Market announcement

Title

EXPLANATORY MEMORANDUM TO THE INTERIM REPORT OF AS STARMAN'S GROUP FOR THE FIRST HALF-YEAR 2008

Message

General                                                                         
Success of Starman continued in the first half-year 2008. The company maintained
its strong position in the spheres of cable-TV and the internet and further     
strengthened its position in the telephony market. Starman is currently offering
the best bundled triple play service in the home user sector. The triple play   
service is now available to the majority of the company's customers. Through its
cable network, Starman is currently represented in most of Estonia's major      
cities, predominantly in densely populated areas. In December 2006, the product 
portfolio of Starman was supplemented with a DTT (digital terrestrial           
television) service. ZUUMtv, which was positioned separately, is transmitted    
through air and Starman's cable network is not used for delivering this product.
ZUUMtv is expected to attract a considerable number of new customers in the near
future, especially in those regions of Estonia where Starman was not present    
thus far.                                                                       
A consortium of financial investors led by Bancroft Private Equity LLP acquired 
a majority holding in Starman at the end of 2007. At the moment, Baltic Moontech
Investments Holding AS representing the above financial investors holds a total 
of 8,505,727 shares in Starman, i.e. 65.16% of the company's share capital.     
Given the current structure of shareholders, delisting of the company from      
Tallinn Stock Exchange will probably be applied for in the near future.         
Starman Group's total revenue for the first half-year 2008 amounted to 10.7     
million euros, representing a 22% increase compared to the same period a year   
ago. EBITDA for the first half-year 2008 amounted to 3.5 million euros and net  
profit attributable to shareholders from ordinary business operations to 1.7    
million euros - respectively an 12% and 27% increase compared to the first half 
of the previous year. The good performance is built on the company's successful 
long-term activities relating to traditional services, where the best-ever      
results were achieved both in terms of volume and profitability. As expected,   
the starting ZUUMtv had a negative impact on Starman's profit figures. A drop of
1.0 million euros in EBITDA - Starman's main performance indicator - is directly
attributable to ZUUMtv, plus certain indirect costs whose amount cannot be      
determined precisely as they were allocated to a number of different products.  
The negative impact of ZUUMtv on the financial results of the Group is          
anticipated to continue also in the near future. However, in the long run the   
new product is expected to strengthen the company's market position and         
profitability.                                                                  

Financial ratios                                                                
A selection of ratios for evaluating the economic activities in the first       
half-year 2008:                                                                 
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|                                | 2006         | 2007         | 2008 H1       |
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| Sales increase                 | 25%          | 19%          | 22%           |
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| EBITDA margin                  | 40%          | 33%          | 33%           |
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| Gross margin                   | 21%          | 13%          | 13%           |
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| Net margin                     | 19%          | 13%          | 8%            |
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| Revenue/average assets         | 0.72         | 0.73         | 0.79          |
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|                                |              |              |               |
--------------------------------------------------------------------------------
| Equity ratio                   | 58%          | 57%          | 54%           |
--------------------------------------------------------------------------------
| Debt to equity                 | 0.56         | 0.57         | 0.63          |
--------------------------------------------------------------------------------
| Debt/EBITDA                    | 1.19         | 1.41         | 1.36          |
--------------------------------------------------------------------------------
| Investments/EBITDA             | 0.83         | 1.15         | 1.01          |
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|                                |              |              |               |
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| Current ratio                  | 1.09         | 0.91         | 1.02*         |
--------------------------------------------------------------------------------
| Invoice turnover rate (annual) | 20.0         | 21.5         | 25.4          |
--------------------------------------------------------------------------------


Definitions:                                                                    
Sales increase = increase compared to the same period last                      
year                                                                            
EBITDA = operating profit + depreciation and amortisation                       
EBITDA margin =                                                                 
EBITDA / total revenue                                                          
Gross margin = operating profit / total revenue                                 
Net                                                                             
margin = net profit attributable to shareholders / total revenue                
Revenue /                                                                       
average assets - for comparison purposes, the revenue for the first half-year   
2008 has been multiplied by 2                                                   
Equity ratio = equity / total assets                                            
Debt =                                                                          
borrowings + long-term borrowings                                               
Debt to EBITDA - for comparison purposes,                                       
EBITDA for the first half-year 2008 has been multiplied by 2                    
Current ratio =                                                                 
current assets / current liabilities                                            
Invoice turnover rate = revenue for the                                         
period / accounts receivable at the end of the period; for comparison purposes, 
revenue for the first half-year 2008 has been multiplied by 2                   
* As to this ratio, it should be borne in mind that because of the special      
nature of the accounting principles applied in preparing this report, only loans
repayable within the current financial year are recognised as short-term        
borrowings under current liabilities (i.e. in the case of the first half-year,  
loan payments due within the following six months) unlike the year-end figures  
where all loans repayable within the following year are recognised as short-term
borrowings. Consequently, the current ratio for the first half-year is somewhat 
overestimated vis-à-vis the year-end figures. Upon eliminating this difference  
from the figures of the first half-year 2008, the current ratio amounts to 0.86.
Group structure                                                                 
Starman Group consists of AS Starman being the parent company and, starting from
October 2006, Eesti Digitaaltelevisiooni AS being a subsidiary company. 66% of  
shares in Eesti Digitaaltelevisiooni AS are held by Starman and 34% of the      
shares by AS Levira. The financial results of Eesti Digitaaltelevisiooni AS have
been consolidated into the Group report on a line-by-line basis, separately     
indicating the minority share.                                                  

Revenue and expenses                                                            
Traditionally, cable television and internet services contributed the majority  
of Starman's total revenue for the first half-year 2008, accounting for 45% and 
30% of total revenue, respectively. The share of telephony service in total     
revenues for the half-year was 16% and that of the DTT service, growing much    
faster than the others services, was 6%.                                        
Revenue from cable television services increased by 17% compared to the first   
half-year 2007. Organic growth in the market has mostly been achieved at the    
expense of price increase in recent years. In the first quarter of 2008 the     
prices of Starman's cable television services further approached those of       
countries with a similar living standard. In addition to the regular price      
increase, the ARPU (average revenue per user) is also supported by structural   
changes. As regards structural changes, the triple packages that do not contain 
smaller programme ranges and the new possibilities such as digital television   
should be mentioned. At the end of June 2008, the company had a total of 137    
thousand cable television customers, 6.2% of which were digital television      
users. The number of cable television customers at the end of June exceeded the 
last year's relevant figure by 3.9%, which is quite a good result given the     
saturated market and tightened competition. The increase in customer numbers in 
the second quarter of 2008 resulted primarily from the expansion of the cable   
network. In the first quarter of 2008 Starman launched its own television       
channel called Neljas. Only Starman's customers can view the channel whose aim  
is to enhance the range of products offered to customers.                       
Revenue from internet services increased by 12%, compared to the first half of  
the previous year. At the end of June 2008, the company had 51 thousand internet
customers - a 19% increase compared to the same period a year ago. Starman      
maintained its position as the market leader of broadband internet for private  
customers in its footprint. In line with the general impacts of the market, the 
ARPU continued to show a downward trend. However, lately there has been a       
certain deceleration of the decline rate - the average figure of the first      
half-year 2008 dropped 5% compared to the same figure a year ago. Starman's     
popular triple packages in which the internet services are cheaper have a major 
impact on the internet ARPU. However, the supporting influence of the triple    
packages on other services and, hence, also on the average aggregate revenue per
user cannot be disregarded.                                                     
As expected, the period of accelerated growth of the telephony service has      
ended; however, the revenue for the first half-year 2008 has still increased 17%
in comparison with the same period a year ago. As of the end of June 2008 the   
company had 48 thousand telephone clients, i.e. 31% more than at the same time  
last year. The ARPU of the telephony service, which had been quite stable       
earlier, has been declining significantly from the beginning of 2007. A similar 
trend continued in the first half-year 2008 - the half-year's average figure    
decreased 12% compared to the last year's relevant figure.                      
Starman views its cable television, internet and telephony services as a single 
integrated service. Since the provision of the integrated service has remained a
part of the corporate strategy for a long period of time, and the services are  
designed to support each other, a separate analysis of the respective segments  
might not give the most accurate picture. In the first half-year 2008, the      
average aggregate revenue from the given services per client was 14% higher in  
comparison with the same period a year ago.                                     
Important positive developments regarding ZUUMtv occurred at the beginning of   
2008. By now, eight Estonian-language TV channels, including the three main     
local channels, are available on the digital platform. The fact that not all of 
the main local channels were available on the digital platform affected the     
whole of the first year of operation of ZUUMtv, constituting a major divergence 
from the initial business plan. Given also the positive developments relating to
the fact that the switchover to digital broadcasting will take place 2 years    
earlier, not in 2012 as first planned, Eesti Digitaaltelevisiooni AS has much   
better chances of making up for the initial setback. Revenue from the DTT       
service was up 5.4 times on the first half-year of the previous year, with      
growth in the second quarter being 50% compared to the first quarter. In June   
2008 the DTT service already constituted 7.1% of the company's total revenue,   
and this share is expected to increase significantly in the near future. At the 
end of June 2008, Eesti Digitaaltelevisiooni AS had 16.5 thousand customers and 
ZUUMtv covered 97% of Estonian households.                                      
Starman's operating expenses amounted to 7.2 million euros in the first         
half-year 2008, having grown 28% compared to the same period in the previous    
year. The fact that the operating expenses grew faster than the revenue is      
attributable to ZUUMtv to a notable extent - when eliminating the direct costs  
relating to this newly launched product, the increase in operating expenses     
would amount to 13%. The impact of ZUUMtv is most notable among expenses        
reported under “Services purchased” which include the transmission charge       
payable to Levira as a major expense item. The amount of the transmission charge
depends primarily on coverage, and therefore its impact on profit figures after 
the product has just been introduced and customer figures are far from the      
company's long-term targets is quite substantial. In relation to the launch of  
Starman's own TV channel, the growth in programme costs has been much greater   
than the growth in revenue. Of major expense items, transportation expenses     
(increases in the price of fuel and insurance, and new vehicles added to the    
fleet), office expenses (a need for more office space due to an increase in the 
number of employees) and personnel expenses have also shown fast growth compared
to the same period a year ago. However, in respect of certain expense items     
growth figures have been quite modest and in some cases even negative. A        
decrease of expenses related to the rental of communication ducts should also be
mentioned. These expenses have a further potential from previous periods (see   
Note 14 for more details).                                                      
In the first half-year 2008, personnel expenses increased 28% year on year. As  
regards personnel expenses, it should be noted that this indicator includes 81% 
of the total wage fund, since the remainder is capitalised in accordance with   
the corporate accounting rules. The average number of employees was 268 in the  
first half-year 2008 (223 in the first half-year 2007). As at 30 June 2008, the 
company employed 287 people. Part-time employees accounted for 25% of the staff.
The average number of employees translated to the full employment equivalent was
231 in the first half-year 2008, up 16% compared to the same figure a year ago. 
The figure grew in the second quarter of 2008 in connection with the expansion  
of the cable network and a continuing decrease in some outsourced services.     
As to expenses related to asset valuation, the provision for bad debts amounted 
to 67 thousand euros, i.e. just 0.6% of the turnover for the period (0.4% in the
first half-year 2007). Losses and discounts of inventories totalled 46 thousand 
euros in the first half-year 2008 (28 thousand euros in the first half-year     
2007).                                                                          
EBITDA for the first half-year 2008 amounted to 3.5 million euros. When         
eliminating the direct influence of ZUUMtv, the EBITDA margin would amount to an
excellent 45%. Hence, the first half-year 2008 was record-breaking in terms of  
profitability of traditional services when compared to similar periods in       
previous years.                                                                 
Depreciation costs increased by 19%, compared to the first half-year 2006. Owing
to the extensive investing activities carried out in recent years, the          
depreciation costs continued to have a considerable impact on the profit        
figures. However, a deceleration of the growth of depreciation costs can be     
noted for the first time in recent years. Considering the fact that traditional 
services have reached a mature stage, the continuation of this trend could only 
be hindered by an extremely successful growth in the sphere of the DTT service. 
The net profit attributable to shareholders for the first half-year 2008        
amounted to 0.9 million euros. The result for minority shareholders - their     
share in the loss of Eesti Digitaaltelevisiooni AS - was 0.4 million euros      
negative. The net profit was adversely influenced by expenses not related to    
ordinary business operations, which amounted to 0.8 million euros (see Notes 3, 
8 and 11 for more details).                                                     

Balance sheet, investments and financing                                        
In the first half-year 2008, Starman's investments in fixed assets amounted to  
3.6 million euros, representing a 4% decrease compared to the same period a year
ago. The company made the following investments: 2.0 million euros in cable     
network construction and renovation; 0.7 million euros in STBs (incl. 0.68      
million for provision of ZUUMtv), 0.3 million euros in internet equipment (incl.
0.27 million euros in Head-Ends); 0.2 million euros in telephone modems; and 0.3
million euros in other spheres.                                                 
Among investments in the cable network, projects aiming at network expansion    
stand out even more than in the previous year. While a few years ago work aimed 
at the modernisation and enhancement of the data communication capability of the
existing network constituted a major part of network investments, the relative  
share of that particular type of network investments is diminishing, given the  
high level already achieved. As at 30 June 2008, Starman's network covered 276  
thousand households with 260 thousand - i.e. 94% - of the households being      
served by a network with the data communication facility (as at 30.06.07 the    
comparable figures were 258 thousand, 237 thousand and 92%, respectively). In   
the first half-year 2008, the acquisition of cable networks from AS NOM was the 
major network investment. As a result, the coverage of Starman's network now    
includes Paldiski and Kohila; in addition, the market position was strengthened 
in Kristiine district in Tallinn, and in Kadrina. The acquisition of the        
out-of-date network temporarily reduced the share of Starman's network with data
communication capacity; however, the company has started to upgrade the network 
and customers receiving the signal from the network will be able to use all the 
major telecommunication services of Starman in the near future. As regards major
network investments, the continuation of network expansion projects in Tallinn, 
particularly in the Kalamaja district of Tallinn, in Haapsalu and Võru as well  
as projects aimed at enhancement of the network's data communication capability 
and expansion of the state-of-the-art network in Kuressaare, Paide and Valga    
should be mentioned.                                                            
Investments in telephone modems and STBs are directly related to the growth in  
the number of customers. Investments in internet equipment primarily enhanced   
quality in the environment of ever growing data communication volumes.          
Starman's balance sheet structure continues to be characterised by high         
capitalisation, a relatively low debt level and a sufficient liquidity. As to   
financing, mostly the company's own resources were used in the first half-year  
2008. External funding increased by 1.2 million euros which accounted for       
approximately one-third of investments in fixed assets during the period. The   
high level of inventories as at 30 June 2008 is mainly due to the network       
expansion projects to be launched in the near future and the STBs designated for
the ZUUMtv offer included in the balance sheet of Eesti Digitaaltelevisiooni AS.
Considering the delivery schedule of the STBs designated for the ZUUMtv offer   
and the anticipated market capacities for the new product, the level of these   
inventories will probably remain high also in the future.                       





Rändy Hütsi                                                                     
Member of the Management Board                                                  
+372 677 9977                                                                   

Additional information: AS Starman interim report for first half-year 2008