EESTI TELEKOM

COMMENTARY TO FINANCIAL RESULTS



THE PRELIMINARY RESULTS OF 2001, EEK



7 February 2002









        THE PRELIMINARY FINANCIAL RESULTS OF 2001

          ‘The first year in full competition’

                            

Eesti  Telekom, the leading provider of telecommunication

services in Estonia, today announces its results for  the

financial year ending 31 December 2001.





Financial highlights

                                2001         2000      

                                                  Gain/loss

                                                      %

Total revenues, mEEK           4,285        3,973          8

EBITDA, mEEK                   1,937        2,078         -7

EBITDA margin, %                  45           52           

EBIT, mEEK                       795        1,109        -28

EBIT margin, %                    19           28           

Profits  before  taxes,          818        1,097        -25

mEEK

Net   profits  for  the          787        1,122        -30

period, mEEK

EPS, EEK                        5.73         8.17        -30

No. of A- shares         137,383,178  137,383,178           

Investments*), mEEK              969        1,268        -23

Net gearing, %                  -9.0         -6.9           

*) excl. purchase of commercial papers



Commenting  on  these  financial results,  Chairman  Jaan

Männik  stressed  the following: “In 2001,  the  Estonian

Telekom group proved its adaptability – to deal with  the

changes  in  the  market environment, to  go  along  with

technological  innovations,  and  to  comply   with   the

diversifying needs of its customers.”



For further information, please contact:



Krister  Björkqvist                    +372 6 272 465

CFO



Hille Võrk                             +372 6 272 460

Financial Manager

CHAIRMAN’S STATEMENT



The  year 2001 was a complicated and challenging one  for

the  Eesti Telekom group. The market opened up  for  full

competition, so that, especially during the first half of

the  year, we had to act under the extremely strong price

pressure  created by the new entrants. At the same  time,

the  regulatory  environment was  in  continuous  change,

resulting   in   the  implementation   to   several   new

limitations  for the dominant market operators.  Now,  at

the  beginning of 2002, I would say that we  successfully

faced  all  the challenges that we were confronted  with,

and much more stability is expected from the coming year.



In addition to dealing with our competitors, and adapting

to  regulations,  several new technological  developments

were  introduced. GPRS was launched into commercial  use.

Penetration of ADSL lines rose above the Western European

average.  Both  operators of the group  launched  several

new,  innovative services in traditional, as well as  new

service  areas.  Co-operation with domestic  and  foreign

telecommunication   and  media  companies   has   allowed

expansion   of   our   activities  into   areas   outside

traditional telecommunications, which is very  important,

taking  into  account the limited size  of  the  Estonian

market.



Revenues, expenses, and profits



In 2001, consolidated revenues of the Eesti Telekom Group

amounted to 4,285 mln EEK, showing a rise of 8%, compared

to  the year 2000. EBITDA of the Group was 1,937 mln EEK,

down  by  7  %  with an EBITDA margin of  45%.  Operating

expenses grew by 24%, compared to the year 2000, to 2,347

mln  EEK. Net profit of the Eesti Telekom Group  in  2001

amounted to 787 mln EEK, showing a fall of 30 %. Earnings

per  share  were  5.73  EEK. The  consolidated  financial

results have been influenced by several unusual factors:



  Ų     An  insolvent company, OÜ Albufent, had  filed  a

     lawsuit against AS Eesti Telefon in the amount of 55 mln

     EEK.  On  6 February 2001, OÜ Albufent submitted  an

     application to the Tallinn City Court to unconditionally

     drop the claim against AS Eesti Telefon. On 19 February

     2001, the Tallinn City Court issued a decree ending the

     proceedings in the aforementioned case. But over the

     years, AS Eesti Telefon had built up a monetary reserve,

     amounting to 46 mln EEK, to deal with this claim. Since

     the case was dismissed, the company was now able  to

     release this sum through the profit and loss account.

Ų    On 11 April 2001, AS Eesti Telefon concluded an

agreement for the sale of shares to Eniro Eesti AS. In

accordance with the agreement, AS Eesti Telefon sold its

60% of AS Teabeliin to Eniro Eesti AS, a subsidiary of

Eniro AB. The sales price of the shares was 43.5 mln EEK.

The capital gain from the transaction, in the amount of

32 mln EEK, is accounted as revenue from subsidiaries.

  Ų     In  accordance  with IAS 12,  the  principles  of

     accounting for the income tax calculated on dividends

     have changed. Until now, income tax on dividends was

     subtracted from the retained profits. Starting in 2001,

     the tax is accounted through the profit and loss account.

     To  ensure  accurate  comparability,  the  financial

     statements for 2000 have been adjusted accordingly.

Ų    New interconnection agreements concluded at the

beginning of 2001, between Eesti Telefon and mobile

operators, have had significant influence on the total

revenues and expenses of both the Eesti Telefon Group and

the EMT Group.

  Ų    Following first year of competition Eesti Telefon

     has reviewed its assets under IAS 36 and made a 100 mln

     EEK write-off.



The year 2001 was a challenging one for AS Eesti Telefon,

the   fixed  line  operator  of  the  Group.   The  fixed

communications market became wide open for competition on

1  January  2001.   Several other operators  entered  the

market,  causing a significant reduction in international

calls  tariffs.  However,  AS  Eesti  Telefon  faced  the

challenge by making its tariffs more flexible,  with  the

introduction  of bonus packages, and with  various  other

promotional activities.  In the middle of the  year,  the

rate  of  the tariff reductions slowed down,  and  market

shares  of  Eesti  Telefon  stabilised.  At  the  end  of

December 2001, the company estimated its market share  of

total  call  minutes, domestic call minutes,  and  mobile

minutes  to  be  91%,  90%, and 75%  respectively.  Eesti

Telefon estimated its market share of international  call

minutes to be 70%. Another step for maintaining customers

was  taken  in  January  2002.  New  price-packages  were

introduced,   which   allow  customers   with   different

communication   needs   to   choose   between   different

combinations  of  monthly fee and  minute  tariffs,  thus

optimising their expenditures on communications.



AS  Eesti  Telefon does not want to limit its  activities

with   traditional  voice  communications.  Several   new

services were launched in 2001. Eesti Telefon has made  a

powerful  entry into the rental services and IT solutions

market.  Based on the ASP (Applications Service Provider)

business  model,  the company offers analytical  software

Atlas  Oraakel, communication and teamwork solution Atlas

Maestro, Internet-based time-scheduling application Atlas

E-administrator,  equipment hosting service  Atlas  Tele-

hotel,  rental  space for video and audio  records  Atlas

Real-Time,  Web-based accounting software rental  service

B24,  rental  of e-shopping applications, IP-based  voice

communication   solutions,  and  call-handling   systems.

During year 2001, Eesti Telefon started co-operation with

several  foreign  partners:  Wicom  Communications,  SAS,

Microsoft, Infonet.



Among  the  main revenue categories of AS Eesti  Telefon,

domestic  call revenues grew by 1%, revenues from  mobile

communications  by  17%,  and dial-up  revenues  by  21%,

compared  to 2000. Revenues from data communications  and

Internet   connections  grew  by  144%.   Revenues   from

international  calls fell by 46%, and main line  revenues

by 6%.



To  increase  its  efficiency,  Eesti  Telefon  has  also

reviewed  its  cost structure. As a result, the  decision

was  made  to  sell  17  office buildings  and  technical

facilities  with  a total area of 21,500  square  metres.

Most  of  these  premises were analog exchange  premises,

which  had become obsolete as a result of digitalisation.

Also, the current head-office of the company will be  put

up  for sale. Eesti Telefon expects to save 5 mln EEK per

year by cutting operating expenses with this sale.



In  order to promote higher efficiency, and to be able to

concentrate on its main activities, Eesti Telefon  turned

over  all  its customer service activities to  Hallo!,  a

chain   store  belonging  to  AS  Telefonipood,  a   100%

subsidiary of Eesti Telefon. At the same time, the number

of Eesti Telefon customer service centres  doubled to 39.



The number of employees of AS Eesti Telefon fell to 1,552

by the end of the year 2001 (December 2000:2,379).



The  consolidated  total revenues of  the  Eesti  Telefon

group in 2001 amounted to 2,872 mln EEK, a rise of  7  %,

compared   to   the   year   2000.   The   increase    in

interconnection  revenue  amounted  to   204   mln   EEK.

Operating  expenses of the group rose by 30 %,  to  1,989

mln EEK, of which, interconnection expenses amount to 430

mln  EEK.  The  EBITDA and the net profit  of  the  Eesti

Telefon   group  were  883  mln  EEK  and  49   mln   EEK

respectively, down by 24 % and 88 %.



A  survey of the Estonian Communications Board shows that

by  the  end  of 2001, mobile penetration in Estonia  had

reached  52%.  The same source estimated  AS  EMT’s  (the

mobile operator of the Eesti Telekom Group) market  share

to  be 54%.  AS EMT itself reported its number of clients

at  the  end of 2001 to be 382.7 thousand. The net growth

in  the number of customers in 2001 was 54.3 thousand. By

the  end  of December 2001, the company had 127  thousand

prepaid customers (net growth of 18.6 thousand) and 225.7

post-paid   customers  (net  growth  of  35.7  thousand).

Monthly  ARPU in 2001 was 452 EEK per customer  (449  EEK

per customer in 2000).



An  important development in 2001 was the launch of GPRS.

The  feedback  from  customers has been  positive.  Also,

several new value added services became available for the

operator’s  customers.  With the orientation  to  younger

customers, co-operation was started with several Internet

portals and TV channels. It became possible for customers

to  load logos or sounds from the Internet, send SMS from

a  portal,  or to a TV SMS-chat. M-parking and m-commerce

were  developed further. EMT started to make it  possible

for   appliances  to  be  remote  controlled  by   mobile

telephone.



The total revenues of the EMT group amounted to 2,217 mln

EEK, up by 402 mln EEK or 22 %, of which, interconnection

revenues amount to 293 EEK. The operating expenses of the

EMT Group were 1,143 mln EEK, up by 273 mln EEK or 31  %,

of which, interconnection fees amount to 163 mln EEK. The

EBITDA  of the group amounted to 1,074 mln EEK (a  growth

of  14  %). The EBITDA margin reached 48%. The net profit

for the year was 765 mln EEK, up by 13 %, compared to the

year 2000.



Balance sheet and cash flow



At  the  end  of December 2001, the total assets  of  the

Eesti  Telekom group amounted to 4,243 mln EEK  (December

2000: 4,621 mln EEK). There has been a reduction in  both

long  term and short term debt obligations. In July 2001,

AS  Eesti Telekom repurchased one-year bonds in the total

amount  of  100  mln  EEK.  AS Eesti  Telekom  made  loan

repayments, both scheduled and pre-scheduled. At the  end

of  2001, the net gearing of the Eesti Telekom group  was

–9.0%.



The  net  operating  cash flow was strong,  amounting  to

1,736 mln EEK. The total cash flow of the group was  –206

mln  EEK.  The  negative total cash  flow  resulted  from

financial  outflows in the total amount of  982  mln  EEK

(incl.  dividend  payouts of 756 mln EEK)  and  investing

activities in the total amount of 960 mln EEK.



Investments



In  2001,  the  Eesti  Telekom group invested,  excluding

investments into commercial papers, 969 mln EEK  in  2001

(24% less than in 2000). The Eesti Telefon group invested

508  mln  EEK, the EMT group 459 mln EEK. Resulting  from

changes  in  the  business environment,  in  2001,  Eesti

Telefon  decreased its planned investments   by  300  mln

EEK.  The  aim  of  this reduction was  to  increase  the

profitability  of investments. The main investments  area

for  Eesti  Telefon  was ADSL network.  The  majority  of

investments   made  by  EMT  went  into  base   stations,

exchanges, and IT systems.



The number of main lines per 100 inhabitants was 34.9  at

the end of December 2001 (December 2000: 35.9). In total,

501,691  Eesti Telefon main lines were in use in December

2001.  The  number  of lines per employee  was  321.  The

digitalisation  rate  has reached 71.8%  (December  2000:

71.2%).  By  the  end  of  the  year  17  thousand   ADSL

connections  were installed, or 1.2 connections  per  100

inhabitants.



One of the most important investment areas for AS EMT was

GPRS.  The  GPRS network, as a commercial endeavour,  was

launched  on  1  July  2001.  The  service  can  be  used

everywhere in Estonia where GSM is available. EMT intends

to support the development of GPRS in Estonia. In May,  a

Mobile  Applications  Initiative  Centre  was  opened  at

Tallinn  Technical University in co-operation  with  EMT.

The centre, the first of its kind in Estonia, is a mobile

communications  testing environment ideal  for  personnel

training  and  product development. These facilities  are

also suitable for designing new GPRS and UMTS networks.



Both  subsidiaries of the Eesti Telekom  group  are  also

supporting    the    development    of    the     general

telecommunications environment in Estonia. On 16 February

2001,  Eesti Telefon, EMT, and two major commercial banks

signed   an  agreement  for  the  establishment   of   AS

Sertifitseerimiskeskus (Certification  Centre  Ltd.)  The

centre will provide certification related services, based

upon the essential public infrastructure. By statute, the

centre   will  deal  basically  with  certification   and

timestamps.  12  mln  EEK  have been  invested  into  the

founding of AS Sertifitseerimiskeskus, 3 mln EEK by  each

participant in the project. At the beginning of 2002, the

Parliament of Estonia made electronic ID-cards compulsory

for   all   Estonian  residents,  which   increased   the

significance of  the PKI project.



On  7  March 2001, several Estonian companies,  including

Eesti  Telefon  and  EMT, together with  the  government,

introduced the look@world project, aimed at promoting the

use of Internet, thereby improving the quality of life in

Estonia  and the nation’s competitiveness in Europe.  One

aim  of the participants is to raise Internet penetration

of  Estonia,  in  three years, to 74 %,  thus  surpassing

Finland.  Both Eesti Telefon and EMT will invest  30  mln

EEK  into the project during the next three years.  Eesti

Telefon’s main contribution within the framework  of  the

project will be to give access to Internet services to as

many people as possible, irregardless of where they live,

or   their   income;   establish  a  permanent   Internet

connection  for non-profit organisations at  preferential

rates;  develop  an infrastructure needed  for  essential

consumer  services  and  an  Internet  environment;   and

support  Internet  training programs. EMT’s  contribution

would  be to provide access to Internet at all times  and

everywhere,  coordinate co-operation between  the  public

and  private sectors, establish an innovation centre, and

support  and  promote info-technological   schooling  and

training programs.



An important investment project in 2002 will be UMTS. The

Ministry  of  Roads and Communications is  preparing  the

necessary legislation for issuing third generation mobile

phone service licenses. It is expected that four licenses

will   be  issued.  The  expected  launch  of  the  third

generation technology will be in 2003-2004.



Regulatory issues



2001  was  the  first  year of full  competition  in  the

Estonian  telecommunications market. Numerous  regulative

acts  became effective and had to be implemented. Several

debates between operators and regulatory authorities rose

out of the different interpretations of the acts.



On  13 February 2001, the Estonian Parliament adopted  an

amendment to the Telecommunications Act,  which  set  the

upper  limits for interconnection service fees (effective

until  31  December 2001) that the major operators  could

charge.   Eesti  Telekom considered  the  stipulating  of

limits for interconnection service fees (on top of a cost-

based  pricing requirement) to be unjustified and unfair.

Eesti  Telefon filed suit to overturn an 18 April  ruling

of  the Communications Board that forced Eesti Telefon to

reduce  the  interconnection  service  fees  which  Eesti

Telefon  was charging other operators, so that  the  fees

would  be in accordance with the amendment. Eesti Telefon

requested   that  the  Communications  Board  ruling   be

suspended  for the duration of the case, which the  Court

refused   to   do.   On   10   December   2001,   Tallinn

Administrative   Court   decided   in   favour   of   the

Communications Board. However, Eesti Telefon had  already

started to implement the ruling, by discounting its cost-

based  interconnection service fees. New  interconnection

contracts had already been concluded with some operators.



On  21 December 2001, the Communications Board ordered AS

Eesti Telefon to lower the regional level interconnection

tariffs in 2002, so that they would be in accordance with

the   Telecommunications  Act  and  the  methodology   of

accounting    the   costs   of   an   operator    of    a

telecommunications network as established by a decree  of

the  Government. Eesti Telefon will comply and lower  the

tariffs by 1 cent.



On 1 April 2001, Eesti Telefon changed the classification

and  tariffs  of calls. As of that date, local  and  long

distance  calls  were  replaced by  national  calls  with

unitary  tariffs.  Following the recommendations  of  the

National  Communications  Board,  methodologies  for  the

calculation  of  end-customer and  interconnection  costs

were  unified. The same tariffs became effective for  all

Estonian operators. The Competition Board reacted  on  24

April  2001,  by  ruling  that, in  accordance  with  the

Competition  Act,  Eesti Telefon must  cancel  these  new

tariffs.   Lower   tariffs  were   recommended   by   the

Competition Board for the service calculated on the basis

of justified pricing, traditional proportions between the

price-rise and the CPI growth rate, and acceptable return

on  equity.  The Competition Board filed a  case  against

Eesti Telefon in the Administrative Court.  A fine of  up

to 5% of annual net sales can be imposed for abuse of the

position of dominant market operator.



Eesti Telefon is of the opinion that the price between 14

and 34 cents for a call within the network is cost-based.

Eesti  Telefon  did  not  accept  the  complaint  by  the

Competition Board, and on 23 May 2001, took the  case  to

Tallinn Administrative Court. On 17 January 2002, Tallinn

Administrative Court decided in favour of Eesti  Telefon,

and dismissed the Competition Board’s complaint.



On  13  November  2001,  AS EMT was  declared  to  be  an

operator  with  significant market power in  the  general

mobile service market in 2002. EMT decided to contest the

Directive  in court, because it found that the  directive

was   not   in  conformity  with  law.  Along  with   the

administrative  appeal, EMT also applied  for  suspending

the  performance  of the directive. Court  satisfied  the

application  by  its ruling of January 18,  2002,  as  it

considered EMT's application to be grounded. AS  EMT  was

not  declared  to be an operator with significant  market

power in interconnection services market. On 26 November,

the Communications Board declared AS Eesti Telefon to  be

an  operator with significant market power, in  2002,  in

the  public telephone service market, public leased  line

service   market,  and  public  interconnection   service

market.



The Estonian Parliament has passed the implementation act

of  the  property statutes, which stipulate the right  of

way  issues for Eesti Telefon. At the moment, we have not

reserved  any  funds  for  the  settlement  of  potential

landowners’ claims.



Annual General Meeting



The  Annual  General  Meeting of the shareholders  of  AS

Eesti  Telekom  took  place  23  May  2001.  The  meeting

approved  Annual Report 2000 and the allocation  proposal

for  the net profit. 12,421 thousand EEK were entered  as

the  mandatory reserve capital. It was decided  that  the

owners of A-shares be paid ordinary dividends of 4.00 EEK

per  share  (in  total, 550 mln EEK, or 49%  of  the  net

profit   of   2000).  Also,  it  was  decided   that   an

“extraordinary dividends” payment of 1.50 EEK  per  share

(in  total,  206  mln EEK) be made to the  owners  of  A-

shares.  The owner of B-share was entitled to 10,000  EEK

of the dividends. The rest of the accumulated net profit,

in  the  amount of 1,068,854 thousand EEK,  was  retained

undistributed.



The  Annual  General  Meeting also  authorised  AS  Eesti

Telekom to acquire, within one year (until 23 May  2002),

up  to 5% of the A-series shares of AS Eesti Telekom.  Up

until  now, no shares have been re-acquired by  AS  Eesti

Telekom.





Hille Võrk

Financial Manager

6 272 460