenor has ownership interests increased by 30 million, reaching a total of 82.7 million. Telenor is currently the world’s twelfth largest mobile company.

During the initial stages of its international expansion, Telenor developed its mobile commitments through active ownership, exercised through the boards of individual mobile operations. Today, Telenor’s mobile operations are developed in accordance with a group-wide industrial model, which has been introduced across all operations. To ensure the success of this model, a governing structure has been established to facilitate joint procedures for procurement, management and coordination, and increase Telenor’s industrial capabilities.

The commercial situation in the markets in which Telenor has activities has become far more challenging in recent years. Telenor is seeing intensified competition, more demanding customers and the emergence of new technology. These factors add pressure on revenues and margins, primarily in fixedline, but gradually also in mobile.

During 2005, Telenor continued to focus on maintaining its strong position in the Nordic market. In order to simplify operations in Norway, develop a more distinct profile and extract synergies from the Nordic operations, Telenor’s mobile and fixed-line operations in the Nordic region were organised under one joint management, effective from February 2005. In July 2005, Telenor acquired the broadband operations Cybercity in Denmark and Bredbandsbolaget in Sweden. In mobile, Telenor’s position was further strengthened through the acquisition of Vodafone Sweden in October 2005. The company was consolidated in January 2006. These acquisitions have enhanced Telenor’s competitive edge in the Nordic region and will facilitate the process of establishing a common Nordic platform for products and services.

The Board will continue to make active efforts to direct and facilitate the extraction of synergies from the Nordic operations, which is essential to maintain satisfactory progress in the Nordic region in the period ahead.

In the Norwegian mobile market, focus has been on enhancing customer satisfaction and stabilising Telenor’s market share. At year-end, Telenor had a 56% market share, measured in the number of subscriptions, a figure that corresponds to the level at the outset of 2004. The mobile network NMT-450 was formally wound up in January 2005.

Revenues from fixed-line operations in Norway were further reduced in 2005, reflecting an ongoing rapid migration from fixed-line telephony and Internet dial-up to mobile telephony, ADSL and broadband telephony. Measures have been introduced to reduce costs and maintain margins. As part of this effort, the core network will be changed into a pure IP network in 2010.

Broadcast recorded strong profits in 2005, maintaining its position in the Nordic market. Through a partnership with TV2 in Norway, the rights to broadcast Norwegian elite football were acquired in June 2005. In September 2005, Broadcast signed an agreement for the acquisition of a new satellite for transmission of TV and data signals. The new satellite, which will replace the Thor II satellite, is due in the fourth quarter of 2007.

In 2005, Telenor’s shares performed better than the sector average, but below the OSE Benchmark Index. Telenor ASA endeavours to provide its owners with added value. Based on the company’s financial position and expected capital requirements, Telenor has adopted a policy of paying an annual dividend to shareholders corresponding to 40 – 60% of normalised annual profits. The company’s goal is to achieve relatively even growth in the annual ordinary dividend per share.

The Board proposes to the AGM that a dividend of NOK 2 per share be paid out for the financial year 2005, against NOK 1.50 for 2004. The dividend approved by the AGM will be paid on 8 June 2005, to parties registered as shareholders on the date of the AGM. The share will be quoted ex-dividend on Oslo Stock Exchange as from Wednesday 24 May.

The Board has also taken the initiative for the company to buy back own shares in the open market. During the period following the AGM in 2005 and up to 22 September 2005, the company acquired 13,844,000 own shares in the open market, and of these 1,738,818 shares have been used in share programmes for employees and options programmes for senior managers and key personnel. The acquisitions of own shares in the open market have been carried out under the authorisation of the AGM of 20 May 2005. As Telenor’s largest shareholder, the Norwegian State has undertaken to participate in the buy-back by cancelling a proportional part of its shareholding whereby the percentage held by the State remains unchanged.

At the forthcoming AGM on 23 May 2006, the Board will propose that Telenor shares owned by Telenor itself be cancelled out, and, furthermore request that a renewed authority to acquire own shares is given.

At year-end 2005, Telenor ASA had 41,340 shareholders. The ten largest shareholders represented 69.9% of all outstanding shares. Telenor’s share capital was NOK 10.2 billion, divided into 1,706,570,293 shares.

Telenor’s shares are listed on Oslo Stock Exchange and Nasdaq. In 2005, Telenor’s shares were among the most traded shares on Oslo Stock Exchange, and at year-end they were quoted at NOK 66.25, compared to NOK 55.00 at year-end 2004. This represents an increase of 20%, and gives Telenor a market capitalisation of NOK 113.1 billion, against NOK 96.2 billion at the start of the year.

During the same period the OSE Benchmark Index rose by 40%, while the Dow Jones European Telecom index fell by 2%.

In 2005, Telenor was again active in channelling information to financial markets and shareholders, thus ensuring that all relevant information required to make external assessments of the company was published in accordance with current regulations and guidelines.

During 2005, the Board closely monitored Telenor’s strategic work. The Board also paid particular attention to performance-related follow-up, efforts to reduce costs, and issues relating to investments. Previous investments were subject to separate evaluation reports.

RESULTS
In 2005, Telenor’s net income was NOK 7,646 million, corresponding to NOK 4.47 per share. The corresponding figures for 2004 were NOK 6,093 million and NOK 3.49 per share, respectively.

In 2005, Telenor’s profit before taxes and minority interests amounted to NOK 12,591 million, compared to NOK 9,874 million in 2004. In both 2005 and 2004, the profit before taxes and minority interests was adversely affected by a number of special items (gains and losses on disposals, costs relating to workforce reductions, loss contracts and write-downs), and amounted to NOK 0.5 billion and NOK 0.7 billion, respectively. Adjusted for these special items, the profit increased by NOK 2.5 billion, reaching NOK 13.1 billion in 2005. The increase was largely due to growth in revenues during 2005, resulting from significant customer growth at the international mobile operations.

The operating profit for 2005 was NOK 11.7 billion, against NOK 7.4 billion in 2004. The operating profit for 2004 was negatively affected by write-downs. Net financial items were NOK 1.9 billion lower in 2005 than in the previous year, mainly because the 2004 figures included a realised gain of NOK 2.6 billion on the sale of shareholding in Cosmote.

Cash flow from operational activities increased by NOK 3.3 billion in 2004, to NOK 22.3 billion in 2005, largely due to an increase in revenues. The consolidation of DTAC in Thailand and the acquisitions of Bredbandsbolaget and Cybercity also contributed positively. During 2005, Telenor invested a total of NOK 25.3 billion. Of this amount, NOK 16.4 billion were capital expenditure, which is an increase of NOK 3.7 billion compared to 2004. This was mainly related to the international mobile operations where network capacity has been increased due to high customer growth.

At year-end 2005, Telenor’s total assets amounted to NOK 124.4 billion and the company’s equity ratio (including minority interests) was 43.0%. The corresponding figures for 2004 were NOK 91.4 billion and 48.2%. Net interest-bearing liabilities amounted to NOK 30.9 billion, reflecting an increase of NOK 11.7 billion during the year, due to high capital expenditure and new acquisitions. In the view of the Board the company’s financial position is satisfactory.

Pursuant to Section 3-3 of the Norwegian Accountancy Act, the Board confirms that the annual accounts have been prepared on a going concern basis.

TELENOR’S OPERATIONS
Mobile
Total revenues from Telenor’s mobile operations in emerging markets showed significant growth in 2005, mainly due to an increase in new additions. Kyivstar in Ukraine experienced a 72% increase in operating revenues, while GrameenPhone in Bangladesh recorded a growth of 36%. Operations in mature markets showed a modest level of growth. In Norway, Telenor’s mobile operation registered a 4% increase in revenues, while the corresponding figure for Pannon in Hungary was 3%.

All of Telenor’s mobile operations, with the exception of Telenor Pakistan, which is currently in a start-up phase, enhanced their operating profits from 2004 to 2005.

Fixed
Total revenues from Fixed were in line with 2004. The reduction in revenues in Norway was due to a decline in telephony revenues, although this was offset by the acquisitions of Bredbandsbolaget in Sweden and Cybercity in Denmark, both of which were made in July 2005.

The operating profit was NOK 0.7 billion lower than in 2004. This was mainly due to writedowns relating to Fixed Sweden.

Broadcast
Total revenues increased by NOK 303 million in 2005, reaching NOK 5,649 million. The operating profit was NOK 1,015 million, against NOK 750 million in 2004. This increase is due to growth in subscriptions and lower leasing costs for satellite capacity.

Other units
Total revenues increased by NOK 427 million in 2005, reaching NOK 9,967 million. This was mainly due to higher revenues derived from EDB Business Partner. This was partly offset by reduced revenues from Venture, following the divestment of activities in 2004.

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 2,188 million. The Board proposes the following allocation:

Transferred to other equity: NOK 2,188 million

After this allocation, Telenor’s distributable equity, as at 31 December 2005, amounted to NOK 13,259 million.

At the AGM, the Board of Directors will propose a dividend of NOK 2 per share, to be paid out in 2006. In total, the proposed dividend will amount to NOK 3.4 billion.

NON-FINANCIAL INFORMATION
Health, Environment and Safety (HES)
During 2005, Telenor again introduced targeted and systematic initiatives aimed at continuous improvement of the working environment at all levels within the group. Special attention was given to sickness absence and rehabilitation, ergonomics, personal safety and crisis management.

A total of 73 HES reviews were carried out as part of the follow-up of these key areas within Telenor’s operations. During 2005, 1,089 employees took part in HES training programmes.

Sickness absence at Telenor’s Norwegian operations was 4.53%, which is approximately the same as the previous year. At Telenor’s other operations, sickness absence varied from 0.43% to 4.0%. During 2005, Telenor registered ten injuries resulting in absence from work, none of them serious. A further 13 injuries which did not involve any absence from work were also registered, as well as two near-accidents.

In April 2003, together with a number of other major enterprises in Norway, Telenor signed an agreement relating to a more inclusive working life. The purpose of this agreement is to reduce the extent of sickness absence, ensure better adaptation of working conditions for employees with special needs, and to increase the actual retirement age within Telenor. This work was continued in 2005.

External environment
Telenor is taking active steps to reduce the environmental impact of its various activities, and has maintained a special focus on energy consumption, travel and installations. A new group-wide environmental policy was adopted in 2005, and this will contribute to even better environmental controls and a reduction in the environmental impact of Telenor’s activities.

Telenor’s environmental accounting shows that the total energy consumption during 2005 was 735 GWh. Of this, 268 GWh related to management of various buildings, while network operations accounted for 467 GWh. The energy consumption per man-year was 33,000 kWh. Additional to this is energy consumed for transportation purposes, which totalled 150 GWh.

Corporate social responsibility
In 2005, Telenor’s activities and commitments in respect of ethics, the environment and society – our corporate social responsibility – again reinforced Telenor’s position as one of the world’s highest-ranking companies on the Dow Jones Sustainability Indexes.

Diversity and equal opportunities
In 2005, Telenor adopted a new policy underlining the significance of diversity with respect to value creation. The policy has special emphasis on gender, age and ethnicity/nationality. In Norway, Telenor’s compiled figures for gender equality reveal that 37% of Telenor’s total workforce, and 24% of Telenor’s managers, were women.

In 2005, the Board of Directors of Telenor ASA consisted of 40% women and 60% men.

During 2005, and in accordance with the Board’s adopted principles of gender equality, initiatives have been introduced to ensure better balance in relation to gender and competence within the boards of Telenor’s own operations. All representatives who are appointed to Telenor’s various boards are offered training in board work.

Competence and training
Telenor recognises the importance of attracting and retaining talented and motivated employees who, in accordance with Telenor’s Codes of Conduct, display a strong passion for business and who are capable of motivating their colleagues to give their best. Two global processes – Telenor Leadership Development Process (TLDP) and Internal Value Creation (IVC) – were developed further during 2005. TLDP is a tool for systematic evaluation, development and remuneration of managers, while IVC monitors human and process capital as well as the quality of management. All managers at Telenor’s Nordic companies, with the exception of Sonofon, participated in the TLDP process in 2005. Outside the Nordic region, the top two management levels of all mobile companies participated in the process.

REGULATORY ASPECTS
Telenor’s operations adapt to the prevailing regulatory frameworks that the group is subject to in individual markets, both within and outside Norway. The development of equal and fair competition is a key challenge for authorities in all countries, and Telenor seeks to play an active role in the development of robust competition in all markets.

Changing framework conditions and market intervention could potentially affect Telenor’s revenues and profitability, and thus represent a regulatory risk.

The goal of ensuring a well-functioning telecommunications market will be difficult to achieve if individual players in Norway are subject to regulations which are more detailed and extensive than those which apply in other European countries. The fact that players with similar market positions are subjected to different regulations, as is the trend with respect to both fixed-line and mobile interconnections in the Norwegian market, is an obstacle to healthy market development.

During the course of 2005, broadband telephony has gained a firm foothold, and an extensive regulatory process has resulted in provisional clarification as regards regulatory obligations and dispensation schemes for the various broadband telephony services. This involves far-reaching and important changes in the area of telephony.

Telenor maintains a relentless focus on the regulations that its international mobile operations are subject to. Of particular importance for a more stable operating environment is adaptation to the EU’s new legislative framework by the new member states in Eastern Europe. Regulatory developments are also being affected, albeit more indirectly, in other countries seeking closer integration with Europe. Outside Europe, membership of the WTO and alignment with the WTO Agreement are of great significance to secure stable framework conditions for the international operations.

An increase in the regulation of mobile operators is expected both within and outside Europe, also as regards contributions to USO funds, the introduction of mobile number portability and conditions for interconnections. Telenor will continue to work actively to ensure regulatory framework conditions that are as optimal as possible for its operations outside Norway.

ORGANISATION AND PERSONNEL
At year-end 2005, Telenor had 28,500 employees (27,600 man-years), of whom 11,300 were employed in Norway and 17,200 abroad. This reflects an increase of 6,750 employees compared to year-end 2004. As in previous years, Telenor restructured its operations in 2005, with the aim of maximising operational efficiency. This is increasingly important in view of the intensifying competition in the Nordic markets and with respect to products that were formerly highly profitable, such as fixed-line telephony.

At the outset of 2005, Telenor implemented a restructuring of its organisation with the aim of reinforcing and developing its activities in the Nordic region, and at the same time secure further growth in the international mobile market. In order to simplify and strengthen its position in the Nordic market, Telenor established a separate management area for mobile and fixed-line services in the Nordic region, effective from 26 January 2005. At the start of 2006, Telenor’s international mobile commitments were split into two regional areas of responsibility, one for Asia and one for Central and Eastern Europe. The heads of each regional area are members of Telenor’s Group Management.

Based on the group’s strategy for long-term industrial development, Telenor has given greater priority to the process of extracting synergies and of developing its mobile operations through the Global Coordination programme. In view of the importance attached to this work, the head of Global Coordination joined the Group Management at the start of 2006.

Telenor has made a considerable effort to ensure that all organisational restructuring is implemented in the most considerate way possible in relation to the group’s employees, and where workforce reductions have been unavoidable, Telenor has introduced appropriate economic support schemes and offered advisory services.

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 Central and Eastern Europe as well as Asia is to be successful and inspire the necessary confidence of shareholders and investors, then risk assessments and risk management must form part of the group’s core expertise. From the Board’s perspective, it is important that the group takes whatever action is necessary to manage and reduce risk factors, thereby ensuring that the overall risk is always kept within acceptable business limits.

Risk factors of this kind are thoroughly assessed by the Board and management in connection with new investments, and they are an ongoing consideration in relation to existing investments. The group has gradually acquired considerable practical experience relating to the establishment and operation of activities in financially constrained areas. When combined with a broad network of contacts, including the Norwegian authorities at home and abroad, the Board believes that this provides a sound basis for undertaking proper risk assessments. The Board has also subsequently carried out 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 scenario.

Telenor continues to address issues relating to personal safety in the light of changes in the political threats presented in the different countries where Telenor operates. As a result, the responsibility for personal safety has been placed with HR, effective from 2005, with an enhanced focus on contingency plans and the ability to take the necessary action in areas where this is needed. In connection with the recent unrest in Pakistan, the Board considers that the risk assessments made, and the steps taken to protect personnel and technical installations were adequate and satisfactory. The material damage was not significant.

A major challenge and factor of uncertainty in the Norwegian market is presented by new and amended rules and resolutions adopted by regulatory bodies as well as civil actions based on breaches of telecommunications regulations. Internationally, Telenor is exposed to special risk factors in certain countries. Among these risks are political issues, currency fluctuations, legal issues, regulatory matters, partnership risks in joint ventures, etc.

In its international commitments Telenor has sought to balance the risk associated with investments outside Norway by dividing its portfolio between mature and emerging markets.

Telenor is exposed to financial market risks relating to changes in interest rates and exchange rates. Financial instruments are used to hedge against risks of this kind. Telenor has taken the steps necessary to maintain adequate financial flexibility.

GOOD CORPORATE GOVERNANCE
The Board considers good corporate governance to be a necessary requirement for value creation and trustworthiness, and for access to capital. Telenor’s principles for good corporate governance have been developed independently, within the framework of the regulations, requirements and recommendations that the activities are subject to. Telenor ASA is a Norwegian company, but Telenor is also an international group. Companies outside Norway have separate governing bodies in accordance with local laws and regulations in individual countries. Special focus is on establishing and implementing internal regulations, procedures and processes. Telenor operates in accordance with the Norwegian recommendation for good corporate governance from 2005. More detailed information about Telenor’s corporate governance is available on: www.telenor.com/about/group/cg/

Telenor’s shares are listed on Nasdaq in the US, and this involves full compliance with regulations promulgated by the Securities Exchange Commission and Nasdaq, and the Sarbanes-Oxley Act (SOX). As from 2006, Telenor’s CEO and CFO will be required to submit a written assessment of the effectiveness of the company’s internal control over financial reporting (SOX Section 404). In order to ensure full compliance with these US requirements within the deadline of 31 December 2006, Telenor has initiated a comprehensive, high-priority SOX project.

All employees and associates of Telenor are subject to regulations and guidelines based on Telenor’s values. Telenor’s Codes of Conduct are applicable to Board members, managers and employees, hired staff and anyone acting on behalf of Telenor. More detailed information about Telenor’s Codes of Conduct is available on: www.telenor.com/csr/telenors/coc/

COMPOSITION AND WORK OF THE BOARD
Following the death of Einar Førde in September 2004, the Corporate Assembly appointed Paul Bergqvist to the Board on 7 April 2005. None of the Board members, apart from those elected by the employees, are employed by Telenor or engaged in work on behalf of Telenor. Telenor’s Board works in accordance with its own Instructions for Board Members and with guidelines for its work and procedures, and the Board has itself carried out an assessment of its activities and competence. It is a matter of considerable importance to the Board to ensure that Telenor has good corporate governance systems. Eleven Board meetings were held in 2005.

OUTLOOK FOR 2006
The strong subscriber growth in Telenor’s mobile operations in 2005 provides the group with a sound basis for further revenue growth. We expect reported revenues to increase by 25 – 30%, based on the current structure.

We also expect high EBITDA growth, mainly driven by the international mobile operations. Telenor will continue the process of identifying initiatives that can contribute to reduce costs. The EBITDA margin for 2006, before other income and expenses, is expected to be around 33%.

We expect high levels of capital expenditure in the coming period, and the ratio of capital expenditure to operating revenues is expected to be above 20%. Capital expenditure is likely to be driven by rapid subscription growth in Telenor’s international mobile operations.

A steadily increasing proportion of Telenor’s operating revenues and profits are generated by operations outside Norway. Fluctuations in exchange rates will affect the figures reported in NOK to an increasing extent. Political risks, including regulatory matters, can also affect profits, and seasonal variations can also be reflected in the interim results. The Board will be particularly alert to these challenges.