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Consolidated Annual Report of AS Eesti Telekom 2008, EUR

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MANAGEMENT REPORT                                                               

General information                                                             

The principal activity of Eesti Telekom Group, the parent company of which is AS
Eesti Telekom (registration number 10234957; address: Valge 16, 19095 Tallinn), 
is the provision of telecommunications services.                                

Since 1999, the shares of AS Eesti Telekom have been listed on the Tallinn and  
London stock exchange (OMX: ETLAT / LSE: EETD).                                 

Changes in the structure of the Eesti Telekom Group                             
In October 2008, AS MicroLink Eesti acquired the majority participation in the  
IT Training Center.  The acquisition of the training company gives MicroLink the
opportunity to provide high-quality training and consultation services to both  
clients and partners in various cooperation projects in all three Baltic        
countries.                                                                      

The ownership structure of AS Eesti Telekom                                     
In the first quarter of 2008, TeliaSonera AB increased its share of AS Eesti    
Telekom (through its subsidiary Baltic Tele AB). TeliaSonera acquired an        
additional 1,197,400 AS Eesti Telekom shares and thereby increased its          
participation to 60.12%. As of the end of 2008, 24.17% of the shares belong to  
the government of Estonia and 3.00% to Estonian Development Fund.               

As of 31 December 2008, the ratio of freely traded shares converted to GDRs was 
12.71%. Of these, 12.91% were converted into GDRs traded on the London Stock    
Exchange.                                                                       

As of 31 December 2008, the 10 largest shareholders in AS Eesti Telekom were:   

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--------------------------------------------------------------------------------
|                                            |        31 December 2008         |
--------------------------------------------------------------------------------
|                                            |    Number of    | Participation |
|                                            |   securities    |               |
--------------------------------------------------------------------------------
|                                                             |    Changed     |
|                                                             | compared to 31 |
|                                                             | December 2007  |
--------------------------------------------------------------------------------
| Baltic Tele AB                   |  82,936,299 |     60.12% |      1,197,400 |
--------------------------------------------------------------------------------
| Ministry of Finance              |  33,346,464 |     24.17% |              - |
--------------------------------------------------------------------------------
| Estonian Development Fund        |   4,138,636 |      3.00% |              - |
--------------------------------------------------------------------------------
| SEB clients                      |   2,864,734 |      2.08% |      1,462,384 |
--------------------------------------------------------------------------------
| Deutsche Bank (GDR accounts)     |   2,264,220 |      1.64% |      (948,018) |
--------------------------------------------------------------------------------
| ING Luxembourg S.A.              |   2,055,783 |      1.49% |        257,453 |
--------------------------------------------------------------------------------
| Clearstream Banking Luxembourg   |     584,976 |      0.42% |       (48,264) |
| S.A. clients                     |             |            |                |
--------------------------------------------------------------------------------
| UniCredit Bank Austria AG        |     496,386 |      0.36% |      (706,024) |
--------------------------------------------------------------------------------
| Mellon Treaty Omnibus            |     392,152 |      0.28% |         89,460 |
--------------------------------------------------------------------------------
| State Street Bank and Trust      |     335,945 |      0.24% |        255,171 |
| Omnibus Account                  |             |            |                |
--------------------------------------------------------------------------------

AS Eesti Telekom shares                                                         
During 2008, the price of AS Eesti Telekom shares decreased by 50%. The share   
price was 7.80 EUR at the beginning of the year and 3.90 EUR at the end of the  
year. The highest and lowest share price during the reporting period was 7.99   
EUR and 3.81 EUR respectively. The turnover for the reporting period was 116.5  
million EUR.                                                                    
                                                                                
During 2008, the share price of AS Eesti Telekom has moved at a higher level    
than the OMX Tallinn Index and the index of the 10 most actively traded shares  
on the OMX Baltic 10.                                                           


Dividends                                                                       
Eesti Telekom has no official dividend policy. However, the shares have been    
characterized by relatively high-yield dividends. The shareholders were paid a  
dividend of 0.67 EUR per share for the 2007 financial year.                     

Dividend information:                                                           

--------------------------------------------------------------------------------
|                   |     2004 |      2005 |      2006 |      2007 |      2008 |
--------------------------------------------------------------------------------
| Year-end number   | 137,954, | 137,954,5 | 137,954,5 | 137,954,5 | 137,954,5 |
| of shares         |      528 |        28 |        28 |        28 |        28 |
--------------------------------------------------------------------------------
| Annual average    | 137,825, | 137,954,5 | 137,954,5 | 137,954,5 | 137,954,5 |
| number of shares  |      320 |        28 |        28 |        28 |        28 |
--------------------------------------------------------------------------------
| Equity per share, |     1.88 |      1.87 |      1.90 |      1.99 |      1.99 |
| EUR               |          |           |           |           |           |
--------------------------------------------------------------------------------
| Earnings per      |     0.46 |      0.50 |      0.61 |      0.70 |      0.66 |
| share, EUR        |          |           |           |           |           |
--------------------------------------------------------------------------------
| P/E ratio         |     15.7 |      15.1 |      13.8 |      11.2 |       5.9 |
--------------------------------------------------------------------------------
| Dividends per     |     0.51 |      0.58 |      0.61 |      0.67 |           |
| share for the     |          |           |           |           |           |
| year, EUR         |          |           |           |           |           |
--------------------------------------------------------------------------------
| Dividend payout   |    111.7 |     114.2 |     100.1 |      96.2 |           |
| ratio, %          |          |           |           |           |           |
--------------------------------------------------------------------------------

Economic environment                                                            
The soft landing anticipated at the beginning of 2008 suddenly turned into an   
economic recession in the last quarter. The cooling of the real estate market   
and the toughening of loan terms by the banks that started in 2007 was followed 
by a decrease in domestic demand in the second quarter of 2008, which altogether
resulted in negative economic growth. The downturn in the real estate market    
continued until the end of 2008. In the fall, the impact of the global financial
crisis was added, which resulted in a decline of demand on Estonia's export     
markets. In the third quarter, export and industrial production suddenly        
decreased. As the total for the year, the reduction in GDP was 3.6 % according  
to Statistics Estonia. Unemployment increased during the second half of the year
from 4.7% to 9.2%.                                                              

Compared to the global economy, the economic downturn arrived in Estonia six    
months earlier. In the European Union, the anticipated average economic growth  
for 2008 was 1-2%.                                                              

2009 will be one of the most difficult years for Estonia during the period after
the restoration of independence. The external economic environment will continue
to be unfavorable throughout the year. This primarily is due to                 
difficult-to-obtain and expensive loan resources and the reduced demand for     
export goods and services. In the Europe Union as a whole, an economic downturn 
of 2% is projected.                                                             

The economic recession should bottom out in the middle of the year, and based on
various projections, Estonia's economic decline in 2009 will be between 5% and  
9%. A decline in domestic demand of the same caliber is also expected. The      
growth of unemployment will continue until the first half of 2010. The wages    
paid out will be reduced by up to 15%.                                          

At the same time, since the beginning of the year, trends have appeared that    
point to a restoration of economic growth in 2010. These include decreases in   
raw materials and fuel prices as well as a decline of producer prices. Inflation
has halted suddenly and a decrease in consumer prices may already occur in the  
third quarter. An improvement in credit conditions is expected at the end of the
year, as is an increase in the new company startups. However, economic growth   
will continue to be negative during the final months of the year.               

Telecommunications market                                                       
The economic crisis has had less impact on the telecommunications sector than on
the economy generally. 2008 was successful for telecommunications companies on  
the whole and the market continued to grow. However, a reduction in demand did  
appear in the private segment, and by the end of the year, also in the business 
segment.                                                                        

Traditional telecommunications services, such a phone calls, are relatively     
unaffected by events in the economic environment, and their consumption is      
autonomous, i.e. they are only slightly affected by prices and consumers'       
incomes. However, traditional communications services have exhausted their      
growth potential in Estonia: the number of ordinary phones has started to       
decrease and the increase of the number of mobile clients has also ended.  The  
growth of broadband connection users has also slowed, and even if economic      
growth has continued, market saturation would have been achieved by 2010.       

However, the impact of the economic recession was added to the natural          
deceleration of the growth of traditional communications services, and          
therefore, new fields of activity are increasingly playing an important role in 
the revenues of telecommunications companies. Clients want telecommunications   
that will provide access to necessary information and entertainment, rather than
just call communications for their home or office.                              

In 2009, a decrease in consumption by private individuals and companies will    
continue, and the price pressure on telecommunications services will increase.  
However, modest growth will continue in the cable and digital television market.
In addition to television services, the clients will be provided with video     
rental, photo uploading, games and other services.                              

Estonia is fertile ground for telecommunications companies to find new outputs. 
The reason is excellent technological education, the government's continued     
intention of making Estonia a leading e-country, as well as a Nordic disposition
that prefers communicating by computers, and TV or telephone screens to direct  
face-to-face contact. In regards to the spread of computer and ordinary literacy
(competence in IT- and telecommunication technology), Estonia is among the most 
quickly developing countries in both “new” and “old” European countries.  Based 
on the percentage of households connected to the broadband network, Estonia is  
definitely among the top ten in Europe. Estonia is almost totally covered with a
high-quality mobile data communications network, and the development of mobile  
TV has been started.                                                            

The companies that will be successful in 2009 are the ones that are able to make
their operations more effective and to develop new technologies and services.   
In 2009, the “0-growth” scenario is most probable in the Estonian               
telecommunications market, in which case companies will develop new services to 
compensate for the reduction in traditional services.                           

Eesti Telekom Group                                                             
The 2008 financial results for the Eesti Telekom Group met expectations. The    
greatest increase in turnover was created by the broadband service segment - a  
contribution was made by the number of triple packages as well as an increase in
the number of digiTV clients. In the mobile communications segment, the number  
of contractual mobile communications clients and number of data communications  
connections demonstrated good growth. In the IT services segment, the greatest  
growth was experienced by IT services sales (including IT training).            

The following developments in the Group's course of action during last year were
satisfying:                                                                     

Compared to 2007, the number of AS EMT clients has increased by 18 thousand,    
reaching 487 thousand by the end of 2008. The revenues received from the mobile 
Internet continued to demonstrated rapid growth and exceeded the revenues for   
the previous year by 50%.  The data volumes being transmitted also increased    
several times.                                                                  
Elion is Estonia's largest provider of digital television service, and in 2.5   
years, it has become the second largest television operator on the market. In   
2008, the number of digiTV clients has increased by 43%, reaching 82,500 by the 
end of the year.  The number of Elion's permanent Internet connections increased
by 8% in 2008 reaching 175,400 by the end of the year.                          
In October 2008, MicroLink Eesti acquired the majority share (82.87%) in IT     
Koolituskeskuse OÜ (IT Training Center). The acquisition of the training company
provides MicroLink the opportunity to provide high-quality training and         
consultation services to clients and partners in various cooperation projects.  
The client base of the IT Training Center and sales units in Latvia and         
Lithuania create excellent opportunities for growth in these markets.           

The Eesti Telekom Group considers rapid adjustment to the macro-economy and     
competitive situation, as well as maintaining and effectively increasing the    
client and revenue bases to be its primary objectives in 2009.                  

Relations with the regulator                                                    
Pursuant to the resolution of the Communications Board, the termination fee for 
voice calls in the mobile phone networks (interconnection fee) for AS EMT, Elisa
Eesti AS and Tele2 Eesti AS for the period 1 July 2006 to 30 June 2007 was fixed
at 0.13 EUR per minute and the interconnection fee was fixed at 0.11 EUR for the
period 1 July 2007 to 30 June 2008. Since Elisa Eesti AS and Tele2 Eesti AS     
disputed the decisions in court, and in the course of provisional legal         
protection, the validity of the aforementioned administrative act was suspended 
the interconnection fees of all three mobile operators remained at 0.16 EUR     
until 5 November 2007. On 5 November 2007, the ruling of the Tallinn Circuit    
Court came into force, whereby the provisional legal protection was cancelled,  
and from the given date, all three mobile operators undertook to implement      
interconnection fees of 0.11 EUR. The litigation with Tele2 concluded at the end
of December to the benefit of the latter. The litigation Elisa Eesti AS is      
continuing and EMT is participating in the litigation as a third party. For the 
period between 1 July 2008 and 30 June 2009, the Competition Board, which is the
legal successor to the Communications Board, established a fee of 0.09 EUR per  
minute for the termination of voice calls in the mobile phone networks of AS    
EMT, Elisa Eesti AS and Tele2 Eesti AS.                                         

On 5 December 2008, the Competition Board announced new market analysis results,
based on which they plan to declare ProGroup Holding OÜ an undertaking with     
significant market power  in the market for the termination of voice calls in   
its mobile phone network, in addition to AS EMT, Elisa Eesti AS  and Tele2 Eesti
AS. According to the resolution plan, within the framework of the price control 
obligation, the given companies will be obligated to apply benchmark-based      
interconnection fees that correspond to the average in the European countries   
during the next three years, which will make 0.09 EUR per minute the maximum    
tariff to be applicable as of 1 July 2009.                                      

At the end of February, the Competition Board ended the proceeding regarding    
Elion's claim regarding the high interconnection fees charged by the Elisa Eesti
AS telephone network, as a result of which Elisa decreased the fees for         
initiating calls by 0.003 EUR.                                                  

Based on a resolution of the Competition Board, which was based on a 2006 cost  
calculation, as of                                                              
1 August 2008, Elion reduced the monthly rental fee for                         
copper pairs by 0.13 EUR and by 0.19 EUR for selected copper pairs, which does  
not have a significant financial impact on Elion's results.                     

At the end of July, the Competition Board completed its proceeding of the       
investigation of Elion's fees for wholesale leased line services and approved   
all the valid fees. At the end of August, the Competition Board approved all    
Elion's currently valid regulated prices (interconnection fees, fees for access 
to copper pairs and fees for broadband access).                                 

Based on 2007 cost information and the requirements of the Competition Board, as
of 1 December 2008, Elion reduced the monthly fee for rental of copper pairs and
selected copper pairs by 0.19 EUR on average and the fees for broadband access  
by 9-16% depending on speed. The price changes do not have any significant      
impact on Elion's results.                                                      


Financial results                                                               

In 2008, the market shares of the Eesti Telekom Group remained stable.          
Satisfying was the increase in the number of contractual mobile communications  
clients and mobile data communications connections, as well as the increase in  
the number of triple package and digiTV clients. Compared to the previous year, 
the EBITDA increased.                                                           

Revenues, costs, profits                                                        
In 2008, the consolidated sales revenues of the Eesti Telekom Group reached     
395.6 million EUR, decreasing by 1% compared to 2007 (2007: 400.2 million EUR). 
In 2008, the consolidated turnover in the mobile communications services segment
reached                                                                         
235.3 million EUR, decreasing by 6% compared to 2007 (2007: 249.5               
million EUR). The decrease of total revenues was caused by a decline in         
interconnection fees, which was partially compensated by a certain increase in  
the number of call minutes incoming to the network, an increase in mobile data  
communications, and growth in the volume of subcontracting services. In         
addition, the revenues received from the retailing and wholesaling of           
telecommunications goods decreased in 2008, which was caused by changes in      
consumer behavior due to postponing the purchase of more expensive permanent    
goods.                                                                          

At the end of 2008, the client base of AS EMT was 14 thousand more than a year  
earlier, reaching,                                                              
779 thousand active SIM cards (December 2007: 765 thousand                      
cards). Compared to a year ago, the number of contractual clients has increased 
by 18 thousand, reaching 487 thousand by the end of 2008, while at the same     
time, the number of pre-paid card users has decreased by more than four thousand
during the year to 292 thousand at the end of the 2008. EMT assesses its market 
share of active SIM cards to be 47%. The estimated penetration of active cards  
in Estonia is on 121%. The number of call minutes initiated by EMT clients      
showed an increase of 1% compared to 2007.                                      

The revenues received from the mobile Internet continued to demonstrate rapid   
growth. In 2008, the revenues from AS EMT mobile data communications exceeded   
the revenues for 2007 by half. At the same time, the volume of data that was    
transmitted increased several times. As of December 2008, the users of AS EMT   
mobile data communications amounted to 168 thousand, i.e. 7 thousand more users 
than a year ago. The increase in the popularity of mobile data communications is
based on the rapid expansion of the 3G coverage area and advantageous offers for
laptops in combination with Internet connection services. Today, most data      
communications already takes place in the 3G network, which allows clients to   
use high-quality Internet connections that approach ADSL speeds with            
conveniently controllable costs. Since EMT is the only operator in Estonia that 
provides EDGE data communications throughout its GSM coverage area, then        
investments in new base stations during the last months have been directly      
primarily at expanding external and internal 3G coverage in cities. At the same 
time, the constant improvement of the GSM network continues.                    

A regulation of the European Parliament and Council applies to AS EMT, as it    
does to other mobile operators in the European Community, which specifies that  
as of September 2007 the rate per minute for outgoing and incoming calls made   
within the borders of the European Community cannot exceed the price ceiling    
established by regulation. In addition, in the third quarter, discount contracts
for roaming services came into force that reduced both revenues and costs from  
roaming fees. Therefore, for the year as a whole, the revenues received from    
roaming clients have decreased by almost 13%.                                   

The turnover of the broadband services segment increased by 10% in 2008 to 209.6
million EUR (2007: 190.7 million EUR). The largest increase in revenues resulted
from the sale of subcontracting services and international interconnection      
services, which increased by 118% and 55% respectively. The increase in revenues
from international interconnection services resulted primarily from the         
significant increase of volumes for incoming international call minutes. The    
increase in sales revenues from subcontracting services was also related to the 
growth of minute volumes and the increase in brokered subservices. The third    
field of substantial revenue growth was the sale of comprehensive service       
packages that increased by 27% on the year. Active marketing campaigns and the  
general increase in the clients' data volumes have successfully supported the   
transfer of business clients' connections to greater speeds, which has in turn  
increased the profitability of comprehensive service packages.                  

Based on the significant increase in the volume of comprehensive solutions, the 
revenues from the individual service fees for call connections and Internet     
connections has decreased by 10% and 14% respectively. At the same time, the    
revenues earned from the sale of comprehensive solutions considerably exceeded  
this decline. Due to the decrease in minute volumes, the revenues for call      
services in the broadband services segment declined by 6.5% during the year.    

The total number of Elion clients with permanent Internet connections increased 
by 12.3 thousand connections in 2008, reaching 175.4 thousand by the end of     
December (31 December 2007:                                                     
163.1 thousand). In addition to the sale of                                     
comprehensive solutions, the increase of permanent connections has been         
supported by the WiMAX base stations that were completed in February in Võru,   
Pärnu and Rapla Counties within the framework of the Külatee 3 follow-up        
project. The company assesses its market share based on the permanent           
connections of private clients to be 54%.                                       

As the result of an active marketing campaign, the number of Elion              
triple-package users increased by 22.6 thousand during the year, reaching 76.1  
thousand as of 31 December (31 December 2007:                                   
53.5 thousand). By the end of the                                               
year, Elion had 82.5 thousand IP and cable television clients                   
(31 December                                                                    
2007: 57.7 thousand). Elion assesses that the company's market share in the     
Estonian cable coverage market was 26% by the end of the year (31 December 2007:
19%), which, in the given market, indicates the greatest increase in 2008 in    
absolute terms.                                                                 

As of the fall, Elion is the only television services provider in Estonia that  
provides all its digiTV services in Russian. All of Elion's digiTV menus,       
programs for the Russian channels, most popular Estonian channels and           
international channels, screen notices and descriptions for the video-rental    
films are available in both Estonian and Russian. At the same time, in the fall,
several famous Russian movies were added to digiTV's video rental service. The  
purpose of the improvements was to increase digiTV's user-friendliness for      
Russian-speaking clients and to provide the most diverse entertainment possible.
                                                                                

A marketing campaign conducted in 2008 providing free films within the framework
of the remote video rental service significantly accelerated the rental of films
for a fee. In 2008, Elion video rental revenues increased by 172% compared to   
the previous year.                                                              

As of December, Elion is the first in Estonia to offer games as a new content   
element of its Internet-based digiTV service, in which each game can be ordered 
separately or as theme packages for a monthly fee.                              

At the end of 2008, the number of Elion's active call interfaces totalled 469   
thousand (31 December 2007: 482 thousand interfaces), remaining stable at the   
same level during the year. In 2008, Elion focused primarily on the development 
and provision of IP-based call communications connections and solutions. The    
number of IP-based Centrex call communications connections increased more than  
50% during the year. In addition, during the second half of the year, Business  
Client VoIP call services based on Internet connections started to be provided  
in areas with wireless WiMAX Internet coverage.                                 

Elion assesses its market share for call minutes initiated in the fixed network 
to be 80.5% (December 2007: 81%). The market share for local call minutes is 82%
(December 2007: 83%), 66% for international call minutes (December 2007: 64%)   
and 71% for call minutes made to mobile phones (December 2007: 72%).            
As a result of the general deceleration of retail sales in Estonia, the retail  
sales of the Elion Group's telecommunications and IT goods slowed by 15% in 2008
compared to the previous year.                                                  

At the end of May, OÜ Viru Net, a 100% subsidiary of Elion, was merged with the 
parent company, Elion Enterprises. Viru Net was the leading provider of Internet
services in East-Viru County, specializing in the provision of services to      
multi-story buildings.  Upon the merger of the two companies, Elion initiated a 
broader program to introduce and develop the Internet in multi-story buildings  
in East-Viru County, by combining Viru Net's knowledge of the client segment and
its long-term experiences in the area with Elion's systematic solutions, as well
as its high-quality and broad product portfolio.                                

In 2008, the consolidated sales revenues for the IT services segment reached    
23.7 million EUR (2007:                                                         
23.4 million EUR). The 2008 IT services segment data                            
includes consolidated data as of 1 November 2008 for the companies of the IT    
Training Center Group that was acquired in October 2008.  Sales revenues        
increased by 1.5%, compared to the previous year, while the sales revenues      
increased by 8.8% for services (including IT training) and decreased by 5.2% for
merchandise.                                                                    

In 2008, one of the most important events for MicroLink Eesti was the move to   
the Ülemiste technology campus, where new worker-friendly office space is being 
completed. A 150-sq-m information technology demo center unique to Estonia will 
be established there, where MicroLink and other IT companies will have an       
opportunity to demonstrate how various information technology solutions work in 
practice to Estonian companies and foreign visitors, and thereby to promote     
export.                                                                         

In October 2008, MicroLink Eesti acquired the majority share (82.87%) of the IT 
Koolituskeskuse OÜ (IT Training Center). The acquisition of the training company
provides MicroLink the opportunity to provide high-quality training and         
consultation services to clients and partners in various cooperation projects.  
The company also plans to start providing its services in all three Baltic      
countries. The client base of the IT Training Center and sales units in Latvia  
and Lithuania create excellent opportunities for growth in these markets.       

In regard to infrastructure solutions, the following large procurements were    
won: the Health Insurance Fund and Ministry of Defense servers, the drive array 
for the Ministry of Social Affairs e-health project, the expansion of Eesti     
Energia's existing drive array, the Ministry of Justice procurement for desktop 
computers, the Estonian Informatics Center servers, etc. In the third quarter of
2008, the “Laptops for Teachers” procurement organized by the Tiger's Leap      
Foundation was won. Within the framework of the procurement, laptop computers   
were procured for almost 4,100 teachers. The transaction totalled more than 2.2 
million EUR. AS MicroLink Eesti designed and procured technological solutions   
for the server farm with large computing power created at the Scientific        
Computation Center of the University of Tartu. The procurement placed great     
importance on the achievement of the best energy consumption and computing power
ratio. For new infrastructure solution, MicroLink became a distributor and      
technical support provider for Apple computers. MicroLink became an official    
Apple partner and acquired resale rights for Apple products.                    

In 2008, two of the largest public procurements that were won for the provision 
of permanent services were the procurement organized by the Ministry of Social  
Affairs for the purchase of the hosting environment for digital prescription    
(provision of services for four years at a total cost of 2.3 million EUR) and   
the procurement for the hosting service for the register of plans organized by  
the Tallinn City Planning Department (provision of services during three years  
at a total cost of 0.13 million EUR). In the fourth quarter, AS MicroLink Eesti 
also won three procurement organized by the Ministry of Social Affairs for      
hosting information systems. Within the framework of these procurements,        
MicroLink Eesti will host and manage the registers of the Ministry of Social    
Affairs with information on those registered as unemployed and job seekers as   
well as information on the provision of labor market services, and the register 
of those dealing with pharmaceuticals. Administration of the operating platform 
of the Estonian Social Insurance Board information system will also be          
performed. Also worth noting are the administration of the central systems and  
workplace computers at Empower Eesti and Trust Media, as well as the hosting of 
the Ministry of Culture's URRAM information system and the information systems  
for the Estonian Private Forest Union.                                          

The most important activities in the project business in 2008 included jobs     
related to the e-health project (patient portal, digital photos and digital     
prescriptions). MicroLink was the principal contractor for the Digital Picture  
and Digital Prescription solutions and the creator of the Patient Portal within 
the framework of the Digital Health Record Project. The 2008 development work   
for the given systems has been completed, and in 2009, they will be actively    
implemented. The most important projects for 2008 include the implementation of 
document management (Livelink) and Service Desk software at the Estonian Post;  
the implementation of Livelink at the Tax and Customs Board; identity management
at the North-Estonia Medical Center and the further development of the KUNDE    
information system at Statistics Estonia. Work will also continue at Estonian   
Post and the North-Estonia Medical Center in 2009, as will the Ergo Insurance   
archival solution project that was started in the fourth quarter.               

The Eesti Telekom Group operating costs decreased in 2008 by 2% to 247.0 million
EUR (2007:                                                                      
252.2 million EUR).                                                             

The operating costs for the mobile communications services segments decreased by
8% compared to 2007 to 145.5 million EUR (2007: 157.4 million EUR). The greatest
decrease was in interconnection costs, which was caused by a drop in            
interconnection fees. The operating costs related to retailing and wholesaling  
also decreased, which correspond to the drop in merchandise sales turnovers.    

Operating costs in the broadband services segment increased in 2008 by 12%,     
reaching 151.2 million EUR (2007: 135.2 million EUR). Of the increase in        
operating costs, 60% resulted from an increase of direct sales costs caused by a
growth of sales volumes. The second primary growth factor for operating costs   
was personnel costs that increased by 9% compared to the previous year. Of the  
cost increase, 13% were non-recurring costs and related to efficiency projects  
and other costs related to the improvement of network resources and service     
quality. The cost for hopeless receivables in the broadband services segment    
increased 3.5 times during the year (by 1.1 million EUR).                       

The consolidated operating costs in the IT services segment increased by 2% in  
2008 compared to the previous year reaching 22.4 million EUR (2007: 21.9 million
EUR). In 2008, labor costs increased by 9.5% and other operating costs by 29.3% 
compared to the previous year. The operating costs for 2008 were affected by    
increased costs accompanying the consolidation of the IT Training Center as well
as by the non-recurring cost of MicroLink Eesti moving to new offices.          

The Eesti Telekom Group EBITDA in 2008 totalled 150.1 million EUR (2007: 149.3  
million EUR), increasing by 1% compared to the previous year. The EBITDA in the 
mobile communications services segment increased by 2% compared to 2007,        
reaching 90.4 million EUR (2007: 88.7 million EUR). In connection with the      
decrease of the interconnection prices between telecommunications operators and 
the reduction in the relative importance of merchandise with lower              
profitability, the EBITDA margin for the year has increased. At the same time,  
the 2007 EBITDA margin was negatively impacted by a one-time provision of 4.0   
million EUR. In 2008, the EBITDA for the broadband services segment increased by
5%, reaching 59.3 million EUR (2007: 56.3 million EUR). The EBITDA in the IT    
services segment reached 1.3 million EUR in 2008 (2007: 1.5 million EUR). The   
Eesti Telekom Group EBITDA margin has increased slightly during the year,       
reaching 37.9% in 2008 (2007: 37.3%).                                           

The Eesti Telekom Group's depreciation costs were 36.7 million EUR in 2008      
(2007: 31.7 million EUR).                                                       

During the last year, the Eesti Telekom Group earned EBIT of 113.3 million EUR, 
which was a reduction of 4% compared to 2007 (2007: 117.6 million EUR).         

During 2008 AS Eesti Telekom paid their shareholders a record-breaking dividend 
of 0.67 EUR per share (2007: 0.61 EUR per share). The income tax subject on the 
payment of the dividends totalled 24.7 million EUR (2007: 23.7 million EUR).    

The Eesti Telekom Group earned a net profit 91.9 million EUR in 2008 (2007: 96.6
million EUR). The earnings per share were 0.66 EUR (2007: 0.70 EUR).            

Investments                                                                     
During 2008, the Eesti Telekom Group invested 48.2 million EUR into property,   
plant and equipment and intangible assets (2007: 55.1 million EUR).             

Investments in the mobile communications services segment totalled 19.0 million 
EUR in 2008, decreasing by 10% compared to the previous year (2007: 21.1 million
EUR). In mobile communications, a development priority, in addition to the      
constant development of the GSM network, was the implementation of technologies 
to support high-speed mobile data communications.                               

In the broadband services segment, the 12-month investments in property, plant  
and equipment and intangible assets totalled 27.3 million EUR (2007: 32.8       
million EUR). The majority of the capital volume was invested in the development
of network resources, for the improvement of service quality and for increasing 
the availability of permanent Internet connections and digiTV.                  
In the first quarter of 2008, Elion's international network node in Amsterdam   
was completed, which was established based on a need to increase the reliability
of the London and Frankfurt connections. The creation of the Amsterdam network  
node enables Elion to better distribute network traffic between various foreign 
connections and to provide clients with increasingly fast access to various     
Internet networks. The new network node also enables Elion's call communications
network to be developed. In addition to the Amsterdam network node, Elion also  
has network nodes in London Frankfurt, Helsinki (two), Riga (two), Vilnius, St. 
Petersburg, and Moscow.                                                         

In 2008, the IT services segment invested 1.9 million EUR (2007: 2.1 million    
EUR), the majority of the investments were for the expansion of infrastructure  
necessary for the provision of services.                                        

It is planned to maintain investments at last year's levels in 2009. Investments
will continue to be made in the construction of the mobile data communications  
(3,5G) network and the development of Elion's broadband network.                

Balance sheet and cash flows                                                    
As of 31 December 2008, the Eesti Telekom Group balance sheet totalled 319.5    
million EUR                                                                     
(31 December 2007: 321.0 million EUR). Compared to the beginning of             
the year, the non-current assets increased by 11.2 million EUR, the balance of  
which reached 186.9 million EUR by the end of the year (31 December 2007: 175.7 
million EUR). The increase in non-current assets resulted primarily from the    
investments of the Group's companies. The Group's current assets decreased by   
12.7 million EUR during the year, reaching 132.6 million EUR by the end of the  
year (31 December 2007: 145.3 million EUR). Cash and cash equivalents, as well  
as the balance of short-term financial investments, have decreased by 14.6      
million EUR. This was related to a dividend payment that was larger by 8.8      
million EUR, to income tax on the dividends and the investments that were made. 

As of 31 December 2008, the Eesti Telekom Group equity was 274.5 million EUR,   
which is 1.2 million EUR less than at the end of 2007 (31 December 2007: 275.7  
million EUR). The decrease in equity is related to the payment of dividends.    

As of the end of December, the Group had long-term obligations of 2.1 million   
EUR (31 December 2007: 1.6 million EUR) and short-term debt obligations of 42.9 
million EUR (31 December 2007:                                                  
43.7 million EUR). The net debt (see definition,                                
page 23) of the Eesti Telekom Group at the end of the fourth quarter was -54.5  
million EUR and the net debt to equity ratio was -20% (31 December 2007:        
-69.5                                                                           
million EUR and -25%).                                                          

The Eesti Telekom Group cash from operations in 2008 totalled 126.7 million EUR 
(2007: 121.6 million EUR). The Group's cash flow from investment activities was 
36.3 million EUR (2007: 33.1 million EUR). The cash flow into the acquisition of
property, plant and equipment and intangible assets in 2008 was 47.5 million EUR
(2007: 55.1 million EUR). In 2008, the Eesti Telekom Group cash flow into       
financial activities was                                                        
92.6 million EUR (2007: 83.8 million EUR), the                                  
majority of which was used to pay dividends.                                    

Personnel                                                                       
As of 31 December 2008, the number of employees in the Eesti Telekom Group was  
2,371                                                                           
(31 December 2007: 2,398). The average number of workers in 2008 was            
2,341 (2007: 2,327).                                                            
The number of employees in the mobile communications segment as of 31 December  
2008 was 600 (31 December 2007: 597).                                           

As of 31 December 2008, the number of employees in the broadband services       
segment totalled 1,465. Compared to the end of 2007, the number of workers in   
this segment decreased by 68 (2007: 1,533). The reduction of the number of      
workers was related to the reorganization of work and improvements in the       
efficiency of operations in the group.                                          
                                                                                
In the IT services segment, the number of employees totalled 286 as of 31       
December 2008                                                                   
(31 December 2007: 261).                                                        

The total amount of wages paid to Eesti Telekom Group employees was 39.9 million
EUR in 2008 (2007: 36.4 million EUR). Employees in the mobile communications    
services segment were paid                                                      
10.7 million EUR (2007: 9.8 million EUR). Employees                             
in the broadband services segment were paid                                     
22.9 million EUR (2007: 20.9                                                    
million EUR). Employees in the IT services segment were paid 5.3 million EUR    
(2007: 4.9 million EUR).                                                        

The management and upper management of the Eesti Telekom Group included 49      
persons as of                                                                   
31 December 2008 (31 December 2007: 52 persons). The remuneration               
for the management and upper management was calculated at 3.2 million EUR during
2008 (2007: 3.6 million EUR).                                                   


Structure of capital and restrictions on transfer of shares                     

The share capital of AS Eesti Telekom (hereinafter “Eesti Telekom“) is divided  
into registered shares of one class, each with a par value of 0.64 EUR. The     
shares of Eesti Telekom can be freely transferred. Each share grants its holder 
one vote at the general meeting of shareholders and entitles the shareholder to 
participate in the general meeting, in the distribution of profit, and in the   
distribution of the remaining assets upon Eesti Telekom's liquidation, as well  
as other rights provided by law. The share capital of Eesti Telekom does not    
include securities that are not admitted to trading on a regulated securities   
market of a member state.                                                       

The articles of association of Eesti Telekom do not prescribe any restrictions  
on the transfer of shares.                                                      

Eesti Telekom has not entered into any agreements with shareholders for         
restricting the transfer of shares, and nor is the management board of Eesti    
Telekom aware of any such agreements having being entered into between the      
shareholders.                                                                   

As at 31 December 2008, the following shareholders have a qualifying holding in 
Eesti Telekom: Baltic Tele Aktiebolag (a holding of 60.12%) and the Republic of 
Estonia through the Ministry of Finance and (a holding of 24.17%).              

Eesti Telekom has no securities granting special control rights.                

Eesti Telekom has not set up any employee share schemes.                        

The management board of Eesti Telekom is not aware of any agreements on voting  
rights between the shareholders. The regulation of voting rights contained in   
the articles of association of Eesti Telekom does not in any way differ from    
that prescribed by law. The shareholders of Eesti Telekom do not hold preferred 
shares.                                                                         

Management                                                                      
Election of management board members. The management board of Eesti Telekom has 
two (2) to                                                                      
five (5) members as decided by the supervisory board. According to              
the articles of association, the members of the management board are elected by 
the supervisory board for a term of three (3) years unless otherwise decided by 
the supervisory board. The articles of association may not prescribe a term of  
office longer than five years for the members of the management board. The      
members of the management board must be residents of Estonia. In order to elect 
a member of the management board, his or her consent is required.               

The supervisory board appoints one member of the management board as the        
chairman of the management board. The chairman of the management board is the   
chief executive officer of Eesti Telekom. The supervisory board defines the     
allocation of duties and responsibilities among the members of the management   
board and the chief executive officer.                                          

Extension of the term of office of a member of the management board may not be  
decided earlier than one year before the planned date of expiry of the term of  
office, and not for a period longer than the maximum term of office prescribed  
by the articles of association. A decision for extension of the term of office  
of a member of the management board entered in the commercial register must be  
immediately sent to the registrar of the commercial register.                   

Appointment of management board members. With good reason, a court may appoint a
new member of the management board to replace a withdrawn member of the         
management board on the petition of the supervisory board, a shareholder or     
other interested person. The authority of the court-appointed member of the     
management board will continue until appointment of a new member of the         
management board by the supervisory board. A member of the management board     
appointed by a court has the right, at the company's expense, to be compensated 
for his or her costs to a reasonable extent and to receive a reasonable fee, the
amount of which shall be established, in the case of dispute, by a court ruling.

Resignation of management board members. A member of the management board may   
resign from the management board with good reason if he or she gives a notice of
his or her resignation to the supervisory board and, if this is impossible,     
submits a relevant application to the registrar of the commercial register.     

Removal of management board members. The supervisory board may remove a member  
of the management board regardless of the reason, but the rights and obligations
arising from a contract concluded with him or her will terminate pursuant to the
contract.                                                                       

The chairman of the supervisory board or a person authorised by him or her must 
sign a petition for entry of expiry of the authority of a member of the         
management board or for entry of a new member of the management board in the    
register. The corresponding minutes of the meeting of the supervisory board must
be appended to the petition.                                                    

The general meeting of shareholders of Eesti Telekom has the authority to amend 
the articles of association. A resolution on amendment of the articles of       
association is adopted by the general meeting if at least two-thirds of the     
votes represented at the general meeting are in favour. A resolution on         
amendment of the articles of association will enter into force as of the making 
of a corresponding entry in the commercial register.                            

The management board of Eesti Telekom is a directing body of the company that   
represents and directs the company. The management board must, in directing,    
adhere to the lawful orders of the supervisory board. The management board is   
required to act in the most economically purposeful manner. Transactions that   
are beyond the scope of everyday economic activities may only be concluded by   
the management board with the consent of the supervisory board; however, the    
lack of such consent does not render the concluded transactions invalid.        

Either the chairman of the management board alone or two members of the         
management board jointly may represent Eesti Telekom and sign documents on      
behalf of Eesti Telekom.                                                        

Issue and buyback of shares                                                     
Members of the management board of Eesti Telekom do not have the authority to   
issue shares; only the general meeting of shareholders is entitled to issue     
shares. The management board of Eesti Telekom may represent Eesti Telekom in a  
transaction whereby the shares of Eesti Telekom are acquired                    
upon a resolution of the general meeting, provided that:                        
this occurs within five years after adoption of a resolution of the general     
meeting which specifies the terms and conditions for the acquisition or taking  
shares as security and the amounts to be paid for the shares;                   
the sum of the nominal values of the shares held or taken as security by the    
company does not exceed one-tenth of the share capital; and                     
the acquisition of shares does not entail the reduction of net assets below the 
aggregate sum of the share capital and the reserve capital, the disbursement of 
which to the shareholders is not permitted, according to the law or the articles
of association;                                                                 
upon a resolution of the supervisory board without a resolution of the general  
meeting if the acquisition of shares is necessary to prevent significant damage 
to the company. The shareholders must be informed of the circumstances          
surrounding and the details of the acquisition of shares at the next general    
meeting of shareholders;                                                        
without the restrictions set forth above if the shares are acquired by          
succession.                                                                     

The annual general meeting of shareholders held on 22 May 2008 granted a right  
to Eesti Telekom to acquire shares of Eesti Telekom within five years as of     
adoption of the resolution (i.e. until 22 May 2013) in such a way that the sum  
of the nominal values of the shares held by Eesti Telekom does not exceed the   
limit prescribed by law (i.e. 10%) and that the price paid per share will not be
lower than nominal value of one share and will not exceed the higher of the     
price of the last independent trade and the highest current independent bid on  
the Tallinn Stock Exchange on the day of the share acquisition. Eesti Telekom   
may pay for these shares from the company's assets that exceed its share        
capital, reserve capital and share premium. The maximum number of shares to be  
acquired each time in accordance will be determined on each occasion separately 
by a resolution of the supervisory board of Eesti Telekom.                      

Effects of takeover bids                                                        
Eesti Telekom has not entered into agreements with the management board or      
employees containing provisions on payment of compensation in the case of a     
takeover bid.                                                                   

Eesti Telekom has not entered into agreements that take effect, alter or        
terminate upon a change of control of the company following a takeover bid in   
accordance with the provisions of chapter 19 of the Securities Market Act.      


Report on Corporate Governance                                                  

As from 1 January 2006, AS Eesti Telekom (“Eesti Telekom”) follows the Estonian 
Principles of Corporate Governance (“the Principles”) in its activities. This   
report describes the management of Eesti Telekom in 2008 and its conformity with
the Principles. In 2008, Eesti Telekom believes it adhered to the Principles    
except in the cases noted in this report.                                       

Eesti Telekom                                                                   
Eesti Telekom is a public limited company registered in the Republic of Estonia,
at Valge 16, 19095 Tallinn, with the registry code of 10234957. The share       
capital of Eesti Telekom in 2008 was 88,169,013 EUR, which is divided into      
registered shares of a single type with a nominal value of 0.64 EUR. Eesti      
Telekom shares are listed on the main list of the Tallinn Stock Exchange (Baltic
Main List), with the abbreviation ETLAT. The Eesti Telekom share register is    
maintained by the registrar of the Estonian Central Register of Securities.     
Eesti Telekom has approximately 4,000 shareholders. In addition, the global     
depositary receipts (GDR) of Eesti Telekom shares are listed on the Main Market 
of the London Stock Exchange, with the abbreviation EETD. Every Eesti Telekom   
GDR represents three Eesti Telekom shares.                                      

General meeting                                                                 
The highest management body of Eesti Telekom is the shareholders' general       
meeting. General meetings shall be regular and extraordinary. The authority of  
the general meeting is defined by the Estonian Commercial Code and the Eesti    
Telekom articles of association (the articles of association are available on   
the Eesti Telekom website at www.telekom.ee). Among other things, the authority 
of the general meeting includes amending the Eesti Telekom articles of          
association, approving the annual report, distributing the profits, and electing
the members of the Supervisory Board.                                           

Exercise of the Rights of Shareholders                                          
Each Eesti Telekom share provides one vote at the general meeting and           
shareholders can participate in general meetings and vote at the meetings       
personally or through representatives. Usually, the general meeting has the     
authority to pass resolutions if more than half the votes represented by shares 
are present. Resolutions of the general meeting are passed if over half of the  
votes represented at the general meeting are in favor, except in certain cases  
(e.g. amending the articles of association, increasing and reducing share       
capital, issuing convertible bonds, and the merger, division, reorganization,   
and termination of Eesti Telekom), in which case the resolution is passed if at 
least 2/3 of the votes represented at the general meeting are in favor.         

In 2008, the shareholders' annual general meeting took place on 22 May. The     
meeting approved the 2007 Annual Report and proposal for the distribution of    
profits, approved the conditions for the repurchase option of Eesti Telekom     
shares, recalled the members of the Eesti Telekom Supervisory Board and elected 
new members, approved the procedure for the remuneration of Supervisory Board   
members, elected the Eesti Telekom auditor for the 2008 financial year, and     
approved the procedure for paying for auditing services, deciding that the      
provision of auditing services and payment for those services shall be regulated
by an agreement to be signed with the auditor. 87.25% of the votes represented  
by shares were present at the annual general meeting, and therefore the meeting 
had the authority to pass resolutions.                                          

On 26 June 2008, an extraordinary shareholders' meeting took place based on the 
application of Eesti Telekom shareholder Baltic Tele AB, which recalled one     
member of the Eesti Telekom Supervisory Board and elected one new member to     
replace him. The recall of the Supervisory Board member was related to the      
change of his duties to be performed in the TeliaSonera AB Group, the parent    
company of Baltic Tele AB, making the performance of his duties as a Supervisory
Board member more difficult. 84.69% of the votes represented by shares were     
present at the general meeting, and therefore the meeting had the authority to  
pass resolutions.                                                               

Calling of the General Meeting and Publishing of Information                    
The Eesti Telekom Management Board announces the convening of a general meeting 
at least three weeks in advance in the case of an annual meeting and at least   
one week in advance in the case of an extraordinary meeting, by publishing a    
corresponding notice in at least one newspaper with national circulation in the 
Republic of Estonia.                                                            

A notice calling the 2008 annual general meeting was published in the Postimees 
daily on 24 April 2008 and through the Tallinn Stock Exchange information system
on 23 April 2008. A notice regarding the extraordinary general meeting to be    
held on 26 June 2008 was published on 16 June 2008 both in the Postimees and    
through the Tallinn Stock Exchange information system. No questions were asked  
regarding the agendas presented in the given notices and no supplementary       
proposals were made.                                                            

Therefore, as regards the general meetings of Eesti Telekom, the Principles were
followed in 2008, except for the rules prescribed by clauses 1.3.2. and 1.3.3.  
of the Principles. Pursuant clause 1.3.2 of the Principles, the candidates for  
Supervisory Board member who have not previously been members of the issuer's   
Supervisory Board will participate in the general meeting. Björn Lindegren, a   
candidate for Supervisory Board member, did not participate in the 2008         
extraordinary general meeting due to the performance of duties not related to   
Eesti Telekom. Clause 1.3.3. of the Principles stipulates that the issuer shall,
if it has the necessary technical equipment and if it does not involve too high 
costs, make it possible to watch and participate in the general meeting through 
telecommunications. Eesti Telekom is of the opinion that adherence to this      
principle would involve too high costs and would not be sufficiently used by the
shareholders.                                                                   

Supervisory Board                                                               
Duties                                                                          
The Supervisory Board plans the activities of Eesti Telekom, elects the members 
of the Management Board, and executes supervision over the activities of the    
Management Board. In conformity with the Eesti Telekom articles of association, 
the Supervisory Board makes decisions regarding the company's activities in     
significant fields of activity and questions that are not under the sole        
authority of the general meeting according to the law or articles of association
and which are outside the framework of the company's everyday economic          
activities (i.e. approval of budgets and business plans, resolving              
organizational questions related to Eesti Telekom and its group, etc.).         

Members and Remuneration                                                        
Pursuant to the articles of association, the Eesti Telekom Supervisory Board    
comprises six to ten members who are elected by the general meeting for a term  
of two years. Until 22 May 2008, the Eesti Telekom Supervisory Board included   
the following people: Anders Gylder, Lars Gunnar Klasson, Jörgen Latte, Tarmo   
Porgand, Mats Salomonsson, Aare Tark, and Jüri Raatma. As from 22 May 2008, the 
following people comprised the Eesti Telekom Supervisory Board: Anders Gylder,  
Lars Gunnar Klasson, Jörgen Latte, Tarmo Porgand, Mats Salomonsson, Aare Tark,  
and Jüri Raatma. At the extraordinary general meeting of Eesti Telekom          
shareholders held on 26 June 2008 Anders Gylder was recalled and Björn Lindegren
was elected to replace him.                                                     
The term of office of the current members will expire on the following dates: on
22 May 2009 in the case of Jörgen Latte, Tarmo Porgand, Mats Salomonsson, Aare  
Tark, Jüri Raatma, and Lars Klasson; and on 26 June 2010 in the case of Björn   
Lindegren.                                                                      

The following Supervisory Board members are associated with the Swedish company 
TeliaSonera AB that controls Eesti Telekom: Lars Klassen, Björn Lindegren,      
Jörgen Latte, and Mats Salomonsson.                                             
The Supervisory Board member, Aare Tark,                                        
has had business connections (provision of legal services) with Eesti Telekom   
through a company controlled by him, but the company providing the services did 
not receive a significant amount of compensation for the services and therefore 
Aare Tark can be considered an independent member of the Supervisory Board.     

The members of the Supervisory Board will elect a Chairman from among           
themselves. In 2008,                                                            
Mats Salomonsson acted as Chairman of the Supervisory                           
Board.                                                                          

Remuneration for the work of the members of the Supervisory Board was paid      
according to the resolution of the annual shareholders' meeting. Until 22 May   
2008, the monthly payment for the Chairman of the Supervisory Board was 1.278   
EUR and 575 EUR for the members of the Supervisory Board. By a resolution of the
annual general meeting of shareholders held on 22 May 2008, the monthly         
remuneration payable to Supervisory Board members was increased to 703 EUR;     
remuneration payable to the Chairman was left unchanged. In addition, the actual
costs incurred by the members of the Supervisory Board in relation to the       
performance of their duties were compensated on the basis of their respective   
applications.                                                                   

Activities                                                                      
The work of the Eesti Telekom Supervisory Board (location, meetings,            
resolutions, and minutes of the Supervisory Board) is organized according to the
Supervisory Board regulations approved by them. In 2008, the Supervisory Board  
held seven meetings. The Management Board presented regular reports to the      
Supervisory Board on the economic activities and financial status of the Eesti  
Telekom Group. The Supervisory Board was provided a summary of the topics       
discussed by the Auditing Committee and the Committee on Remuneration and       
Appointments, including the results of the audits conducted by the internal and 
external auditors. During 2008, the Supervisory Board approved the 2007 Annual  
Report, the results of the motivational system for the top management of the    
Group for 2007, the Group's budget for 2009 and the motivational system for the 
top management of the Group for 2009, drew up the agendas for the general       
meetings of shareholders, and approved the acquisition of IT Koolituskeskuse OÜ 
by AS MicroLink Eesti.                                                          

All members of the Supervisory Board of Eesti Telekom participated in more than 
a half of the meetings of the Supervisory Board in 2008.                        

Conflict of Interests                                                           
Pursuant to the law and the articles of association, decisions regarding        
transactions between members of the Supervisory Board and Eesti Telekom are     
under the authority of the general meeting, and the members of the Supervisory  
Board may not compete with Eesti Telekom without the permission of the          
shareholders' general meeting. Until the compilation of this report, the members
of the Supervisory Board have not notified the Eesti Telekom Management Board of
any cases of conflict of interests in 2008.                                     

Hence, as regards the work of the Supervisory Board of Eesti Telekom, the       
Principles were adhered to in 2008.                                             

Management Board                                                                
Duties                                                                          
The Management Board is the Eesti Telekom management body that deals with the   
management of everyday economic activities and the representation of Eesti      
Telekom. Eesti Telekom may be represented in all legal acts by Valdo Kalm alone 
or two Management Board members jointly. For the achievement of Eesti Telekom's 
objectives, the Management Board analyzes the risks related to Eesti Telekom's  
activities and financial targets. By its resolution, the Management Board of    
Eesti Telekom has established the Eesti Telekom Group's rules for handling of   
inside information and other internal rules, e.g. accounting policies and       
procedures. The Management Board must comply with the legitimate regulations of 
the Supervisory Board. In 2008, a constant exchange of information took place   
between the Management Board and Supervisory Board of Eesti Telekom, i.e. the   
Management Board submitted regular reviews on the economic activities and       
financial status of the Eesti Telekom Group to the Supervisory Board.           

Members and Remuneration                                                        
According to the Eesti Telekom articles of association, the Supervisory Board   
may elect two to five members to the Management Board. The members of the       
Management Board are elected for three years with the option of extending the   
term. The Supervisory Board appoints one Management Board member as the         
Chairman, who also acts as the company's Managing Director. In 2008, the members
of the Management Board of Eesti Telekom were Valdo Kalm (the Chairman), Leho   
Tamm, Valdur Laid, and Enn Saar.                                                

The term of office of the current members will expire on the following dates: on
1 January 2010 in the case of Valdo Kalm; and on 1 July 2010 in the case of Leho
Tamm, Valdur Laid, and Enn Saar.                                                

The salaries and severance pay of the members of the Management Board, as well  
as the payment conditions, are determined by the contracts of service concluded 
with the members of the Management Board. The bonus system for members of the   
Management Board is approved annually by a resolution of the Supervisory Board. 
Upon the achievement of the maximum level of the objectives for 2008, the       
members of the Management Board would receive a bonus equal to six months'      
salary. In 2008, Eesti Telekom did not comply with clause 2.2.7 of the          
Principles, which provides for disclosing the benefits and bonus system of each 
member of the Management Board on the website and in this report, as well as the
presentation of the principles for the remuneration of the members of the       
Management Board at the general meeting. On 13 December 2005, the Eesti Telekom 
Supervisory Board decided that, at this time, the disclosure of such information
is not in the interests of the Eesti Telekom Group and it would not provide an  
adequate overview of the motivational system for the Group's top management.    
Currently, there are no share option programs in the Eesti Telekom Group.       

Conflict of Interests                                                           
Pursuant to the law and the articles of association, transactions between       
members of the Management Board and Eesti Telekom must be approved by the       
Supervisory Board, and members of the Management Board may not compete with     
Eesti Telekom without the permission of the Supervisory Board. Until the        
compilation of this report, the members of the Management Board have not        
notified the Eesti Telekom Supervisory Board of any cases of conflict of        
interests in 2008.                                                              

Therefore, in 2008, the Principles were followed in the work of the Eesti       
Telekom Management Board, except for the rule prescribed by clause 2.2.7 of the 
Principles.                                                                     

Control Functions and Auditing                                                  
In addition to a reporting system and procedures for risk management, the Eesti 
Telekom Supervisory Board and Management Board have established various control 
functions.                                                                      
Auditing Committee                                                              
The Auditing Committee helps the Supervisory Board to perform its supervisory   
function. In 2008, the Committee members were Mats Salomonsson (the Chairman),  
Jörgen Latte, and Tarmo Porgand. During 2008, the Committee met 5 times.        

External Auditors                                                               
According to the articles of association, the auditor(s) are chosen by the      
general meeting. In 2008, the Eesti Telekom auditor was AS                      
PricewaterhouseCoopers. AS PricewaterhouseCoopers audited all the companies in  
the Eesti Telekom Group (except of IT Koolituskeskuse OÜ, OÜ Voicecom and AS    
Sertifitseerimiskeskus) and submitted the auditor's report to the general       
meeting. The auditors also informed the Auditing Committee and Management Boards
of the Group's companies of their observations.                                 




Internal Control                                                                
Since April 2002, the internal control service has been outsourced from AS      
Deloitte & Touche Audit. The Audit Committee and Deloitte agree upon the extent 
of the internal control projects once a year. Deloitte reports on the completed 
work to the Audit Committee.                                                    

Committee on Remuneration and Appointments                                      
The principal function of the Committee on Remuneration and Appointments is to  
harmonize the remuneration principles for the top management of the Eesti       
Telekom Group and to make proposals for the appointment of Supervisory Board    
members and their remuneration. Until 17 July 2008,                             
Mats Salomonsson (Committee                                                     
Chairman), Anders Gylder, and Aare Tark were the members of the Committee. As   
from 17 July 2008, the Committee comprised the following members: Mats          
Salomonsson (Committee Chairman), Björn Lindegren, and Aare Tark. During 2008,  
the Committee met 2 times.                                                      

Disclosure of Information                                                       
The information required by the Principles, including the financial calendar,   
articles of association, financial reports, information on presentations and    
meeting with analysts, information on the members of the Supervisory Board and  
Management Board, the auditors, and other information, is available on the Eesti
Telekom website at www.telekom.ee. Therefore, in 2008, Eesti Telekom complied   
with the Principles in terms of the disclosure of information.                  

Financial reporting and auditing                                                
Eesti Telekom prepares its accounting reports in accordance with the            
international financial reporting standards applied in the European Union       
(IFRS). In respect to the disclosure of financial reporting, Eesti Telekom      
proceeds from the provisions of the law and the regulations of the Tallinn Stock
Exchange (please see the table below for dates of disclosure). At the meeting of
the Supervisory Board where the annual report was examined, technical means were
present for having a telephone conference with the auditors; however, the       
Supervisory Board did not consider it necessary to use this opportunity. By an  
opinion of the Supervisory Board sent along with the notice calling the general 
meeting, data regarding the auditor and the Supervisory Board's assessment of   
the work of the auditor, as well as information on the fees paid to the auditor,
were disclosed to the shareholders. Thus, as regards financial reporting and    
auditing, Eesti Telekom adhered to the Principles in 2008.                      

--------------------------------------------------------------------------------
| Interim report   | Interim report   | Interim report   | Interim report for  |
| for the first    | for the second   | for the third    | 2008 and the fourth |
| quarter of 2008  | quarter and      | quarter and nine | quarter of 2008     |
|                  | first half-year  | months of 2008   |                     |
|                  | of 2008          |                  |                     |
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| 23 April 2008    | 18 July 2008     | 24 October 2008  | 5 February 2009     |
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CONSOLIDATED INCOME STATEMENT                                                   
In thousands of EUR                                                             

--------------------------------------------------------------------------------
|                                          |      Year ended 31 December       |
--------------------------------------------------------------------------------
|                                          |             2008 |           2007 |
--------------------------------------------------------------------------------
| Revenue                                  |         395,588  |       400,151  |
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| Cost of sales                            |        (225,777) |      (226,426) |
--------------------------------------------------------------------------------
| Gross profit                             |         169,811  |       173,725  |
--------------------------------------------------------------------------------
| Selling, administrative and research &   |         (57,972) |       (57,521) |
| development                              |                  |                |
| expenses                                 |                  |                |
--------------------------------------------------------------------------------
| Other operating income                   |           2,001  |         1,797  |
--------------------------------------------------------------------------------
| Other operating expenses                 |            (543) |          (404) |
--------------------------------------------------------------------------------
| Operating profit                         |         113,297  |       117,597  |
--------------------------------------------------------------------------------
| Finance income                           |           3,527  |         3,108  |
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| Finance costs                            |             (56) |          (150) |
--------------------------------------------------------------------------------
| Finance income, net                      |           3,471  |         2,958  |
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| Share of profit/(loss) from associates   |            (182) |          (244) |
--------------------------------------------------------------------------------
| Profit before tax                        |         116,586  |       120,311  |
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| Income tax expense                       |         (24,664) |       (23,705) |
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| Net profit for the period                |          91,922  |        96,606  |
--------------------------------------------------------------------------------
| Attributable to:                         |                  |                |
--------------------------------------------------------------------------------
| Equity holders of the Company            |          91,703  |        96,194  |
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| Minority interest                        |             219  |           412  |
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|                                          |          91,922  |        96,606  |
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| Earnings per share for profit            |                  |                |
| attributable to the equity holders of    |                  |                |
| the Company during the year              |                  |                |
--------------------------------------------------------------------------------
| Basic earnings per share (in EUR)        |            0.66  |          0.70  |
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| Diluted earnings per share (in EUR)      |            0.66  |          0.70  |
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CONSOLIDATED BALANCE SHEET                                                      
In thousands of EUR                                                             

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|                                     |           As at 31 December            |
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|                                     |               2008 |              2007 |
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| ASSETS                              |                    |                   |
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| Non-current assets                  |                    |                   |
--------------------------------------------------------------------------------
| Property, plant and equipment       |           165,542  |          153,715  |
--------------------------------------------------------------------------------
| Intangible assets                   |            14,592  |           13,807  |
--------------------------------------------------------------------------------
| Investments in associates           |               676  |              858  |
--------------------------------------------------------------------------------
| Other non-current receivables       |             6,115  |            7,352  |
--------------------------------------------------------------------------------
| Total non-current assets            |           186,925  |          175,732  |
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| Current assets                      |                    |                   |
--------------------------------------------------------------------------------
| Assets classified as held-for-sale  |                 -  |              111  |
--------------------------------------------------------------------------------
| Inventories                         |            10,861  |           11,989  |
--------------------------------------------------------------------------------
| Trade and other receivables         |            66,576  |           63,460  |
--------------------------------------------------------------------------------
| Short-term financial investments    |            31,956  |           44,357  |
--------------------------------------------------------------------------------
| Cash and cash equivalents           |            23,206  |           25,359  |
--------------------------------------------------------------------------------
| Total current assets                |           132,599  |          145,276  |
--------------------------------------------------------------------------------
| TOTAL ASSETS                        |           319,524  |          321,008  |
--------------------------------------------------------------------------------
| EQUITY AND LIABILITIES              |                    |                   |
--------------------------------------------------------------------------------
| Equity                              |                    |                   |
--------------------------------------------------------------------------------
| Capital and reserves attributable   |                    |                   |
| to equity holders of the Company    |                    |                   |
--------------------------------------------------------------------------------
| Share capital                       |            88,169  |           88,169  |
--------------------------------------------------------------------------------
| Share premium                       |            22,753  |           22,753  |
--------------------------------------------------------------------------------
| Statutory legal reserve             |             8,817  |            8,817  |
--------------------------------------------------------------------------------
| Translation reserve                 |                 1  |                -  |
--------------------------------------------------------------------------------
| Retained earnings                   |           154,274  |          155,265  |
--------------------------------------------------------------------------------
| Total capital and reserves          |           274,014  |          275,004  |
| attributable to equity holders of   |                    |                   |
| the Company                         |                    |                   |
--------------------------------------------------------------------------------
| Minority interest                   |               513  |              733  |
--------------------------------------------------------------------------------
| Total equity                        |           274,527  |          275,737  |
--------------------------------------------------------------------------------
| Non-current liabilities             |                    |                   |
--------------------------------------------------------------------------------
| Interest bearing loans and          |               375  |               85  |
| borrowings                          |                    |                   |
--------------------------------------------------------------------------------
| Retirement benefit obligations      |               138  |              208  |
--------------------------------------------------------------------------------
| Provisions                          |             1,443  |            1,321  |
--------------------------------------------------------------------------------
| Non-interest bearing liabilities    |               127  |                -  |
--------------------------------------------------------------------------------
| Total non-current liabilities       |             2,083  |            1,614  |
--------------------------------------------------------------------------------
| Current liabilities                 |                    |                   |
--------------------------------------------------------------------------------
| Trade and other payables            |            42,399  |           42,885  |
--------------------------------------------------------------------------------
| Interest bearing loans and          |               259  |              178  |
| borrowings                          |                    |                   |
--------------------------------------------------------------------------------
| Retirement benefit obligations      |                66  |              308  |
--------------------------------------------------------------------------------
| Provisions                          |               190  |              286  |
--------------------------------------------------------------------------------
| Total current liabilities           |            42,914  |           43,657  |
--------------------------------------------------------------------------------
| Total liabilities                   |            44,997  |           45,271  |
--------------------------------------------------------------------------------
| TOTAL EQUITY AND LIABILITIES        |           319,524  |          321,008  |
--------------------------------------------------------------------------------



CONSOLIDATED CASH FLOW STATEMENT                                                
In thousands of EUR                                                             

--------------------------------------------------------------------------------
|                                             |     Year ended 31 December     |
--------------------------------------------------------------------------------
|                                             |          2008 |          2007  |
--------------------------------------------------------------------------------
| Net cash from operating activities          |      126,736  |       121,560  |
--------------------------------------------------------------------------------
| Cash flows from investing activities        |               |                |
--------------------------------------------------------------------------------
| Purchases of property, plant and equipment  |      (47,506) |       (55,059) |
| and intangible assets                       |               |                |
--------------------------------------------------------------------------------
| Proceeds from sale of property, plant and   |          653  |           944  |
| equipment  and intangible assets            |               |                |
--------------------------------------------------------------------------------
| Acquisition of business net of cash         |       (1,545) |          (315) |
| acquired and settlements of deferred        |               |                |
| consideration                               |               |                |
--------------------------------------------------------------------------------
| Net cash changes of short-term financial    |       12,402  |        23,631  |
| investments                                 |               |                |
--------------------------------------------------------------------------------
| Net cash changes of other long-term         |         (276) |        (2,305) |
| receivables                                 |               |                |
--------------------------------------------------------------------------------
| Net cash used in investing activities       |      (36,272) |       (33,104) |
--------------------------------------------------------------------------------
| Cash flow before financing activities       |       90,464  |        88,456  |
--------------------------------------------------------------------------------
| Cash flows from financing activities        |               |                |
--------------------------------------------------------------------------------
| Dividends paid                              |      (93,058) |       (83,761) |
--------------------------------------------------------------------------------
| Proceeds from finance lease                 |          579  |            65  |
--------------------------------------------------------------------------------
| Repayments of finance lease liabilities     |         (154) |          (116) |
--------------------------------------------------------------------------------
| Net cash used in financing activities       |      (92,633) |       (83,812) |
--------------------------------------------------------------------------------
| Net change in cash and cash equivalents     |       (2,169) |         4,644  |
--------------------------------------------------------------------------------
|                                             |               |                |
--------------------------------------------------------------------------------
| Cash and cash equivalents at beginning of   |       25,359  |        20,733  |
| year                                        |               |                |
--------------------------------------------------------------------------------
| Net change in cash and cash equivalents     |       (2,169) |         4,644  |
--------------------------------------------------------------------------------
| Effect of foreign exchange rate changes     |           16  |           (18) |
--------------------------------------------------------------------------------
| Cash and cash equivalents at end of year    |       23,206  |        25,359  |
--------------------------------------------------------------------------------