*Draft of June 13, 2006*

**As filed with the Securities and Exchange Commission on June 21, 2005**

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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**FORM 20-F**

** **

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For the fiscal yearended: December 31, 2005**

** **

**Commission file number:0-29080**

** **

**Tele2 AB**

(Exact name of Registrant as specified in its charter)

** **

**SWEDEN**

(Jurisdiction of incorporation or organization)

** **

**Skeppsbron 18Box 2094S-103 13 Stockholm, Sweden**

(Address of principal executive offices)

** **

**Securitiesregistered or to be registered pursuant to Section 12(b) of the Act.**

| **Title of each class** |   | **Name of  each exchange on which registered** |
|-------------------------|--------|------------------------------------------------|
| None                    |   | None                                           |

 

**Securitiesregistered or to be registered pursuant to Section 12(g) of the Act.**

| **Title of each class**                          |   | **Name of  each exchange on which registered** |
|--------------------------------------------------|--------|------------------------------------------------|
| Series A Share  (quota value SEK 1.25 per share) |   | None                                           |
| Series B Share  (quota value SEK 1.25 per share) |   | None                                           |

 

**Securitiesfor which there is a reporting obligation pursuant to Section 15(d) of the Act.**

| **Title of each class** |   | **Name of  each exchange on which registered** |
|-------------------------|--------|------------------------------------------------|
| None                    |   | None                                           |

 
| Outstanding shares of each of the issuer’s  classes of capital or common stock as of December 31, 2005: |   | 46,549,989 Series A Shares  397,102,843 Series B Shares |
|--------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes   x   No   o

If this report is an annual or transition report,indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.   Yes   o   No   x

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.   Yes   x No   o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

Large accelerated filer   x      Acceleratedfiler   o      Non-acceleratedfiled   o

If this is an annual report, indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes   o No   x

Indicate by check mark which financial statement item theregistrant has elected to follow. Item 17   x Item 18   o

 

 

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**TABLE OF CONTENTS**
|                                                  | ** ** | ** **                                                              | ** ** | **Page** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------|------------|
| PRESENTATION OF  FINANCIAL AND OTHER INFORMATION |       | 2                                                                       |       |
| FORWARD-LOOKING  INFORMATION                     |       | 3                                                                       |       |
| ***Part I***                                |       |                                                                    |       |     |       |
| **Item 1:**                                 |       | Identity of Directors,  Senior Management and Advisers                  |       | 3        |       |
| **Item 2:**                                 |       | Offer Statistics and  Expected Timetable                                |       | 3        |       |
| **Item 3:**                                 |       | Key Information                                                         |       | 4        |       |
| **Item 4:**                                 |       | Information on the  Company                                             |       | 12       |       |
| **Item 4A:**                                |       | Unresolved Staff  Comments                                              |       | 69       |       |
| **Item 5:**                                 |       | Operating and  Financial Review and Prospects                           |       | 70       |       |
| **Item 6:**                                 |       | Directors,  Senior Management and Employees                             |       | 89       |       |
| **Item 7:**                                 |       | Major  Shareholders and Related Party Transactions                      |       | 95       |       |
| **Item 8:**                                 |       | Financial Information                                                   |       | 98       |       |
| **Item 9:**                                 |       | The Offer and the  Listing                                              |       | 100      |       |
| **Item 10:**                                |       | Additional  Information                                                 |       | 102      |       |
| **Item 11:**                                |       | Quantitative  and Qualitative Disclosures about Market Risks            |       | 109      |       |
| **Item 12:**                                |       | Description Of  Securities Other Than Equity Securities                 |       | 111      |       |
| ***Part II***                               |       |                                                                    |       |     |       |
| **Item 13:**                                |       | Defaults,  Dividend Arrearages and Delinquencies                        |       | 111      |       |
| **Item 14:**                                |       | Material  Modifications To The Rights Of Security Holders               |       | 111      |       |
| **Item 15:**                                |       | Controls and  Procedures                                                |       | 111      |       |
| **Item 16:**                                |       | [Reserved]                                                              |       | 111      |       |
| **Item 16A:**                               |       | Audit  Committee Financial Expert                                       |       | 111      |       |
| **Item 16B:**                               |       | Code of Ethics                                                          |       | 111      |       |
| **Item 16C:**                               |       | Principal  Accountant Fees and Services                                 |       | 111      |       |
| **Item 16D:**                               |       | Exemptions  from the Listing Standards for Audit Committees             |       | 112      |       |
| **Item 16E:**                               |       | Purchases of  Equity Securities by the Issuer and Affiliated Purchasers |       | 112      |       |
| ***Part III***                              |       |                                                                    |       |     |       |
| **Item 17:**                                |       | Financial Statements                                                    |       | 112      |       |
| **Item 18:**                                |       | Financial Statements                                                    |       | 112      |       |
| **Item 19:**                                |       | Exhibits                                                                |       | 112      |       |

 

**PRESENTATION OFFINANCIAL AND OTHER INFORMATION**

Unless the context otherwise requires, referencesherein to “we,” “us,” “our,” “the Company,” “Tele2” or the “Group” are to Tele2AB and its consolidated subsidiaries (collectively, the “Tele2 Group”), andreferences herein to “this Annual Report” are to our Annual Report on Form 20-Ffor the year ended December 31, 2005.

We prepare our consolidated financial statements inconformity with the International Financial Reporting Standards (IFRS) asadopted by the European Union (EU), which is different in certain respects fromaccounting principles generally accepted in the United States of America orU.S. GAAP. The transition date to IFRS was January 1, 2004. No comparableinformation for IFRS has therefore been presented for periods prior to 2004. Inthis Annual Report, unless otherwise stated or the context otherwise requires,references to “kronor,” “krona” or “SEK” are to the lawful currency of Sweden,references to “dollars” or “$” are to the lawful currency of the United States,references to GBP are to the lawful currency of the United Kingdom andreferences to “euro”, “EUR” and “€” are to the lawful currency of the EU memberstates participating in the third stage of European Economic and MonetaryUnion. Solely for your convenience, this Annual Report contains translations ofcertain SEK amounts into dollars at specified rates. These translations shouldnot be construed as representations that the SEK amounts actually representsuch dollar amounts or that you could convert into dollars at those rates.Unless otherwise stated, the translations of SEK into dollars have been made atthe rate of $1.00 = SEK 7.9370, the rate derived from the noon buying rate inThe City of New York for cable transfers in SEK as certified for customspurposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on December 31,2005. See Item 3: “Key Information—Exchange Rate Information” for information 

2

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regarding certain currency exchange rates and Item 11:“Quantitative and Qualitative Disclosures about Market Risks—Risk of Variationsin Exchange Rates” for a discussion of the effects of fluctuations in currencyexchange rates on the Company.

**FORWARD-LOOKINGINFORMATION**

This Annual Report includes certain forward-lookingstatements. All statements regarding our future financial condition, results ofoperations and business strategy, plans and objectives are forward looking.Statements containing words such as “believe,” “plan,” “intend,” “estimate,” “expect”and “anticipate” or similar expressions are also forward looking. Actual eventsor results may differ materially from those projected in such forward-lookingstatements as a result of various factors that may be beyond our control. Thesefactors include, without limitation, the effects on the Company of the intensecompetition existing in the telecommunications markets in which we operate andin the markets we intend to enter; the impact on the Company of governmentregulation; our ability to adapt to technological changes in thetelecommunications industry; trends in results, operations and overall markettrends; and the risk of exchange rate fluctuations. You should also considerthe information contained in Item 3: “Key Information—Risk Factors” and Item 5:“Operating and Financial Review and Prospects,” as well as the informationcontained in our periodic filings with the Securities and Exchange Commission(including our reports on Form 6-K), for further discussion of therisks and uncertainties that may cause such differences to occur. We cautionyou not to place undue reliance on these forward-looking statements,which reflect our management’s view only as of the date of this document.

**PART I**

**Item 1: Identityof Directors, Senior Management and Advisers**

This item is not applicable.

**Item 2: OfferStatistics and Expected Timetable**

This item is not applicable.

3

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**Item 3: KeyInformation**

**SelectedConsolidated Historical Financial Data**

The following tables set forth selected consolidatedfinancial data for the periods indicated and are qualified by reference to, andshould be read in conjunction with, our consolidated financial statements andthe accompanying notes thereto appearing elsewhere in this Annual Report (the “ConsolidatedFinancial Statements”) and Item 5: “Operating and Financial Review andProspects.” The balance sheet data as of December 31, 2004 and 2005 and theincome statement data for the years ended December 31, 2004 and 2005 set forthbelow have been derived from our Consolidated Financial Statements. OurConsolidated Financial Statements have been prepared in accordance with theInternational Financial Reporting Standards (IFRS) as adopted by the EU, which,as described in Note 39 of the Notes to the Consolidated Financial Statements,differs from U.S. GAAP in certain significant respects. The transition date toIFRS was January 1, 2004. No comparable information for IFRS has therefore beenpresented for periods prior to 2004.

Our auditor is the auditing firm Deloitte AB,authorized public accountants in Sweden and an independent public accountingfirm registered with the Public Company Accounting Oversight Board of theUnited States of America.

**ConsolidatedIncome Statement Data**
| ** **                                                                    | ** ** | **Year ended December 31,**                                                        | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                                                                                          | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | **(in SEK millions, except share and per share amounts)** | ** ** |
| *Amounts in accordance with IFRS*                                             |       |                                                                                              |       |   |   |
| Operating revenue                                                             |       | 43,033                                                                                            |       | 49,943 |   |
| Operating profit/loss                                                         |       | 4,318                                                                                             |       | 3,510 |   |
| Profit/loss after  financial items                                            |       | 4,207                                                                                             |       | 3,127 |   |
| **Net profit/loss for the year**                                              | ** ** | **3,428**                                                                                         | ** ** | **2,341** | ** ** |
| Dividends declared per  share SEK                                             |       | 1.67                                                                                              |       | 1.75 |   |
| Redemption per share  SEK                                                     |       | 3.33                                                                                              |       | — |   |
| Dividends declared per  share USD                                             |       | 0.25                                                                                              |       | 0.22 |   |
| Redemption per share  USD                                                     |       | 0.50                                                                                              |       | — |   |
| Weighted average number  of shares outstanding during the year                |       | 442,680,525                                                                                       |       | 442,842,576 |   |
| Weighted average number  of shares outstanding during the year after dilution |       | 443,741,574                                                                                       |       | 443,391,346 |   |
| Earnings/loss per share  in SEK                                               |       | 7.74                                                                                              |       | 5.30 |   |
| Earnings/loss per share after dilution in SEK                                 |       | 7.73                                                                                              |       | 5.29 |   |

 
| ** **                                         | ** ** | **Year ended December 31,**                                                        | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2001**                                                                                          | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(in SEK millions, except share and per share amounts)** | ** ** |
| *Amounts in accordance with U.S.  GAAP(1)*         |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Operating revenue                                  |       | 25,085                                                                                            |       | 31,282 |   | 36,798 |   | 42,963 |   | 49,936 |   |
| Operating profit/loss                              |       | (1,819                                                                                            | )          | 2,968 |   | 3,657 |   | 4,575 |   | 3,511 |   |
| Net profit/loss for the  year                      |       | 763                                                                                               |       | 1,692 |   | 3,857 |   | 3,237 |   | 2,343 |   |
| Earnings/loss per share  in SEK                    |       | 1.75                                                                                              |       | 3.83 |   | 8.72 |   | 7.31 |   | 5.29 |   |
| Earnings/loss per share after full dilution in SEK |       | 1.75                                                                                              |       | 3.82 |   | 8.70 |   | 7.30 |   | 5.28 |   |

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(1)    The consolidated financialstatements of Tele2 are prepared in accordance with IFRS as adopted by the EU,with transition date January 1, 2004, which differs in certain significantrespects from U.S. GAAP. See Note 1 and the Reconciliation to U.S. GAAP in Note39 to the Consolidated Financial Statements filed as part of this Form 20-F.

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**ConsolidatedBalance Sheet Data**
| ** **                                                                      | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                              | ** ** | **2005** | ** ** |
| ** **                                                                      | ** ** | **(in SEK millions)**       | ** ** |
| *Amounts in accordance with IFRS*                                               |       |                                  |       |   |   |
| Fixed Assets:                                                                   |       |                                  |       |   |   |
| Intangible assets                                                               |       | 24,016                                |       | 31,079 |   |
| Tangible assets                                                                 |       | 9,107                                 |       | 14,282 |   |
| Long-term  financial assets                                                     |       | 624                                   |       | 506 |   |
| Deferred tax assets                                                             |       | 3,218                                 |       | 5,281 |   |
| Total fixed assets                                                              | ** ** | **36,965**                            | ** ** | **51,148** | ** ** |
| Total current assets                                                            |       | 12,900                                |       | 17,135 |   |
| **Total assets**                                                                | ** ** | **49,865**                            | ** ** | **68,283** | ** ** |
| Shareholders’ equity  attributable to equity holders of the parent company |       | 32,898                                |       | 34,965 |   |
| Minority interest                                                               |       | 2                                     |       | 403 |   |
| Shareholders’ equity                                                       | ** ** | **32,900**                            | ** ** | **35,368** | ** ** |
| Long-term  liabilities                                                          |       | 2,237                                 |       | 11,422 |   |
| Current liabilities                                                             |       | 14,728                                |       | 21,493 |   |
| **Total shareholders’ equity and liabilities**                             | ** ** | **49,865**                            | ** ** | **68,283** | ** ** |

 
| ** **                                 | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **2001**                              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in SEK millions)**       | ** ** |
| *Amounts in accordance with U.S.  GAAP(1)* |       |                                  |       |   |   |   |   |   |   |   |   |
| Total assets                               |       | 55,870                                |       | 54,824 |   | 57,398 |   | 58,596 |   | 77,674 |   |
| Total shareholders’ equity            |       | 36,041                                |       | 36,578 |   | 36,602 |   | 41,912 |   | 44,271 |   |

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(1)    The consolidated financialstatements of Tele2 are prepared in accordance with IFRS, with transition date January1, 2004. IFRS differs in certain significant respects from U.S. GAAP. See Note1 and the Reconciliation to U.S. GAAP in Note 39 to the Consolidated FinancialStatements filed as part of this Form 20-F.

**Exchange RateInformation**

This section contains translations of Swedish kronainto U.S. dollars at specified rates. These are simply translations, and youshould not expect that a krona amount actually represents a stated U.S. dollaramount or that it could be converted into U.S. dollars at the rate suggested,or at any other rate. In particular, fluctuations in the exchange rate betweenthe krona and the U.S. dollar will affect, among other things, the U.S. dollarequivalent of the krona price of our ordinary shares on the Stockholm Exchange,which is likely to affect the market price of, and amount of U.S. dollardividends, if any, paid on Shares. Such fluctuations could also affect the U.S.dollar equivalent of the krona dividends, if any, paid on our ordinary shares.Changes in the exchange rate between the krona and the U.S. dollar could affectour financial results and accordingly, our results on a consolidated basis. SeeItem 3: “Key Information—Risk Factors” and Item 11: “Quantitative andQualitative Disclosures about Market Risk.” These rates may differ from theactual rates used in the preparation of our financial statements and otherfinancial information appearing in this Annual Report.

The table below sets forth the average of the noonbuying rates in New York City for cable transfers as certificated for customspurposes by the Federal Reserve Bank of New York (“Noon Buying Rates”) forkrona on the last full day of each full month during each of the last fiveyears ending December 31, 2005:
| **Year ended December 31,** | ** ** | **Kronor per U.S. dollar** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| 2001                                       |       | 10.4571                                   |       |
| 2002                                       |       | 8.6950                                    |       |
| 2003                                       |       | 7.1950                                    |       |
| 2004                                       |       | 6.6687                                    |       |
| 2005                                       |       | 7.9370                                    |       |

 

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The following tables set forth, for the previous sixmonths, the high and low Noon Buying Rates expressed in kronor per $1.00.
| **Monthly rates** | ** ** | **High  SEK** | ** ** | **Low  SEK** | ** ** |
|------------------------|------------|---------------|------------|--------------|------------|
| *2005*                 |       |          |       |         |       |
| December               |       | 8.1162        |       | 7.8323       |       |
| *2006*                 |       |          |       |         |       |
| January                |       | 7.8097        |       | 7.5385       |       |
| February               |       | 7.9656        |       | 7.6487       |       |
| March                  |       | 7.9604        |       | 7.6491       |       |
| April                  |       | 7.7580        |       | 7.3579       |       |
| May                    |       | 7.3929        |       | 7.1975       |       |
| June (through June 12) |       | 7.3298        |       | 7.0917       |       |

 

**Risk Factors**

*In addition to the other information contained inthis Annual Report, investors in our securities should consider carefully therisks described below. Our financial condition or results of operations couldbe materially adversely affected by any of these risks. The risks describedbelow are not the only risks facing us. Additional risks not currently known tous or risks that we currently regard as immaterial could also have a materialadverse effect on our financial condition or results of operations.*

*The followingdiscussion contains a number of forward-looking statements. Please referto the “Forward-Looking Statements” discussion at the front of thisAnnual Report for cautionary information.*

***Our projected financial results are subject tofluctuations in market conditions and factors that are difficult to predict.***

Our future ability to maintain positive cash flow andoperating profits will depend upon a number of factors about which projectionsare difficult to make. These include the ability of our operating companies to:attract and retain customers; maintain, control or improve usage levels per customerand tariff levels; and control costs. In addition, ongoing changes in ourmarkets, including the current consolidation trend in a number of our Europeanmarkets, may affect our results in the future. There is a risk, especially asthe number of our mobile customers increases, that average call volumes andaverage revenues per customer will not remain at current levels or increase.

***We anticipate significant future capital expenditures.***

We expect to incur significant costs related toexpansion in the future. We expect that the GSM (Global System for MobileCommunications) investments that we have undertaken in Russia and Croatia willcontinue to require significant capital expenditures. Our UMTS (UniversalMobile Telecommunications System) investments in Latvia will also requiresignificant capital expenditures. There is a risk that these UMTS investmentswill not deliver the same return we have historically experienced from our GSMinvestments. In particular, there is a risk that we may not be able to deliverdata services at a price that our current and future customers are willing topay.

Investments into unbundling of the local loop (ULL)that we currently undertake in a number of countries may not deliver adequatereturns, as potential overcapacity may lead to tariff pressure.

***The success of our operations will depend on ourability to attract and retain customers.***

Our ability to attract and retain customers—and thusthe success of our mobile telephony operations—is subject to high penetrationrates in some of our market areas, and other external factors. Given thesefactors, as well as the relatively short history of these industries, it isdifficult to predict the future penetration rate of mobile telephony servicesfor any of our companies.

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The future growth of our mobile telephony customerbase is increasingly vulnerable to market saturation and may be significantlylower than in past years. The market penetration rates in some of the marketareas in which we operate are among the highest in the world. This forces us toseek growth in direct competition with other providers. With the focus ofcompetition shifting from customer acquisition to customer retention and toincreasing average revenues per user by stimulating demand for new products andservices, churn rates could rise as mobile network operators seek to acquirecustomers of other mobile network operators.

In addition, the growth of our customer base in eachof our markets may be affected by dealer commissions and the related costs ofattracting new customers, handset prices, tariffs, general customer usagepatterns, the competitiveness of alternative services, the development of themobile telecommunications market and general macroeconomic conditions.

Similar concerns apply to our Fixed telephony &internet operations. On fixed telephony we face a declining market whereoperators seek to acquire customers from other operators. On broadband, amarket that is not yet saturated, we face numerous competitors, all trying toattract the same limited growth, resulting in strong downward tariff pressure.

***Expected benefits from our operations in Russia andCroatia may not be realized.***

Our Russian subsidiary, Tele2 Russia, operates GSM orAMPS/D-AMPS (Advanced Mobile Phone System / Digital - Advanced MobilePhone System) networks in all regions in Russia where we have mobileoperations. We will have to make significant investments to build out the GSMnetworks under our GSM 1800 licenses. To date we have launched thirteen GSMnetworks in Russia. There is a risk that our investments in GSM technology inRussia will not result in increased profits in the region, and the investmentsnecessary to maintain and build capacity there could have an adverse effect onresults from our Russian operations. In addition, the political and regulatoryenvironment in Russia is relatively volatile compared to other countries inwhich we operate, and there is accordingly a greater risk that political andregulatory changes may occur that could have an adverse effect on the resultsof our Russian operations.

Similar concerns apply to our Croatian operations.

***We expect to encounter increasing competition, whichcould force us to lower prices and reduce margins.***

Despite recent consolidation in certain markets, thetelecommunications markets in which we operate are generally characterized by alarge number of competitors, some of whom may have significantly greaterfinancial, technical and marketing resources than us. Our operations in theNordic market area face competition from TeliaSonera AB, Telenor ASA, TDC ASand Hi3G Access AB among others. Our competitors in continental Europe includelocal public telecommunications operators as well as new entrants, such ascable companies, that are able to leverage their existing networks. Othercompetitors include unbundlers of the local loop (ULL), such as Neuf Telecom inFrance.

In order to continue to grow and generate profits, wemust provide our customers with attractive pricing policies. However, sustainedprice competition could hinder our ability to generate profits. If we areforced to lower our rates then, to the extent that we cannot cover our costs,our business, financial condition and results of operations would be adverselyaffected.

***Our mobile telephony operations may be subject tospectrum capacity constraints.***

Our mobile telephony services business has experiencedsubstantial growth since it commenced operations. The growth of our mobiletelephony services businesses could, at least in densely populated metropolitanareas, is restricted by capacity limitations in the local mobiletelecommunications networks. One major constraint on the capacity of a mobiletelecommunications system is the amount of frequency spectrum it is allocated.The only other currently practical ways to increase capacity arecell-splitting, adding base stations to existing cells and utilizing dual-bandhandsets to exploit our GSM 1800 network frequencies. Splitting cells as a wayto increase capacity can be costly and subject to technological limitations.

***The success of our fixed-line operations depends uponeffective interconnections with other operators.***

Our ability to provide commercially viable telephonyservices depends in part on our ability to interconnect with thetelecommunications networks of all other fixed and mobile operators in thecountries in which we operate. We lease national and 

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international circuits from network operators, usuallythe successors of the relevant state-owned public telecommunicationsoperator, in certain countries in which we operate. We depend on these networkoperators to provide interconnect services for the origination and terminationof our public fixed-line and mobile telephony services. We have experiencedinterconnection capacity shortages in the past, and we may be unable to obtainreplacement interconnect services as rapidly as we would like and oncompetitive terms in each country in which we intend to introduce or continueto offer our telephony services. Interconnect and transmission circuitsprovided by national public telecommunications operators and other networkoperators are often subject to unanticipated price fluctuations and servicerestrictions or cancellations. We may also be subject to the constraints of therelevant network operator, which may be unable to provide all of the capacitythat we request. If we cannot obtain the capacity we require to adequatelyservi all of our existing customers, our services might suffer, we could losecustomers and consequently our reputation in the market could suffer. If wecannot obtain the capacity we require to connect all of our potential newcustomers, we may lose them to our competitors. All of these factors couldadversely affect our business, financial condition and results of operations.

***Our operations could be interrupted.***

Our operationsdepend on our ability to protect our computer and telecommunications equipmentand software systems against damage. Our data processing services areparticularly sensitive to interruptions. Such damage could result from:

·                     Fire

·                     Powerloss

·                     Telecommunicationinterruption or failure

·                     Attacksby computer “hackers”

·                     Terrorists

·                     War

·                     Naturaldisasters

If all or part of our systems becomes temporarily orpermanently unavailable, our businesses could be adversely affected. Shouldsuch interruption occur, we might have to pay contractual damages to clients orallow clients to terminate or renegotiate their contracts.

***We may be unable to adapt to technological changes ona timely basis or may need to make substantial unbudgeted expenditures to doso.***

Rapid technological changes in communications andinformation technology are redefining the markets in which we operate and theproducts and services we offer. Our businesses depend heavily on our computerand telecommunications equipment and software systems. If we fail to maintainand upgrade the quality of our technological capabilities or to respondeffectively to technological changes, our business, financial condition andresults of operations could be adversely affected. Future success also dependsheavily on our ability to enhance existing services and introduce new servicesand products to respond to changing technological developments. We may notsucceed in developing and marketing any new services or products. Furthermore,such new services or products might not succeed commercially. Moreover,technologies or services developed by our competitors might render our productsor services uncompetitive or obsolete.

***Majority control of our company is concentrated.***

As of December 31, 2005, Kinnevik, Emesco and theestate of Jan Stenbeck collectively owned shares representing a majority of ourvoting rights and, consequently, if they are acting together then they would beable to elect our entire board of directors and cast the majority of the voteswith respect to virtually all matters submitted to a vote of our shareholders.See Item 7: “Major Shareholders and Related Party Transactions—MajorShareholders.” Other holders of our shares may therefore have limited influenceover our management and affairs.

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***We have delisted our American Depositary Shares fromNASDAQ and may deregister our shares from registration with the U.S. Securitiesand Exchange Commission if and when that becomes possible.***

We terminated our ADR deposit agreement with The Bankof New York (the “Depositary”) on April 25, 2005. After the expiration of oneyear from the termination date, the Depositary was entitled to sell anyremaining deposited securities and hold uninvested the net proceeds of any suchsale, together with any other cash then held by it, for the pro rata benefit ofthe holders of ADRs which had not yet been surrendered.

We may pursue a suspension of our U.S. reportingobligations by deregistering our [Shares] in the future if and when thisbecomes possible. If we deregister our [Shares], we may without advance noticecease to make filings that would otherwise be required by U.S. securities laws;with the result that information about us might become more difficult to obtainon a timely basis.

***We have incurred indebtedness and contingentliabilities from loan guarantees.***

To finance the establishment and operation of ourbusinesses, we have incurred indebtedness in the form of loans from externallenders. As of December 31, 2005, the net borrowing (interest-bearingliabilities less interest-bearing assets) of the Tele2 Group was increased toSEK 11,831 million and shareholders’ equity was SEK 35,368 million. All of thisindebtedness has been incurred directly by our companies.

Our ability to borrow additional funds is limited in anumber of respects by the terms of existing external debt obligations,including a syndicated SEK 19.1 billion senior secured credit facility. We hadat December 31, 2005 available liquidity of SEK 8,941 million, of which unutilizedoverdraft facilities and unused credit lines amounted to SEK 5,854 million. SeeItem 5: “Operating and Financial Review and Prospects—Liquidity and CapitalResources—Borrowings.”

We have also guaranteed 50% of the borrowings ofSvenska UMTS-nät AB, an associated company formed as part of a joint venturewith TeliaSonera, up to a maximum amount of SEK 2.7 billion each. As of December31, 2005, our guarantee amounted to only SEK 1,475 million. Over the next fewyears Svenska UMTS-nät AB’s borrowings under the credit facility maysignificantly increase. If Svenska UMTS-nät AB were to default on theirrepayment of any loans extended under the facility and thereby trigger ourguarantee obligations, payment of our obligations under the guarantee could materiallyaffect our results as well as impair our ability to incur additional borrowing.

We may need to seek additional financing in order tofinance growth in the longer term or if investments exceed currently expectedlevels, or in the event that operating profitability is lower than expected. Wemay also need to seek additional financing in order to finance the expansion ofour operations, including in the Russian market, and moves into other markets,or to pursue opportunities relating to the joint provision of services by ourdivisions that require investments beyond those currently planned. If suchadditional financing is not available when needed or on the terms we expect itto be available, our business, financial position and results of operations couldbe adversely affected.

***We are exposed to exchange rate risks, andfluctuations in exchange rates may adversely affect our results.***

We are exposed to fluctuations in exchange rates.Although we maintain our books and report our results in Swedish kronor, weconduct a material portion of our operations through subsidiaries outsideSweden. These subsidiaries accounted for approximately 79% of our consolidatedrevenues in 2005. The translation risks associated with currency fluctuationsbetween the Swedish kronor and the currencies in which these subsidiariesconduct operations may have an adverse effect on our financial condition in thefuture. The impact of currency fluctuations on our revenue is partially hedgedby the fact that most of our costs are also determined in local currency. Inaddition, our SEK 19.1 billion five-year loan facility can be used in severalcurrencies, including at present USD, SEK, EUR and GBP. The exchange ratedifferences that continually arise in translating our loan liability are offsetagainst the exchange rate differences that arise on the corresponding netinvestments in subsidiaries. No hedge is undertaken against other types ofcurrency risk. See Item 11: “Qualitative and Quantitative Disclosures aboutMarket Risk—Risk of Variations in Exchange Rates” and Note 12 of the Notes tothe Consolidated Financial Statements.

***We are affected by fluctuations in variable interestrates.***

Our total loan liability that carried a variable rateof interest at December 31, 2005 was SEK 14,096 million. An increase ininterest rates would cause us to incur additional interest expense, adverselyaffecting our financial results. See Item 11: “Qualitative and QuantitativeDisclosures about Market Risk—Risk of Variations in Floating Interest Rates” andNote 24 of the Notes to the Consolidated Financial Statements.

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***Additional regulatory restrictions and changes in theregulatory environment may negatively affect our business.***

The telecommunications markets in the countries inwhich we operate or intend to introduce our telephony services are subject to asignificant degree of regulation. Like other telecommunications serviceproviders we face regulatory and market access barriers resulting from avariety of restrictive laws, policies and licensing requirements. We mustnotify or obtain licenses from regulatory authorities and enter intointerconnect agreements with one or more telecommunications network operatorsin most of the countries in which we offer telephony services. Our ability tocontinue to provide services depends on obtaining and maintaining such licensesand agreements. However, the regulatory regimes of EU member states aredeveloping toward notification rather than licensing requirements in accordancewith the impending regulatory framework of the European Union. Nevertheless, EUmember states are permitted to require individual licenses for communicationsactivities that consume scarce resources, such as radio frequencies andnumbers.

Changes in laws, regulations or governmental policy affectingour business activities and those of our competitors could adversely affect ourresults of operations. Discussions regarding changes in the regulatoryframework in each European Union member state continue to take place as theEuropean Union liberalization process is progressing. Significant changes inthe regulations affecting our operations could have a material adverse effecton our results of operations. In particular, such changes could affect ourability to interconnect, or the prices at which we obtain interconnection, tothe national public telecommunications operators in each of their markets. Forexample, Sweden’s National Post and Telecommunications Agency, or NPTA, hasannually introduced new caps on interconnect rates for mobile operators. Suchcaps or similar reductions in rates that we are able to charge could have anadverse effect on our business.

The European Union has made a decision of newregulation concerning retaining of traffic data. The new EU regulatoryframework allows member states to adopt legislative measures concerning trafficdata retention where this is proportionate and necessary to, among otherthings, safeguard national and public security and prevent and prosecutecriminal offences or unauthorized uses of electronic commerce systems (see Item4: “Information on the Company—Business Overview—Group Perspective—LegalFramework—New EU Regulatory Framework”). An obligation to retain traffic datacould, depending on the scope and duration of the retention, result in significantcosts for us as a network operator. Finally, the new EU regulatory frameworkmay lead to an increase in legal proceedings and uncertainty in thetelecommunications market.

***Mobile telephone handsets may pose technological andhealth risks.***

Media reports have suggested that radio frequencyemissions from wireless handsets and cell sites may raise various healthconcerns, including cancer, and may interfere with various electronic medicaldevices, including hearing aids and pacemakers. Research and studies areongoing. Whether or not such research or studies conclude there is a linkbetween radio frequency emissions and health, these concerns over radiofrequency emissions may discourage the use of wireless handsets and may resultin significant restrictions on the location and operation of cell sites, eitheror both of which could have a material adverse effect on our results ofoperations.

Lawsuits against several wireless service operatorsand several wireless phone manufacturers relating to radio frequencytransmissions to and from wireless handsets are pending in the United States.There is a risk that similar litigation will arise in our markets and that wewill be subject to such litigation in the future. In addition, we could besubject to additional legislation or adverse publicity relating to damagecaused by mobile telephones, including damage caused by persons using mobiletelephones while driving.

***In 2003, the Swedish tax authorities challenged ouruse of a deduction in connection with our acquisition of SEC S.A.***

In December 2003, we announced that the taxauthorities’ review of our financial accounts for 2001 had been completed andthat the Swedish tax authorities wished to change our taxation. In 2000, weacquired a majority interest in the listed company Société Européenne deCommunication S.A. (“SEC”). Because SEC’s operations were restructured, anexternal valuation was carried out, and this indicated a fall in value. Theoperations in SEC were therefore transferred at this reduced value. It was forthis realized loss that we claimed a deduction.

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The tax authorities’ announcement about changing ourtaxation was expected, as large sums are involved. However, We considered itremarkable that the assessment was made with the reference that there shouldnot have been an actual fall in the value of SEC, despite the fact that theindependent valuation, as well as valuations carried out by analysts and othersector observers at that time, showed that there had actually been a decline inthe value of SEC. We decided to request a reinvestigation from the same localtax authority and an explanation of the grounds for their decision, which thetax authorities made in December 2004.

In October 2005 Tele2 submitted a supplementarystatement since the tax authorities did not provide their own statement. Noinformation has been presented changing Tele2’s opinion that they fulfill therequirements for submission of evidence. Tele2’s opinion is still that thededuction claimed will be finally approved, and we have now lodged an appealwith the country administrative court.

Loss carry-forwards in Tele2 questioned by the taxauthorities with regard to this correspond to a tax effect of SEK 3,910million. We are of the opinion that the disputes will be settled in our favor,which is why a contingent tax liability has not been recorded for the amount oflosses utilized. Nonetheless, we cannot be certain of a favorable result, andour financial results would be adversely impacted by an unfavorable result inthis matter.

***Our cooperation with TeliaSonera in connection withthe build out and operation of a UMTS network in Sweden may not be successful.***

We have entered into a cooperation arrangement withTeliaSonera to build and operate a UMTS network in Sweden through our 50percent owned joint venture Svenska UMTS-nät AB, which has rights to theSwedish UMTS license originally granted to Tele2. We have made significantinvestments in and financial commitments to this venture. As this is a jointlycontrolled venture, there is a risk that the partners may disagree on importantmatters, including the funding of the company. This risk may be magnifiedbecause TeliaSonera and Tele2 are significant competitors. A disagreement ordeadlock regarding the company or a breach by one of the parties of thematerial provisions of the cooperation arrangements could have a negativeeffect on our ability to pursue our UMTS strategy. In addition, the currentexemption for Svenska UMTS-nät from the prohibition against anti-competitiveagreements included in the Swedish Competition Act will expire in 2007. Sincechanges in the legislation have removed the possibility of exemption, futureoperations of Swedish UMTS networks will be executed at the risk of theinvolved parties. Accordingly, there is a risk that the Swedish CompetitionAuthority will in the future change its view on our cooperation withTeliaSonera, which could have a material adverse effect upon Svenska UMTS-nätand our operations.

***The integration of recent major acquisitions may notrender anticipated synergies.***

The acquisitions of Comunitel and Versatel waspartially driven by synergies to be created by the integration of theseoperations into the operations of Tele2. There is a risk this integration willbe less successful than planned, and thus the size of the synergies will beless than anticipated.

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**Item 4: Information on theCompany**

**History and Development of theCompany**

We are a public limited liability company incorporatedunder the laws of Sweden and subject to the Swedish Companies Act. We wereincorporated under the legal and commercial name NetCom Systems AB in 1990 withthe Swedish Patent and Registration Office—Company Register under theregistration number 556410-8917. We changed our legal and commercial nameto Tele2 AB from NetCom System AB in 2001. Our principal offices are atSkeppsbron 18, S-103 13 Stockholm, Sweden, and our telephone number is+46 8 562 000 60. Tele2’s shares have been listed on the Stockholm StockExchange’s (Stockholmsbörsen) O list since 1996.

Tele2 was formed to own and developIndustriförvaltnings AB Kinnevik group’s telecommunications operations in theNordic market area following the deregulation of the Swedish fixed telephonymarket in 1993. The subsidiary Tele2 Sverige AB (Tele2 Sweden) was incorporatedunder the name Comvik Skyport AB in 1986. The first services offered includedthe transmission of data via satellite and the provision of equipment used forthe direct transmission of television signals via a Sky-Bus installation. In1991, Tele2 became the first Swedish telecom operator to offer internetconnections, and in the same year was awarded a license to operate fixedtelephony. Tele2’s fixed telephony operations subsequently began in 1993,thereby laying the foundations for Tele2’s current business. In January 1998,Tele2 Sweden, with fixed telephony operation, merged with the group companyComviq GSM AB (Comviq), a Swedish mobile telecommunication operatorincorporated in 1985 by the late Mr Jan Stenbeck. A group company to Comviq,Comvik GSM AB, had launched its own analog network for mobile telephony in 1981and obtained a license for Global System for Mobile communication (GSM) inSweden in 1988. Comviq was the first company to establish a GSM network inSweden. This program was started in 1990, and in September 1992 Comviq, asone of the very first commercial GSM operators in Europe, was able to place itsnetwork in commercial service.

We were demerged from Kinnevik when the shareholdersof Kinnevik received a special dividend of Tele2 shares in May 1996, andtrading of our shares on the Stockholm Exchange (Stockholmsbörsen) commenced.In 1997, Tele2’s shares were listed on Nasdaq, by which time Tele2 had launchedfixed telephony services in Norway (in 1995) and Denmark (in 1996). In October 1998,Tele2 began operations in Estonia through the acquisition of 48% of theordinary shares of AS Ritabell, a mobile telecommunications operator. In January 1999Tele2 increased its holding in Ritabell to 94.8% and acquired 100% of a DCS1800 license in Lithuania.

In 1999, we acquired a 17.8% stake in Société EuropéenneCommunication S.A. (SEC) also known as Tele2 Europe, with operations incontinental Europe. In 2000, we increased our stake in SEC to 99.7%, from therelated parties, Kinnevik and Millicom. SEC was fully operational in eightEuropean countries with licenses in a further three. SEC had established theTele2 brand in these markets and provided national and international longdistance telephony services through Tele2 Europe in the Netherlands, Germany,Switzerland, Austria, France, Italy, Luxembourg and Liechtenstein, and providedmobile telecommunication services in Luxembourg (Tango), Liechtenstein andSwitzerland. SEC also included 3C and C3 operations. In October 2000 Tele2acquired Baltkom GSM, Latvia’s second-largest mobile phone operator and in thesame year launched internet services in Poland and the Czech Republic, andlaunched fixed telephony in Finland. Also, in 2000, Tele2 launched the world’sfirst mobile virtual network operator (MVNO) in Denmark and was awarded aUniversal Mobile Telecommunications System (UMTS) license, a technology forthird generation mobile phones, in Sweden. In the following year, Tele2established a joint UMTS venture with TeliaSonera in Sweden.

In 2001, we increased our interest in SEC to 100% andwe expanded our operations into Russia with the acquisition of Fora Telecom BV,with twelve mobile telephony operations. In 2001, fixed telephony services werelaunched in Spain. 2003 saw the launch of Tele2’s fixed telephony services inPortugal, Belgium and the UK and the launch of Tele2’s GSM network in Russia.In the same year, Tele2 acquired Alpha Telecom, the UK’s leasing operator inprepaid fixed telephony for private individuals and a market leader in cashcards for fixed telephony.

In July 2004 we acquired the remaining shares inTele2 Estonia and Tele2 Lithuania. In December 2004, Tele2 acquired UTATelecom AG, Austria’s leading alternative telecom operator which operates infixed telephony and internet. In 2004 Tele2 also acquired Votec Mobile ZAO inRussia. In the same year Tele2 launched fixed telephony services in Hungary andIreland.

2005 saw Tele2 making several significant acquisitionsthroughout Europe. Tele2 spent approximately SEK 9 billion on these strategicacquisitions, thereby reshaping the company’s infrastructure. Theseacquisitions included in January 2005 Tiscali’s

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Danish operations, in September 2005 ComunitelGlobel SA, one of Spain’s largest alternative telecoms operators and in October 200580.29% of the public company Versatel Telecom International NV (Versatel), aleading alternative telecommunications operator with operations in theNetherlands and Belgium. A common rationale behind these 3 acquisitions was toget access to their extensive Unbundled Local Loop (ULL) infrastructure. In July 2005Tele2 also acquired Econophone AG, Switzerland’s third largest alternativefixed line operator, and in November 2005 Lipetsk Mobile CJSC, a mobiletelephony operator with a GSM license in Russia. In December 2005, Tele2decided to sell its non-core UK and Ireland operations. In 2006, Tele2 hascontinued its strategic acquisitions with the increase in its shareholdings infive of its Russian operations, as a result of which Tele2 now wholly owns 11of its 14 Russian operations. See “—Recent Acquisitions and Divestitures” andItem 7: “Major Shareholders and Related Party Transactions—Related PartyTransactions—Acquisitions and Divestitures.”

***Organizational Structure***

Tele2 is a European alternative telecom operator. Ourmission is to offer cheap and simple telecom. Tele2 always strives to offer themarket’s best prices. We have over 30 million customers in 23 countries as of December 31,2005. Tele2 offers products and services in fixed and mobile telephony,broadband and cable TV. Ever since Jan Stenbeck founded Tele2 in 1993, thecompany has been a tough challenger to the former government monopolies. Tele2has been listed on the Stockholm Stock Exchange (Stockholmsbörsen) since 1996.In 2005, we had operating revenues of SEK 50 billion and a profit before taxesof SEK 3.1 billion.

As of December 31, 2005, our Company is organizedaround six market areas, five of which are geographical:

·                  *Nordic*, including operations in Sweden, Norway and Denmark.Operations in Finland were discontinued in 2005;

·                  *Baltic & Russia*, including operations in Estonia,Latvia, Lithuania, Russia and Croatia;

·                  *Central Europe*, including operations in Germany, Austria,Poland, the Czech Republic and Hungary;

·                  *Southern Europe*, including operations in France, Italy,Spain, Switzerland and Portugal;

·                  *UK & Benelux*, including operations in theNetherlands, Luxembourg, Liechtenstein, Belgium, C3 operations and Alpha Telecom. Fixed telephonyoperations in the UK and Ireland were sold during 2005; and

·                  *Services*, including 3C, Datametrix, ProcureITright, RadioComponents and UNI2, where a number of these are operating in severalcountries. Proceedo Solutions was sold in 2005.

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The following table presents a breakdown of theprimary services we provide in the market areas in which we operate.
| **Market Area**                 | ** ** | **Fixed  telephony  and dial-up   internet** | ** ** | **Mobile  telephony** | ** ** | **Calling  cards** | ** ** | **Broadband** | ** ** | **IP  Telephony  (Voip)** | ** ** | **Cable TV  and IP TV** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|-----------------------|------------|--------------------|------------|---------------|------------|---------------------------|------------|-------------------------|------------|
| ***Nordic***                    |       |                                         |       | l(2),(3)              |       |               |       |          |       |                      |       |                    |       |
| Sweden                          |       | l                                            |       | l(1                   | )          | —             |       | l(2),(3)      |       | l                         |       | l                       |       |
| Norway                          |       | l                                            |       | l                     |       | —             |       | l(2),(3)      |       | l                         |       | —                  |       |
| Denmark                         |       | l                                            |       | l                     |       | —             |       | l(2           | )          | l                         |       | —                  |       |
| ***Baltic &  Russia*** |       |                                         |       |                  |       |               |       |          |       |                      |       |                    |       |
| Estonia                         |       | —                                       |       | l(1                   | )          | —             |       | l(3           | )          | —                    |       | —                  |       |
| Latvia                          |       | —                                       |       | l(1                   | )          | —             |       | l(3           | )          | —                    |       | —                  |       |
| Lithuania                       |       | —                                       |       | l(1                   | )          | —             |       | l(3           | )          | —                    |       | l                       |       |
| Russia                          |       | —                                       |       | l(1                   | )          | —             |       | l(3           | )          | —                    |       | —                  |       |
| Croatia                         |       | —                                       |       | l(1                   | )          | —             |       | —        |       | —                    |       | —                  |       |
| ***Central  Europe***           |       |                                         |       |                  |       |               |       |          |       |                      |       |                    |       |
| Germany                         |       | l                                            |       | —                |       | l                  |       | l             |       | —                    |       | —                  |       |
| Austria                         |       | l                                            |       | l                     |       | l                  |       | l(2           | )          | l                         |       | —                  |       |
| Poland                          |       | l                                            |       | —                |       | l                  |       | l(3           | )          | —                    |       | —                  |       |
| Czech Republic                  |       | l                                            |       | —                |       | —             |       | l(3           | )          | —                    |       | —                  |       |
| Hungary                         |       | l                                            |       | —                |       | —             |       | —        |       | —                    |       | —                  |       |
| ***Southern  Europe***          |       |                                         |       |                  |       |               |       |          |       |                      |       |                    |       |
| France                          |       | l                                            |       | l                     |       | l                  |       | l             |       | —                    |       | —                  |       |
| Italy                           |       | l                                            |       | —                |       | l                  |       | l(2           | )          | —                    |       | —                  |       |
| Spain                           |       | l                                            |       | —                |       | l                  |       | l(2           | )          | l                         |       | —                  |       |
| Switzerland                     |       | l                                            |       | l(1                   | )          | l                  |       | l             |       | l                         |       | —                  |       |
| Portugal                        |       | l                                            |       | —                |       | l                  |       | —        |       | —                    |       | —                  |       |
| ***UK &  Benelux***    |       |                                         |       |                  |       |               |       |          |       |                      |       |                    |       |
| The Netherlands                 |       | l                                            |       | l                     |       | l                  |       | l(2           | )          | l                         |       | l                       |       |
| Luxembourg                      |       | l                                            |       | l(1                   | )          | —             |       | l             |       | —                    |       | —                  |       |
| Liechtenstein                   |       | l                                            |       | l(1                   | )          | —             |       | l             |       | —                    |       | —                  |       |
| Belgium                         |       | l                                            |       | —                |       | —             |       | l(2           | )          | l                         |       | —                  |       |
| United Kingdom                  |       | —                                       |       | —                |       | l                  |       | —        |       | —                    |       | —                  |       |

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(1)           Own/shared network.In other markets, Tele2 acts as MVNO.

(2)           Own/shared broadbandnetwork.

(3)           Broadbandover 3G, cable TV or WLL.

We had total consolidated operating revenues of SEK49,943 million in 2005 (2004: SEK 43,033 million), of which the Nordic marketarea represented 30% or SEK 15,074 million (2004: 31% or SEK 13,467 million);Baltic & Russia represented 8% or SEK 4,234 million (2004: 8% or SEK3,297 million); Central Europe represented 17% or SEK 8,378 million (2004: 12%or SEK 5,058 million); Southern Europe represented 29% or SEK 14,258 million(2004: 33% or SEK 14,152 million); UK & Benelux represented 15% or SEK7,406 million (2004: 15% or SEK 6,536 million); and Services represented 1% orSEK 593 million (2004: 1% or SEK 523 million).

Broken down by the types of service we provide, fixedtelephony & internet represented 70% (SEK 37,277 million) of our totalconsolidated operating revenues, mobile telephony 28% (SEK 14,672 million),cable television 0% (SEK 236 million), and other operations 2% (SEK 859million). Our total consolidated operating revenues are reduced by SEK 3,235million due to intra-group sales and affected by non-recurring items ofSEK 134 million.

In 2005, we had operating profit of SEK 3,510 millionand net profit of SEK 2,341 million. For additional information on the resultsof our operations see Item 5: “Operating and Financial Review and Prospects”and Note 4 and Note 5 of the Notes to our Consolidated Financial Statements.

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The following table presents a breakdown of our activecustomers by market area and by business area as of December 31, 2004 and2005. Customers in Other operations are not included.

 
| ** **                                  | ** ** | **Number of  customers as of  December 31,** | ** ** | **Net customer  intake** | ** ** |
|---------------------------------------------|------------|----------------------------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **2004**                                     | ** ** | **2005**                 | ** ** | **2004-2005** | ** ** |
| ***All figures in thousands of customers*** |       |                                         |       |                     |       |   |   |
| **Market Area**                             |       |                                         |       |                     |       |   |   |
| Nordic                                      |       | 6,787                                        |       | 6,280                    |       | 33 |   |
| Baltic & Russia                    |       | 3,708                                        |       | 6,358                    |       | 2,649 |   |
| Central Europe                              |       | 5,893                                        |       | 6,485                    |       | 907 |   |
| Southern Europe                             |       | 8,509                                        |       | 8,379                    |       | 78 |   |
| UK & Benelux                       |       | 2,897                                        |       | 2,750                    |       | (254 | ) |
|                                        |       |                                         |       |                     | ** ** | **3,413** | ** ** |
| Acquired companies                          |       |                                         |       |                     |       | 721 |   |
| Divested companies                          |       |                                         |       |                     |       | (274 | ) |
| Changed method of calculation               |       |                                         |       |                     |       | (1,402 | ) |
| **Total**                                   | ** ** | **27,794**                                   | ** ** | **30,252**               | ** ** | **2,458** | ** ** |
| **Business Area**                           |       |                                         |       |                     |       |   |   |
| Mobile Telephony                            |       | 8,259                                        |       | 11,527                   |       | 3,261 |   |
| *of which prepaid*                          | * *   | *6,072*                                      | * *   | *8,738*                  | * *   | *2,666* | * * |
| Fixed Telephony & internet         |       | 19,323                                       |       | 18,518                   |       | 157 |   |
| Cable Television                            |       | 212                                          |       | 207                      |       | (5 | ) |
| Acquired companies                          |       |                                         |       |                     |       | 721 |   |
| Divested companies                          |       |                                         |       |                     |       | (274 | ) |
| Changed method of calculation               |       |                                         |       |                     |       | (1,402 | ) |
| **Total**                                   | ** ** | **27,794**                                   | ** ** | **30,252**               | ** ** | **2,458** | ** ** |

 

In 2005 the number of customers increased by 76,000 inconnection with the takeover of Tiscali of Denmark, 128,000 customers throughthe acquisition of Econophone in Switzerland, 81,000 customers through theacquisition of Comunitel in Spain, 434,000 customers through the acquisition ofVersatel in the Netherlands and Belgium, as well as 2,000 customers through theacquisition of Votec in Russia. The number of customers has also reduced duringthe year by 274,000 customers through the sale of the operations in Tele2 UKand Tele2 Ireland.

After the acquisition of Versatel and Comunitel, thereporting of the number of customers with dial-up internet has been changed.Previously, a fixed telephony customer also using Tele2’s dial-up internetservice, has been reported as two customers. Given that a reported broadbandcustomer can use up to three different services, Tele2 now reports a fixedtelephony customer using dial-up internet, as one customer. The one-time effectfrom this change is a decrease in the reporting customer base of 1,402,000customers, of which 616,000 are in Nordic, 1,000 in Baltic & Russia,315,000 in Central Europe, 417,000 in Southern Europe and 53,000 in UK &Benelux. A retroactive change has been considered not possible in practice andhas not applied.

***Recent Acquisitions and Divestitures***

The principal subsidiaries acquired or divested by usduring the three years ended December 31, 2005, are set out below.

*Divestment of Tele2 UK and Tele2Ireland (UK and Ireland)*

On December 16, 2005, we divested all of ourshares in Tele2 UK Communications Ltd and Tele2 Telecommunication Service Ltd,with operations in fixed telephony in UK and Ireland with a total of 274,000fixed telephony customers, for SEK 157

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million. Tele2 UK and Tele2 Ireland have affectedTele2’s operating revenue for 2005 with SEK 517 million and net profit by SEK -318million beyond the capital gain of SEK 137 million.

*Acquisition of Lipetsk (Russia)*

On November 10, 2005, we acquired all the sharesin Lipetsk Mobile CJSC, a mobile telephony operator with a GSM license in theterritory of Lipetsk in central Russia, for SEK 3 million.

*Divestment of Trigger Software(Estonia)*

On October 31, 2005, we divested all of ourshares in OU Trigger Software, with operations in Estonia, for SEK 18 million.

*Acquisition of Versatel (theNetherlands and Belgium)*

On July 18, 2005, Tele2 announced its intentionto acquire the public company Versatel Telecom International N.V., a leadingalternative telecom operator in the Netherlands and Belgium with 434,000 fixedtelephony and internet customers. On October 14 and November 1collectively, Tele2 acquired a total of 80.29% of the shares in the company forSEK 6.6 billion. Tele2 made the acquisition together with the private equitycompany Apax Partners, where Apax took over Versatel’s German business andTele2 assumed control of operations in the Netherlands and Belgium. Goodwill inconnection with the acquisition of Versatel relates to an expectation ofobtaining economies of scale advantages in the merger of Versatel and Tele2’sexisting operations in the Netherlands and Belgium. There will be a migrationof Tele2’s traffic to Versatel’s infrastructure.

*Acquisition of Comunitel (Spain)*

On September 30, 2005, we acquired 99,96% of theshare capital in Comunitel Global S.A., a Spanish telecom operator, for SEK 2.3billion with 81,000 fixed telephony and internet customers. Goodwill inconnection with the acquisition of Comunitel relates to our expectation ofstrengthening our position in Spanish market via reduced costs, powerfullyimproved coverage of the consumer market and a breakthrough in the corporatemarket. The acquisition is also an important milestone for Tele2’s pan-Europeanbroadband offerings.

*Divestment of Proceedo Solutions(Sweden)*

On September 14, 2005, we divested all of ourshares in Proceedo Solutions AB, a Swedish company with electronic solutions togather information on different suppliers’ products and prices, for SEK 19million.

*Acquisition of Econophone(Switzerland)*

On July 20, 2005, we acquired all the shares inEconophone AG, the third largest alternative Swiss fixed network operator, forSEK 116 million with 128,000 fixed telephony and internet customers.

*Acquisition of Tiscali (Denmark)*

On January 31, 2005, we acquired all the sharesin Tiscali in Denmark, with extensive ADSL network, for SEK 165 million with76.000 fixed telephony and internet customers.

*Acquisition of UTA (Austria)*

In December 2004, we acquired all the shares inUTA, an Austrian alternative telecom operator with fixed-telephony andinternet operations, for SEK 1,723 million.

*Song Networks*

On September 22, 2004, we launched a public cashtender offer for the outstanding shares and convertible debentures of SongNetworks Holding AB (“Song Networks”), a telecommunications company active inthe Nordic region. However, although

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we raised our initial offer, in October 2004,TDC, the Danish telecommunications company, ultimately acquired Song Networks,and we sold the stake we had acquired in Song Networks in accordance with theterms of the merger with TDC. The disposal resulted in a capital gain of SEK171 million.

*Acquisition of remaining sharesof Tele2 Estonia and Tele2 Lithuania*

In July 2004, we acquired the remaining 10% inTele2 Holding AS in the Baltic region for SEK 323 million, with the result thatTele2 now owns all the shares in Tele2 Estonia and Tele2 Lithuania.

*Acquisition of Alpha Telecom(United Kingdom)*

In February 2003, we acquired all the shares inAlpha Telecom for SEK 850 million. The acquisition resulted in goodwill of SEK479 million, which was later reclassified to intangible assets, brand names andinterconnection agreements on December 31, 2004. At December 31, 2005an impairment of goodwill related to Alpha Telecom of SEK 263 million wasrecorded. Alpha Telecom is a United Kingdom service provider of prepaid, fixed-networktelephony for individuals and cash cards for fixed telephony.

***Strategy***

Tele2 employs alow risk strategy that originates from the deregulation of the Europeantelecommunications markets in the late 1990s, as result of which state-ownedincumbent telecoms companies had to make their network access available as aregulatory requirement. On the advent of deregulation, Tele2 embarked on astrategy of expanding into neighbouring markets, being one of the firsttelecoms operators to execute a strategy of leasing network capacity and usinginterconnect agreements from an incumbent, as opposed to first building orbuying network assets. Tele2 strives to be a low cost leader in each of itsmarkets, and its mantra is “to provide cheap and simple telecommunicationsservices for all Europeans”.

The starting pointfor Tele2’s strategic model is to enter a market by leasing network capacity.Having achieved this, Tele2 repackages the service offered and sells it underthe Tele2 brand name. Tele2 will then leverage on this new customer base bycross-selling other products to improve its margins. When sufficient scale isreached, Tele2 will consider acquiring or building its own network, a processotherwise known as backward integration. In several markets backwardintegration has been accomplished (e.g. the recent addition of Versatel in theNetherlands and in Belgium). Opportunities to undertake backward integration orcomplete any acquisition are always balanced with financial objectives,including the ability to maintain a conservative financial profile.

This approachallows Tele2 to enter a market quickly, and, since it does not requiresignificant capital expenditure, Tele2 believes that this strategy isrelatively low risk. Tele2 will also exit markets as necessary (recent examplesinclude exiting the UK, Ireland and Finland) where it deems profitability to beinsufficient to retain a presence.

One of Tele2’smain objectives is to achieve product profitability within three years. Inorder to achieve this, Tele2 retains a low cost base, provides simple fixedline or mobile offers, and invests in marketing campaigns. The aim of thesecampaigns is to establish the image of Tele2 in the minds of the customer as anoperator that provides value for money. Tele2 has developed an efficientorganization (for example, its French operation employs around 100 people withclose to 4 million customers) and considers itself an expert in managing costs.This has enabled Tele2 to remain one of Europe’s leading low cost alternativetelecommunications providers.

**Business Overview**

***Group Perspective***

*Legal Framework*

We are subject to certain licensing and otherregulatory requirements in the countries in which we provide fixed-line ormobile telephony services. In our major markets, all of our current telephonyservices are now open to competition. However, we see a new potential inproviding fixed-fee subscriptions for fixed networks, a.k.a. wholesale linerental, which is still generally the domain of incumbent national providers, butwhich we expect will become open to competition in the near future in most 

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countries in which we operate. We generally mustinterconnect to a network operator (usually the formerly state-ownednational public telecommunications operator) in each country in which weoperate to provide access services for the origination and termination ofpublic fixed-line and mobile telephony services and we must also either filenotice with or obtain a license to provide public telecommunications servicesfrom the National Regulatory Authority (“NRA”) in each jurisdiction.

We believe that we are in compliance with applicabletelecommunications laws and regulations in markets in which we operate.

European Union

Overview

All of the member states of the European Union must incorporateprinciples of European Union law into their respective domestic legalframeworks. As a matter of practice, several other countries, includingSwitzerland and Norway (non-members of the European Union), in which we operatehave conformed or are conforming their regulatory frameworks to European Unionrequirements. In addition, countries outside the European Union are conformingtheir regulatory framework with the EU legislation. As a result, the markets inwhich we operate have been significantly affected by regulation initiated bythe European Union. As it develops, such European Union regulation, includingfuture convergence of telecommunications, media and information technology,will continue to have a significant effect on these markets.

European Union “legislation” can take a number offorms. European Union regulations have general application and are binding intheir entirety and directly applicable in all European Union member states.European Union directives are binding on the member states as to “the result tobe achieved,” but national authorities may choose the form and method ofimplementation. Failure on the part of a member state to implement thedirective completely or properly within the required period of time may lead tolitigation against the defaulting member state before national courts. Thus,directives could have major effects in certain circumstances, in particular, ifthe respective provision concerned is unconditional and sufficiently precise,and confers rights on individuals that can be exercised against a member state.

Liberalization and Harmonization of theTelecommunications Market

Over the past 15 years, the EU Commission hasintroduced competition in the telecommunications markets through a series ofliberalization directives that gradually abolished the monopoly rights of state-ownedtelecommunications operators. Public voice telephony services, already open tofull competition in the United Kingdom, were opened in the majority of EUMember States on January 1, 1998. All restrictions on the provision ofmobile and personal communications services, including restrictions on the useof facilities for mobile networks, were required to be removed by November 15,1996 (unless otherwise extended) in order to allow operators in that sector tomake full use of their own and third parties’ infrastructure.

Between 1989 and 2001, the European Union also adopteda series of directives and recommendations regarding open and efficient accessto, and use of, public telecommunications networks and services. These wereintended to harmonize technical interfaces and usage conditions and providemandatory minimum service standards for all fixed-line users. The directivealso created a general framework for tariffs throughout the European Union. Inaddition, specific measures have been adopted in a number of areas includinglicensing and interconnection. Operators designated by the NRAs in thetelecommunications sector as having significant market power in thetelecommunications market face additional obligations with respect to specialnetwork access, interconnection charging, accounting separation and costaccounting, publication and non-discrimination.

Electronic Commerce

On June 8, 2000, the European Parliament and theEuropean Union Council of Ministers adopted the Directive (2000/31/EC) oncertain legal aspects of information society services, in particular electroniccommerce, in the Internal Market (“E-Commerce Directive”) relating to the legalaspects of information society services in the European Union. The purpose ofthe E-Commerce Directive is to ensure the free circulation of electronicallyprovided services among European Union member states. The E-Commerce Directivehad to be implemented within 18 months following its publication.

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TheE-Commerce Directive sets forth two fundamental principles:

·                  Adherenceto the legal requirements of the country of origin, meaning that the serviceselectronically provided by a service provider established within a EuropeanUnion member state must conform to the legal requirements of that state; and

·                  The generalprinciple of mutual recognition, according to which a European Union memberstate may not, as a rule, restrict the electronic services provided fromanother European Union member state, as long as the service provider complieswith applicable legal requirements of that other state.

The most relevant provisions of the E-CommerceDirective provide that:

·                  EuropeanUnion member states will ensure that their legislation permits entering into contractsby electronic means, with a limited number of exceptions;

·                  Intermediarieswho play a passive role as mere conduits of information from third parties maynot be held liable for the contents of the information;

·                  Ahost service provider may not be held liable for information on its site,unless the provider is aware of the fact that providing the information isillegal and fails to restrict access to it; and

·                  Commercialcommunications such as advertising and direct marketing are subject to transparencyrequirements and other limitations to ensure consumer confidentiality and fairtrade.

New EU Regulatory Framework

The telecommunications regulatory framework wassignificantly revised on March 7, 2002, when the European Parliament andthe Council of the European Union adopted the Directive (2002/21/EC) on aCommon Regulatory Framework for electronic communications networks and services(“Framework Directive”), Directive (2002/19/EC) on access to, andinterconnection of, electronic communications networks and associatedfacilities (“Access Directive”), Directive (2002/20/EC) on the authorization ofelectronic communications networks and services (“Authorization Directive”),and Directive (2002/22/EC) on universal service and users’ rights relating toelectronic communications networks and services (“Universal Service Directive”).These directives superseded the prior directives. The implementation of the newlegal framework was supposed to have been completed by July 2003 but ithas been delayed in many countries and it has finally been implemented in allmember states. A new telecommunications data protection directive (Directive(2002/58/EC) concerning the processing of personal data and the protection ofprivacy in the electronic communications sector) was adopted on July 12,2002.

The objective of the new regulatory regime is toreplace the existing complex system of telecommunications regulations with asingle system that can be applied to all types of electronic communications,including fixed-line telephony, mobile telephony and Internet-basedcommunications.

The new regulatory framework:

·                  Sets out therights, responsibilities, decision-making powers and procedures of themember states’ NRAs and the European Commission. This includes the NRAs’ obligationto submit to the Commission and the NRAs of other European Union member statesin draft form the regulatory measures that they intend to take with respect tomarket definition and significant market power, and the Commission’s power torequire NRAs to withdraw such drafts, if the Commission considers that theycreate a barrier to the single European market or are incompatible with law;

·                  Identifiesspecific policy objectives that NRAs must achieve in carrying out theirresponsibilities (namely, to promote an open and competitive European marketfor communications services, to promote the interests of European citizens andto consolidate the European Union’s internal market in a convergingtechnological environment); and

·                  Provides thatoperators with significant market power in relevant communications markets willbe subject to certain obligations as set out in the directives on universalservice and access. The definition of significant market power, which a 

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company may have individually or jointly with othercompanies, is based on the concept of dominance as developed in the case law ofthe European Court of Justice and the Court of First Instance of the EuropeanCommunities.

The European Commission issued a recommendation onrelevant product and services markets in February 2003. The recommendationidentifies eighteen markets having characteristics which may justify theimposition of regulatory obligations relating to, for example, the relationshipof costs to prices, transparency of information, non-discrimination betweencustomers, accounting separation and mandated access to, and use of, networkfacilities. The Commission recommendation refers to, among other things:

·                  Atthe retail market level:

·                  Accessto a fixed-location public telephone network for residential andnon-residential customers;

·                  Publiclyavailable local and/or national and international fixed-locationtelephone services for residential and non-residential customers; and

·                  Aminimum set of leased lines;

·                  Atthe wholesale market level:

·                  Callorigination as well as call termination and transit in the fixed publictelephone network;

·                  Unbundledaccess to the local loop;

·                  Broadbandaccess;

·                  Terminatingand trunk segments of leased lines;

·                  Accessand call origination on public mobile networks;

·                  Calltermination on individual mobile networks; and

·                  A nationalmarket for international roaming on public mobile networks.

We cannot predict what consequences the new regulatoryframework will have, but it is has resulted in some additional regulation ofour business. On the other hand, it has also enabled us to compete better in other areas, e.g. with an offer ofline rental and in the broadband markets. The new regulatory framework appliesto all communications markets that the European Commission has included in itsrecommendation or that NRAs have decided to include in the scope of sector-specificregulation with the agreement of the Commission. Thus, an extension of sector-specificregulation to mobile markets and online communications markets cannot be ruledout.

Currently most NRAs have finalized the  market definitions which in general have beenin line with the Commission’s recommendations. Once the definition process iscompleted the NRAs are to conduct a market analysis to determine whethersufficient competition exists in each specific market. If the result of theanalysis is that there is insufficient competition then one operator withSignificant Market Power is designated the “SMP Operator”. Where an NRAidentifies an SMP Operator, it is to impose on such SMP Operator appropriatespecific *ex ante* regulatory obligations. Thisthree-stage process is supposed to enable the refocusing of regulationonto areas with an already identified competition issue.

In certain fields that are currently subject to sector-specificregulation, the new regulatory framework may lighten the regulatory burden as aresult of greater flexibility for NRAs when choosing appropriate regulatorymeasures to address alleged market failure and because of the alignment of thenotion of significant market power with the concept of dominance under generalEuropean Union competition rules. In particular, the new regulatory frameworkno longer allows for regulation of a retail market unless the relevant NRAconcludes that regulation on the level of the wholesale market is notsufficient to achieve the objectives of the directives. Whether any reductionof regulatory burdens will occur will largely depend on the manner in which thedirectives are implemented in member states and how the concepts of the newframework are applied in practice. We expect that the time period between thedate a new legal framework is implemented nationally and the date thatdecisions on remedies are imposed on operators with SMP to run between twelveand eighteen months.

The European Regulators Group (“ERG”), a body composedof NRA representatives, will influence the NRAs’ decisions and furtherdetermine the manner in which the directives will be implemented in the memberstates.

One result of the new framework has been an increasein cooperation among the EU Commission and the NRAs, with the EU Commissiontaking a leading role in deciding key regulatory issues such as marketdefinition and market power analysis. The new framework  has lead to an increase in legal proceedingsand uncertainty in the telecommunications market.

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*Competition Rules of the ECTreaty*

The two main principles of European Union competitionlaw that apply to private firms or “undertakings” are contained in Articles 81and 82 of the EC Treaty (formerly Articles 85 and 86, respectively). Article 81prohibits collusion, agreements, and concerted practices with an object oreffect of the prevention, restriction or distortion of competition within theEuropean common market. Article 82 prohibits abuse of a dominant marketposition within the common market or in a substantial part of it insofar as itmay affect trade between member states.

These rules are enforced primarily by theCommission, in cooperation with the national competition authorities, and thenational courts. The application of the general antitrust rules complementsthe regulatory framework described above. The obligations imposed by theregulatory regime on telecommunications operators, particularly incumbent carriers,are in some cases stricter than restrictions resulting from the application ofArticles 81 and 82.

In September 1991, the European Communitypublished general guidelines on the application of the competition rules inthe telecommunications sector that outline the European Community’s approach tocommon competition issues. On August 22, 1998, the European Commissionpublished a notice on the application of the competition rules to accessagreements in the telecommunications sector. The notice sets forth a series of rules designedto assist providers of telecommunications services to gain access to existingnetworks in competition with current suppliers. Without establishing newprinciples, the notice sets forth the way in which the principles of current competitionlaw implemented by the European Commission and the European Court of Justicecould be applied to the problems relating to access in the context of theliberalization of the telecommunications sector.

*Mobile Virtual Network Operators*

In cases where deregulation in the telecommunicationssector has been effective, new markets can be opened to service providers. BothMobile Virtual Network Operators (MVNOs) and Service Providers (SPs) haveemerged as new business models that add to competition in the mobile telephonemarket. In both models, the operator leases an existing network and thus avoidsbuilding a new mobile network. The difference between MVNOs and SPs is afundamental one. In the case of SPs, the operator becomes a vendor of anothercompany’s telephony, since it only handles outgoing traffic. MVNO, by contrast,means simply that a mobile operator purchases radio access from an existingmobile operator, but is otherwise completely independent and can developservices, payment forms and direct traffic as if it were a conventional mobileoperator. One significant difference between a conventional operator and a MVNOis that a MVNO has no control of geographic coverage build-out. In countries inwhich Tele2 does not have a mobile license, the MVNO model permits us tocomplement our fixed telephony with a full range of services in subscriptionand prepaid calling cards for mobile telephony. We expect MVNOs to expand inthe immediate future since deregulation of the EU telecommunications market isgaining momentum and the mobile market is maturing. These alternative modelscould provide major growth opportunities for our company, given our establishedcustomer base in many countries coupled with the fact that we only have limitedown infrastructure.

***Products and Services Overview***

We offer products and services in fixed and mobiletelephony, dial-up Internet, broadband, telephone cards, cable TV and contentservices. Everything we offer is geared to the customers’ preference forcheaper and simpler services.

*Fixed Telephony*

We usually start operations in a new country bygaining a foothold in the fixed-telephony market, which is why thisservice is available in the majority of our countries. Our fixed-telephonyproduct portfolio includes fixed preselection, fixed subscription, broadbandtelephony (VOIP) and telephone cards.

Fixed pre-selection

With pre-selection, customers make their calls withTele2 from their landlines without having to dial a prefix before the telephonenumber. Following deregulation in the EU, fixed pre-selection is now availableto most of our customers. If the service has not been introduced in the localmarket, our customers can use Tele2’s prefix to make calls.

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Subscription

In many markets, the traditional supplier has kept a tightgrip on customers through its monopoly on fixed subscriptions. This means thatthe customer has two bills to settle, one to Tele2 for the traffic and one tothe incumbent supplier for the fixed subscription. Tele2 is now offering fixedsubscriptions to customers in Denmark, Norway and Sweden, which means thatthese customers not only obtain cheaper subscriptions, but also avoid receivingtwo bills. If the deregulation which began in the Nordic countries continuesacross the rest of Europe, Tele2 will then be in a position to put morepressure on the national incumbent operators, and ultimately offer cheaper andsimpler telephony to more Europeans.

Broadband telephony (voice over internet protocol, VOIP)

Broadband telephony involves the customer using theInternet to make phone calls. Customers can save money through lower call ratesand by canceling their fixed line rental and using their broadband connectionfor telephony.

Telephone cards

Tele2’s telephone card operations are run by AlphaTelecom and Calling Card Company (C3). C3 sells fixedtelephone cards in several European markets. The cards are marketed underdifferent brands and are sold mainly in stores and at newsstands. Alpha Telecommarkets and sells prepaid fixed telephony. Instead of buying a telephone card,customers pre-pay an amount to their account in advance and can then make callsvia the fixed network without receiving a bill.

*Mobile Telephony*

Tele2 offers mobile telephony to private residentialand business users in 14 countries, under different types of subscriptions andprepaid offerings. Tele2 has its own network in eight countries. In other countries we use an arrangement called MVNO,which involves leasing network capacity from another operator.

Our customers still use mobile phones mainly  for voice and to send SMS messages. Voicemailbox continues to be the most popular additional service. Use of WAP and MMShas increased significantly, due to the upgrading of GSM networks to GPRS,improved content and sophisticated new camera mobile phones.

Mobile virtual network operator (MVNO)

MVNO means that Tele2 functions as a mobile operatorwith a limited infrastructure, leasing radio network capacity from a networkowner. In countries where Tele2 does not have its own mobile license or mobilenetwork, the MVNO model allows us to complement fixed telephony with mobiletelephony, without having to make any appreciable investment in infrastructure.

Content services

Tele2’s content services include news, weather, ringtones, ring-up tones, images and games etc. The services are offered to thecustomers via our WAP portal. Tele2 works with content providers on a revenuesharing model to offer attractive content services. This also means that Tele2does not need to invest in development and operation.

3G

UMTS technology increases mobile network capacityconsiderably compared with GSM. Increased data transmission speed allowscustomers simpler and faster use of advanced mobile services. 3G also enablesvideo telephony, i.e. the ability to see the person to whom one is speaking.Surfing, WAP, mobile e-mail, video clips, games and other content services willbe used increasingly as more of our customers gain access to 3G.

*Internet services*

Tele2 sells Internet access in 20 countries. We have awide range of different offerings to meet the different requirements ofcustomers with regard to price, speed and security. We also offer differenttypes of security solutions, such as antivirus software and firewalls.

 

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Dial-up internet

Dial-up internet is a common way of connecting to theInternet. Customers usually pay for the time they are online, which is oftenthe cheapest option. In 2004, Tele2 launched Tele2 Safe Surf which protectsagainst modem hijacking.

ADSL

ADSL (Asymmetric Digital Subscriber Line) providesbroadband via an ordinary telephone jack. This is the fastest-growingbroadband technology, and the new standard, ADSL2+, means that customers canachieve download speeds of up to 26 Mbit/s. We believe there is major potentialin offering packages with ADSL, VOIP, and Internet TV (IPTV). Currently Tele2offers ADSL in thirteen countries. Triple play is a telephony package bundledwith broadband and TV.

Wireless broadband

Wireless broadband via local radio networkscomplements existing wire line broadband and offers exciting potential. Also,in areas where it is not possible to offer broadband services via xDSLtechnology or fiber, Tele2 can provide broadband via WLL.

Broadband via cable TV

Tele2 was offering broadband as early as 1998 inSweden, with cable TV as the carrier. Over the years, a large number ofnetworks have been converted to allow broadband access, and we now offer VOIPtelephony to our cable TV customers.

*Cable TV*

Tele2 offers cable TV in Sweden and Lithuania.

***Market and Customers***

Tele2 seeks to offer the same services and the samehigh quality as our competitors, but at a more affordable price. We are able todo this because we believe we have developed an efficient organization and areexperts in keeping costs down. Our approach is first to build a large customerbase in one service area, such as fixed telephony, and then to cross-sell otherservices to the same customers. In mature markets, where customers areexperienced users and greater competition exists, Tele2 aims to cross-sellservices and create long-term, stable relationships with our customers. Thismeans that a customer who uses Tele2 for fixed telephony will receive anattractive offer for other services, such as ADSL. Tele2 is using advertisingin all markets with the aim to become the perceived price leader. Some of themain intake channels are telemarketing, retailers and direct sales. Successesand learning’s of the different channels are replicated between the countries.

***Infrastructure***

In Sweden, Luxembourg, the Baltic States, Russia andCroatia, we expect that expenditure on infrastructure over the next few yearswill principally be to accommodate growth in GSM mobile telephony as well as toroll out the next generation mobile network, UMTS. In the rest of Europe, weexpect that expenditures on infrastructure will principally be on networkimprovements and modifications designed to accommodate growth in fixed-linetelephony. We also plan to expand our ADSL and ULL infrastructure.

*Mobile Telephony*

The basic infrastructure of GSM and UMTS cellularnetworks consists of a mobile services switching center (or exchange), basestation controllers, radio base stations, repeaters and transmission systems.The area serviced by a cellular telephone network is divided into a number ofcells. A radio base station, containing a number of transmitters and receivers,is installed in each cell. Radio base stations are connected to base stationcontrollers that, in turn, are connected to a mobile services switching center.Switches control the routing of calls and allow cellular phone users to movefreely from cell to cell while 

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continuing their calls. Mobile services switchingcenters are connected to other such centers in the same network and to otherfixed or mobile telephone networks. Transmissions between base stations, basestation controllers and switches occur through digital fiber optic cables orradio microwave links.

The widespread adoption of the GSM and UMTS standardsin Europe and elsewhere facilitates international roaming that enables acustomer to use the same mobile telephone throughout the countries that use theGSM or UMTS standards.

Improved capacity is achieved through decreasing cellsize or by adding capacity enhancing equipment to existing base stations. Weexpect to focus additional capital expenditures on improving coverage in moredensely populated regions. To optimize infrastructure investment, we seek tocooperate with other operators by co-locating base stations where possible.

Cellular telephone systems are interconnected withfixed-line telephone networks, allowing customers to receive and originatelocal, long-distance and international calls from their cellular telephones.Cellular telephone system operators therefore require interconnection withlocal fixed-line telephone companies. We pay TeliaSonera, P&T Luxembourgand other operators directly for interconnection to their respective publictelephone networks. Rates vary according to the distance traveled on the publictelephone network. We attempt to use our own fixed-line network as much aspossible to minimize interconnect costs.

Capacity Limitations

One major constraint on the capacity of a mobiletelecommunications system is the amount of frequency allocated to the systemoperator. Frequency is limited and is shared both by the different operatorsproviding a particular type of service and, for frequency bands, by othersystems. Currently, one of the economically practical ways to increase acellular system’s capacity (other than the procurement of additional frequencyallocations) is through a process known as cell-splitting. Cell-splittingentails dividing a single cell into a number of smaller cells throughrelatively simple technological modifications. This allows for better use ofthe allocated frequency, thereby increasing the number of calls that can behandled in a given area. Another way to increase system capacity is to add basestations to existing cells. As cells become smaller, the investment per customerincreases, since the infrastructure required to handle calls within smallercells is more costly. The ability to increase capacity by splitting cells islimited below a minimum cell size because of cost and technologicallimitations, particularly in densely populated areas.

We have applied these capacity enhancement techniques,and will continue to do so, in order to satisfy our capacity needs. However,based on the present allocation of frequency, existing technologies and thecurrent pattern of GSM customer growth rates, we could reach capacitylimitations in certain markets in future years. For the same reasons, other GSMoperators may experience similar capacity limitations. We expect, however, thatadvances in capacity enhancement technologies and increased frequencyallocation from our additional licenses should provide us with sufficientadditional capacity during the intervening years.

*Fixed-line Telephony and Internet*

We currently do not intend to build a pan-Europeannetwork infrastructure with our own cable and microwave links. Instead, welease existing lines under short-term leases from other operators oftelecommunications networks, mainly from the incumbent operators in eachcountry. We lease international lines that connect to national networks fromother independent service providers.

As our customer base grows, we expect to be able touse leased lines sourced from new alternative suppliers with increasinglyhigher bandwidths and on longer term, low cost contracts. The current terms ofsuch contracts are one year, but as prices in the industry stabilize, the termsmay be extended. We expect that this, together with technological enhancements,will decrease our network unit costs per customer over time.

Unbundling of Local Loop (ULL)

In certain countries, deregulation combined withmarket conditions has allowed Tele2 to investing into ULL. In short, this meansTele2 will rent the last mile copper cable that connects the customer with thelocal telephone station. In the local telephone station, Tele2 will invest intoequipment that will allow us to offer the customer voice and data services.

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International traffic

We strive to carry our international traffic betweenour countries of operation on direct leased lines across borders. Traffic toother destinations outside our network is routed through external carriers. Asthe volume of traffic carried on our network grows, we will consider obtainingcapacity on international links to the most frequent destinations, thusobviating the need to incur the additional cost of leasing lines from thirdparties, and offering the potential to generate additional revenues through thesale of termination within countries where we have our own operation.

We offer our international telephone services throughinternational sea cables in which we have purchased or leased capacity, throughterrestrial cables and through radio links. We and Tele Denmark jointly own asea cable and radio links between Sweden and Denmark. We are co-owners—togetherwith Cable & Wireless, TeliaSonera and Lattelcom—of sea cables betweenSweden and Latvia, and we are also co-owners—together with Cable &Wireless and TeliaSonera—of sea cables between Sweden and Finland. We are apart-owner of certain German-Swedish sea cables. We are also one of theinvestors, together with Mercury, TeliaSonera and Tele Denmark, in a second seacable between Sweden and Denmark. We own capacity in a fiber optic sea cablebetween Europe and the United States, which is being used to meet growingdemand for our Internet services. We believe we can maintain adequate capacityfor the needs of our Internet customers.

International traffic can also be carried viasatellite. Most such satellites belong to international organizations such asIntelsat and Eutelsat.

We believe that our capacity in sea cables,terrestrial cables and our radio links will enable us to satisfy projectedcustomer demand for our services in the foreseeable future.

***Suppliers***

In each segment, we obtain telecommunications networkequipment from a small number of suppliers. These business relationships arestable and typically involve a high degree of cooperation with respect to acustomer’s particular infrastructure needs.

Under the Council Directive 93/38/EEC (EC CompetitiveProcurement Directive) we are required to solicit bids in order to procureequipment for our networks in the European Union. We believe that we havecomplied to date with these tender requirements and intend to comply with suchrequirements in the future.

Most of the network infrastructure for our fixed-lineand Internet operations has been supplied by Nokia, Ericsson and Cisco which webelieve are able to supply our future network equipment requirements. Siemens,Motorola and Ericsson supply most of the network infrastructure for our mobiletelecommunications operations. We expect that these suppliers will continue tosupply our future network equipment needs.

***Seasonality***

Our results are not materially affected by seasonalvariations. However, our revenues may be subject to quarterly fluctuationsdepending on purchasing patterns, customer usage and other factors that aresubject to general economic conditions and are difficult to predict. Generally,the number of customer minutes used declines in July and August, but thisis at least partially offset by an increase in international calls during thosemonths, resulting in higher revenue per minute. Revenues that we receive in aparticular quarter may not be indicative of future revenues to be received inany subsequent quarter.

***Market Area Nordic***

***Sweden***

*Legal Framework*

In 1993, legislation was enacted to govern thetelecommunications sector in Sweden. The regulatory framework was establishedprincipally by the Telecommunications Act and the Radio Communications Act.Regulation under both acts is implemented by the National Post and TelecomAgency (“NPTA”). The Telecommunications Act and the Radio Communications Actwere succeeded by the Electronic Communications Act (the “Act”) in 2003. TheAct was introduced in response to the new 

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European Union legal framework that all EU memberstates were required to implement into national legislation by July 25,2003. See “—Group Perspective—Legal Framework—New EU Regulatory Framework.”

The Electronic Communications Act

The main objective of the Act is to provide theSwedish government with the means to manage and regulate electroniccommunications activities so that two telecommunications policy objectives canbe met: providing the general public and the authorities with effectiveelectronic communications at the lowest possible cost, and enabling all personsto use telephone services within a public network. The Act strives to achievethese policy goals by creating and promoting efficient competition within allareas of the electronic communications sector.

Under the Act, operators of certain electroniccommunications services in a public telecommunications network are required tonotify the NPTA about their activities in that sector. In addition, a licenseis required to use radio transmitters and frequencies within a publiccommunications network that provides mobile telecommunications services. Alicense under the Act may contain conditions that impose obligations on theoperator to provide certain services and information.

There is no limit under the Act on the number oflicenses that may be granted for radio transmitters, although the number oflicenses within a specific frequency range may be limited in order to secureefficient usage of frequencies due to the scarcity of frequency spectrum.

The term of a license is of limited duration. Apartfrom the term of the license itself, its conditions may each have a separateand shorter duration and must then be renegotiated with the NPTA upon expiry.New conditions may be substantially different. Conditions may also be alteredby the NPTA before they expire if the license so specifies.

A license may be revoked in whole or in part if theoperator violates the terms of the Act or any conditions of the license.However, the operator must be notified and given an opportunity to cure theviolation before any of the above measures are taken. The NPTA also may imposefines on licensees for failure to fulfill the conditions set forth in thelicense.

Tele2 Sweden has licenses under the Act for itstransmitters of radio signals in the GSM system and for its transmitters in itsradio link network. The licenses terminate at regular intervals and are renewedthrough notice by Tele2 Sweden to the NPTA.

The NPTA’s process of market analysis, designation ofoperators with significant market power and determination of remedies for suchoperators is at various stages of completion in each of the new relevantmarkets.

*Licences*

Mobile Telecommunications Licences

*1. GSM 900/1800Licences*

Under the previous regulatory structure, providers ofmobile telecommunications services had to be licensed under the RadioCommunications Act and had also to be licensed under the TelecommunicationsAct. Under the new Act only one license is required. Tele2 Sweden and Tele2 ABreceived licenses under the Act, which succeeded the old licenses on March 31,2004. License obligations apply to the license holder. The conditions of theGSM 900 license were amended on July 25, 2003. The principal conditions,which will remain in force until December 31, 2010, are as follows:

·                  Tele2 Sweden isrequired to cover all the roads in Sweden that were classified as Europeanmotorways as of December 31, 1990 and to cover all Swedish cities that hada population greater than 10,000 as of December 31, 1990. We believe thatthis condition has been fulfilled.

·                  When connectingto other operators’ networks, Tele2 Sweden is required to comply with existingand future technical standards and recommendations in Sweden and abroad.

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The license is valid through 2010, and the conditionsmay, upon expiration, be reconsidered by the NPTA. Tele2 Sweden must pay ayearly fee to the NPTA of 0.127% of Tele2 Sweden’s annual turnover for thebusiness subject to the license. In addition, an operator that has filed noticeor been granted a license must pay a yearly fee of 0.170% of the annualturnover for the business concerned to support Sweden’s civil defence.

Tele2 Sweden also provides mobile telephony servicesunder a GSM 1800 license. The GSM 1800 license is valid through 2010 andcontains conditions similar to those described above with respect to Tele2Sweden’s GSM 900 license, including those with respect to payment of fees.These conditions also expire on December 31, 2010.

*2. UMTS Licenses*

In December 2000, we received one of four third-generationcellular standard UMTS mobile network licenses offered in Sweden. On March 15,2001, we entered into a joint venture with TeliaSonera AB, which was notawarded a Swedish UMTS license, to exploit our UMTS license. We believe thejoint venture, Svenska UMTS-nät AB, is the most effective way to limit ourcosts in building the necessary infrastructure and to generate a more rapidreturn on our invested capital. Both we and TeliaSonera can use our existingGSM networks as a base upon which to build the new network, reducing both theneed for new transmitting masts and the environmental impact of the build out.During February 2005 an agreement was made with a banking consortium toreduce the total loan facility for Svenska UMTS-nät AB from SEK 7 billion toSEK 5.3 billion. The reduction was made possible by cost-cutting measures ininfrastructure through the use of new technological solutions. The loan,following the reduction, will cover the expansion of the jointly owned UMTSnetwork. We and TeliaSonera each guarantee this loan facility up to the extentof our 50% interest in Svenska UMTS-nät AB.

Tele2 assigned 50% of its UMTS license to TeliaSonera.A jointly owned company, Svenska UMTS-license AB, now holds the license. Theprincipal conditions are as follows:

·                  Svenska UMTS-nätAB was required to cover at least a population of 8,860,000 inhabitants inSweden by the end of 2003. This condition has not been fulfilled. There iscurrently a revision of the license conditions and a draft has been submittedfrom the NPTA to be effective by July 2006. The draft contains the samecoverage requirement which we not will be able to fulfill; hence the NPTA mayissue an order, which may be connected with a fine. We expect such order to beissued during the autumn  of 2006. It islikely that the order will include a potential fine if we do not meet a newroll-out time schedule set by the NPTA based on their estimate on our remainingroll-out time schedule to meet the license condition.

·                  At least 30% ofthe population coverage should be based on radio infrastructure owned by thelicensee. This means that the licensee can only build a joint network withanother license holder covering 70%, and the remaining network must be owned bythe license holder.

·                  The license isvalid through December 16, 2016, although the license conditions are validfor periods expiring before that date. Both the license and the conditions may,upon expiration, be considered for revision by the NPTA. Svenska UMTS-nät ABmust pay a yearly fee to the NPTA of 0.127% of Svenska UMTS-nät AB’s annualturnover for the business subject to the license. In addition, an operator thathas filed notice or been granted a license must pay a yearly fee of 0.170% ofthe annual turnover for the business concerned in support of Sweden’s defence.

Fixed Telephony & Leased Lines

Under the Act no license is required for providingfixed-telephony services, or to provide leased lines. All relevantinformation on obligations for a service provider is now stated directly in theAct. Tele2 Sweden has been designated as an SMP operator and has been assignedcertain obligations, which in all relevant aspects are the same as were imposedby the previous legislation, e.g.:

·                  Tele2 Swedenmust prepare its accounts in such a way that costs and revenues for thelicensed services are separated from costs and revenues for other services.Accounts must be provided to the NPTA upon request. The NPTA has the right toaudit Tele2 Sweden’s accounts and to review the method used in preparing suchaccounts; and

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·                  Tele2 Swedenmust pay, for each of its telephony and leased line operations, a yearly fee tothe NPTA of 0.127% of Tele2 Sweden’s annual turnover for the respectivebusinesses subject to the licenses. In addition, an operator that has filednotice or been granted a license must pay a yearly fee of 0.170% of the annualturnover for the business concerned in support of Sweden’s defence.

Interconnection

The most critical issue with interconnect agreementsis the interconnect rate that entitles a network operator to compensation for: (i) terminatinga call in its network that has originated in another network; (ii) providingits customers with access to those services of another network that areinvoiced by the other network; and (iii) shifting traffic between twonetworks.

The interconnect rates for TeliaSonera fixed andmobile networks, Telenor, Hi3G and Tele2 mobile networks must be cost based.Operators of other telephony services are required to interconnect with other operatorson fair and reasonable terms and conditions.

The fixed-line interconnect rates that TeliaSoneracharges Tele2 Sweden and are based on whether Tele2 Sweden’s interconnection isfor a local segment, single segment or a double segment, and on the time of day(peak or off-peak) at which the call is made. We have established interconnectpoints in each transit exchange area to ensure that double segment fees areavoided. Local interconnection points are established to ensure that the vastmajority of calls are rated at local interconnection rates. TeliaSonera isobligated to provide interconnect services to operators even where there is nointerconnect agreement signed between the parties.

Mobile Telephony Interconnect Agreements

On January 21, 2000, Tele2 Sweden asked the NPTAto decide if and what tariffs TeliaSonera should pay Tele2 Sweden forinternationally originated calls, and calls transmitted via TeliaSonera’snetwork to Tele2 Sweden’s mobile network. On August 31, 2000, the NPTAruled that Tele2 Sweden should be entitled to the same remuneration regardlessof where the calls originated and, unless another agreement existed, paymentshould be made by the operator transmitting the calls. The Administrative Courtof Appeal made a final ruling in favor of Tele2 on June 26, 2003. As forthe minute price to be paid this is still pending in court — see section Legalproceedings.

Tele2 Sweden has been designated an SMP-operator inthe mobile termination market and as a consequence must now apply cost-basedprices. We have appealed this decision. As a consequence we must apply the sameprice to all operators that change minutes with us. Even though Tele2 continuesto invoice its counter parties at historic termination tariffs, we onlyrecognize as revenue according to cost-based tariffs.

Fixed-line Telephony Interconnect Agreements

The interconnect agreement between TeliaSonera andTele2 Sweden expired on December 31, 2000, though the agreement continuedto apply afterwards on an interim basis. The agreement introduced newinterconnect fee arrangements that resulted in substantially lowerinterconnection tariffs for Tele2 Sweden. In particular, under the agreement,Tele2 Sweden paid only local segment fees on approximately 85% of itsfixed-line interconnect traffic. The interconnect fees charged by TeliaSonerais currently scrutinized by NPTA and it may result in substantially lowerprices.

For its fixed network, Tele2 Sweden has interconnectagreements with, among others, TeliaSonera Mobile, Telenor Business SolutionsAB, Colt Telecom AB and TDCSong AB.

Number Portability

In 2001, number portability between mobile networkswas implemented in Sweden.

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*Products and Services*

Mobile Telephony

Tele2 Sweden remains the principal market for ourservices despite our recent expansion in other market areas. Our total numberof mobile telephony customers in Sweden grew to over 3.5 million as of December 31,2005, a 3% increase over our total number of telephony customers as of December 31,2004. A clear majority of the customers are prepaid customers. Sweden is also akey test market for the development of new products and services, which wethen, on a case-by-case basis, implement in other countries in which weoperate.

Fixed-line Telephony and Internet

In fixed telephony, the Tele2 market share was stableamong private and corporate customers in 2005. On the fixed telephonysubscription that Tele2 started marketing at the end of 2004, there are nowmore than 500 000 subscribers that have signed up for the service. Dial-upInternet experienced stable development during the year. In ADSL, the incumbentoperator has maintained what we regard as unrealistic pricing. Consequently, inorder to lower ADSL prices for our customers, we are starting to offer ADSL on our own network during 2006.

Optimal Telecom, our subsidiary, is a service providerthat offers a lowest-price guarantee for fixed telephony, dial-upInternet and prepaid calling cards to Swedish households. By offering customerspre-selection for fixed telephony via telemarketing campaigns and effectivecross-selling, the company increased its customer intake.

Cable Television

Via our subsidiaryTele2Vision, we offer the Swedish market both analogue and, since February 2006,also digital- TV packages. The new digital platform gives access toapproximately 60 TV channels in a range of interest areas such as sport,entertainment, news, documentaries and premium movie channels. The platformalso supports Pay-Per-View (PPV) and Video-on-demand (VOD) services.Tele2Vision offers broadband and broadband telephony (via Tele2) as well. Theservices are available throughout Sweden to 270 000 households, makingTele2Vision the second largest cable- TV operator.

Taking advantageof our cable- TV lines, we started offering broadband to consumers in 1998. Asignificant percentage of our network is today converted to handle broadband.We also offer the market broadband over Local Area Networks (LANs), xDSL, cityring networks and wireless local loop (WLL). In addition, we have access to ahighly developed network in Swipnet.

*Sales and Marketing*

We market our mobile services in Sweden under theTele2Comviq brand. Tele2Comviq targets the consumer and business market, whereits focus is to make services available to as many people and companies aspossible at the lowest possible rates. We strive to position the Tele2Comviqbrand as the price leader in the market.

*Competition*

The Swedish government follows a policy of unlimitedcompetition in the telecommunications sector in Sweden. Entry into thetelecommunications sector was never formally restricted in Sweden. Since,however, TeliaSonera was the only operator and there was no independentregulator, TeliaSonera had a de facto monopoly over the telecommunicationsmarket. The Swedish government decided to encourage competition through theintroduction of a new competition law, new telecommunications legislation andan independent telecommunications agency, the NPTA.

On July 1, 1993, a new Competition Act enteredinto effect in Sweden. The Competition Authority, the regulatory authorityunder the Competition Act, is empowered to issue injunctions and to enjoin aparty to immediately discontinue practices that are not permitted under theCompetition Act. The Competition Act is based on and generally conforms toEuropean Community competition rules. The Competition Authority and the NPTAcooperate in order to facilitate investigations of monopolistic behavior in thearea of telecommunications services.

Tele2 Sweden has filed complaints with the CompetitionAuthority relating to what it believes to be anti-competitive practices byTeliaSonera, including an abuse of dominance relating to pricing policy inrespect of ADSL services.

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There are few providers of mobile telephony servicesin Sweden, with our principal competitors being TeliaSonera Mobile, and Hi3GAccess AB.

According to telecommunications market publications,Sweden has one of the highest penetrations of mobile telephone services in theworld. We believe, based in part on industry estimates, the rapid growth of ourmobile telephony services to date and the global trend of growth in the GSMmarket, that there is still potential for customer growth in Sweden. Weanticipate, however, that the future growth rate will be slower than the rapidgrowth we have experienced in the past.

The Swedish fixed-line telephony market is highlydeveloped. Fixed-line telephony revenues represent about half of the revenuesfrom telephony services in Sweden, while broadband and other datacommunications services, mobile telephony, leased lines, cable television andother types of communications services comprise the remaining sources ofrevenue, as reported by the Swedish government. Sweden also has a growingInternet market. We are one of the leading Internet access service providersvia dial-up access. ADSL and other types of high-speed Internet access aregrowing rapidly, and we also face competition in this area from companies suchasTelenor and TDC.

The cable industry in Sweden is generally deregulated,and there can be multiple competitors in any geographical area. A license isnot required to provide cable television programming in Sweden. We face fiercecompetition in most areas throughout Sweden, especially from ComHem, the marketleader, previously owned by TeliaSonera. Other competitors include CanalDigital and UPC.

*Infrastructure*

Our right to use capacity on the trunk network ofBanverket in Sweden, based on an agreement between Kinnevik (transferred to usas of December 2001) and Banverket, is critical to our fixed-linetelecommunications infrastructure, particularly in areas not served by thenetwork of Svenska Kraftnät. See Item 10: “Additional Information—MaterialContracts.” We have the exclusive right to install fiber optic cables through2017 on the electricity transmission network of Svenska Kraftnät. This capacityis supplemented in Stockholm by our own local trunk network. These local cablenetworks permit us to expand our base of direct access fixed-line telephonyservices customers and to reduce payments to TeliaSonera for customer access.The fiber optic cable loop formation also protects against serviceinterruptions since calls are merely routed in the opposite direction in theevent of a fault somewhere in the loop. We plan to add additional fiber opticcable loops in other towns and cities consistent with customer demand.

***Norway***

*Legal Framework*

Norway, although not a Member State of the EuropeanUnion, is a member of the European Free Trade Agreement and the EuropeanEconomic Area Agreement, and thus its regulatory framework must conform to theEuropean Union model. Deregulation of the Norwegian telecommunications markethas, to a large extent, proceeded in parallel to deregulation in the EuropeanUnion, and European Union directives and implementing legislation in variousEuropean Union countries have served as points of reference for the developmentof the Norwegian regulatory regime.

The telecommunications market in Norway was opened tofree competition on January 1, 1998 under the Telecommunications Act of June 23,1995, as revised April 30, 1999 (the “Act”), and the Regulations on PublicTelecommunications Networks and Public Telecommunications Services of December 5,1997. The Electronic Communications Act (Ekomloven) of June 25, 2003 and theElectronic Communications Regulation of February 16, 2004(Ekomforskriften) have replaced the old regulatory legal acts.

The object of Ekomloven and Ekomforskriften is toimplement the new regulatory framework of the European Union with the aim ofenabling free and fair competition in the telecommunications sector. The lawsdefine concepts in conformity with the respective European Union directives andprovide a framework for the subjects to be covered by governmental regulations.They may grant administrative remedies against monopolistic measures taken by adominant network operator such as, for example, charging unreasonable fees orsetting unreasonable technical conditions for access.

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The Norwegian Post and Telecommunications Authority’s(“PT”) main responsibility is to ensure that the interconnect rates fromTelenor are cost based. The method used to set cost-based prices is presently,in the fixed network, to implement fully distributed costs (FDC) based onhistoric costs. There were no significant changes in interconnect rates for thefixed network between August 2000 and their adjustment in 2004.

All *ex ante*regulations imposed under the Act since 1995 will remain in force until the PThas analyzed the markets defined by the European Commission and decided onremedies to be imposed on the SMP firms in each of these markets. The firstdraft decision on remedies under the Ekomloven/Ekomforskriften was issued inearly 2005. PT has so far issued decisions in markets 8,9,10,11,12,15 and 16.Telenor has appealed against the decisions in markets 11, 15 and 16, and theycan still appeal against the decisions in markets 8-10. The Ministry ofTransport and Communications (“the Ministry”) is the deciding body in theappeal cases, and no final decisions have been issued from the Ministry so far.Those operators not having significant market power but providing publictelecommunications networks or services are required to register with the PT.

*Interconnection andInfrastructure*

Mobile Telephony

The MVNO agreement with Telenor Mobil gives us theopportunity to deliver GSM and UMTS services. All mobile services are providedon our own network either in Norway or Sweden.

Fixed-Line telephony

We have interconnection with Telenor in all 12interconnection areas in Norway. We also have interconnection with TelenorMobil and Netcom GSM in Oslo. All international traffic is routed via Tele2 inSweden.

ADSL

Tele2 has a wholesale agreement with Telenor on ADSL.This agreement gives us the opportunity to deliver ADSL to approximately 80% ofall the households in Norway. Tele2 has connections with Telenor in Oslo,Trondheim and Bergen, where all our customers’ traffic is transferred to Tele2.All services, including mail accounts, homepages and Spam filters, thatare offered to our customers are provided through our own network in eitherNorway or Sweden. All international data traffic is directed to Tele2 Sweden;for national traffic we are connected to two NIX points where we meet otherISPs.

*Products and Services*

We provide fixed-line telephony, mobile telephony,Internet access and data communications services to consumer and businessmarkets.

Mobile Telephony

We have offered mobile telephony services in Norwaysince 2000. Customers using Tele2’s fixed-line services, mobile telephonyservices and ADSL receive all Tele2 charges on a single bill.

Tele2 increased its mobile revenue by approximately48% in 2005 compared to 2004.

Fixed-line Telephony and Internet

Tele2 was able to maintain its market share during2005 despite aggressive marketing from existing competitors. A variety ofmarketing programs have been implemented in Norway to slow down the overalldecrease of fixed revenues, including free domestic calling and “free weekends”,i.e. national fixed-to-fixed calls free of charge other than the opening fee.

Although the market for our dial-up Internet productcontinued to weaken in Norway in 2005, Tele2 managed to uphold its marketshare. Marketing campaigns for ADSL and cross-selling in 2005 weresuccessful in recruiting a substantial number of new customers, in addition tooffering ADSL to customers churning on dial-up.

 

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* *

*Sales and Marketing*

During 2005 we reduced our prices several times,especially on mobile and ADSL products. New sales channels that have increasedrapidly are web and field sales. Web has primarily been driven by intensivemarketing of mobile subscription and also to a certain extent marketing ofADSL. Due to the high percentage of telemarketing reservations, field saleshave become an important new sales channel both for mobile and fixed telephony.Retail distribution has also become a significant sales channel for mobile withthe bundling of subscription with terminals.

*Competition*

Norway has a competitive fixed-line telephony market.Tele2 faces significant competition from the largest fixed-line provider inNorway, Telenor, the majority state-owned provider. Tele2 providesInternet access service in Norway in competition primarily with Telenor,Nextgentel, Song/TDC and Ventelo. Mobile Telephony is a very competitivemarket, with three operators with their own network, Telenor, Netcom andTeletopia, along with several Service Providers and MVNOs.

**Denmark**

***Legal Framework***

In Denmark, the Telecommunications Act of June 1997provided the basis for the liberalization of the telecommunication market inDenmark. However, in the access network market, Tele Denmark (“TDC”), theincumbent and the former public telecommunications operator, still retains adominant position.

In 1998, the Danish Telecommunications Act amended theprevious law, extending obligations to all telecommunications operators. Thenew operators were granted new rights, including carrier pre-selection andnumber portability from fixed to fixed in 1999, which, together with theunbundling of the local loop and service provisions in 1998, helped liberalizethe telecommunications market in Denmark.****On July 1,2001, number portability from mobile to mobile was introduced. Numberportability between fixed and mobile was postponed to end of 2005 due totechnical and billing issues and lack of international standards.

The legal framework governing telecommunications hasbeen established by the “Act of Competition and Consumer Regulation in theTelecommunication Market” of May 31, 2000. The law represents a generalrevision and includes conditions regulating a decrease in interconnect pricesin Denmark by using the long run average incremental cost (“LRAIC”) model inorder to further liberalize the telecommunications market. An LRAIC Bottom Upworking group was established by several operators, including Tele2 A/S,TeliaSonera A/S and Orange A/S; and a Bottom Up Model was delivered on November 1,2001. The incumbent operator delivered its Top Down Model as well on November 1,2001. The new interconnect prices based on LRAIC were in force on January 1,2003. The above mentioned law is based upon the “Agreement in principleconcerning perspectives of the telecommunication policy in Denmark” of September 1999.The agreement is between political parties whose objectives include offeringInternet access to all consumers in Denmark and creating virtual network operatoraccess for new mobile operators.

The new EU regulatory package was implemented inDenmark on July 25, 2003. Analysis concerning the markets has been done,and decisions were made on more markets in 2005. The remainder of the decisionswere made within January to March 2006. Several of the decisions havebeen appealed by the incumbent and are therefore not yet implemented.

*KonkurrencestyrelsenThe National Competition Authority in Denmark regulates competition issuesgenerally, including those in the telecommunications market. IT- ogTelestyrelsen, the National Telecom Agency in Denmark, administers specifictelecommunication regulation by, for example, granting licenses and supervisingcompliance with regulation, but also in doing the market examinations andmaking decisions on each market under the new EU regulatory package. TheMinistry of Telecommunications has the authority to implement applicable lawsby issuing “executive orders” with the force of law.*

***Licenses***

Under Danish law, only mobile telecommunicationsoperators need a license for radio frequencies. Licenses are not 

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required for mobile virtual network operators (“MVNOs”),or operators on the fixed network, such as Internet or telephony serviceproviders. Tele2 A/S currently provides mobile telephony as an MVNO, fixedtelephony, ADSL and Internet services, and, accordingly, does not have alicense.

***Interconnection***

Tele2 primarily operates on infrastructure owned by 3rd parties,and provide end-user access on this infrastructure according to agreements madewith the network owners.

***Products and Services***

Mobile Telephony

In October 2000, Tele2Denmark launched the first MVNO through an agreement with Sonofon A/S. Theagreement allows us to offer mobile telephony services to (our existing fixed-line)customers in Denmark.

In 2005, Tele2 has  continued the expansion onthe mobile market, now with more mobilecustomers than fixed-line customers. The growth is similar in both prepaid andpost-paid products and the market is constantly dependent on the enhanceddemand for new and more advanced terminals. During 2005 Tele2 has concentratedto consolidate on the current product portfolio.

In 2006, Tele 2 expects themobile products to continue the integration with other business areas combinedwith extended services via Internet. Tele2 expects to continue the growth ratefrom 2005.

#### *Fixed-lineTelephony and Internet*

Tele2 is still no. 2 on theDanish fixed-line market, maintaining its position and revenue in a decliningmarket.In 2006, the company intends to maintain and strengthen its position asthe primary alternative to the incumbent, TDC.

The strong growth on the ADSL-market has continued in2005 A growing number of customers are migrating from dial up to ADSL. TheTele2 dial up product, Get2net, has continued the decline in customer base and revenue.

In 2006, the company will continue its focus on theInternet, especially the ADSL market.

***Sales and Marketing***

Tele2 is one of the few companiesin the Danish market offering a complete range of telephony services. Thecompany uses a variety of different sales and marketing efforts, including.directs sales (sales personnel in shopping malls, train stations and retailenvironments), online sales, TV campaigns, direct mails etc., and to a smallerextent a professional sales force focusing on the larger business customers.

***Competition***

Denmark has a competitive andopen telecommunications market. Tele 2 provides mobile, fixed-line and Internetaccess to both consumer and business markets in Denmark. During 2005 theNorwegian company Telenor Group acquired Cybercity a major player in theInternet market in Denmark. Telenor also owns Sonfon.

Tele 2 is  the second largest fixed-line telephonyservice provider in Denmark. Major competitors in this market are  TDC and TeliaSonera.

In the mobile market the majorcompetitors are TDC, Telenor and TeliaSonera.

In the Internet market majorcompetitors are TDC and Telenor.

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***Infrastructure***

Tele2 has on February 1st, 2005 acquired all the sharesin Tiscali A/S. Tiscali has made significant infrastructure investments in theDanish ADSL market. These investments have been on co-locations, therebyproviding the company with a competitive advantage and better options forsupplying customers with new and innovative Internet products. During 2005 theintegration of the Tiscali business in Tele2 has taken place. The positivesynergies between the companies are currently being reakuzed.

***Finland***

Tele2 decided to withdraw from the Finnish market in2005, due to the prevailing regulatory climate.

***Market Area Baltic & Russia***

***Estonia***

*Legal Framework*

The electronic communications sector in Estonia isregulated by the Electronic Communications Act (the “Act”), which was passed onDecember 8, 2004 by the Parliament of Estonia and entered into force on January 1,2005. The purpose of the Act is to create the necessary conditions to promotethe development of electronic communications networks and communicationsservices in Estonia and to ensure the protection of the interests of users ofelectronic communications services by promoting free competition. The Act isbased on EU directives concerning electronic communication.

In the electronic communications sector the regulatoryagency is the Estonian National Communications Board (“NRA”), which acts underthe Authority of the Estonian Ministry of Economic Affairs and Communications.

*Licenses*

Under the Act anyone has the right to commenceprovision of communications services. Before the commencement of activities,anyone intending to provide communications services must submit written noticeto the NRA. Therefore under the Act no license is required unless acommunications provider applies for the right to use radio frequency bands fromthe national radio frequency allocation plan, or the right to use number rangesfrom the national numbering plan for the provision of services. Both frequencyauthorizations and numbering authorizations are issued for a term of one year.

On August 5, 2003 Tele2 was granted a UMTSlicense for a period of 10 years with the following obligations: Tele2 muststart operating a 3G mobile network covering at least 30% of the population ofEstonia by the seventh year after issuance of the license at the latest and itmust guarantee a data transmission speed of at least 144 kbit/second in urbanareas and 64 kbit/second in rural areas.

*Interconnection*

In 2004 the interconnect termination prices (“ICprices”) of Tele2’s mobile operations were reviewed by the NRA. As a result ofthis, the NRA made a determination that our mobile network call termination feewas to be calculated proportionally from a reasonable profit, thus forcingTele2 to lower its IC prices starting from October 1, 2004. Tele2interpreted the determination of the NRA to mean that the new prices should beagreed with other communication operators as of October 1, 2005 and wouldbe applicable in new IC agreements signed after that date. The NRA has acceptedthis interpretation. At the same time, Tele2 has contested the determination ofthe NRA, since Tele2 is not an SMP and our prices should therefore not besubject to regulation by the NRA. This court case with the NRA is stillpending.

On March 22nd, 2006, the NRA analyzed the marketof voice call termination in a specific mobile telephone network and Tele2 hadbeen designated as undertaking having SMP. The NRA imposed the followingobligations: obligation of transparency, obligation of non-discrimination,obligation of access and price control and cost accounting obligation. Price 

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control and cost accounting obligation includes fixingthe rate of maximum termination rate for the voice calls and obligation to useglide path and price cap method for years 2006-2008. Tele2 will appealthe decision.

*Products and services*

Tele2 offers a broad range of telecom services: mobiletelephony, fixed telephony, Internet and content services. Due to anunsatisfactory the regulatory situation, Tele2 decided to stop investment inmarketing the fixed line services during the summer 2005.

In 2005, Tele2 enlarged its product portfolio with newproducts and services thus offering its customers even more flexibleconsumption opportunities and strengthening its position as the price leader.In the first quarter of 2005, Tele2 introduced the best-priced Internet-basedservice plans *Tele2.net 1* and *Tele2.net 2* to its contractual mobile subscribers. Theopening of GPRS and MMS to *Smart* and *Ultra* prepaid card customers in September supports moreflexible usage of mobile phones.

Besides the private subscribers market where Tele2 hasa good positioning, during 2005 we became more active in approaching thecorporate market.

*Sales and marketing*

We are using various media and direct marketing,including our unique web-based self-service, to inform new and existingcustomers about the Company’s prices and products. Our distribution networkconsists of dealers as well as our own shops.

*Competition*

Competition increased in Estonia at the end of 2004with a number of new Service Providers entering the market before the launch ofMobile Number Portability (MNP) that was implemented in Estonia starting from January 1,2005.

*Infrastructure*

Tele2 Estonia owns its own mobile network, whichconsists of a radio network and related equipment.

***Latvia***

*Legal framework*

The main legislation governing the telecommunicationssector in Latvia is the Electronic Communications law. The object of the law isto implement the new EU regulatory framework in Latvia. This law has beenadopted by the Government and approved by the Parliament.

In 2001, the Law on Telecommunications amended theprevious law and changed the regulatory environment. Since 2002 the regulatoryauthority in Latvia has been the Public Utilities Commission. The Ministry ofTransport has authority to promulgate Regulations of the Cabinet of Ministersconcerning telecommunications matters. In addition, the Council of Competitionhas jurisdiction over general matters of unfair competition and abuse of adominant position in the market. The Public Utilities Commission administersthe law by granting general authorizations and overseeing compliance withregulations. The Public Utilities Commission reviews the quality of servicesand monitors interconnection agreements in order to provide fair, transparentand non-discriminatory rules.

Due to an unsatisfactoryregulatory situation, Tele2 decided to stop investment in marketing fixed lineservices in 2005.

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*Licenses*

Under the Electronic Communication Law, licenses arerequired for the use of limited national resources, i.e. radio frequencies andnumbering. Only general authorization is required for telecommunicationproviders if they do not use limited national resources. Tele2’s current mobiletelephony (GSM 900/1800 standard) license was granted in October 2000 fora five-year period. Recently the license has been prolonged for another 10years.

In October 2002 Tele2 was granted a UMTS licensefor a 15-year period. In order to meet the UMTS license requirements, asmall-scale commercial launch was made in December 2004 and 30% ofthe Latvian population was covered by the end of 2005.

*Interconnection*

The Public Utilities Commission has stated that atelecommunications service provider having a dominant position in a particularmarket must provide interconnection to other telecommunications serviceproviders on a non-discriminatory basis and in accordance with a transparentand cost-based pricing policy. The regulator has recognized the mobile operators “LMT”, and “Tele2” andthe fixed incumbent operator as having SMP in the interconnection market. Onlythe fixed incumbent operator has been recognized as having SMP in the retailmarket.

The market analysis stipulated by the new ElectronicCommunications law is in process and it is expected that the first results willbe available at the third quarter of 2006.

The Public Utilities Commission has approved aninterconnection cost calculation model. If the parties involved cannot agree onterms for the provision of interconnection, the Public Utilities Commission mayintervene and make a decision, which may be appealed in court.

In 2005, the regulatorintervened in the interconnect pricing and lowered the mobile terminationinterconnect charged by Tele2 and its competitors.

*Products and Services*

Tele2 provides both prepaidcalling cards, under the brands “Ura!” and “ Zelta Zivtina” and postpaid mobiletelephony services. Tele2 Latvia has a wide range of roaming partnersthroughout the world, allowing both post- and prepaid customers to use theirTele2 sim cards also when abroad. Zelta Zivtiņa-customers get a bonuscredited to their accounts when receiving calls, which is a feature thatdistinguishes the product in the prepaid segment in Latvia. Tele2’s prepaidcustomers in Latvia can also refill their prepaid calling cards directly fromtheir bank accounts, saving costs for Tele2.

During 2005, Tele2 further developed its mobile offerby introducing GPRS services for both postpaid and prepaid customers. In late November 2005,Tele2 was the first operator in Latvia who launched a 3G (UMTS) networkcommercially.

Due to an unsatisfactory  regulatory situation, Tele2 decided to stopinvestment in marketing the fixed line services during the summer 2005.

Sales and Marketing

Low prices combined with handset subsidies are ourmain tools for attracting and retaining customers. Tele2 is using various mediaand direct marketing to inform new and existing customers about the Company’sprices and products. Tele2 has strong brand recognition among the generalpublic: 97% of the Latvian Public recognizes the Tele2 brand, according toTele2 market research executed by Data Serviss.

The main sales channels used in Latvia are the Tele2shops, which are located in the country’s main cities and are owned andoperated by Tele2. Furthermore, in areas not served by the Tele2 shops, anextensive network of dealers covering the whole country offers the Company’sservices.

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*Competition*

Tele2 is one of three operators in Latvia that own mobile networks. The others are  the partly state-owned operatorLatvijas Mobilais Telefons (LMT) and Bite (a subsidiary to the Danish operatorTDC). LMT is a well-established player in the market, whereas Bite was awardedtheir license in March 2005 and launched their services in September 2005.In addition, there is one service provider, Zetcom, which is using LMT’snetwork and is marketing their prepaid cards under the brand name “Amigo”. Atotal of three GSM licenses and three UMTS licenses have been awarded inLatvia, and Tele2, LMT and Bite hold one of each type of license. Furthermore,during 2004 a 450 MHz license was awarded to a local company, TriaTel. TriaTelis offering mobile services based on CDMA technology.

In the fixed-line market, state-owned Lattelekomis the dominant player with close to 100% market share.

*Infrastructure*

Tele2 Latvia owns its own mobile network, whichconsists of a radio network, related equipment and a core network. In addition,there is surrounding equipment that supports the various product featuresoffered. Tele2 Latvia also owns a small optical network in Riga.

***Lithuania***

*Legal Framework*

The principal institutions involved intelecommunications policy and regulation are the Ministry of Transport andCommunications (MTC) and the Communications Regulatory Authority (CRA). Whileall drafts of legal acts to be adopted by the government, including theregulation of the CRA, are required to be submitted to the MTC for comment andapproval, the court can only change regulatory decisions of the CRA. In linewith the 2002 EU regulatory framework on electronic communications,discretionary power was granted to the CRA under the 2004 Law on ElectronicCommunications (the “LEC”) which entered into force on May 1, 2004,particularly in determining which entities have SMP, and it was also given fullauthority over licensing.

In the second half of 2005, after completing the studyof the market of termination of voice calls in individual public mobiletelephone networks the Communications Regulatory Authority set obligations,foreseen in the Law on Electronic Communications (*Official Gazette Valstybes zinios*No. 69-2382,2004) to the undertakings, holding significant market power - UAB ,,Omnitel”together with the related legal persons, UAB ,,Bitė Lietuva”, UAB ,,Tele2”together with the related legal persons, which obligations include granting ofaccess and non-discrimination. In the fourth quarter of 2005 the aforementionedpublic mobile telecommunication operators publicly announced typical networksinterconnection offers.

Under secondary legislation adopted by the CRA, numberportability with central databases must be implemented by July 1, 2005.

*Licenses*

Tele2 holds a Lithuanian GSM 900 and GSM 1800licenses. Since the acquisition of its GSM 900 license in December 2000,Tele2 has gradually upgraded its network to operate on the GSM 900 band. During2004, the GSM network was expanded to cover approximately 97% of thepopulation.

Based on the public tenderresults CRA in March 2006 grantedthe right to use radio frequencies/channels in the third generation UMTS/IMT-2000 mobile radiocommunication networks of the 1920 — 1980 MHz and 2110 — 2170 MHz radiofrequency bands for UAB Tele2. According tothe general terms not later than within the time period of one year fromthe date of issuance of the Permission shall commence the provision of publicmobile telephone communication UMTS/IMT-2000 services by using its ownpublic mobile telephone communication UMTS/IMT-2000 network.

*Products and services*

Tele2 provides mobile telephony, fixed telephony andcable-TV services in Lithuania. It also offers a prepaid calling card marketedunder the Pildyk brand. Last year we launched two new subscription plans forprivate postpaid customers under 

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Plepys (prototype of the Swedish product “Kompis”) andCempionas names to stimulate new usage patterns and to boost retention. In 2006Tele2 launched new products such as GPRS and MMS services to its prepaidcustomers.

Due to an unsatisfactoryregulatory situation, Tele2 decided to stop investment in marketing the fixedline services during the summer 2005

*Sales and marketing*

Our marketing strategy is to invest in our network andbrand and to seek a position as the price leader in order to increase ourmarket share, especially in the prepaid segment. During 2005 the company hasincreased focus on the business segment. We are increasing our focus oncustomer benefits to strengthen the perception of the Company as consumer-friendlyand reliable, qualities that are vital for future expansion.

*Competition*

Today in Lithuania there are three mobile operatorsand four  MVNO, which provide mobiletelephony services through the network of Bite GSM. There is fierce competitionin the Lithuanian market and the market has reached its saturation.

*Infrastructure*

Tele2 Lithuania owns its own mobile network, whichconsists of a radio network and related equipment. In addition there issurrounding equipment like SMSC, IN-node and voicemail equipment. Thetransmission between base stations, base station controllers and switchesoccurs through digital lines, which we lease from the incumbent operator.

***Russia***

*Legalframework*

Implementation of the new Russian regulation oncommunications has been continuing in 2005. The highlights were:

- Liberalization of licensing;

- Demonopolization of the long distance (LD) telephonymarket;

- Introduction of SNP status for fixed monopolists;

- CPP(Calling Party Pays) implementation.

20 kinds of wired and wireless telecom services arenow under licensing in Russia: long-distance telephony, local fixed telephony,IP-telephony as a sort of fixed telephony, mobile telephony, data transmission,channel leasing, telematic services including Internet providing, etc. Licenseprocedures for wired services are transparent now, but obtaining of spectrum isstill not quiet transparent. A procedure of spectrum tender was approved whichassumes either an auction or a beauty contest.

Around 20 operators obtained long-distance telephonylicenses. The main problem for newcomers is the absence of our own channelinfrastructure because only Rostelecom and Transtelecom (also LD licenseholders) have now developed pan-Russia networks. Business of all future LDplayers depends on channel leasing tariffs, which are not regulated by theState. In Q1 2006 two mobile giants MTS and Vympelcom each with their owndeveloped inter-regional network also obtained LD licenses. In the end of 2005 all Sviazinvest incumbent fixedoperators were qualified as SNP (Significant Network Power), which is similarto the European SMP. The state now regulates their interconnect tariffs. Theirtariffs for subscribers are also under the state regulation so far.

CPP is to be introduced from July 1, 2006. Mobileoperators will be prohibited charging incoming calls while fixed operators aresupposed to pay them for termination. So far calls to mobile networks are freefor the PSTN subscribers. An attempt to introduce such payments a year agocaused public protests.

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Since 2005 a fee to the Universal Services Reserve wasimposed on all the telecom operators. In Q1 2006 Constitutional Court approvedthis obligation. The taxation equals 1.2% of the operator’s revenue.

The pilot project on the introduction of MNP (MobileNetwork Portability) is supposed to be done in 2006.

3G licenses are expected in the end of 2006.

*Licenses*

Currently Tele2-Russia has a strong license setin 14 operational regions:

·                  14GSM-1800 licenses;

·                  4GSM-900 licenses (including 3 E-GSM);

·                  13(D)AMPS-800 licenses;

·                  1CDMA-800 license;

·                  4licenses for local fixed telephony;

·                  13data transmission licenses;

·                  13telematic service licenses; and

·                  4 licenses forchannel leasing.

All of the telecommunications activities in Russia aresubject to licensing. The licenses are granted by and registered with theRegulator (the Ministry). Each license covers specific areas — one of the 89Russian regions in general and is issued for a period from 3 to 25 years. Alicense validity period can be extended for the same period for which it wasinitially issued.

The receipt of the right to use radio frequencyspectrum is a separate preliminary procedure.

The process of license issuance and radio frequencyspectrum receipting is rather complicated, the operators managed to safe evennon profitable licenses for DAMPS and CDMA.

The terms of the GSM-1800 and GSM-900licenses (identical for all Russia’s operations) can be summarized as follows:

·                  Licenses arevalid for 10 years

·                  Licensee isprovided 1.5 years to put the mobile system into commercial operation, whichcan be extended for additional 6 months

·                  Licenses cannotbe transferred

·                  Licensees shallfacilitate a gradual switching-over of the customer base from the AMPS-networkto the GSM network no later than by 2010.

*Interconnection*

Since January, 1st 2006 allthe mobile and fixed telecom operators in the territory of Russia wereobligated to sign interconnect contracts with each other and include the new rules andpayment conditions established by the Russian Ministry of Telecommunicationsrelated to the implementation of “calling party pays” set-up. The respectiveagreements have though not been signed a due time by the fixed line operatorsdue to some disagreements. All the operators now are at the process of pricenegotiations. All the disputes should be solved before July 1st 2006, whenthe new law will obtain legal status, but as of today there are a number ofuncertainties about the final outcome.

*Products and Services*

Our strategy is to provide inexpensive cellularcommunication services for which there is strong demand to all types of mobileusers. At the first stage of the company’s development, Tele2 sought toposition itself as a price leader using the slogan “always cheaper”. Tele2provides mass-market services such as voice-mail, SMS, national/internationallong-distance, 

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automatic customer services, IP-telephony and value-addedservices based on SMS.****In 2005 GPRS services were launched in Chelyabinsk. The launch was verysuccessful, helping to strengthen the image of Tele2. The roll-out of GPRS intoother operations will happen throughout 2006. The internal Tele2 roaming wasenabled in 2005 between the Russian regions.****

*Sales and Marketing*

During 2005 Tele2 continued introduction ofnew products to secure the companies price leader position. Central marketing campaigns were continued  to help establish a single image of Tele2 inall regions and to improve brand awareness. A new GSM network waslaunched in Voronezh city in August 2005.

*Competition*

In 2005 the Russian cellular market demonstrated animpressive growth rate, and the number of cellular users grew by 50%, reaching124 million. The market developed faster in regional areas, which accounted formore than 90% of all new subscriptions. The market cycle has moved towardconsolidation: the three Pan-Russian mobile operators control over 80% of theRussian market. Tele2 faces strong competition from these companies and otherlocal players. Our strategy is to secure growth by establishing and maintainingprice leadership in the regions we operate in.

*Infrastructure*

****Tele2 Russia continued to expandthe network**** covering, not only in highly populatedcities, but also settlements and villages trying to provide “non-stop” coveragein the licensed territory. In some regions (****Kemerovo, Rostov and Irkutsk) dual network (GSM 1800- 900) started functioning.****

****Also the construction of Tele2’sown transport infrastructure began in 2005 and will be continued in 2006.****

****In most operations expansionsites were launched to provide good quality of communication. Necessary actionshave been taken to secure the launch of WAP and GPRS.****

*Other*

We acquired the Russian operations from Millicom, arelated party, in November 2001. During 2003 and 2004, GSM services werelaunched in all regions, complementing and eventually replacing the older AMPSnetworks. In 2004 a new company, Votec Mobile, a mobile operator with a GSMlicense in the territory of Voronezh, in Southern Russia was acquired. On April 2,2004 Tele2 obtained 100% ownership in and full control over the Russian GSMoperator Sankt-Peterburg Telecom by purchasing the remaining 14% stake inthe company. Sankt-Peterburg Telecom operates in Russia’s second largestcity, St Petersburg, with a population of 4.7 million. In 2005 Tele2 continuedto develop its operations: through expanding the operations in the existingregions and through acquiring new operations. During 2005 a new company wasacquired: CJSC “Lipetsk Mobile”, a mobile operator with a GSM license in theterritory of Lipetsk, in Southern Russia.

Currently Tele2’s addressable market is about 34million people in Irkutsk, Kemerovo, Omsk, Chelyabinsk, Izhevsk (Republic ofUdmurtia), Nizhniy Novgorod, Rostov-na-Donu, Voronezh, Smolensk, Kursk,Belgorod, Lipetsk and Sankt-Peterburg.

We believe that prospects for the Russian economy arepositive and there is an excellent growth opportunity for Tele2 before marketsaturation in these regions is reached. The liberalization of thetelecommunication market declared by the Regulator would support such newbusiness models for Russia as CPP, MNP and MVNO, which would open up newopportunities for Tele2 Russia in Russia’s mobile market.

***Turkey***

Plans to enter the Turkish market in 2005 wereabandoned.

 

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***Croatia***

*Legal framework*

Croatia adopted EU legislation in thetelecommunications field with the promulgation of the new TelecommunicationsLaw, which came into effect on August 1, 2003. There were minor amendmentsto this law in 2004 and more extensive in 2005. This law stipulates that thesetting up, maintenance and development of telecommunications infrastructureand equipment, management and use of radio waves and letter and numericaladdress spacing and the provision of telecommunications services and activitiesare matters of national interest to Croatia and therefore fall within an areawhich is under the special care of the state.

The Telecommunications Law sets out the governmentalauthorities with jurisdiction over telecommunication matters: the Parliament,which enacts laws and general regulations on telecommunication activities; theMinistry of Telecommunications, which is responsible for inspection intelecommunications affairs and enacting bylaws; and finally theTelecommunication Agency, a regulatory agency dealing with telecommunicationissues on a case-by-case basis which is responsible only to the Parliament.

The principles of the telecommunications market arealso set out in the Telecommunication Law: to promote the interest of the usersof telecommunications services by implementing the principles ofnon-discrimination and transparency; to protect the privacy of personalinformation of users and of the information transmitted throughtelecommunications channels; to adapt telecommunication technology to meet theneeds of disabled and socially disadvantaged persons; and to maintain aneffective telecommunications market for the benefit of its users through newand innovative products and services.

*Licenses*

The Telecommunications Law distinguishes two sorts ofapprovals for providing telecommunications services: licenses and concessions.Licenses are granted for telecommunications services which do not includeemitting radio waves.

The provider of a mobile public voicetelecommunications service must be a company which has been granted aconcession on the basis of a public tender. The candidate for the concessionmust prove that it is competent to provide mobile public voicetelecommunications service in terms of technical support, personnel, financialresources and other means necessary for the successful construction of anetwork.

The Council of the Telecommunication Agency decided onDecember 22, 2004 that Tele2 should be granted a frequency for providingpublic telecommunication services in the mobile network of the secondgeneration GSM/DCS—1800 and the network of the third generation UMTS over theentire territory of Croatia for twenty years.

Tele2 started building the network in the firstquarter of 2005, with a commercial launch made on October, 17th 2005. This is the third GSM and UMTS licenseto be awarded in Croatia. Croatia’s population is 4.4 million and the country’smobile penetration is currently around 83%. Tele2 must build the requiredinfrastructure in accordance with the plan it submitted with the application toacquire the concession.

*Interconnection*

Interconnection must include the following services:

·                  Access to thenetwork of operators with significant market share from the networks of otheroperators through programmed network selection or by dialing numbers forselection in accordance with the number plan;

·                  Transmission ofinformation necessary for connection to the linked network;

·                  Switching callsto the users of the second operator; and

·                  Storinginformation on cost calculation in adequate form for the operator or serviceprovider linked to the network.

Operators are obliged to enable interconnection and torequest interconnection from other operators. Moreover, operators must enableand develop communication among users of different networks.

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The only situation in which an operator is notrequired to allow interconnection is if it provides evidence thatinterconnection could result in contravening the Telecommunication Law bycompromising:

·                  Thesecurity of network operations;

·                  Theunity of the telecommunication network;

·                  Thejoint functioning of telecommunication services; or

·                  Informationprotection.

The Telecommunication Agency decides whether or notthe evidence submitted by an operator seeking to disable interconnection issufficient to justify disabling interconnection.

Operators are required to negotiate interconnectionwith each other. The Telecommunication Agency has the power to decide disputesbetween operators. The interconnection costs charged by the operators withsignificant market share must be calculated on the basis of transparency andmoderate expenses, and must be based on the real costs of the service to beprovided, including a reasonable return on investment. This is still not inpower so the incumbent is using this situation to its benefit.

Operators holding significant market share must notifythe Telecommunication Agency on concluding an agreement on interconnection andmust allow the Telecommunication Agency to inspect the agreement. Thereafterthe Telecommunication Agency may change the provisions of such agreements ifthey contravene the Telecommunications Law. Operators holding significantmarket share must act in a non-discriminatory and transparent fashion.

*Sales and Marketing*

Low prices combined with handset subsidies are ourmain tools for attracting and retaining customers. Tele2 is using various mediaand marketing to inform new and existing customers about the company’s pricesand products.

The main sales channels are non-exclusive shops throughoutCroatia where customers can sign postpaid contract. Prepaid SIM cards are beingsold also through several alternative channels available throughout Croatia.

*Competition*

Tele2 is one of three operators in Croatia. The othertwo are T-mobile and VIP that have been operating in the country for 11 and 7years respectively.

*Infrastructure*

Tele2 Croatia is building its own  network according to the concessionagreement. In the meantime, the territory of Croatia is covered through anational roaming agreement signed with VIP.

***Market Area Central Europe***

***Germany***

*Regulatory Framework*

The regulatory framework of the telecommunicationssector in Germany is defined by the Telecommunications Act (*Telekommunikationsgesetz*), which entered into force on June 26,2004 (“TKG 2004”). The TKG 2004 was adopted to implement the European Unionreform package of 2002. Based on the EU requirements, the principal objectivesof the TKG include the protection of consumer interests, promotion ofcompetition in the telecommunications sector and guaranty of appropriate andadequate telecommunications services throughout Germany, as well as thepromotion of efficient infrastructure investments and support of innovations.Furthermore, the efficient administration of scarce resource, i.e. frequenciesand numbers, is included in the principles of regulation under the TKG 2004.

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Since January 1, 1998 regulatory functions underthe TKG have been carried out by a supervisory body, the Regulatory Authorityfor Telecommunications and Post (*Regulierungsbehörde fürTelekommunikation und Post*) (the “Regulatory Authority”). TheRegulatory Authority maintains various powers under the TKG 2004, including theauthority to assign and supervise frequencies and numbers, impose universalservice obligations, control network access and interconnection and approve orreview the tariffs and tariff-related general business terms andconditions of market-dominant providers.

Under the TKG 2004, specific regulatory obligationsare only to be imposed where the Regulatory Authority concludes that therelevant market is not effectively competitive as per the EU reform package.The TKG 2004 provides for a transition period by stating that until thesedeterminations with regard to companies having SMP and with regard to effectivecompetition are made, the obligations under the TKG of 1996 will remain inforce if a market dominant position had been determined in regulatory findingsunder the TKG of 1996. This transitory provision has been subject to highlycontroversial debates between the Regulatory Authority, market participants andthe administrative court, with the controversy focusing on the specific meaningof the term “obligations”.

*Licenses*

In accordance with the EU reform package, the TKG 2004has abolished all licensing requirements. Instead, the provision oftelecommunications services is subject to notification requirements. Tele2holds both a Class 3 license for the operation of transmission lines and aClass 4 license for the provision of voice telephony services in Germany.The licenses are not subject to any special restrictions or material licenseconditions and remain in force under the TKG 2004.

*Interconnection*

The TKG 2004 imposes a general obligation for publicnetwork operators to provide upon request an interconnection offer to otherpublic network operators. This obligation in principle applies to all publicnetwork operators irrespective of their market position. Access andinterconnection obligations for SMP operators may only be imposed on the basisof the results of a market analysis proceeding.

The Regulatory Authority has established aninterconnect tariff regime which has been in force since January 1, 2002.Under this regime operators are charged on the basis of the network elementsused (element-based charging). As a corollary to the new element-basedcharging, the relevant network for interconnect agreements with DeutscheTelekom has changed to a two-tiered system with 475 local switch areas and 23transit switch areas. In its decision of November 28, 2003, the RegulatoryAuthority determined interconnection tariffs for voice telephony until May 31,2006; compared to the previous level, the interconnection rates were reduced onaverage by 9.5%.

At present, interconnection between Deutsche Telekomand Tele2 is carried out on the basis of orders by the Regulatory Authoritydated January 30, and February 21, 2003. On this basis Tele2 extendedits network to 475 points of interconnection with Deutsche Telekom and iscapable of offering local calls nationwide. At the same time, the extension to475 points of interconnection optimizes its average level of interconnecttariffs. The interconnection orders were not affected by the entry into forceof the TKG 2004.

Under the terms of our existing interconnect agreementwith Deutsche Telekom, Deutsche Telekom continues to charge fees at peak andoff-peak rates based on the distance over which the call travels on DeutscheTelekom’s network, the applicable time-of-day tariff, the type ofinterconnection service and the duration of the connection.

*Pricing*

Under the TKG 2004, tariffs (including tariff-relatedbusiness terms and conditions) for the telecommunications services of market-dominantproviders and their affiliates are subject to special regulatory oversight andcontrol. Moreover, the tariffs of all providers in Germany are subject toEuropean and German law of general application, including competition andconsumer protection laws and ordinances.

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The tariffs of an SMP provider such as DeutscheTelekom are only subject to prior approval to the extent they apply to accessservices imposed by the Regulatory Authority. These tariffs are reviewed by theRegulatory Authority to ensure they are cost based. End-customer tariffs do notrequire prior approval.

*Products and Services*

Tele2 launched fixed-line telephony in March 1998when the German market was deregulated. Tele2 focuses its business on theresidential mass market and offers fixed telephony including open-call-by-callservices and dial-up Internet access. Since 2003 Tele2 has also been able tooffer local calls. Growth has resulted from several measures undertaken duringthe year such as a simplified price structure, successful marketing campaignsfocusing on comparing our prices with those of our competitors and thetargeting of preselection customers.

In November 2005 Tele2 successfully launched ADSLservices on a resale basis.

*Sales and Marketing*

The main focus is to acquire preselection customers inthe residential mass market via telemarketing, promotion stands anddoor-to-door sales agencies. In addition, the brand and the prefix are promotedvia TV advertising.

*Competition*

Tele2 Germany’s main competitors, besides theincumbent, Deutsche Telekom, are Arcor, the fixed-line operation of Vodafone inGermany, and an open-call-by-call company, 01051 GmbH. In addition to theseproviders there are several other open-call-by-call companies in the highlycompetitive fixed-line telephony market.

In the ADSL market Tele2 Germany’s main competitorsare United Internet (1&1), Arcor, AOL, Freenet and Hansenet.

*Infrastructure*

Our network in Germany currently consists of digitalswitches, 475 points of interconnect and digital transmission equipment tointerconnect to the network of Deutsche Telekom. The points of interconnect arelocated throughout Germany in regional centers and are linked to our switchesin several cities via lines leased from Deutsche Telekom or other suppliers onan annual basis. Every call initiated with our prefix, “01013,” is carried byDeutsche Telekom to the point of interconnect within the relevant “collectionarea,” where it is transferred to our leased lines. The call then travels tothe switch, is routed to the designated point of interconnect, transferred backto Deutsche Telekom’s network and carried to the recipient of the call.

For international call termination, we use wholesalecarriers to a considerable extent, and terminate at a location and with acarrier selected on the basis of price, quality and volume.

***Austria***

*Legal framework*

The Austrian Telecommunications Act, *Telekommunikationsgesetz* (“TKG 1997”), became effective in1997 and was enacted to prepare the market for the abolition of the voicetelephone monopoly in 1998 and to fulfill Austria’s obligations under therelevant European Union directives. In order to implement the new EuropeanRegulatory Package, the TKG 1997 was revised by a new TKG on August 20,2003.

The TKG provides for two regulatory authorities: the *Rundfunk und Telekom-Regulierungs-GmbH* (RTR GmbH) andthe *Telekom-Control-Kommission*,or the TKK. The TKK is an independent three-member committee meeting therequirements of a tribunal under the European Convention on Human Rights. TheTKK is responsible for decisions regarding the confirmation of notificationsfor the provision of communication services, the approval of businessconditions and tariffs of market-dominating operators, the determinationof financial compensation to be paid from and to the universal service fund,market analysis and determination of the obligations of market-dominatingoperators and the determination of the conditions for interconnection in theevent of a dispute. RTR GmbH (which acts as an operative arm of the TKK) isresponsible for the implementation of the basic provisions of the TKG, andprovides legal, technical and commercial expertise for the TKK's decisions.

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Based on the new European Regulatory Package, the TKGprovides for a two-tiered process through which the specific obligations ofmarket-dominating operators are determined. First, the RTR defines therelevant geographic and product markets in a binding Ordinance. Then the TKKanalyzes these relevant markets to determine which, if any, operators havesubstantial market power in these markets. The TKK then decides on the obligations(remedies) to be imposed on these operators.

In its Telecommunications Markets Ordinance 2003, theRTR identified 16 relevant markets which are subject to specific regulation.These markets were determined mainly in accordance with the EC Recommendationon Relevant Markets. All markets comprise the entire territory of the Republicof Austria. In an  Ordinance publishedin  2005, the RTR has added  the market for wholesale broadband access,which was not included in its 2003 Ordinance. In this  Ordinance the RTR includes cable TV networksand other alternative access infrastructures in the wholesale broadband accessmarket.

The TKK has completed its market analysis proceedingsfor all markets defined in the Telecommunications Markets Ordinance 2003 exceptfor the wholesale national market for international roaming on public mobilenetworks. Neither of the local subsidiaries of Tele2 (Tele2 and UTA) weredetermined to have significant market power in any of these markets, except forUTA which was determined to have significant market power in the market for thetermination of calls on its own fixed telecommunications network and  Tele2 as a MVNO in the market for thetermination of calls in its MVNO network.

*Licences*

* *

In 1998, the TKK granted Tele2 two licenses, one forfixed-line voice telephony and one for the operation of leased lines. Tele2started operations in Austria in 1999. UTA, which was acquired by Tele2 in2004, holds two licenses, one for fixed-line voice telephony and one for theoperation of leased lines, which were both granted in 1997. According to thenew TKG these licenses serve as confirmed notifications for the provision offixed-line and leased-line services. Furthermore, Tele2 has providednotification regarding the provision of Internet and mobile services. Allnotifications were confirmed by the TKK and therefore represent authorisationsof unlimited duration and without any special restrictions or materialconditions.

According to the TKG, anyone may offer communicationservices provided that the statutory requirements are met. Notice of theprovision of communication services must be given to the TKK, which confirmsauthorisation without licenses being issued.

*Interconnection*

* *

The framework for interconnection is set out in theTKG and two ordinances concerning interconnection (*Zusammenschaltungsverordnung*)and numbering (*Kommunikationsparameter-, Entgelt-und Mehrwertdiensteverordnung*). Additional principles forinterconnection have been set out by the TKK in several decisions. Thesedecisions in practice serve as a guideline for interconnection agreementsconcluded between other operators.

A decision dated October 1998 established, among otherthings, the tariffs for carrier selection, the type of carrier selection to beimplemented, local exchange interconnection, mutual access to free-phonenumbers and transmission of unrestricted ISDN bearers at the same tariff asvoice and emergency services. The specific conditions and fees forinterconnection with Telekom Austria were modified in 2002.

Preselection was required by law to be made availableby January 1, 2000. A decision of the TKK dated March 7, 2000, modified inApril 2002, established the specific conditions and modalities for carrierpreselection.

A decision by the TKK dated July 1999, and lastmodified in January 2003, established conditions and modalities under whichTelekom Austria AG is required to unbundle local loops. By decisions in 2005,the TKK modified the interconnection fees for mobile operators. In decisions of2004 and 2005, the TKK established conditions and modalities for theinterconnection of Tele2 as a MVNO. Interconnection decisions issued by the TKKunder the old legal framework (TKG 1997) remain in force until they arereviewed and, if applicable, replaced by a formal decision of the TKK.

The interconnect agreement with Telekom Austria has anindefinite term but may be terminated by either party with three months'notice, as of June 30 and December 31 of each year.

*Products and Services*

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Mobile Telephony

 

Tele2 launched a mobile telephony service under anMVNO agreement in early 2003. More than 20 percent of Tele2's fixed telephonycustomers also had a mobile subscription with Tele2 at the end of the year.

Fixed-line Telephony and Internet

 

In 2005 both the customer base and fixed-line revenueslightly eroded.

The acquisition of UTA Telekom AG, which was completed in December 2004, opened theunbundling segment for Tele2. Business focus is shifting from offeringpreselection telephony to higher-value access-based services. End of 2005 theULL coverage is 50 % of residential and 60 % of business customers. In areaswhere ULL is not available, resale ADSL is offered as an alternative.

*Sales and Marketing*

* *

In the fixed-line market,  marketing is addressing private customers inAustria, which constitute a slightly shrinking market. The focus is onproviding access-based services at competitive rates and a high level ofcustomer service and reliability. ARPU (Average Revenue Per User) is underpressure from the substitution of fixed line by mobile traffic. Tele2continuously engages in efforts to increase customer loyalty to reduce thechurn rate.

In the mobile segment, Tele2 cross-sells a cheapand simple prepaid service to its fixed-line customers. Efforts are taken toacquire mobile customers also outside Tele2’s existing customer base. 

For all products, door-to-door sales remain the mostimportant intake source.

*Competition*

After the acquisition of UTA, the incumbent is theonly major competitor left in the fixed-line market. Other operators cover onlyspecific segments of the market, like business or broadband customers.

The mobile market in Austria is characterized by stiffcompetition, with four GSM/UMTS operators, one UMTS-only operator, Tele2, thefirst MVNO in the market, and another aggressive MVNO launched in 2005. Themarket is over-saturated and competition is focusing on low per minute pricesin our own networks and heavily subsidized handsets. However, there are strongsigns of upcoming concentration in the market; the takeover of Tele-ring, thenumber 4 GSM operator by T-Mobile, the number 2 in the market, is awaitinggreen light from European Commission.

*Infrastructure*

 

In 2005, the Tele2 and UTA networks were integratedand now  consist of a transmissionnetwork covering all of Austria, data networks for ATM, Frame Relay and ahigh-capacity IP Internet backbone. The switching infrastructure also expandedto include a multi-switch network with several layers to serve directaccess customers, carrier preselection customers and international minutewholesale.

To get access to the Unbundled Local Loop (ULL) andthe copper line of the last mile, UTA has invested in more than 180 sites(co-location or rented space), in which technical equipment to collect voiceand data traffic from unbundled customers is installed.

***Poland***

 

*Legal Framework*

* *

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The new regulatory framework for electroniccommunications has been implemented in Poland in July 2004. At present thetelecommunications market in Poland is open to competition on the fixed linecall market. Still, the fixed subscription has not been opened up tocompetition in Poland. Because of this the former monopolist can offer a numberof unfair bundled products, in order to preserve and gain further market shares,and the other market players do not have fair and effective competitionconditions in the provision of telecommunications services.

The new Telecommunications law has neverthelessintroduced different regulations, according to which entities with significantmarket power (SMP) are to perform relevant regulatory obligations. A startingpoint is the analysis of 18 relevant markets, the results of which are to allowregulation that conforms to actual market conditions. This process is stillongoing and European Commission has started the procedure against Polandrelated with significant delays in this area.

The reference offers for regulated services still needto be improved. A reference offer for interconnection has been announced inearly 2004 and since that time has not been changed at all. A reference offerfor local loop unbundling was issued in early spring 2005 in accordance withthe old telecoms legislation and then was changed in August 2005 but thischange wasn’t significant. However, due to the high wholesale prices, limitedaccess to co-location and other issues, the unbundling of local loop in Polandhas not started yet. However, the new NRA has identified these and othershortfalls and currently runs the proceeding aiming to substantially improve thekey reference offers, which will improve the competitive conditions on thefixed line market and will open up the ADSL market for alternative operators.

The Polish mobile market still has not been activelyliberalized yet and the existing MVNO licenses are not subject to anycommercial deals.

*Products and Services*

* *

Tele2 targets the mass market, providing the followingtypes of fixed-line telephony:

·                  Localcalls—Domestic Short Distance

·                  Domestic LongDistance

·                  Fixed-to-Mobile

·                  InternationalLong Distance

·                  Dial-up Internet

 

Tele2also offers Internet access services through Wireless Local Loop (WLL).

 

*Sales and Marketing*

* *

Our sales channels are telemarketing, partner salesand direct mail advertising. We seek to position ourselves to be the price leaderin the Polish market. We make most of our sales through door-to-doorsolicitations, independent dealers, direct marketing and telemarketing orthrough promo teams in public places.

We promote ourselves as the operator offering cheaperphone calls of equal quality to those of the incumbent.

*Competition*

* *

The markets in which we currently operate are highlycompetitive and increasingly are characterized by price competition. Thenational public telecommunications operator, Telekomunikacja Polska (owned by FranceTelecom), still has a dominant market position in Poland. A number of smallercompetitors are growing rapidly and are aggressively offering products that aremore and more competitive with our own offerings. However, these players focusprimarily on the business and corporate segments of the market. Currently, ourcompetitors in the fixed-line telephony market include, among others:

·                  Telekomunikacja Polska S.A., (TP S.A.);

·                  Netia S.A.;

·                  TelefoniaDialog;

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·                  Energis Polska Sp. z o.o.;

·                  NOM Sp. z o.o.

 

On the mass market, Tele2 is the main competitor forthe incumbent, TP. Although the prices for all types of calls have declined in thelast  few years, there is still room forfurther price erosion. The incumbent is trying to compete by offeringuncompetitive product bundles, bundling free minutes with the monthlysubscription (where they still have the monopoly). 

***Czech Republic***

 

In June 2006, Tele2’s operations in Czech Republicwere divested.

*Legal Framework*

 

Regulations in the telecommunications sector are inneed of improvement. The advent of the Czech Republic's EU membership in May2004 is expected to further contribute towards fair competition and a betterregulatory environment.

The new Electronic Communication Act, effective fromMay 2005, formally implemented the new regulatory framework. Based on therecommendation of the European Commission, the relevant markets are expected tobe analyzed and the draft decision of assigned remedies is expected to beissued in 2006.

Tariffs are regulated by the Czech NRA. The NRArecently issued price regulations relating to ULL, ADSL, universal service andminute reductions in interconnect tariffs. Due to the fact that the new law iseffective from May 2005, the requirements currently imposed on the formermonopoly by the Czech NRA have been left unchanged until the market analysis iscompleted.

The Office For Protection of Economic Competition inthe Czech Republic regulates competition issues generally, including those inthe telecommunications market. The NRA administers laws concerning electroniccommunications by overseeing the competitiveness of the electroniccommunication market and by upholding the interests of the end users. TheMinistry of Informatics has the authority to implement laws by issuing"departmental orders" with the same force as laws.

*Licenses*

 

Under the new Electronic Communication Act, alltelecommunications activities may be provided under a general license. Licensesare required to obtain frequency allocations. Tele2 currently provides Internetaccess via fixed wireless access at 3.5 GHz. Tele2 received the frequencyallocation for 3.5 GHz at the end of 1999. The licenses are valid until August2005.

*Interconnection*

 

Network operators are obligated by the ElectronicCommunications Act to conclude interconnection agreements with othertelecommunications service providers. A network operator having significantmarket power is obliged to provide interconnection and access to its network ona non-discriminatory basis. Copies of interconnection agreements must bedeposited with the Czech NRA.

*Products and Services*

 

Towards the end of 2002, Tele2 started offering fixedtelephony to private customers. Apart from the former monopoly, Tele2 currentlyis the only company focusing entirely on the residential market**.** During 2003, the company introduced local calls, dial-upInternet and carrier pre-selection. Tele2 markets fixed-line telephony anddial-up Internet access primarily to the residential market. Our core productis carrier pre-select (CPS) voice telephony.

 

*Sales and Marketing*

 

Tele2 uses media, as well as special promotions andcampaigns to promote our services. Tele2 always promotes itself as the priceleader for telephony and Internet services, providing services of equal qualityat a lower cost.

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*Competition*

 

Tele2 has no competitor in the residential marketother than the incumbent. All other alternative operators are competing solelyin the business segment. Czech incumbent Cesky Telecom was recently privatized.The privatization is in the approval process, and the new owner, Telefonica,has 51 % of the shares in Cesky Teleco.

In August 2004 the Office for Protection of EconomicCompetition opened a case against the former monopoly for abuse of its dominantposition by offering bundled products, but there is no clear indication as towhen this case will be closed. Tele2 has filed a lawsuit against the formermonopoly, claiming damages resulting from the repeated breach of thecompetition law and abuse of its dominant position when offering certainbundled products.

*Infrastructure*

 

Tele2 currently operates 3.5GHz fixed wirelessnetworks in eight cities, with 18 base stations. Tele2 expects that expenditureon infrastructure will principally be on network improvements and modificationsdesigned to accommodate growth in fixed-line telephony and Internet.

***Hungary***

* *

*Legal Framework*

* *

The Act of 2003 on electronic communications (the"ECA"), which became effective on January 1, 2004, is the mostimportant act on electronic communications: it lays down the tasks and powersof the Government, the Minister for Informatics and Communications, theNational Communication Authority ("NCA") and the Board of theNational Communications Authority, Hungary ("NCA Board"). Thedecisions of the NCA Board are also binding on parties that they are addressedto. According to the ECA, the Government, the Minister of Informatics andCommunications and the other concerned Ministers listed in the ECA are mandatedto issue decrees on details of the regulation (secondary legislation). Two ofthe most relevant of these decrees is the government decree on referenceoffers, network agreements and detailed rules of the related procedures,Government Decree 277/2003 (XII.24.) and the government decree on carrierselection, Government Decree 73/2004 (IV.15.)

Carrier selection and carrier pre-selection have beeneffective since December 23, 2001. Other remedies applicable according to theEuropean Framework Regulation and the ECA are imposed by the NRA on SMPoperators. Fixed incumbent telephony operators are thus designated as SMPoperators in several markets (fixed telephony retail markets, fixed originationand fixed termination markets, local loop unbundling, wholesale broadbandaccess market). As a result, incumbent operators are obliged to publish areference interconnect offer and a reference unbundling offer with transparentprocesses and cost based tariffs. Mobile operators are designated SMP operatorson the mobile termination market, and are also obliged to set cost basedtermination fees.

Fixed-telephoneand mobile radio-telephone operators are obliged to offer numberportability to end users by a government decree effective from May 1, 2004.

 

*Licenses*

* *

In Hungary anyone can provide electroniccommunications service, provided they satisfy the requirements set out in theECA and in the relevant secondary legislation. The provision of service itselfcan be initiated after giving notification to the NCA with all the requireddata. Other than the notification no license is required, although in specialcases fulfillment of other conditions is necessary to providetelecommunications services.

*Interconnection*

* *

The ECA also acts as the framework law forinterconnection, insofar as it regulates the duties of the service providersconcerning interconnection.

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According to the provisions of the ECA, everytelecommunication service provider with SMP is obligated to enter intonegotiations with other service providers and operators based on its referenceinterconnection offer, which is approved by the NCA Board. Refusal to concludean interconnection contract may only be based on well-established objectivecriteria listed in the ECA. Legal disputes concerning interconnection can beresolved in several ways set out in the ECA (NCA Board, court, arbitration).

The reference interconnect offers of the SMP operatorsrecently changed: CPS fees and interconnect charges have been significantlyreduced by the NRA. Tele2 Hungary has signed direct interconnection agreementswith all fixed incumbent operators.

*Products and Services*

* *

Tele2 operates under licenses permitting the followingactivities:

·                  Provision oflocal public telephone services;

·                  Provision ofdomestic public telephone services;

·                  Provision ofinternational public long-distance telephone services; and

·                  Provision ofInternet access (dial up, broadband) services.

 

The NCA allocated the National Interconnect SignalPoint Code (NISPC) (CCITT No. 7) to Tele2 on February 17, 2004 and theInternational Signal Point Code (ISPC) (CCITT No. 7) on March 30, 2004. Tele2was allocated a carrier pre-selection prefix on April 1, 2004.

*Sales and Marketing*

* *

Currently we market fixed-line telephony and dial-upinternet focusing on the residential market through our call center and ourwide network of sales partners. We use media, as well as special promotions andcampaigns, to promote sales of fixed-line telephony and Internet services. Wepromote ourselves as the price leader for telephony services, providingservices of equal quality at a lower cost.

*Competition*

* *

In Hungary there are five incumbents, with T-Com(majority owned by Deutsche Telecom) being the largest with approximately 79%market share, according to the NCA, followed by Invitel (12%), HTCC (5%),MonorTel (2%) and EmiTel (2%). There are a few alternative operators in themarket, but Tele2 is the only one focused on the residential market. There iscompetition from UPC, the largest cable TV operator in Hungary. They launched3Play services including VoIP telephony service during 2004, and expanded theiroffer to the full footprint during 2005. 

*Infrastructure*

* *

We expect that expenditures on infrastructure willprincipally be on network improvements and modifications designed toaccommodate growth in fixed-line telephony. As our customer base grows, weexpect to be able to use leased lines sourced from new alternative supplierswith increasingly higher bandwidths and on longer term, low-cost contracts. Thecurrent terms of such contracts are two or three years.

***Market Area Southern Europe***

 

***France***

 

*Legal Framework*

* *

The *Loi de Réglementation desTélécommunications*, or LRT, which was adopted in France in 1996, isthe principal legislation governing the activities of Tele2 in France. The LRTprovided for a complete transformation of the regulatory environment for theFrench telecommunications industry and full liberalization as of 1998. Itsgeneral objectives were to create a 

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framework for a fullycompetitive telecommunications market, to ensure the provision of universalservice and to establish an independent regulatory authority, the *Autorité de Regulation des Communications Electroniques et des Postesor ARCEP (formerly Autorité de Regulation des Télécommunications*, orART), which was formed in 1997.

The LRT has been implemented through a series ofdetailed administrative decrees (*décrets* or *arrêtés*) covering specific subjects. Most of the regulatoryframework set out in the LRT has been implemented, especially the provisionspertaining to numbering and interconnection and universal service. Carrierselection and preselection for mobile networks became effective in 2000, andcarrier selection and preselection for local calls in 2002.

In April 2000, the EU directive relating to terminalequipment was put into effect, imposing obligations on network operators toensure greater access and easier interconnection of networks. Furthermore, aEuropean recommendation on local access enables the French regulator to ruleunilaterally on conditions for local loop access, and the ARCEP took twodecisions in April and July 2002, which launched competition on ADSL,concerning both retail and wholesale markets. The growth of the ADSL market inFrance has as a result been strong since 2003, specifically with thedevelopment of unbundling networks.

The 2002 European Regulatory Framework was implementedin French law in July 2004. This law is known as *Loi sur lesCommunications Electroniques* (LCE). The new LCE is now beingimplemented with the review of the markets listed in the Directive. The ARCEPhas issued its views for most of the markets, and these market analyses are formost of them finished. New obligations are implemented for all markets, exceptmarket 15 (mobile) whose analysis has been suspended.

*Licenses*

* *

The LRT requires licensing for certaintelecommunications services and telecommunications networks. Each license isaccompanied by a schedule of conditions (*cahier des charges*)setting forth obligations applicable to the particular service or network.Standard provisions of the *cahier des charges*have been set forth by decree. These standard provisions relate to privacy ofcommunications, public safety, education and national defense requirements,research and development expenditures, provision of directory information,equal treatment of foreign operators, regulatory oversight, use of frequencies,management and accounting procedures necessary to guarantee fair competition,publication requirements, network coverage and universal service.

On April 16, 1998, our French subsidiary, Téle2 FranceSAS, was granted a license to establish and exploit a telecommunicationsnetwork open to the public and to provide telephone service to the public. Aone-digit prefix (*préfix E*) was granted on February9, 1998, giving Téle2 France SAS the number "4" as a carrierselection code. The license has a term of 15 years, subject to renewal inaccordance with the provisions of the LRT.

*Interconnection*

* *

Any operator authorized by license to operate a publictelecommunications network is required to permit interconnection with itsnetwork, on public and non-discriminatory terms, to other public networkoperators and public telephone service providers. Any authorized operator maynot refuse a request for interconnection within the terms of the LRT if theterms are reasonable. Interconnection requests are governed by agreementsbetween the parties, which must conform to the requirements of the LRT and itsimplementing decrees. Market-dominant operators with significantinfluence over a telecommunications market must fulfill certain supplementalobligations. Primarily, they must publish their technical and pricing terms forinterconnection to other operators. The operators that are considered dominantoperators are determined annually by the ART after prior consultation with theFrench Competition Council (*Conseil de la Concurrence*).The only operator currently considered a dominant operator in the fixed marketis France Telecom, but all local loops operators like Free, Neuf Cegetel orTele2 are also dominant on the market of fixed termination over their network.

Orange (in France Telecom mobile), SFR (Vivendi Group)and Bouygues Telecom have obligations related to their power in the mobilemarket.

In general, interconnection tariffs of dominantoperators must reflect their pertinent costs, including a proportionate shareof overall costs that are common to interconnection and other services, networkreplacement costs based on the best available technology and an appropriatereturn on investment.

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Tele2 France is interconnected to all major carriersin France. The interconnect agreement with France Telecom is of indefiniteduration, but can be terminated on three months' notice. France Telecom chargesfees at peak and off-peak rates.

*Products and services*

* *

Since 2002, we have offered the full range of fixed-telephonyservices (International, National, Local and Fixed to Mobile). Internet dial-upwas launched in 2002, and ADSL in mid 2003. An Enhanced Service Provider("ESP") agreement was signed in April 2005 with Orange. Tele2 Francehas been offering mobile services  sinceJune 2005.

*Sales and Marketing*

* *

Tele2 France targets residential and small businesscustomers. Its services are mainly marketed through direct sales, supported bymedia campaigns.

*Competition*

* *

Tele2 France's main competitors are the incumbentFrance Telecom,, NeufCegetel Iliad (One Tel, Free), Alice, Club Internet, Orange.

*Infrastructure*

* *

Our network in France currently consists of digitalswitches and digital transmission equipment to interconnect with France Telecomand other operators. This equipment is linked by fiber optic cable, eitherowned (mainly from our local points of presence to the France Telecom premises)or operated through IRU, long-term and mid-term lease agreements.

Since mid 2005, Tele2 has an agreement withNeufCegetel, giving us full access to their ULL network. The agreement givesTele2 the benefits of owning a ULL network, without the need to make thecapital expenditures.

***Italy***

 

*Legal framework*

* *

Italian telecommunications law has recently beenconsolidated in Legislative Decree n. 259 of August 1, 2003 (the "Code ofElectronic Communications" or the "Code"), which entered intoforce on September 16, 2003. The Code contains provisions concerning, amongother things:

·                  The role andfunction of the Ministry of Communications and the National RegulatoryAuthority;

·                  Authorisationsfor the provision of electronic communication services;

·                  Access andinterconnection;

·                  Specialobligations imposed on operators having significant market power;

·                  Universalservice obligations and their financing;

·                  Numbering andnumber portability; and

·                  Rights of way.

 

The Italian telecommunication market has beenextensively liberalized for substantially all telecommunications services, includingthe provision of fixed public voice telephony services and the operation ofnetworks to support the provision of such services, starting from January 1,1998. The main authorities in the Italian telecommunication sector are:

·                  The Ministry ofCommunications, which is responsible for determining telecommunications policyin Italy and issuing authorisations;

 

·                  The NationalRegulatory Authority (*Autorità per le Garanzienelle Comunicazioni*) ("AGCOM"), which is mainlyresponsible for (i) implementing primary and secondary legislation; (ii)promoting competition in the telecommunication 

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market; (iii) settling interconnectiondisputes between telephone network operators; (iv) promoting the unbundling oflocal loops; and (v) granting UMTS licenses, WLL licenses and mobilefrequencies; and

 

·                  The AntitrustAuthority (*Autorità Garante della Concorrenza e del Mercato*)("AGCM"), which is responsible for antitrust issues and cooperateswith the AGCOM.

 

Authorisations

 

Since the entry into force of the new Code, theprovision of telecommunication services to the public is no longer subject tothe dual system of licenses and general authorisations. The Code sets forththat operators wishing to provide such services must apply for an authorisationusing a standard form that states the type of services they intend to provideand the date on which they intend to start. The Ministry then verifies that theoperator has satisfied all the necessary requirements to provide the servicesand, in the case of a negative outcome, notifies the operator within 60 days.Otherwise, the operator is free to provide the services.

*Rights of Way*

* *

According to the Code, all licensed or authorizedoperators enjoy equal rights with regard to rights of way. No specialauthorization is required to install equipment to provide services, except forthose licenses issued by the competent local authorities, which must be grantedbased on non-discriminatory criteria.

*Licenses*

* *

On September 15, 1998, the Ministry of Communicationsgranted us a license for the provision of voice telephony services in Italy.The license has a term of 15 years. On March 17, 1999, we transferred thelicense to our Italian subsidiary, Tele2 Italia S.p.A. The main conditions ofthe license, all of which have been fulfilled, are:

·                  Coverage of allthe provinces of Italy by the end of 2003; and

·                  A commitment tomake combined investments in infrastructure of Euro 63,000,000 by the end of2003.

 

In addition to an initial fee of ITL 100 million,Tele2 must pay an annual contribution of EUR 129,000 for the allocation ofcertain carrier selection codes, and EUR 62,000 as an annual contribution tocover the costs of monitoring the performance of services offered.

On December 23, 1998 the Italian Finance Ministryissued a decree defining the obligation of licensed operators to pay an annualcontribution, set for 2002 at an amount equal to 2% of the annual approvedearnings of each licensed operator from telecommunications like fixed andmobile telephony, radio and television services and interactive multimediaservices.

On July 12, 2000 the Italian Finance Ministry issued adecree defining the obligation of licensed operators to contribute to thefunding of the AGCOM (as provided for in Article 2, paragraph 38(b) of theTelecommunications Regulation). For 2000, the contribution was set at an amountequal to 0.35 per thousand of the annual approved earnings of each licensedoperator from telecommunications services, like fixed and mobile telephony,radio and television services and interactive multimedia services.

To facilitate the market entry of new competitors,such contribution was not levied during 2000 on, among other things, revenuesarising from (i) services that have been rendered by an operator for a periodof less than two years, unless such revenues derive from the same activityperformed by other operators during the same two-year period; (ii) servicesrendered pursuant to concessions, authorizations or licenses assigned forcoverage at the local level; and (iii) interactive and multimedia services.

*Interconnection*

* *

The Code sets forth general principles regardinginterconnection and confers extensive powers to AGCOM in this matter. It mayset time limits for the execution of interconnection agreements on acase-by-case basis, and if such time limits are not observed, the AGCOM canestablish mandatory time frames for interconnection. The AGCOM also has thepower to issue binding decisions on operators failing to comply with theconditions of interconnection agreements and, in the event of disputes, tomandate interconnection. To this end, each party to a dispute may file arequest for the settlement of any unresolved issue. In 

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particular, the AGCOM hasinitiated a market analysis in order to re-examine existing obligations in thefield of access and interconnection and to assess whether to maintain, amend orrevoke such obligations.

*Products and services*

* *

We offer a complete range of services in fixedtelephony in Italy and in particular we have offered all customers local callsvia pre-selection since 2001. Dial up internet was launched in 2002 and ADSLwas launched in 2003. During 2006 Local loop unbundling will be launched.

*Sales and Marketing*

* *

The strategy of supplementing our products andservices offerings to our existing customer base and an increased number ofpreselection customers has created the potential for continuing growth. TheADSL service and local loop unbundling will contribute to further growth.

*Competition*

* *

Our main competitor is Telecom Italia.

*Infrastructure*

* *

Our network in Italy currently consists of switchesand digital transmission equipment to interconnect with Telecom Italia.

The interconnect agreement with Telecom Italia enteredinto on March 20, 1999, has a 15-year term. It is automatically renewable andcan be terminated exclusively by us on six months' notice. Telecom Italiacharges fees at peak and off-peak rates based on the distance over which thecall travels on Telecom Italia's network and the duration of the interconnect.

***Spain***

 

*Legal Framework*

* *

The National Regulatory Authority in Spain is composedof the following authorities, each with its own jurisdiction andresponsibilities:

·                  TheTelecommunications Market Commission (the "CMT") is an independentAgency responsible for (a) arbitrating conflicts between operators, (b) number assignmentfor the provision of services, (c) safeguarding competition, avoidingdiscrimination and assigning numbers, (d) overseeing some aspects of theuniversal service obligations, (e) resolving interconnection conflicts betweenoperators, (f) adopting measures to promote competition, in particularregarding network interconnection/access, pricing policy, and any issuesinvolving the restriction of competition, (g) controlling mergers, changes ofcontrol and agreements between operators, (h) defining relevant markets for *ex ante* regulation, (i) advising and informing theGovernment and the Minister of Science and Technology on issues affecting thetelecommunications market, (j) requesting the intervention of the Minister ofScience and Technology (Radio Communications State Agency) to inspecttelecommunications equipment in order to determine compliance with radioemission limits, (k) imposing fines, (l) overseeing the register of operators,and (m) any other responsibilities delegated by the Government or the Ministerof Science and Technology.

·                  The Ministry ofIndustry (MI) is charged with defining telecommunications and "informationsociety" policy, supervising technical specifications, regulating consumerprotection matters (notification of telephony, contracts with consumers,consumer arbitration, etc.) and investigating and imposing fines forinfringements in areas are under its jurisdiction.

 

·                  The RadioSpectrum Agency is integrated in the above-mentioned MI and itsresponsibilities include assigning frequencies and managing the radio spectrum.It also investigates and imposes fines for infringements in areas under itsjurisdiction.

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·                  The Ministry ofEconomy is charged with setting SMP retail tariffs, and it approves bonds,discounts and special offers of the incumbent. As well, is charged of thenational competition authority (Servicio de Defensa de la Competencia, “SDC”).

 

·                  The Government.

 

The Law of Telecommunications partially implements theEuropean "Telecom package" Directives. The Telecom Act is implementedthrough two main Regulations, the Market and Network Access Regulation and theUniversal Service and Authorization Conditions Regulation (Enacted on April 14,2004).

Market analyses have not been completed. CMT hasnotified to the European Commission the conclusions of its analysis in most ofthe markets and the final resolution has been adopted in market 15 with theintroduction of Mobile Virtual Network Operator (MVNO) as a remedy.

Alternative operators have complained that the currentframework allows the incumbent to be very aggressive in ADSL. As a result, theCMT has started to apply price squeeze tests to retail offers. Nevertheless,this test does not take into account competitors' costs and it allows theincumbent operator to launch retail offers without prior modification of thewholesale offer in order to provide a reasonable margin to competitors.Recently, Telefonica has been approved to charge for ADSL by volume of data,and the corresponding wholesale offer provides very narrow margin.

Local loop unbundling penetration is very low, andoperators are facing difficulties in deployment. A great number of accessconflicts have been submitted before the NRA. Comunitel, the company acquiredby Tele2 in July of 2005, was the first operator to provide services based onunbundling local loop and has a large number of its clients based on thisaccess.

Tele2 has used verbal preselect ordering since it wasregulated in August 2004. The incumbent is still very aggressive in fixedtelephony and it is using same verbal ordering to win back preselectedcustomers, in addition to special price plans and promotions, like bundledoffers of line rental and traffic minutes. Tele2 has complained about thosepractices. Telefonica has recently obtained an authorization for the provisionof VOIP and is planning to launch its service this year.

The price of line rental increased again during 2005,for a cumulative increase of 80% since 1998. Tele2 has complained about thelack of a wholesale line rental product and asked for it as a remedy in theanalysis of market 8, 1 and 2.

*Licenses*

* *

Tele2 is licensed to provide all the services that itcurrently provides and intends to provide in the near future in terms of fixedtelephony, Internet access and mobile services (MVNO). Former licenses arestill in force under the new Telecom Act, but obligations will be reviewed oncethe Authorization Conditions Regulation is finally published. Tele2 is dulyregistered in the CMT public Registry. It also has a license to provide nomadicservices.

*Interconnection*

* *

For fixed-line telephony Tele2 has an interconnectionagreement with Telefonica, based on regulated RIO, which is among the first inEurope to use various models like Interconnection per Minute andInterconnection by Capacity. Tele2 uses both systems depending on the actualneed in the relevant province or region. Through Comunitel, it has aninterconnection with the three mobile network operators.

Tele2 has filed a complaint before the CMT becausemobile operators are reluctant to provide access to their networks. We weregranted a mobile virtual network operator (MVNO) license (A2) in July 2002, butcommercial negotiations have failed. With the new situation after the analysisof market 15, it is hoped that an agreement will be reached during 2006.

*Products and Services*

* *

Tele2 started in 2001 by providing services forinternational and long-distance calling for prepaid customers and laterexpanded to cover all major fixed-line indirect access services. Dial-upInternet service was launched in December 2003. ADSL was launched in November2004. With the acquisition of Comunitel in 2005, Tele2 launched full ULLservices (direct access 

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voice + broadbandbundles) as well as expanded its portfolio to SMBs and Corporations offering awide range of telecommunications solutions ranging from voice and data VPNs toadvanced datacenter and outsourcing services.

*Sales and Marketing*

* *

Tele2 is still strong on the residential fixedtelephony market, however Tele2 is moving very fast to broadband and directaccess voice by using full ULL over its own recently acquired network. With theacquisition of Comunitel, Tele2 also entered in the business market (SMB &Corporations) accounting for almost half of the total revenues.

*Competition*

* *

The incumbent (Telefonica) still has a very stronghold on the market, both fixed line and ADSL, and is extremely aggressive.Recently it launched a TV service, thus coming up with a triple play offer. Therecent merger of the two main cable operators (ONO and AUNA) has led to astrong rival.

Other significant players are Wanadoo (France Telecom)which has recently acquired Amena thus now holding a GSM license, Ya.com(Deutsche Telecom affiliate), which is only active in the ADSL segment, andJazztel, which was previously experiencing financial difficulties but with thenew management has managed to improve its financials and has a very aggressivegrowth strategy both in terms of network development and customer intake.

*Infrastructure*

* *

After the acquisition of Comunitel, existinginfrastructures have been added in Spain. Within this new infrastructure isincluded a broad footprint of 226 DSLAM collocated in Incumbent’ premises toprovide direct access voice and data services to corporate and residentialmarkets with almost 40% coverage. A roll-out plan to increase the number ofcollocations up to close to 400 (almost 60% coverage) in 2006 has already beenlaunched in the last quarter of 2005.

In addition to the access network, an IP network with41 PoPs all over Spain is also deployed to provide direct VoIP, VPN andInternet Services to end customers. This network is also connected toIncumbent’s data network to provide indirect access adsl services based inwholesale services.

SDH Transmission network is deployed over 2,5Gbpslambda rings and leased lines to provide full control of the services. Darkfiber is used in metro rings to provide connectivity between big hostingcenters and different internal PoPs within the same city.

Voice Services are provided through two differenttechnologies; TDM and VoIP. Direct access customers are served by conventionalswitching facilities or via Soft Switch facilities installed to provide VoIPservices. Conventional Digital TDM network is also deployed to provideinterconnection services to Incumbent’s network and other local operators.

***Switzerland***

 

*Legal Framework*

* *

A comprehensive new regulatory framework governingtelecommunications services in Switzerland was established on January 1, 1998;the Telecommunications Act (*Fernmeldegesetz*),or FMG. The FMG and implemented ordinances opened domestic and internationalpublic fixed-line telephony in Switzerland to full competition.

The Ordinance to the FMG (*Fernmeldeverordnung*),or FDV, was amended on April 1, 2003 by new articles granting to alltelecommunication service providers full access, shared-line access andbitstream access to the ultimate last line to the customer, which has beenunder Swisscom control. Swisscom has appealed to block these provisions.

The FMG is also under review. The Swiss Parliament hasfinally reached an agreement in the spring of 2006 for a new FMG. One of themain planned obligations for Swisscom is to resell the "last mile".

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*RegulatoryFramework*

Switzerland is not a member state of the EuropeanUnion and therefore is not subject to European Union legislation relating totelecommunications. However, the deregulation of the Swiss telecommunicationsmarket has to a large extent run in parallel to deregulation in the EuropeanUnion, and European Union directives and implementing legislation in variousEuropean Union countries have served as points of reference for the developmentof the Swiss regulatory regime.

The FMG is intended to ensure that: (i) reliableuniversal service is provided at affordable prices to the entire Swisspopulation; (ii) telecommunications traffic is free from interference andrespects personal and intellectual property rights; and (iii) effectivecompetition in the provision of telecommunications services is allowed todevelop. Important features of the regulatory framework include:

·                  *Open Competition Subject to Licensing and Notification Requirements*.With limited exceptions, anyone who provides telecommunications services andthereby independently operates a significant portion of the telecommunicationsinstallations used to provide transmission and anyone who wishes to make use ofradio communication frequencies must obtain a license from the regulatory authority.Anyone meeting the conditions for a license application is entitled to receivea license, subject to frequency availability in the case of a license to useradio communication frequencies. Other providers of telecommunications servicesthat are not required to obtain a license must file notice with the regulatoryauthority.

·                  *Universal Services.* Swisscom is the only operator to provideuniversal service in Switzerland. It is unlikely that, in the near future, anyoperator other than Swisscom will be able to provide 100% full network coveragein Switzerland.

·                  *Price Ceilings on Universal Service*. Swisscom may notincrease the prices charged for specified universal services above the priceceiling for each service set forth in the regulatory ordinance. The priceceilings limit Swisscom’s ability to rebalance tariffs by increasing prices forservices such as line rental or local telephone calls.

·                  *Interconnection Prices*. Market-dominant serviceproviders must set their prices for interconnection services in a transparentand cost-oriented manner. As of January 1, 2000, such prices must be based onthe long-run incremental costs of providing the interconnection service, whichmay include an appropriate return on capital employed and an amount for jointand common costs. The latest price list of interconnect rates became effective May1, 2003. Since January1, 2004 the new prices are the subject of an appeal byTele2.

·                  *Carrier Selection*. In order to promote competition innational and international telephony services, as of January 1, 1998, publicfixed-line telephony service providers are required to provide call-by-call andpre-selection services.

·                  *Number Portability*. As of January 1, 2000, public telephonyservice providers generally provide number portability.

Important regulatory matters not resolved by the FMGare regulated by legislative bodies and regulatory agencies through theimplementation of ordinances. Due to the relatively recent enactment of the FMGand the lack of prior competition in most of the Swiss telecommunicationsmarket, important aspects of the regulatory regime will require time toclarify. Legal challenges concerning the application of the FMG and theinterpretation of the ordinances that follow may subsequently arise.

The revision of the Law of 30 April 1997 onTelecommunications (LTC) was accepted by the Federal parliament on 24 March 2006.The new text opens up the way to liberalizing the last mile for all services.As far as high-speed access is concerned, this liberalization is limited tofour years, during which the alternative operators must develop their owninfrastructure. The statutory decrees are now in preparation. The new law isexpected to enter into force in the first quarter of 2007.

It will have the following positive implications forTele2:

·                  Resale of fixed linerental — consequently less churn

·                  Leased line prices basedon LRIC calculation

·                  Full unbundling of thecopper lines

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*Licences*

Our Swiss subsidiary was granted a final license on February9, 1999 to provide the requested fixed-line telephony services. On January 1,2004, Tele2 received the final GSM 1800 license to provide mobile telephonyservices. The License has the following conditions:

Coverage (population) timetable:

·                  End2005: 50% of one of the following cities: Zurich, Geneva, Basel, Bern andLausanne

·                  End2006: 95% of one of the following cities: Zurich, Geneva, Basel, Bern orLausanne and 50% of one further city

·                  End 2008: 95% ofZurich, Geneva, Basel, Bern and Lausanne

Quality:

·                  96% grade of serviceat peak times

*Interconnection*

The FMG provides that a telecommunications serviceprovider with a dominant position in a particular market must provideinterconnection to other telecommunications service providers on anon-discriminatory basis and in accordance with a transparent and cost-basedpricing policy, stating the conditions and prices separately for eachinterconnection service. The FMG authorized the Federal Council of Switzerlandto determine the principles governing interconnection. Failing a negotiatedagreement between the market-dominating operator and another serviceprovider, the regulatory authority may determine the interconnectionconditions.

The Federal Council has specified that a market-dominantprovider must provide access to necessary equipment, services and informationto other providers on a non-discriminatory basis and in the same manner thatthe market-dominant provider supplies these internally to its divisions,subsidiaries and partners.

*Products andServices*

Mobile Telephony

In 2000, we launched a GSM reselling product incooperation with Swisscom, giving the Tele2 Mobile network coverage of 98% ofthe area of Switzerland. Tele2 Mobile offers the use of prepaid cards. Thesecards can be recharged either by entering a pin code on the mobile handset orby calling a help line. This product will be stopped as per end of May 2006 andbe replaced by the Tele2 Mobile solution (see below).

In December 2003, Tele2 was awarded a GSM license inSwitzerland. We have and are still building up mobile base stations in the cityof Zurich and were able to fulfil the first milestones set by the licence byhandling a call in December 2004 and the coverage of 50% of the population ofZurich. Furthermore Tele2 signed a national roaming agreement with TDC in February06 and will launch within the next months a national campaign.

Fixed-line Telephony

We launched fixed telephony in Switzerland as soon asthe market was deregulated in October 1998, and we have been able to take localtraffic since April 1, 2002. We are known for our competitive rates,easy-to-understand pricing and for challenging the former monopoly.

In order to further strengthen our market positionTele2 Europe acquired Econophone AG and merged Econophone into Tele2Switzerland in early 2006.

ADSL

Currently the only way to offer ADSL in Switzerland isby reselling Swisscom’s product, which we have been doing since the end of2002.

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*Sales andMarketing*

We base our sales activities on telemarketing(contracts via voice recording), stand and door-to-door activities, assisted byup-sale and cross-sale activities. These sales initiatives are backed up by TV,poster, print and direct mail activities. We focus on price and havelaunched  “Moonlight” price plans,offering free calls at night and highly competitive international rates.

*Competition*

Apart from the former monopoly (Swisscom), the TDCCompany “Sunrise” and Cablecom owned by UPC are our main competitors. Themarket is highly competitive, where fixed line telephony is heavily substitutedby mobile and also recently by voice over TV cable. New price plans are beingintroduced to the market, many of them with binding periods. As more priceplans appear, the more complex it gets for the end customer to make a choice.

*Infrastructure*

Given our GSM licence we are now investing in buildingup our own GSM network. Currently we are putting up GSM antennas in and aroundZurich as well as in Berne, Lausanne, Geneva and Basel.

***Portugal***

*Legal Framework*

Originally incorporated in 1988 as ICP—Instituto dasComunicações de Portugal, ICP—Autoridade Nacional de Comunicações, ANACOM is,for the purposes of article 3 of the Framework Directive, the PortugueseNational Regulatory Authority. According to its current statutes, ANACOM is apublic entity endowed with financial and administrative autonomy and with itsown assets and charged with the general duties of regulating, supervising andrepresenting the communications sector.

Although ANACOM’s statutes were not modified by eitherthe Electronic Communications Law (Law 5/2004, of February 10—“2004Communications Law”), or by the Electronic Commerce Law (Decree Law 7/2004, of January7), its supervisory powers and particularly its regulatory policy objectiveswere broadened and it was given the power to impose new harsher penalties forinfringements of electronic communications laws. Under the 2004 CommunicationsLaw, ANACOM’s regulatory policy objectives may be summarised in two keyobjectives:

·                  promotingeffective competition in the provision of electronic communications network andservice provision and rationalizing the use of frequency allocation andnumbering resources; and

·                  securingconsumer protection, universal access services and privacy protection andacting as a watch dog for some aspects of the e-commerce.

The 2004 Communications Law introduced two veryimportant innovations in respect of ANACOM’s powers and duties:

·                  a consultationand transparency mechanism referred to as the “general consultation procedure”,under which ANACOM will be required to hold public consultations as part of itsregular decision making process; and

·                  the empowermentof administrative courts to review the merits of ANACOM’s decisions on appeal.Before the 2004 Communications Law, only appeal courts could review decisionson legal and procedural grounds.

ANACOM’s powers as an independent regulatory agencyare relatively new. However, over the last quarter of 2004 it considerablystepped up its supervisory and regulatory activity. ANACOM’s Board of Directorsmay only be dismissed in very limited circumstances, and after their five-yearterm they may not be part of the management of any company subject to ANACOMsupervision, i.e., any company holding a telecommunications or postal licenseor registry.

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*RegulatoryFramework*

Most of the new EU regulatory package was implementedin a single act of Parliament, the 2004 Communications Law, which revokedpractically all existing telecommunications regulations. Although someprovisions of the 2004 Communications Law already dealt with data privacyissues, the Data Protection Directive was implemented on August 18, 2004.

*Licenses*

Tele2 Portugal holds authorisations for the followingactivities:

·                  Operatinga public telecommunications network;

·                  Providingfixed telephony service;

·                  Providingdata transmission service; and

·                  ProvidingInternet services (ISP).

*Interconnection*

The new legislation establishes the principle offreedom of negotiation of interconnection agreements between all operators,notwithstanding ANACOM’s intervention powers. ANACOM may impose access andinterconnection obligations on all operators whenever it believes this isappropriate to promote competition and protect the customer, and it may alsoimpose technical and operational interconnection requirements.

*Products andServices*

From the launch of our fixed telephony service inPortugal in September of 2003, we have offered local, national, internationaland fixed-to-mobile calls on a nationwide basis. In December of 2004, a dial-upservice was launched.

*Sales and Marketing*

Tele2 targets residential customers and its servicesare mainly marketed through direct sales and telemarketing, supported by mediacampaigns.

*Competition*

Tele2 is an alternative telecom operator in Portugaland its main competitor is the incumbent PT Portugal Telecom.

***Market Area UK & Benelux***

***The Netherlands***

*Legal Framework*

The basic provisions of Dutch telecommunicationsregulation are laid down in the Telecommunications Act (“Telecommunicatiewet”)of October 19, 1998, as modified on May 19, 2004. The revisions to the Act,based on European Union directives, grant more powers to the regulatorOnafhankelijke Post en Telecommunicatie Autoriteit (“OPTA”). OPTA has performedmarket analysis in the course of 2005, which have resulted in several market analysisdecisions as per 1 January 2006. Following these decisions, various remedieshave been imposed on both incumbent KPN as on other operators. The marketanalyses decisions currently subject to appeal procedures, which will takeplace in the course of 2006. Pending the appeal, the obligations followingthese decisions remain into force.

Carrier pre-selection (CPS) was implemented in TheNetherlands on January 1, 2000. However, CPS for local traffic did not becomeavailable until August 1, 2002, while premium rated numbers have becomeavailable in March 2006.

The retail prices of the incumbent are required tomeet a price squeeze test, i.e. the margin between the retail and wholesaleprice must be sufficient for an efficient operator to manage to provide asimilar service, before the prices will be 

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effective. Following the market analysis decision forthe retail market, the price squeeze test has been amended, granting morefreedom to the incumbent to introduce potentially non-competitive retailpricing. The revised price squeeze is being appealed by Tele2 (Netherlands) BVand several other market parties. Mobile number portability entered into forceon January 1, 1999. Following the market analysis decisions, the incumbent isrequired to offer Wholesale Line Rental (“WLR”). The regulator, together withmarket parties and the incumbent, is still in the process of shaping the WLRoffer and the accompanying wholesale pricing. WLR is not expected to beoperational before 2007.

*Licenses*

Under the Telecommunications Act, licenses fortelecommunications providers are no longer required. Instead, it was sufficientto register Tele2 (Netherlands) BV in a public register.

*Interconnection*

All providers of a public telecommunications networkor telecommunication services offered to the public in The Netherlands fororigination and termination services, who thereby control the means of accessto end users, are obliged to enter into negotiations with other providers ofsuch networks or services if those other providers request interoperability.The European Committee has started an infringement procedure against the DutchGovernment since the EU Directives were not followed on this subject.

Operators with significant market power in the marketfor interconnection are required to ensure that interconnection charges arenon-discriminatory, transparent and cost-based. As a result, any such operatoris required to provide interconnection to its competitors on terms comparableto those afforded to its subsidiaries, divisions and business partners. Everyyear the regulator reviews the interconnection rates of the incumbent.Following the market analysis decision for fixed termination markets, costcalculations for the incumbent’s terminating access services will be based on aWholesale Price Cap system, which is a combination of an Embedded Direct Cost(EDC) model and a comparative efficiency analysis (CEA). All other operatorshaving their own fixed network are obliged to set their fixed terminatingtariffs based on the principle of delayed reciprocity, following the incumbent’sinterconnection tariffs of three years before.

*Products andServices*

Tele2 (Netherlands) B.V. began offering services inThe Netherlands in October 1997. The strategic concentration is on residentialfixed-line, mobile and broadband services with limited focus on the Small/HomeOffice market.

Our interconnect agreement with KPN had a term ofthree years, from 1997 to 2000, and is automatically extended for consecutivetwelve-month periods unless terminated with six-months’ notice. KPNcharges interconnection rates based on the distance over which the call travelson its network, the applicable time-of-day tariff and the duration ofinterconnection.

In August 2001, Tele2 launched the first MVNO in TheNetherlands. Tele2 signed an agreement with Telfort, an independent GSMoperator in The Netherlands. This service is operated on Tele2’s own GSMequipment to handle calls, roaming, SMS and voice mail.

Tele2 Netherlands launched a dial-up Internet servicein August 2003. To be able to further develop Internet services a wholesaleADSL agreement was signed with KPN in December 2004, after which the ADSLconsumer product was launched in April 2005. In February 2006 a ‘Dual Play’(combination of ADSL and Voice-over-IP) product was launched.

*Sales andMarketing*

Tele2 Netherlands is the country’s largest alternativefixed telephony operator. Eight out of ten Tele2 fixed-line customers havepre-selection. During 2005 Tele2 Netherlands operations focused on sellingpostpaid mobile services, retention of fixed-line customers and implementingADSL and VoIP services. Common ways of customer intake include direct sales,direct mailing and telemarketing.

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*Competition*

Our main competitor in the fixed-line market remainsKPN although competition is getting more aggressive from cable operators andADSL offers like UPC, Casema. Bundling of fixed-line subscriptions and voiceservices is not allowed. On the mobile side, Tele2 Netherlands facescompetition from both MNOs and MVNO/ESPs. The latter continue to offer “sim-only”products and Internet-based products (balance info/top-ups available onwebsites).

*Infrastructure*

The structure of the Dutch Tele2 network consists ofdigital switches and digital transmission equipment to interconnect at all 20Regional Interconnect Points with the incumbent’s (KPN) network.

*Acquisition ofVersatel*

On September 14, 2005 Tele2 Finance B.V. in theNetherlands made a public bid on all outstanding shares and convertible notesof Versatel Telecom International N.V. (Versatel), a public company listed onthe Euronext stock exchange in Amsterdam. In October 2005 the bid was declaredunconditional and the German operations of Versatel were sold to Apax, as wasannounced in the in the offer memorandum. Tele2 now holds 80.3% of alloutstanding shares and 100% of the convertible notes of Versatel. Versatel andTele2 are currently in the process of preparing a proposal for a triangularmerger among Versatel, Tele2 Finance B.V. and Tele2 Netherlands Holding B.V. whichis anticipated to be effectuated in 2006.

Versatel and Tele2 are engaged in legal proceedingswith minority shareholders (some investment funds and the Dutch Association ofShareholders). The Enterprise Chamber of the Court in Amsterdam appointed threeindependent Supervisory Board members to represent Versatel in all transactionswith the Tele2 group.

Versatel Telecom International N.V. was founded in1995 and owns an extensive telecommunication network in the Netherlands andBelgium that uses the latest technologies to provide business and residentialcustomers with voice, data and internet services. Versatel’s network supportsall major protocols, including Frame Relay, Asynchronous Transfer Mode (‘ATM’)and Internet Protocol (‘IP’) and consists of proven technical equipment from,amongst others, Cisco Systems, Samsung Electronics and Nortel Networks. Thebackbone infrastructure constitutes the largest part of the network and extendsto all major commercial and population centers in the Netherlands and Belgium,including most interconnection points with other telecommunication networkoperators and major internet exchanges.

Fiber optic business park rings, city rings and “nearoverlay sections” as well as DSL infrastructure, ISDN infrastructure and pointsof presence are all examples of local access extensions that Versatel uses inits markets. Via its own equipment in the central offices Versatel deploys DSLand ISDN based services to end customers in all regions.

Versatel re-branded it’s residential products in theNetherlands and Belgium to the Tele2 brand. The main products sold to theresidential market are ADSL, ‘Dual Play’ (combination of ADSL andVoice-over-IP) and ‘Triple Play’ (ADSL, VoIP and Television) services. For theTelevision product Versatel acquired the rights for broadcasting live soccergames of the Dutch premier soccer league.

The business products remain being sold under theVersatel brand. Main products are Voice (e.g. ISDN 20/30), Data (e.g. IP VPN)and Internet (e.g. Business Internet) services. Versatel sells its productsthrough personal sales, telemarketing and media.

***Luxembourg***

*Legal Framework*

The enforcement of telecommunications laws andregulations is carried out by the Luxembourg Institute of Regulation (InstitutLuxembourgeois de Régulation, or ILR).

A new package of 4 laws has been implemented on June 30,2005. They are an adaptation of European Union’s ‘Telecommunication Package’regulations. The main objectives of these laws are to define the conditions ofaccess to 

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telecommunication networks with the aim of increasingcompetition, promoting investments and offering more services to the market.

Mobile number portability was introduced in February 2005.

*Licenses*

The new legislative framework replaces the licensingregime with a lighter notification procedure. This change does not howevercancel the requirements set forth to Tango and Tele2 in the licenses receivedunder the previous framework.

Our Luxembourg subsidiary, Tango, was granted a GSM900/DCS 1800 license under the Telecommunications Act on November 28, 1997. Theprincipal conditions of the license are as follows:

·                  GSMcoverage of at least 99% of the population and 97% of the territory;

·                  DCS1800 coverage of at least 76% of the population and 48% of the territory,including major highways and tunnels on major highways and in Luxembourg City;

·                  Callblocking rate not exceeding 2.3%;

·                  Provisionof four calling plans (prepaid, low subscriber, medium subscriber and highsubscriber); and

·                  Provision of 24hours-a-day and seven days-a-week multilingual (Luxembourgish, French, Englishand German) customer services free of charge.

Tango’s license is valid until 2012. Unless otherwisenotified by the Ministry of Telecommunications prior to its expiration, thelicense will be renewed automatically for additional five-year periods. Inaddition to the initial fee of EUR 1,859,201, Tango is required to pay anannual management fee of at least EUR 400,000 and at most 0.2% of turnover forthe market covered by the license concerned, and an annual frequency fee of EUR7,500 per duplex channel.

On May 22, 2002, Tango was granted a 3G license underthe Telecommunications Law (modified on March 21, 1997) and under the Grand-Ducaldecree of December 14, 2001. The principal conditions of the license are asfollows:

·                  Populationcoverage of 97% and geographical coverage of 92% by May 2004;

·                  Populationcoverage of 99% and geographical coverage of 98% by May 2010;

·                  Probabilityof connectivity of 95% (with call blocking rates at peak time below 1% and callseizure rate below 1.5%); and

·                  Services offeredat commercial launch to include higher quality voice service and datatransmission at a speed of 384 kbit/s downlink and 64kbit/s uplink in the areasof coverage.

These obligations are subject to modifications basedon regulation and building permits, the granting of necessary authorizations,and the existence and availability of adequate 3G equipment. The Minister hasthe authority to modify the license upon a reasonable request by the licenseholder.

Under the terms of the license, we have furthercommitted to share sites on terms based on objective and transparent criteriaand on costs, offer number portability from commercial launch onwards and offertechnical and financial conditions for national roaming to other operators atthe latest on the date of commercial launch.

Tango’s license is valid until 2017. Unless otherwisenotified by the Minister of Telecommunications prior to its expiration, thelicense will be renewed automatically for additional five-year periods. Tangois required to pay an annual management fee of at least EUR 200,000 and at most0.2% of the turnover for the market covered by the license concerned, and anannual frequency fee of EUR 24,000 per MHz of duplex symmetrical channel inpaired bands and EUR 12,000 per MHz of simplex channel in non-paired bands.

On February 10, 1999, the Luxembourg regulatoryauthority granted Tele2’s subsidiary a license with a term of 30 years toprovide fixed-line telecommunications services in Luxembourg. The license isrenewable for ten-year periods. Significant terms of the license include:

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·                  Anobligation that 95% of customers with fixed lines be activated within eighthours, if the point of interconnect already exists;

·                  Anobligation that 90% of customers with fixed lines be activated within 15 days,if the point of interconnect does not yet exist;

·                  Anobligation that 99% of all requests for appointments with the company begranted; and

·                  A dropped callrate of no more than 1%.

*Interconnection*

Our network in Luxembourg is interconnected with EPT’s,to terminate calls on EPT’s fixed network and on networks of operators withwhich Tango/Tele2 Luxembourg does not have direct interconnection, andVoxMobile’s to terminate on its mobile network. We have one interconnectagreement with the EPT and one with VoxMobile, which can be terminated on threemonths’ notice. Interconnect rates are renegotiated every year. We charge auniform tariff rate for fixed international calls, regardless of whether suchcalls are made during peak or off-peak hours.

There are different interconnect rates for callsterminating on fixed or on mobile networks. Rates vary if calls are made duringpeak or off-peak hours. Interconnect rates do not vary for national orinternational calls.

*Products andServices*

Tango holds a combined GSM 900/DCS 1800 license andhas sold a wide range of services since 1998. UMTS commercial services werelaunched in June 2004. Tele2 Luxembourg provides a variety of fixed-linetelecommunications services. The company has offered fixed telephony since1999, Internet services since 2000 and ADSL since 2005. Pre-selection customerscomprised half of Tele2 Luxembourg’s customer base in 2005.

*Sales andMarketing*

For both mobile and fixed-line businesses, traditionalchannels are used, like mass market advertising, promotions through events andTango shops, with the main focus on the residential market.

*Competition*

In May 2004 a new mobile operator, VoxMobile, startedoperation. On the fixed-line side we mainly compete with the local incumbent(EPT).

***Liechtenstein***

*Products andServices*

We have provided mobile telephony services inLiechtenstein since March 2000 under the Tango brand. We hold a license for GSMand were awarded a UMTS license in 2002.

We have provided fixed telephony services inLiechtenstein under our own brand since 2000. We hold a license for all typesof fixed telecommunications services, including the Internet.

***Belgium***

*Legal Framework*

The basic provisions of Belgian telecommunicationsregulation are set forth in the new electronic communications Act of 13 June 2005(“2005 Act”). A separate law deals with the national regulatory authority, theBIPT, that became independent by the law of January 17, 2003. However,following a decision by the Belgian Constitutional court, the Federalgovernment and the French, Flemish and German Communities had to reach acooperation agreement by the end of 2005, otherwise some of the BIPTcompetencies under the law of January 17, 2003 would become void. Thiscooperation agreement has not yet been adopted.

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Carrier selection has been in place since January 1,1998. Carrier pre-selection became compulsory in Belgium on January 1, 2000.The royal decree of March 16, 2000 obliges fixed operators to offer numberportability to end-users. Mobile number portability entered into force on October1, 2002. The 2005 Act created a fund to finance universal telecommunicationsservices. The unbundling of local loop and bitstream access was imposed on SMPoperators (i.e. Belgacom) on December 12, 2000. Belgacom must annually publisha Belgacom Reference Unbundling Offer (BRUO) and a Belgacom Reference Offer onBitstream Access (BROBA). These offers allow for naked ADSL.

Article 9 of the 2005 Act establishes the authorizationregime for providers of electronic communications services. Awaiting theadoption of the secondary legislation (i.e. implementation royal decrees), whenapplicable, existing rights and obligations stated in royal decrees are stillvalid.

In April 2006, the European Commission has given alast warning to Belgium before initiating infringement proceedings with the ECJfor not having notified one single market analysis nor remedy in the frameworkof Article 7 of the Framework Directive. Draft market analysis and remedieshave been submitted to public consultation on markets 1 to 6, 8 to 12, 16 and17. In addition to existing SMP obligations, proposed remedies includewholesale line rental and bitstream access for ADSL2+ and VDSL.

*Licenses*

On March 24, 2000, the Minister for Telecommunicationsgranted to Tele2 Belgium SA a license to provide voice telephony services overthe entire Belgian territory and a license to establish and operate a publictelecommunication network in the municipalities covered by the geographicallicense scope. The voice telephony license is granted for 15 years and will beautomatically renewed for 10-year periods, unless Tele2 Belgium or theMinister terminates the license by written notice. The network license isgranted for an undetermined period of time. No investment or coverageobligations are linked to these licenses. Tele2 Belgium SA fully complies withthe terms of its licenses.

Versatel Belgium SA has been granted such voicelicense on November 9, 1998 and infrastructure license on December 21, 1998.Versatel Belgium SA also fully complies with the terms of its licenses.

*Interconnection*

All providers of a public telecommunications networkor of telecommunication services offered to the public in Belgium, who therebycontrol the means of access to end users, are obliged to enter intonegotiations with other providers of such networks or services if those otherproviders request interconnection.

In relation to interconnection tariffs, operators withsignificant market power in the market for interconnection (*i.e.* Belgacom, Belgacom Mobile and Mobistar) are required toensure that interconnection charges are non-discriminatory, transparent andcost-based. The BIPT reviews and approves every year the Belgacom ReferenceInterconnection Offer (BRIO) which includes all technical, commercial andfinancial terms of interconnection with the incumbent.

As a consequence of huge infrastructure investmentsmade by Versatel Belgium SA, the BIPT has granted Versatel on December 7, 2004,the right to charge non reciprocal interconnection termination charges to otheroperators. Belgacom, the incumbent operator, has appealed the BIPT decisionbefore the Brussels court of appeal. Parties have pleaded the case in January 2006,no judgment has yet been rendered.

*Products andServices*

Tele2 Belgium offers fixed-telephony andInternet services to the residential population. The operations were launchedin January 2003 in Brussels and in July 2003 in the rest of the country. In2005 to further develop internet services a wholesale ADSL agreement was signedwith Belgacom and in August 2005 an ADSL consumer product was launched.

Versatel Belgium offers fixed-telephony andInternet services to the residential population and a range of fixed-telephony,Internet, leased line and VPN services to the business market and carrierservices to other carriers, ISP’s(internet service providers) and otherresellers.

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In November 2005 Tele2 and Versatel jointly launched aproduct combining ADSL and fixed telephony through Voice over IP on thebitstream network of Versatel. With this product the customers does not need aseparate fixed line subscription.

*Sales andMarketing*

Tele2 and Versatel markets to the Belgian residentialpopulation through a mix of telemarketing, direct sales, TV and print media.Versatel uses a number of resellers for its Residential and business products.For Versatel the corporate and carrier service segments are approached by salesmanagers with an account management structure.

*Competition*

The main competitors in the residential market areBelgacom (the incumbent), Telenet (a cable operator) and Scarlet. For thebusiness and carrier services the main competitors are Belgacom, Colt andMCI/Verizon and BT.

*Infrastructure*

The structure of the Belgian Tele2 network consists ofdigital switches and digital transmission equipment to interconnect at allRegional Interconnect Points with the incumbent’s (Belgacom) network.

The backbone infrastructure constitutes the largestpart of the network and extends to all major commercial and population centersin Belgium, including most interconnection points with other telecommunicationnetwork operators and major internet exchanges.

Fiber optic business park rings, city rings and “nearoverlay sections” as well as DSL infrastructure, ISDN infrastructure and pointsof presence are all examples of local access extensions that Versatel uses inher markets. Via its own equipment in the central offices Versatel deploys DSLand ISDN based services to end customers in all regions.

*Acquisition ofVersatel*

See comments under The Netherlands.

*Governmentregulations*

The VAT administration continues to investigate VATissues regarding call shops at Versatel.

Versatel generated revenues on Post and pre-paidresellers. Most of the pre-paid resellers were allegdly established in otherEuropean Countries and as such were invoiced by Versatel without VAT inaccordance with the exception foreseen in the Belgian VAT legislation and theSixth EU Directive. This legal exception foresees this VAT exemption providedthe Party to whom Telecommunication services are provided for have theireconomic activities in this European Country (i.e. are established in this EUCountry). The Special VAT Authority in Belgium (BBI) questions the foreignestablishment of some of these foreign prepaid resellers and as such questionsthe VAT exemption applied by Versatel.

Versatel is in worst case exposed to a retroactiveapplication of VAT (21%) + 20% fine as from 2001 and if considered as fraud afine up to 200%.

In the opening balance of Versatel in the consolidatedTele2 accounts, we have provisioned an amount of 5.6 MEUR. The administrationcould potentially claim up to 5 million euros of VAT for the years from 2001 to2005 and up to 10 million euros of fines.

***United Kingdom***

As of December 16 2005, Tele2 UK (Tele2 UKCommunications Limited) has been sold to the CarPhone Warehouse Group PLC, acompany incorporated in England.

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***Ireland***

As of December 16 2005, Tele2 Ireland (Tele2Telecommunications Service Limited) has been sold. to the CarPhone WarehouseLimited, a company incorporated in the Republic of Ireland, a wholly ownedsubsidiary of the CarPhone Warehouse Group PLC, a company incorporated inEngland.

***Calling Card Ccompany, C***3

*Legal frameworkand Licences*

Calling Card Company provides prepaid telephonyservices. CCC Holding BV is the holding company for the C3 group. Telephony services are provided by aPECN provider. Therefore no telecommunications licences are required directly.All interconnections are provided by the Tele2 Services company. Services are provided across Europe, mainly inthe following countries: Ireland, Austria, Belgium, the UK, France, Germany,Spain, Netherlands, Switzerland, Poland, Portugal and Italy.

*Products andservices*

C3 currently offerstelephony via prepaid international calling cards, call shops and e-vouchers,as well as a rechargeable international calling card that can be used to makecalls from 45 different countries. C3 has launched a mobile service for ethnic customersvia the Dutch MVNO and has launched “Mi-Locutorio”, which is a product designedfor the call shop market, in Spain. However, not all products will be availablein all markets.

*Sales andMarketing*

Sales are directed via country managers in each country.These managers are responsible for creating new products as well as marketingthese products via various channels. These channels include direct advertisingvia the distributors as well as mainstream advertising using print media.Distributors can also have cards branded as they wish to facilitate increasedsales. Dealers are offered commissions on card sales, which vary depending onthe type of card as well as the country.

*Competition*

The group faces intense competition from companiesacross Europe such as:

·                  IDT

·                  Nomicall

·                  PlanetTalk

·                  LykaTelecom

·                  1stNational

·                  SwiftCall

·                  VoiceTelecom

·                  Vectone

·                  Universalcom

*Governmentregulations*

Decisions taken by local VAT Authorities andregulators might effect C3 operations. VATdiscussion with German Authorities is ongoing. A provision of 161 MESK has beentaken in 2005 of which 110 MSEK has been paid in February 2006 to the GermanVAT Authorities.

***Alpha Telecom***

*Legal frameworkand Licences*

Alpha International Overseas TelecommunicationsServices Limited, which has a registered branch office in Portugal, hasauthorisation from the Regulator to operate a telecommunications business fromPortugal. Alpha International Overseas 

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Telecommunications Services Limited is also authorisedby Ofcom, the UK regulator, to operate an electronic communications network inthe UK. Services are provided in the following countries: Ireland, the UK andFrance.

*Products andservices*

Alpha Telecom Communications Ltd currently offerstelephony via a prepaid account service.

*Sales andMarketing*

Sales are directed from the registered branch officein Luxemburg. The Sales and Marketing division is responsible for creating newproducts as well as marketing these products via various media channels.

*Competition*

The group faces competition from companies in the UKsuch as:

·                  OneTel

·                  Telediscount

·                  Telestunt

·                  IDT

·                  Nomi

·                  PlanetTalk

·                  1stNational

·                  SwiftCall

·                  VoiceTelecom

·                  Vectone

·                  Universalcom

***Market Area Services***

***3C Communications***

3C Communications (3C) offers integrated solutions forcard processing to the hospitality, retail, parking and e-commerce industries.3C has a presence in 24 countries, with a customer base consisting of 1000hotels, 650 restaurants/retailers, 900 parking companies and more than 250e-commerce customers. 3C is the only provider of card processing solutionsoperating on a global basis and offering standardised solutions around theworld.

3C will launch its services in Asia Pacific in 2006and today 3C is the only provider of integrated card processing solutionsincorporating Dynamic Currency Conversion (DCC) in the Hospitality marketworldwide.

***Datametrix***

Datametrix has a strong position as a systemintegrator in the Nordic market. The market for integration of telephonyservices is driven by IP telephony, increasing demand for integrated mobilesolutions and call center integration. Datametrix has a good position andwell-developed expertise in all of these areas. Like Tele2, Datametrix is atotal solution provider with a strong product and service profile, offeringsolutions for IP telephony, LAN/WAN and VPN solutions, MPLS networks, wirelesssolutions, security, advanced call center services and voice recording.

***ProcureITright (PIR)***

ProcureITright (PIR), acquired during 2002, is aprocurement consultant that targets the TIME segment (telecommunications,information, media and entertainment). The company focuses on strategicprocurement and procurement of technically complex products and services. PIRoffers a complete range of procurement services, which enable the customer tooutsource procurement. PIR has sold Proceedo in September 2005. The market foroutsourcing procurement services is expected 

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to grow in 2005. PIR works globally and has completeda number of projects in 34 countries in Europe, Asia, Latin America and Africa.Its head office is located in Stockholm.

***Radio Components Sweden AB***

One of Radio Components’ products is an antennasolution for GSM 1800, which reduces the need for sites by a factor of three tofour for coverage build-out. With the acquisition of this company in 2003,Tele2 has helped to secure a cost-efficient build-out in Russia and in areaswhere mobile rollouts may occur.

***UNI2***

UNI2 is an IT outsourcing supplier with operations inSweden, Denmark, Norway, the UK, Luxembourg, Estonia, Latvia and Lithuania. Thecompany, with around one hundred employees, takes responsibility for all orpart of the customer’s IT environment and works to standardise and streamlinethe customer’s business operations. Using centralised automated functions andremote access, UNI2 can reduce the customer’s overall IT costs. UNI2 alsooffers functional responsibility, which means the Company guarantees that aparticular IT function is working. UNI2 has four different areas of service:desktop solutions—operation of PC workplaces, server solutions—operation ofservers, system solutions—shared customer applications and security solutions.Security is an important aspect of all the solutions provided by UNI2. Thetarget market is primarily small and medium-sized companies.

**Item 4A.Unresolved Staff Comments.**

None.

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**Item 5: Operating and FinancialReview and Prospects**

*This discussion ofour results of operations and liquidity and capital resources includes forward-lookingstatements that involve risks and uncertainties. Our actual results in thefuture could differ materially from those anticipated in these forward-lookingstatements. See “Forward-Looking Information” and Item 3: “KeyInformation—Risk Factors.” Our Consolidated Financial Statements, and the otherfinancial information relating to the Tele2 companies set forth in thissection, have been prepared in accordance with IFRS. At transition to IFRScertain exceptions permitted by IFRS 1 has been applied, for additionalinformation see Note 37 of the Notes to the Consolidated Financial Statements.See “—U.S. GAAP—Reconciliation from IFRS to U.S. GAAP.” You should read thefollowing discussion in conjunction with our Consolidated Financial Statementsand the accompanying Notes thereto appearing elsewhere in this Annual Report.*

**Introduction**

We believe the telecom market will continue to movetowards mobile and broadband services. In order to prosper in this market, wehave positioned ourselves to exploit broadband opportunities with keyacquisitions and infrastructure access agreements, as well as further investmentinto own mobile networks in markets where this can be justified, complementedwith MVNO agreements in other markets.

Our operating revenue in 2005 amounted to SEK 49,943million, an increase of SEK 6,910 million, or 16.1%, including (and 14.1%excluding) exchange rate effects, from SEK 43,033 million in 2004. Exchangerate effects amounted to 0.3-3.1% per market area. Organic growth(changes in revenues less acquired and divested operations) was 6.9% including,and 5.1% excluding, exchange rate effects.

We had a total of 30.3 million customers at December 31,2005. Net customer intake, excluding acquired and divested companies was 3.4million customers compared with 5.0 million customers the pervious year.

The Group’s ARPU (monthly average revenue per user)was SEK 143 in 2005 compared to SEK 143 in 2004.

Operating profit/loss totaled SEK 3,510 million,compared with SEK 4,318 million in 2004, with an operating profit margin of7.0% for 2005 compared to 10.0% in 2004.

Net interest expense and other financial items totaledSEK -383 million for 2005 compared to SEK -111 million in 2004.Exchange differences of SEK -198 million for 2005 and SEK -9million for 2004 were reported under net financial items, of which SEK -124million relates to exchange differences on intra-group balances, which werepreviously recognized directly in equity. The previous year’s net financialitems included a gain of SEK 171 million from sale of shares in Song Networks.The average interest rate on outstanding liabilities was 3.7% in 2005 comparedto 4.4% the same period last year. Profit after financial items amounted to SEK3,127 million for 2005, compared to SEK 4,207 million in 2004.

Tax on net profit for 2005 and 2004 amounted to SEK -786million and SEK -779 million, respectively, of which SEK 340 millionrelated to the tax portion of the accumulated losses valued for the first time.The corresponding amount was SEK 1,212 million the previous year. Net profitwas SEK 2,341 million in 2005 compared to SEK 3,428 million in 2004. Earningsper share were SEK 5.29 after dilution, compared with SEK 7.73 in 2004.

In 2005, cash flow from operating activities amountedto SEK 5,487 million, compared to SEK 5,876 million for 2004, and cash flowafter investments in intangible and tangible assets amounted to SEK 1,847million, compared to SEK 4,314 million for 2004. Investments (CAPEX) amountedto SEK 3,640 and SEK 1,562 million respectively.

**Factors Affecting Revenues**

***1.    Mobile Telephony Services***

The main revenue source for our mobile telecommunicationsbusiness is air-time revenues, which consist of charges for calls thatoriginate or terminate in our mobile telecommunications network. Air-timerevenues depend on the number of 

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customers, call volume and tariff pricing. Air-timerevenues also include charges for “roaming” calls. Roaming calls are calls madeby customers of other mobile networks that originate or terminate in ajurisdiction covered by our network, as well as calls made or received by ourcustomers in a jurisdiction covered by another operator’s network for which wereceive revenue.

Other revenue sources include monthly subscriptionfees, service activation fees and customer-calling services. The rates wecharge for air time, monthly access and service activation are the key determinantsof the level of our mobile telephony revenues.

*Number of Customers*

The total number of mobile telephony customersincreased by 40% to 11.5 million as of December 31, 2005, compared to 8.3million as of December 31, 2004. The prepaid card business increased itscustomer base by 44% to 8.7 million as of December 31, 2005, compared to6.1 million as of December 31, 2004. Our post-paid business accounted forthe remaining 2.8 million customers as of December 31, 2005, compared to2.2 million as of December 31, 2004.

Our mobile telephony operations in Sweden had 3.6million customers as of December 31, 2005, an increase of 3% on an annualbasis. Nordic accounts for 35% of our group’s mobile telephony customers.Number of mobile telephony customers in Baltic & Russia increased by73%, accounting for 54% of our group’s total number of mobile telephonycustomers. UK & Benelux accounts for 7% of our group’s mobiletelephony customers.

Our customer base is affected by the level of churnand the level of passive customers. “Churn” refers to subscription terminationsthat are either voluntary, upon termination by the customer, or involuntary,due to non-payment of bills or because of suspected fraudulent use. “Passivecustomers” are customers that continue to pay subscription fees but do not usetheir phones. We generally seek to minimize customer churn by providing strongcustomer service and high-quality services at competitive prices, as well asthrough customer loyalty programs and direct customer communication. Webelieve, based on an independent survey conducted twice every year, that ouremphasis on programs intended to promote customer loyalty and our improvedcoverage have increased customer satisfaction across our operations. Continuedcustomer growth is also dependent on tariff pricing as well as, among otherthings, general economic conditions, competitive pressures and the quality andcoverage of our mobile telecommunications network.

*Call Volumes*

Our mobile telephony revenues are affected by the callvolume per customer. The influx of new private customers in recent years hasbeen partly a result of our strategy to attract mobile telephony customers withcall patterns that are different from those of business customers. However, wealso focus mobile telephony marketing efforts on large corporate and otherhigh-volume customers to maintain an appropriate balance of customers withdiffering calling patterns with the aim of ensuring maximum utilization of ournetwork at all hours of the day.

We anticipate that our aggregate revenues willcontinue to increase as our customer base grows. However, while increased usagehas thus far sustained average revenue per customer, we believe that thisaverage is likely to decline over time as the number of low-usage customers onour network increases. An increase in the proportion of the number of low-usagecustomers could have the effect of diluting the average revenue per customerand therefore lowering average revenue per customer, even while overallaggregate revenues increase.

*Tariff Pricing*

Tariff pricing structures vary between market areas.Typically, we offer three or four main mobile telephony tariff structures forpost-paid customers, with different airtime, monthly access and serviceactivation charges that are designed to cater to different customer usagepatterns. Airtime tariffs for domestic calls vary depending on the time of daywhen a call is made and tariffs for international calls vary according to thedestination of the call. We charge mobile customers separately for certain ofthe additional custom-calling services we offer, such as voice-mail, callwaiting, call forwarding, short message service and data and facsimiletransmission.

Prepaid customers purchase an initial start-up packageand then purchase cards for fixed amounts from which their call charges arededucted. Prepaid customers do not pay monthly fees.

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We believe that future price levels will be determinedprimarily by the level of competition in the GSM and UMTS services market,changes affecting underlying costs, increased competition from othertechnologies and local telecommunications regulators’ decisions on terminationfees. See “ —Factors Affecting Expenditures—Mobile Telephony Services—Cost ofServices” and Item 3: “Key Information—Risk Factors.”

***2.    Fixed-line Telephony andInternet Services***

The main revenue sources for our fixed-line telephonyand Internet services are call charges from international, national andfixed-to-mobile telephony and revenue from international traffic from overseasentities with which we have direct carrier agreements, known as “returntraffic.” We also generate revenues from subscription fees for our ADSL anddial-up internet access, as well as from payments for the provision of leasedlines and permanent internet capacity to direct access customers.

Average monthly revenue per customer variessignificantly from market area to market area depending on factors such asprice differentials, the percentage of international calls, the percentage offixed-to-mobile calls and general competitiveness in the fixed-telephonyand Internet services market. Average monthly revenue per customer in theNordic market area tends to be higher than in our continental European marketsbecause of lower usage per customer, which is explained by the lowerpenetration of preselect in continental Europe. We introduced preselect in theNordic market area a few years before it was introduced in the continentalEuropean countries in which we operate.

*Tariff Pricing*

The most significant factor that has affected, and isexpected to continue to affect, our revenues in the Nordic market area is thelevel of our rates. The most significant factors affecting continental Europeanrevenues are the number of customers in our targeted markets, their usagelevels and our tariffs.

Our fixed-line call charges are either based on a rateper second that varies depending upon the destination and time of the call or afixed fee per month for unlimited call minutes, again depending on thedestination and time of the call. In some markets we also charge a connectionfee for each call. The rates which the relevant former monopoly charges itscustomers are likely to represent the upper limit on the rates we can chargefor similar services. Hence, rate reductions by the former monopoly forservices offered by us without corresponding reductions in the former monopoly’sinterconnection charges could have an adverse effect on our profitability. Webelieve that downward pressure on rates and interconnection charges isdeclining.

Due to technological improvements, liberalization ofthe European telecommunications market and increased availability oftransmission capacity from third parties, we expect costs per minute todecline. We expect that the decline of per-minute costs will outpace anydecline in per-minute rates. If reductions in costs do not outpace reductionsin revenues, we may experience a substantial decline in our margins on calls.Absent a significant increase in billable minutes of traffic carried or increasedcharges for additional services, this would have a material adverse effect onour business and financial results.

*Preselection*

Preselection is an option whereby a customer can haveall calls routed through an operator of the customer’s choice, without havingto dial a prefix for every call. The availability of preselection in a givencountry depends, among other things, on the speed of implementation of theservice by the relevant national public telecommunications operator. Ourexperience in markets where preselection has been introduced is an increase inrevenues per customer. Our intention is to introduce this service in eachmarket served by the Tele2 brand as permitted by the relevant regulators.

*Resale of fixed-linesubscriptions*

Our source of revenue from resale of fixed-linesubscriptions is the monthly fixed fee. As of December 31, 2005, we onlyoffered resale of fixed-line subscriptions in three of the countries in whichwe operate. As deregulation continues across Europe, we expect to be able tooffer this service in more countries, which would affect revenues from resaleof fixed-line subscriptions. The number of customers that we can attract ineach country and the pricing levels of the fixed fee are also significantfactors that affect our fixed-line subscription revenues. Though margins forthis product typically are very thin, we expect a positive effect on churn andthus profit levels.

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*ULL*

In the countries where Tele2 has invested into ULL, wetake full control of the revenue streams from the customer, including linerental, voice services and data services. Additionally, we capture revenue fromtermination fees for calls from other operators’ customers that are terminatedwith our ULL customers.

***3.    Cable Television Services***

Our primary source of revenues from cable televisionservices is monthly fees for subscription to our programming packages. Thenumber of customers and pricing levels are significant factors that haveaffected, and are expected to continue to affect, our cable televisionrevenues. Revenues are also affected by the churn rate of the customer base. Webelieve that cable customers are generally more sensitive to changes indisposable income than our fixed-line and mobile telephony customers.

**Factors Affecting Expenditures**

***1.    Mobile Telephony Services***

The principal components of our mobiletelecommunications operating expenditures are the cost of services, sales anddistribution expenses and indirect production and administrative costs.

*Cost of Services*

The cost of services for our mobile telephony businessconsists primarily of payments to other operators for delivering calls outsideour network (interconnect costs), payments for the provision of fixed-line andmicrowave links between our and outside networks, and payments totelecommunications operators abroad for calls made by our mobile telephonycustomers in other systems. We also include certain costs of production andservices personnel in cost of services.

Our costs have risen more slowly than revenues. Thisis due primarily to the effect of economies of scale, decreases in theinterconnect rates payable for mobile calls delivered to other networks and anincrease in local mobile-to-mobile calls among mobile telephony customerswithin our network that do not incur interconnect expenses. Regulatoryauthorities have indicated that mobile telecommunications operators may berequired to reduce mobile interconnection rates in the future. The benefit tous of cost reductions associated with lower interconnection rates payable by usare likely to be offset in part, or possibly exceeded, by reductions in ourrevenues from incoming traffic.

*Sales and Marketing Expenses*

Sales and marketing expenses include fixed commissionsthat are paid to dealers for the acquisition of customers, marketingcontributions, variable dealer commissions, advertising and other marketingcosts, as well as certain costs of sales and marketing personnel. Dealercommissions have fallen significantly from previous levels. Marketingcontributions consist of contributions made to dealers to subsidize theirmarketing activities in connection with periodic sales campaigns. Marketingcontributions vary according to the sales campaign but are not related to adealer’s actual customer intake during a campaign. Competition has kept ourfixed dealer commissions at relatively high levels. Variable dealer commissionsconsist of air-time commissions, which depend on the call volume of thecustomers obtained by each dealer. In recent years, our prepaid customer base hasgrown more rapidly than our contract customer base, and average sales andmarketing expenses per prepaid customer are generally lower than for contractcustomers. In an effort to reduce fixed dealer commissions, new tariff planshave been introduced, with no subsidised handset offset by lower per minutecharges.

Expenditures for advertising and other marketingactivities (*e.g.*, dealer commissions) are charged toexpense on an ongoing basis. Marketing activities will have a negative effecton results of operations in the period the marketing activity is performed, butthe result of the marketing activity will often have a positive effect(increased revenues) in subsequent periods. This will result in fluctuations inour operating profit depending on when and to what extent marketing activitiesare undertaken.

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* *

*Administrative Costs*

Administrative costs include salary and overheadexpenditures relating to administrative functions and costs not attributable toother functions. Transcom World Wide, a company owned in part by FörvaltningsAB Kinnevik, performs customer service functions for us in exchange for aservice fee that we believe is equivalent to compensation agreed at arm’slength. Because our customer base has been growing significantly, customer servicesaccount for an increasing share of the general administrative costsattributable to our mobile telephony services business.

Due to fraud prevention efforts, we have not incurredsignificant expenses associated with mobile telecommunications customer fraudto date. We also have not made any significant write-offs for bad debt inrelation to our mobile telephony business.

*Depreciation and Amortization*

Depreciation and amortization costs primarilyrepresent depreciation of telephony and office equipment and amortization oflicenses, interconnect agreements and customer agreements. We include theportion of depreciation and amortization allocatable to assets employed inoperating activities as part of cost of services. Other depreciation andamortization expenses are included in selling and administrative expenses. Weallocate substantially all of our depreciation and amortization expenses toassets employed in operating activities.

***2.    Fixed-line Telephony andInternet Services***

*Cost of Services and Revenues*

Our cost of services for fixed-line telephony andinternet services include the cost of interconnecting to the relevant state-ownedor formerly state-owned public telecommunications operator’s networks orto the networks of other local operators, including mobile operators, and thecost of transmission and leased lines. We also include certain costs ofproduction and services personnel in the cost of services. We expect that ratescharged by state-owned or formerly state-owned publictelecommunications operators will continue to fall, but that these expenseswill increase overall, as our fixed-line customer base and total call volumesincrease. The level of interconnect costs is an important factor in determiningwhether it is cost-effective for us to offer certain services. By transmittingcalls along our own owned or leased network as far as possible beforeinterconnecting with the network of any other operator for transmission of acall we are able to control, to a certain extent, the level of our fixed-lineinterconnect costs.

In the countries where Tele2 has invested into ULL, weincur a cost of renting the copper cable of the “last mile” between the localtelephone station and the customer.

Fixed-line production expenses also include costsrelated to operating our international and national fixed-line network, such aspayments for transmission capacity, payments for leased lines and payments forinternational call transmission capacity. We believe that the proportion ofthese costs relative to revenues, along with operating expenses relating to ourfixed-line networks, will decline as further growth yields economies of scale.

We carry international calls between our countries ofoperation on direct leased lines across borders. These direct leased lines acrossborders offer significant cost advantages, as we do not have to use othercarriers, usually the state-owned or former state-owned publictelecommunications operators that have links across borders. Instead, we cancarry the call on our leased lines directly to the relevant point ofinterconnection in the country in which the call is terminated. Theinterconnect costs payable by us to the relevant national publictelecommunications operator are local call, rather than international call,termination costs.

As our customer base grows, we expect to be able touse leased lines with increasingly higher bandwidth. We expect that this,together with other technological enhancements, will decrease our network unitcosts over time.

*Selling and Administrative Expenses*

Selling and administrative expenses include marketingcosts, amounts paid to Transcom World Wide for call center services and generalexpenses related to administrative functions, as well as costs that cannot beallocated to other functions. We anticipate that these costs will increase inconjunction with the growth of our operations and work force expansion. Inparticular, we expect our continental European marketing expenses to increasesignificantly as we expand our fixed-line telephony services 

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and increase call center service purchases fromTranscom World Wide. However, we expect the impact of such increasedoutsourcing costs on revenue growth to be mitigated by corresponding savings inrespect of cost of personnel. Accordingly, our results of operations will vary,depending on the timing and speed of our expansion strategy. We expect that,during a period of rapid expansion, sales and marketing expenses will berelatively higher than during more stable periods of growth.

*Depreciation and Amortization*

Depreciation and amortization costs representprimarily depreciation of telephony and office equipment. We include theportion of depreciation and amortization allocatable to assets employed inoperating activities as part of its cost of services. Other depreciation andamortization expenses are included in selling expense and administrativeexpenses. Substantially all of our depreciation and amortization expense isallocated to assets employed in operating activities.

***3.    Cable Television Services***

The principal operating costs for our cable televisionservices include the costs of programming, system maintenance and customerservice expenses. Both system maintenance and customer service costs have beenrelatively stable in recent years. We expect system maintenance and customerservice costs in the future to change proportionally with the number ofcustomers. The cable television industry in Sweden has not shown significantgrowth for several years, with approximately 70% of households connected. Ifdemand for cable service increases, costs would likely rise proportionally.Future growth of internet service on the 950 MHz band could increaseexpenditures on cable infrastructure, customer service and technical support.

**Critical Accounting Policiesunder IFRS**

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with IFRS as adopted by EU. Forsignificant accounting principles see Note 1 of the Notes to the ConsolidatedFinancial Statements.

***Choice of accounting principles***

When choosing and applying Tele2’saccountingprinciples, the board and the president have made the following choices:

*Reporting of joint ventures*

Tele2 reports joint ventures according to the equitymethod of accounting. Another accepted method is the proportional method, whichmeans that the consolidated balance sheet includes the Group’s share of assetsand liabilities in joint ventures as well as any residual value of consolidatedsurplus value when Group’s accounting principles have been applied. Theconsolidated income statement includes the Group’s share of joint venture’srevenues and expenses.

Application of the proportional method would increaseTele2’s total assets and liabilities while the net income would be unchanged.

***Assessments and estimates***

Our reported financial condition and results ofoperations are sensitive to accounting methods, assumptions and estimates thatunderlie preparation of the financial statements. We base our estimates onhistorical experience and on various other assumptions, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.

The selection of critical accounting policies, thejudgments and other uncertainties affecting application of those policies andthe sensitivity of reported results to changes in conditions and assumptionsare factors to be considered when reviewing our financial statements. Webelieve the following critical accounting policies involve the most significantjudgments and estimates used in the preparation of our consolidated financialstatements.

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No material changes in assumptions and estimated hasoccurred during the last years except for the write-down in Alpha Telecom in2005, according to Note 14 of the Notes to the Consolidated FinancialStatements, and valuation of deferred tax assets in 2004 and 2005, according toNote 13 of the Notes to the Consolidated Financial Statements.

*Valuation of acquired intangibleassets*

When acquiring businesses, intangible assets arevalued at fair value. If there is an active market for the acquired assets, thefair value is defined based on the prices on this market. Since there is oftenno active markets for these assets, valuation models have been developed toestimate the fair value. Examples of valuation models are discounting of futurecash flows and estimates of Tele2’s historic costs to acquire correspondingassets.

*Valuation of goodwill*

When estimating cash generating units’ recoverableamount for the evaluation of goodwill impairment, the assumption of futurevalues and estimates of parameters are made. These assumptions are presented inNote 14 of the Notes to the Consolidated Financial Statements.

*Valuation of property, plant andequipment with a finite useful life*

If the recoverable amount falls below the book value,an impairment is recognized. The decision of whether the existing factors indicatingthat an asset is exposed to an impairment is based on management’s evaluationof future cash flows including discounting factors.

*Useful lives for fixed assets*

Depreciation according to plan is based on theacquisition value of the fixed assets and estimated utilization period, withthe estimated residual value deducted at the end of the utilization period. Iftechnology develops more quickly than expected, or competition, regulatoryrequirements or market conditions develop differently than expected, this mayaffect the company’s future assessment of utilization periods and residualvalues.

*Valuation of deferred taxes*

The calculation of deferred taxes takes intoconsideration temporary differences, including the valuation of unutilized losscarry-forwards. Deferred tax assets are reported only for loss carry-forwardsto the extent that it is more likely than not that the loss carry-forwardswill be utilized in the future. Our management conducts regular appraisals toconfirm that previous assessments are reasonable. The valuation of deferredtaxes is based on expectations about future results and market conditions,which by nature are subjective.

*Valuation of disputes and damages*

Tele2 is involved in a number of disputes. For eachindividual dispute, an assessment is carried out of the most likely outcome,and the results are presented in accordance with this.

*Valuation of reserves fordoubtful accounts*

Receivables are valued regularly and are reported ataccrued acquisition value. Reserves for doubtful receivables are based onvarious assumptions and historical experience.

**U.S. GAAP**

***Reconciliation from IFRS to U.S. GAAP***

Our financial statements are prepared in accordancewith IFRS as adopted by the EU, which differ in certain significant respectsfrom U.S. GAAP. There are no material adjustments that must be made for thepurpose of reporting our net profit for 2005 in accordance with U.S. GAAP. Theadjustments amounted to a net amount of SEK 2 million.

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Adjustments that must be made for the purpose of reportingshareholders’ equity as of December 31, 2005 in accordance with U.S. GAAPamounted to SEK 8,903 million, of which SEK 6,667 million relates tocalculating the share price and the value of net assets when we acquired SEC in2000 and SEK 3,112 million relates to the reversal of the amortization ofgoodwill during 2002-2003 due to Tele2s’ transition date to IFRS was 2004and as goodwill is not amortized under U.S. GAAP from 2002.

The other adjustments to arrive at U.S. GAAP relateto: (i) valuation of acquired loss carry-forwards; (ii) accountingfor step acquisitions; (iii) accounting for surplus value of acquisitions;(iv) connection charge; (v) minority share; (vi) other.

A detailed description of the differences and aquantification of their effects can be found in Note 39 of the Notes to theConsolidated Financial Statements.

***Critical Accounting Policies under U.S. GAAP***

In order to prepare the reconciliation of ourconsolidated financial statements to U.S. GAAP, the following criticalaccounting policies require significant judgments and estimates different fromthose used for IFRS.

*Valuation of intangible assets*

When assessing impairment of intangible assets withdefinite life and tangible fixed assets, and to calculate any write-downamount, IFRS mandate that a future discounted cash flow be calculated andcompared with the carrying value of the related asset. According to U.S. GAAP,a non-discounted cash flow is calculated to assess the need for any impairmentwrite-down and then a write down to fair value is made if an initial impairmenthas been indicated. Management has to make certain assumptions and estimateswhich may have a significant effect on the evaluation of the recoverability ofan asset. If the actual outcome varies from these estimates or if Tele2 changesthese estimates in the future, this may have considerable impact on the futureresults.

*Revenue Recognition*

According to IFRS, connection charges are recognizedas revenue when collected at the inception of a contract.

According to U.S. GAAP, for all contracts entered intoprior to 2004, connection charges collected at the inception of a servicecontract were deferred and recognized as revenue over the period in which thereis a customer relationship which was approximately three years. Effective fornew contracts entered into from January 1, 2004, U.S. GAAP changed inregards to the Group’s accounting for revenue arrangements containing multipleelements which are required to be treated as separate units of accounting as aresult of the adoption of Emerging Issues Task Force Issue (“EITF”) No. 00-21(“EITF 00-21”). Where a revenue arrangement contains multiple elementswhich are determined to require separate accounting, total revenue under thecontract is allocated and measured using units of accounting within thearrangement based on relative fair values.

The application of EITF 00-21 by the Group torevenue arrangements containing multiple elements which are required to betreated as separate units of accounting generally results in the connectioncharge being recognized as revenue at the inception of the contract, togetherwith any proceeds received pertaining to the delivery of a mobile handset.

EITF 00-21 did not change the Group’s U.S. GAAPaccounting for connection charges collected on revenue arrangements which aredetermined not to contain multiple elements which require separateaccounting—that is, the Group continues to defer and amortize connectioncharges for such arrangements.

Connection charges received on all contracts prior to2004 continue to be deferred and amortized over the estimated life of thecustomer relationship. The adoption of EITF 00-21 during 2004 did nothave a significant effect on the Group’s consolidated financial position orresults of operations under U.S. GAAP.

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**Effects of New AccountingPronouncements**

***U.S. GAAP***

A detailed description of new accountingpronouncements under US GAAP can be found in Note 39 of the Notes to theConsolidated Financial Statements.

**Consolidated Results ofOperations**

***Acquisitions and Divestitures***

During the three years ended December 31, 2005,we acquired shares in a number of companies and, as a consequence, thefinancial results of many of these companies were consolidated in our financialstatements for the first time during that three-year period. The principalconsolidated subsidiaries acquired by us during the three years ended December 31,2005, and the dates on which these entities became consolidated subsidiaries,are set out below.

·                  *Tele2 UK and Tele2 Ireland (market area UK & Benelux)*.In December 2005, we divested all of our shares in Tele2 UK CommunicationLtd in UK and Tele2 Telecommunication Service Ltd in Ireland. Tele2 UK andTele2 Ireland was a consolidated subsidiary up to December 16, 2005. SeeItem 4: “Information on the Company—Recent Acquisitions andDivestitures—Divestment of Tele2 UK and Tele2 Ireland (UK and Ireland).”

·                  *Lipetsk (market area Baltic & Russia)*. In November 2005,we acquired Lipetsk Mobile CJSC in Russia. Lipetsk became a consolidated subsidiaryon November 10, 2005. See Item 4: “Information on the Company—RecentAcquisitions and Divestitures—Acquisition of Lipetsk (Russia).”

·                  *OU Trigger Software (market area Baltic & Russia)*.In October 2005, we divested all of our shares in OU Trigger Software inEstonia. Trigger was a consolidated subsidiary up to October 31, 2005. SeeItem 4: “Information on the Company—Recent Acquisitions andDivestitures—Divestment of Trigger (Estonia).”

·                  *Versatel (market area UK & Benelux)*. In October 2005,we acquired 80.29% in the public company Versatel Telecom International N.V. inthe Netherlands and Belgium. Versatel became a consolidated subsidiary on October 14,2005. See Item 4: “Information on the Company—Recent Acquisitions andDivestitures—Acquisition of Versatel (the Netherlands and Belgium).”

·                  *Comunitel (market area Southern Europe)*. In September 2005,we acquired 99.96% in Comuntel Globel S.A. in Spain. Comunitel became aconsolidated subsidiary on September 31, 2005. See Item 4: “Information onthe Company—Recent Acquisitions and Divestitures—Acquisition of Comunitel(Spain).”

·                  *Proceedo (market area Services)*. In September 2005, wedivested all of our shares in Proceedo Solutions AB in Sweden. Proceedo was aconsolidated subsidiary up to September 14, 2005. See Item 4: “Informationon the Company—Recent Acquisitions and Divestitures—Divestments of ProceedoSolutions (Sweden).”

·                  *Econophone (market area Southern Europe)*. In July 2005,we acquired Econophone AG in Switzerland. Econophone became a consolidatedsubsidiary on July 20, 2005. See Item 4: “Information on theCompany—Recent Acquisitions and Divestitures—Acquisition of Econophone(Switzerland).”

·                  *Tiscali (market area Nordic)*. In January 2005, weacquired Tiscali in Denmark. Tiscali became a consolidated subsidiary on January 31,2005. See Item 4: “Information on the Company—Recent Acquisitions andDivestitures—Acquisition of Tiscali (Denmark).”

·                  *UTA (market area Central Europe)*. In December 2004, weacquired UTA in Austria. UTA became a consolidated subsidiary on December 31,2004, with no effect on the income statement during 2004. See Item 4: “Informationon the Company—Recent Acquisitions and Divestitures—Acquisition of UTA(Austria).”

·                  *Tele2 Estonia and Tele2 Lithuania (market area Baltic & Russia)*.In July 2004, we acquired the remaining 10% of Tele2 Holding AS in theBaltic region, with the result that we now own all the shares in Tele2 Estoniaand Tele2 Lithuania. See Item 4: “Information on the Company—RecentAcquisitions and Divestitures—Acquisition of remaining shares of Tele2 Estoniaand Tele2 Lithuania”.

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·                  *Alpha Telecom (market area Southern Europe).* In February 2003,we acquired Alpha Telecom in the UK. The subsidiaries of the Alpha Group becameconsolidated subsidiaries on February 15, 2003. See Item 4: “Informationon the Company—Recent Acquisitions and Divestitures—Acquisition of AlphaTelecom (United Kingdom).”

The income statement in 2005 was affected byacquisition of Comunitel and Versatel in September and October 2005.Tele2’s result for 2005 includes operating revenue of SEK 397 million and SEK942 million related to Comunitel and Versatel respectively, and a net loss ofSEK -65 million and SEK-65 million, respectively. The other threeacquisitions (Tiscali, Econophone and Lipetsk) are included in Tele2’soperating revenue of SEK 347 million and the net profit of approximately SEK -44million. Since Tiscali has merged with Tele2 Denmark, only an estimate has beenmade of how large a share relates to the acquired Tiscali operations. Thedivested operations, Tele2 UK and Tele2 Ireland, have affected Tele2’soperating revenue for 2005 with SEK 517 million and net profit by SEK -318million beyond the capital gain of SEK 137 million. The other two divestedoperations (Proceedo and Trigger) has affected Tele2’s operating revenue by SEK26 million and net profit by SEK 1 million beyond the capital gain recorded ofSEK 10 million.

According to a pro forma analysis for operatingrevenue, based on if acquired and divested operations during 2005 instead hadbeen acquired and divested January 1, 2005, shows operating revenue for2005 of approximately SEK 53.4 billion compared with reported revenues for 2005of SEK 49.9 billion. Additional pro forma figures are stated in Note 16 of theNotes to the Consolidated Financial Statements.

The acquisition of UTA during 2004 did not have anyeffect on the income statement in 2004 since the acquisition became aconsolidated subsidiary on December 31, 2004. The acquisition of theremaining shares in Estonia and Lithuania will have no material effect on theincome statement since the companies already were consolidated subsidiaries,and the acquisition will only affect minority interests.

The income statement in 2003 was affected by theacquisition of Alpha Telecom in February 2003. The contribution of AlphaTelecom in 2003 amounted to SEK 919 million of our aggregate revenues in 2003.

***Results of Operations for 2005 as Comparedwith 2004***

*Operating Revenue*

Tele2 had total operating revenue of SEK 49,943 millionin 2005, compared with SEK 43,033 million in 2004.

Our total operating revenues are generated from oursix market areas. The market area Southern Europe represented 29% of totalrevenues for our Group in 2005 and the Nordic market area represented 30%.

The contribution of each of our market areas to ourtotal revenues in 2005 was as follows:

|                           | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **2004**                                   | ** ** | **Net change 2004-2005** | ** ** | **2005** | ** ** |
| ** **                | ** ** | ** **                                 | ** ** | **(SEK in millions)** | ** ** | ** ** | ** ** |
| Nordic                    |       | 13,467                                     |       | 1,607 |   | 12 | % | 15,074 |   |
| Baltic &  Russia |       | 3,297                                      |       | 937 |   | 28 | % | 4,234 |   |
| Central Europe            |       | 5,058                                      |       | 3,320 |   | 66 | % | 8,378 |   |
| Southern Europe           |       | 14,152                                     |       | 106 |   | 1 | % | 14,258 |   |
| UK &  Benelux    |       | 6,536                                      |       | 870 |   | 13 | % | 7,406 |   |
| Services                  |       | 523                                        |       | 70 |   | 13 | % | 593 |   |
| **Total**                 | ** ** | **43,033**                                 | ** ** | **6,910** | ** ** | **16** | **%** | **49,943** | ** ** |

 

Nordic represented SEK 15,074 million affected byone-off items of SEK 134 million related to a dispute with TeliaSonera inSweden (2004: SEK 13,467 million). Nordic increased by 12%. For the Nordicmarket area, mobile telephone revenues increased by 14% from 2004 to 2005, andthe number of customers, before changed method of calculation according to Note4 of the Notes to the Consolidated Financial Statements, increased during thesame period by 7%. Revenues from fixed telephony and internet increased by 7%in 2005, compared with a decrease of -6% in the number of customers in2005. The 

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introduction of new products such as Line Rental inSweden outweighed the negative effect of a declining customer base. Tele2Sweden is the largest operation in the Nordic market area. Tele2 Sweden has 3.6million mobile telephony customers.

Baltic & Russia experienced growth of 28%, orSEK 937 million, in 2005. The total number of customers in the Baltic &Russian market area increased by 71% during 2005. Most of the customer growthcame from Russia, where a lower ARPU diluted the corresponding effect onrevenue growth for the region.

In 2005, Central Europe revenues increased by 66%,Southern Europe increased by 1% and UK & Benelux increased by 13%. The2005 acquisition of Comunitel and Versatel impacted the operating revenue of2005 with SEK 397 million and SEK 942 million respectively. Operating revenuefor 2005 was also impacted by the UTA operation acquired in the end of 2004.The total number of customers, before changed method of calculation accordingto Note 4 of the Notes to the Consolidated Financial Statements, in the sameperiod increased by 15% for Central Europe, 3% for Southern Europe anddecreased by -3% for UK & Benelux.

The contribution of each of our business area to ourtotal revenues in 2005 was as follows:

 

|                                      | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                   | ** ** | **Net change 2004-2005** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | ** **                                 | ** ** | **(SEK in millions)** | ** ** | ** ** | ** ** |
| Mobile telephony                     |       | 11,974                                     |       | 2,698 |   | 23 | % | 14,672 |   |
| Fixed  telephony & internet |       | 32,978                                     |       | 4,299 |   | 13 | % | 37,277 |   |
| Cable TV                             |       | 224                                        |       | 12 |   | 5 | % | 236 |   |
| Other operations                     |       | 742                                        |       | 117 |   | 16 | % | 859 |   |
| Non-recurring  items                 |       | -                                          |       | 134 |   |   |   | 134 |   |
| Intra-Group  sales                   |       | -2,885                                     |       | -350 |   |   |   | -3,235 |   |
| **Total**                            | ** ** | **43,033**                                 | ** ** | **6,910** | ** ** | **16** | **%** | **49,943** | ** ** |

 

Our total operating revenues are generated from fourbusiness areas, of which Fixed telephony & internet represented 70% ofrevenues for our group and Mobile telephony represented 28% in 2005. CableTVand Other operations represent 0% and 2% respectively of total revenue. Fixedtelephony & internet accounted for 60% of total revenue increase in2005, fuelled by the push into broadband and the acquisitions supporting thisstrategy. Mobile telephony accounted for 38% of the revenue growth, half ofwhich was generated by our operations in Sweden, Norway and Russia. See Note 4 ofthe Notes to the Consolidated Financial Statements.

*Operating Costs*

Total operating costs increased by 20% from SEK 38,784million in 2004 to SEK 46,524 million in 2005. Operating costs consisted, in2005, of 64% costs of service sold, 27% selling costs and 9% administrativeexpenses.

The split of each operating costs in 2005 was asfollows:

 

|                                          | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                   | ** ** | **Net change 2004-2005** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | ** **                                 | ** ** | **(SEK in millions)** | ** ** | ** ** | ** ** |
| Cost of services  sold (“CoS”) |       | 24,889                                     |       | 4,812 |   | 19 | % | 29,701 |   |
| Selling &  marketing expenses   |       | 10,738                                     |       | 1,831 |   | 17 | % | 12,569 |   |
| Administrative  expenses                 |       | 3,157                                      |       | 1,097 |   | 35 | % | 4,254 |   |
| **Total**                                | ** ** | **38,784**                                 | ** ** | **7,740** | ** ** | **20** | **%** | **46,524** | ** ** |

 

Operating costs in relation to operating revenues wasas follows:

 

|                                          | ** ** | **Year ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(SEK in millions)**        | ** ** |
| Cost of services  sold (“CoS”) |       | 58                                     | %          | 59 | % |
| Selling &  marketing expenses   |       | 25                                     | %          | 25 | % |
| Administrative  expenses                 |       | 7                                      | %          | 9 | % |
| **Total**                                | ** ** | **90**                                 | **%**      | **93** | **%** |

 

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The increased CoS were driven by the market areas wherewe experienced strong revenue growth. In all of these market areas CoS isinfluenced by two factors: continually decreasing interconnect and networkcapacity costs, offset by the steadily increasing volume growth. Selling costper gross new customer increased in 2005 compared to 2004. We expect this costto continue to increase as markets mature, and customers become more reluctantto change telecommunications operator, combined with our move towards morecomplex ULL services.

Administrative expenses for 2005 increased by 35%driven partly by the increased revenue and partly by the acquired companies,whose administrative expenses in relation to revenue was higher than theaverage Tele2 administrative expenses in relation to revenue.

*Other Operating Revenue and OtherOperating Expenses*

Other operating revenue increased during 2005 by SEK139 million to SEK 231 million, mainly due to a capital gain of SEK 147 millionin 2005 related to the sale of Tele2 UK, Tele2 Ireland, Proceedo and Triggercompared to a sale last year of SEK 26 million of the cable TV operation inEstonia, and increased exchange rate gains from operations of SEK 22 million.See Note 6 of the Notes to the Consolidated Financial Statements.

Other operating expenses remained stable at SEK -40million in 2005 compared to 2004. This development was mainly attributable to alower exchange rate loss from operations of SEK 10 million and a higher capitalloss of SEK -10 million relating to disposal of fixed assets. See Note 7of the Notes to the Consolidated Financial Statements.

*Results from Associated Companiesand Joint Ventures*

Profit in associated companies and joint ventures in2005 decreased from SEK 17 million in 2004 to SEK -100 million in 2005,mainly due to the change from profit to loss of the joint venture SvenskaUMTS-nät AB (SUNAB) in Sweden. See Note 8 of the Notes to the ConsolidatedFinancial Statements. In a short term perspective, SUNAB’s revenues from Tele2and TeliaSonera are set to balance the operating costs and thus achieve aneutral operating cash flow. To the extent SUNAB’s depreciation costs are notmatched by corresponding loan repayments, SUNAB will show a negative profit.

*Operating Profit*

Operating profit was SEK 3,510 million (2004: SEK4,318 million), a decrease of SEK 808 million, with an operating profit marginof 7.0% (2004: 10.0%).

Depreciation and amortization included in operatingprofit amount to SEK 2,328 million in 2004 and SEK 2,968 million in 2005.Depreciation and amortization for 2005 are affected by SEK 304 million due toimpairment in fixed assets of which SEK 263 million is related to impairment ofgoodwill in Alpha Telecom. The reason for this impairment was primarily achange in the rate of VAT which resulted in lower margins. Information regardingimpairment assumptions and calculations is stated in Note 14 of the Notes tothe Consolidated Financial Statements. Depreciation and amortization for 2004are affected by SEK 378 million due to the tax effect of the year’s valued losscarry-forwards related to acquired loss carry-forwards which at thetime of acquisition were valued at zero. This value has reduced the book valueof goodwill through Group depreciation/amortization in the income statement.See Note 5 of the Notes to the Consolidated Financial Statements.

The operating profit margin of each of our marketareas in 2005 was as follows:

|                           | ** ** | **Year ended  December 31,** | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(SEK in millions)**        | ** ** |
| Nordic                    |       | 22                                     | %          | 19 | % |
| Baltic &  Russia |       | 14                                     | %          | 11 | % |
| Central Europe            |       | -6                                     | %          | 1 | % |
| Southern Europe           |       | 10                                     | %          | 4 | % |
| UK &  Benelux    |       | -5                                     | %          | -7 | % |
| Services                  |       | 6                                      | %          | 1 | % |
| **Total**                 | ** ** | **10**                                 | **%**      | **7** | **%** |

 

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The operating profit margin in the Nordic market areadecreased from 22.2% in 2004 to 19.1% in 2005. Mobile telephony operatingprofit margin in the Nordic market area decreased to 27.4% (2004: 32.4%), dueto margin pressure on the highly profitable Swedish market. Fixed telephony andinternet operating profit margin decreased to 6.0% (2004: 9.6%), depressed bythe one-time costs of converting the Swedish fixed line customer stock to LineRental customers.

Baltic & Russia had a mobile telephonyoperating profit margin of 12.0% in 2005 (2004: 14.2%), reduced as Russia’srelative weight increases.

Central Europe had a fixed telephony &internet operating profit margin of 1.9% in 2005, compared with 2.2% in 2004.Southern Europe had a fixed telephony & internet operating profitmargin of 6.4% in 2005, compared with 10.2% in 2004. The reduction was partlydue to margin pressure in fixed telephony in France, and partly due toincreased marketing costs for internet services in France. UK &Benelux had a mobile telephony operating profit margin of 2.8% in 2005,compared to 4.3% in 2004. The decline in 2005 was affected by the reduction ofthe relative weight of highly profitable Tango in Luxembourg partially offsetby an improved fixed telephony and internet operating profit margin of -4.2%,compared to -5.6% in 2004, due in part to the decreased exposure to theUK market.

*Net Interest Expenses and OtherFinancial Items*

Net interest expenses and other financial itemstotaled SEK -383 million in 2005 (2004: SEK -111 million), anincrease cost of SEK -272 million.

Interest income decreased from SEK 99 million in 2004to SEK 89 million in 2005. See Note 9 of the Notes to the ConsolidatedFinancial Statements.

Interest costs decreased with SEK 86 million comparedwith 2004, of which SEK 55 million relates to a non-recurring cost in 2004related to the expensing of the previous loan facility’s remaining prepaidfinancing costs, and SEK 28 million relates to decreased interest on loans (-9%).The average interest rate applied to debt outstanding decreased to 3.7%compared to 4.4% for the same period in the prior year. See Note 10 of the Notesto the Consolidated Financial Statements.

Other financial items amounted to SEK -186million in 2005 compared to a positive amount of SEK 162 million in 2004. Thechange of SEK -348 million are mainly due to a capital gain from the saleof shares in Song Networks of SEK 171 million in 2004, and increased exchangerate differences cost on financial assets and liabilities of SEK -189million. See Note 11 of the Notes to the Consolidated Financial Statements.

*Profit/Loss after Financial Items*

Profit after financial items amounted to SEK 3,127million (2004: SEK 4,207 million).

*Tax on Profit for the Year*

Income tax expense on profit for the year amounted toSEK -786 million (2004: SEK -779 million), which was positivelyaffected by SEK 340 million (2004: SEK 1,212 million) related to the taxportion of the accumulated losses valued for the first time.

The weighted average tax rate was 29.3% (2004: 28.4%).The increase compared with previous year is due to the fact that increasinglymore subsidiaries in continental Europe with a higher tax rate than the moremature operations in Nordic and Baltic are starting to report positive results.The effective tax rate for 2005 was impacted by a reserve for tax disputes ofSEK -162 million and non-taxable gain from sale of shares in subsidiariesof SEK 515 million.

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*Net profit for the Year*

Net profit in 2005 was SEK 2,341 million (2004: SEK3,428 million). Earnings per share in 2005 were SEK 5.29 (2004: SEK 7.73) on adiluted basis (See Note 23 of the Notes to the Consolidated FinancialStatements).

**Liquidity and Capital Resources**

Our primary sources of liquidity have been cashgenerated by our operations, mainly from our Swedish operations, but several ofour other operations are also generating positive cash flow. Liquidity is alsoprovided by our secured long-term bank loans from external lenders. As of December 31,2005, we had cash and cash equivalents of SEK 4.0 billion and availableliquidity of SEK 8.9 billion after reductions for restricted funds of SEK 0.9billion and the addition of un-utilized overdraft facilities and credit linesof SEK 5.8 billion. See “—Borrowings”. In the immediate future we anticipatethat our primary needs will be investments in the Russian and Croatianoperations, expansion of our ADSL and ULL capabilities and in capitalexpenditures and marketing expenditures in both fixed and mobile business areasin the market areas where we are experiencing the strongest growth.

In 2006 we paid a dividend to an amount of SEK 1.75per share with respect to the fiscal year 2005 (2004: distribution of SEK 5 pershare), or an aggregate amount of SEK 776 million (2004: SEK 2,213 million).

***Cash Flow***

The following table sets forth certain informationabout the cash flows of the Tele2 Group for the periods indicated.
| ** **                                                    | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(SEK in millions)**            | ** ** |
| Cash flows from  operations before changes in working capital |       | 6,228                                      |       | 5,659 |   |
| Change in working  capital                                    |       | (352                                       | )          | (172 | ) |
| **Net cash from operating  activities**                       | ** ** | **5,876**                                  | ** ** | **5,487** | ** ** |
| Cash flow from  investing activities                          |       | (3,417                                     | )          | (11,176 | ) |
| **Cash flow after investing  activities**                     | ** ** | **2,459**                                  | ** ** | **(5,689** | **)** |
| Cash flow from  financing activities                          |       | (3,074                                     | )          | 7,395 |   |
| **Net change in cash and cash  equivalents**                  | ** ** | **(615**                                   | **)**      | **1,706** | ** ** |
| ** **                                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** |
|  Cash and cash equivalents at the end of year            |       | 2,148                                      |       | 3,979 |   |
| *of which, restricted funds*                                  | * *   | *365*                                      | * *   | *892* | * * |

 

Net cash provided by operating activities decreased bySEK 389 million to SEK 5,487 million in 2005 (2004: SEK 5,876 million). Thedecrease of SEK 389 million consists of a decrease of SEK 569 million from cashflows from operations, and an increase of SEK 180 million from change inworking capital compared with last year. The changes of cash flow fromoperations are mainly due to increased tax payments of SEK 400 million as aresult of improved profits and fully used loss carry forwards. Change inworking capital compared with last year, SEK 180 million, is mainly due toincreased operating liabilities of SEK 687 million with positive effect on cashflow, but also decreased operating assets of SEK -321 million andmaterial and supplies of SEK -186 million. Change of operatingliabilities are very much impacted by the timing of payments of interconnectcharges from other operators, and therefore fluctuates between periods**.**

Cash used in investing activities of SEK 11,176million (2004: SEK 3,417 million) primarily went toward the acquisition of newbusinesses and capital expenditures relating to infrastructure. Investingactivities in 2005 compared with 2004 increased SEK 7,759 million, mainly dueto net acquisition of new businesses of SEK5,680 million and increasedinvestments in intangible and tangible assets of SEK 2,078 million comparedwith the prior year. See additional information in Note 16 and Note 14 of theNotes to the Consolidated Financial Statements.

Net cash provided by financing activities of SEK 7,395million (2004: SEK -3,074million) increased SEK 10,469 million in 2005compared with 2004 mainly due to a new loan facility, but also increased due todividends paid in 2005 of SEK 1,770 million. See “—Borrowings.”

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***Borrowings***

On October 10, 2005, the existing loan facilitywas increased from SEK 7.0 billion to SEK 19.1 billion.

In October 2005, Tele2 Sverige AB signed anagreement with a number of banks regarding a loan facility of SEK 19.1 billion,divided into SEK 14.1 billion expiring in November 2009 and SEK 5.0billion expiring in November 2006 with the opportunity of extending oneyear at a time. The interest margin of the long-term portion amounts to 25-50basis points, depending on the debt/equity ratio and on the short-term partamounting to 20 basis points. The loan facility will be used for financingoperations and for potential acquisitions. The loan can be used in severalcurrencies, at present USD, SEK, EUR and GBP. The loan facility is guaranteedby a number of banks and financial institutions. See Item 10: “AdditionalInformation—Material Contracts.”

The loan in Banque Invik relates to loans to Tele2’soperation in Russia, Croatia and Turkey. Tele2 has deposited a correspondingamount in Banque Invik. The loan in SEB relates to mobile network investmentsin Russia.

The following table summarizes our current externalinterest-bearing indebtedness outstanding as of December 31 of theyears indicated.

 
| ** **                        | ** ** | **December 31,**           | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(SEK in millions)** | ** ** |
| Five-year  Bank Facility          |       | 3,940                           |       | 13,412 |   |
| Banque Invik                      |       | 300                             |       | 822 |   |
| SEB                               |       | 225                             |       | 206 |   |
| Eredivisie CV                     |       | —                          |       | 592 |   |
| Samsung                           |       | —                          |       | 180 |   |
| Financial leases                  |       | 505                             |       | 450 |   |
| Other                             |       | 43                              |       | 49 |   |
| **Total**                         | ** ** | **5,013**                       | ** ** | **15,711** | ** ** |
| ** **                        | ** ** | ** **                      | ** ** | ** ** | ** ** |
| *Of which mature within one year* | * *   | *3,304*                         | * *   | *6,259* | * * |

 

***Restrictive Covenants***

The five-year loan facility is based on requirementsinvolving the fulfillment of certain key financial ratios. Tele2 expects tofulfill these requirements.

The five year loanfacility is based on requirements involving the fulfilment of two financial keyratios;

(1)            totalnet debt in relation to operating profit before depreciations, amortization andresult from associated companies and joint ventures less restructuring costsrelated to acquisitions, and

(2)            inrelation to operating profit before depreciations, amortization and result fromassociated companies and joint ventures less restructuring costs related tointerest expense.

The five-year loan facility entails a certaincurtailment of Tele2 Group’s potential to raise other external loans and thepotential to provide assets as collateral.

The five-year loan facility also entails some generalcovenants. The constraints are mainly for negative pledges, disposal of assets,financial indebtedness and acquisitions. The definitions of the constraints arebroad and put no material limit on the business of Tele2.

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***Working Capital and Investments***

The following table summarizes the capital resourcesof the Tele2 Group for the periods indicated.
| ** **                 | ** ** | **Year ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                 | ** ** | **(SEK in millions)**            | ** ** |
| Change in working  capital | ** ** | **(352**                                   | **)**      | **(172** | **)** |
| Capital  expenditures(1)   | ** ** | **(1,562**                                 | ** ** | **(3,640** | **)** |
|                       | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| *Split  by Market Area:*   |       |                                       |       |   |   |
| Nordic                     |       | (427                                       | )          | (596 | ) |
| Baltic &  Russia  |       | (684                                       | )          | (1,539 | ) |
| Central Europe             |       | (156                                       | )          | (272 | ) |
| Southern Europe            |       | (119                                       | )          | (685 | ) |
| UK &  Benelux     |       | (117                                       | )          | (500 | ) |
| Services                   |       | (59                                        | )          | (48 | ) |
|                       | ** ** | **(1,562**                                 | **)**      | **(3,640** | **)** |
|                       | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| *Split  by Business Area:* | * *   | * *                                   | * *   | * * | * * |
| Mobile Telephony           |       | (1,063                                     | )          | (1,807 | ) |
| Fixed and  internet        |       | (432                                       | )          | (1,768 | ) |
| Cable TV                   |       | (7                                         | )          | (17 | ) |
| Other Operations           |       | (60                                        | )          | (48 | ) |
|                       | ** ** | **(1,562**                                 | **)**      | **(3,640** | **)** |

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(1)             Notincluding acquisitions and purchases of assets and shares from Group companiesand changes in long-term lending.

We have incurred, and expect to continue to incur,capital expenditures in order to build and expand our operations. The vastmajority of our capital expenditures over the past three years have consistedof telecommunications infrastructure costs and the acquisition of licenses. Weexpect significant investment in the market areas where we are experiencing thestrongest growth. The continued build out of GSM networks in our Russian andCroatian operations as well as our investments into ADSL and ULL willnecessitate capital expenditures. Lastly, we are continually evaluatingopportunities to enhance or expand our telecommunications activities throughjoint ventures with strategic partners and also through targeted acquisitions,which may require us to commit substantial parts of our cash flow fromoperations and/or incur additional indebtedness.

If future operating results are lower and capitalexpenditures are higher than expected or if anticipated cost savings in ourbusinesses are not achieved or investments are accelerated beyond currentlyprojected levels, additional financing may be necessary in order to funddevelopment and operations or to service the principal and interest repaymentobligations under our external financing arrangements.

*Mobile Telephony*

We plan to expand our mobile telecommunicationsnetwork in order to meet anticipated growth in the number of mobile customersand to add new services. We anticipate that significant additional investmentin our mobile telecommunications networks will be required. Additionalexpenditures, which consist primarily of dealer commissions and relatedincentives, will also be necessary to attract new mobile customers. We believethat additional capital expenditures relating to infrastructure will beprincipally based on projections as to where it would be most profitable toincrease capacity and quality of coverage.

In March 2001, we signed an agreement to form ajoint UMTS network company with TeliaSonera in Sweden. We decided on the jointventure with TeliaSonera as the most effective way to limit our costs inbuilding the necessary infrastructure and generate a more rapid return on ourinvested capital. Both we and TeliaSonera can use our existing GSM network as abase upon which to build the new network, reducing the need for newtransmitting masts and reducing the environmental impact of the build out. Thejoint venture is 50% owned by each party, through both equity and guarantees ofthe financing obtained by the joint venture. During 2005, an agreement was madewith a banking consortium to reduce the total loan facility for SvenskaUMTS-nät AB from SEK 7 billion to SEK 5.3 billion. We and TeliaSonera each guaranteeany amounts outstanding under this loan facility up to the extent of our 50%interest in the joint venture, or SEK 2.7 billion. The joint venture will buildand maintain 

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the UMTS network and willown the license. We will continue to compete with TeliaSonera for customers, onthe basis of both prices and services offered. The terms of the joint venturewere approved by the relevant competition authorities in March 2002.

*Fixed-Line and internet*

We expect to increase capital expenditures related toADSL and ULL. Depending on deregulation and market conditions, Tele2 willinvest into ADSL and ULL where we expect such investments will generate anadequate return.

*Cable TV*

The relatively small investments into Cable TV will bedirected towards digitalization. This will enable Tele2 to offer not only TVservices, but also voice services and data services (Triple play), via thecable TV network.

**Contractual Obligations andCommercial Commitments**

The following table represents our contractual cashobligations and other commercial commitments as of December 31, 2005:

 
| ** **                             | ** **                       | **Payments Due by Period** | ** ** |
|----------------------------------------|----------------------------------|-------------------------------------------|------------|
| ** **                             | **Contractual Obligations** | ** **                                | ** ** | **Within  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After  5 years** | ** ** | **Total** | ** ** |
| ** **                             | ** **                       | **(SEK in millions)**           | ** ** |
| Liabilities to  Financial Institutions |                             | 5,812                                     |       | 72 |   | 8,549 |   | 12 |   | 14,445 |   |
| Other interest-bearing  liabilities    |                             | 447                                       |       | 548 |   | 102 |   | 169 |   | 1,266 |   |
| Contractual and  other commitments     |                             | 366                                       |       | — |   | — |   | — |   | 366 |   |
| Operational  Leases                    |                             | 1,462                                     |       | 1,043 |   | 362 |   | 715 |   | 3,582 |   |
| **Total Contractual Obligations**      | ** **                       | **8,087**                                 | ** ** | **1,663** | ** ** | **9,013** | ** ** | **896** | ** ** | **19,659** | ** ** |
|                                        |                                  |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

As described previously, Svenska UMTS-nät AB, a 50/50joint venture between Tele2 and Telia Sonera, has entered into a loan facilityamounting to SEK 5.3 billion. We currently guarantee utilized amounts underthat loan facility up to 50%, or a maximum of SEK 2.7 billion. As of December 31,2005, our guarantee amounted to SEK 1,475 million (2004: SEK 1,007 million).

We have only contingent liabilities of SEK 163 millionbesides the guarantee of the loan facility of Svenska UMTS-nät AB. See Note 30of the Notes to the Consolidated Financial Statements. The Group’s pledgedassets of SEK 963 million (2004: SEK 430 million) are mainly restricted cash.See Note 29 of the Notes to the Consolidated Financial Statements.

***Tax Loss Carry-forwards***

A deferred tax asset is reported for loss carry-forwardsonly to the extent that it is considered likely that the loss carry-forwardscan be utilized against future profits. According to this principle, losses innewly started operations are not offset against profits in more established operationsfor tax purposes.

Total losses carried forward for the Group as of December 31,2005, amounted to SEK 17,679 million (2004: SEK 13,275 million), of which SEK15,053 million (2004: SEK 10,582 million) has been recorded as deferred incometax assets and the remainder, SEK 2,626 million (2004: SEK 2,693 million), isvalued to zero. Of the total loss carry-forwards, SEK 1,399 million(2004: SEK 917 million) expires after five years or may continue to apply inperpetuity. See Note 13 of the Notes to the Consolidated Financial Statements.

***Tax disputes***

In December 2003, we announced that the taxauthorities’ review of our financial accounts for 2001 had been completed andthat the Swedish tax authorities wished to change our taxation. In 2000, weacquired a majority interest in the listed company Société Européenne deCommunication S.A. (“SEC”). Because SEC’s operations were restructured, anexternal valuation was 

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carried out, and thisindicated a fall in value. The operations in SEC were therefore transferred atthis reduced value. It was for this realized loss that we claimed a deduction.

The tax authorities’ announcement about changing ourtaxation was expected, as large sums are involved. However, We considered itremarkable that the assessment was made with the reference that there shouldnot have been an actual fall in the value of SEC, despite the fact that theindependent valuation, as well as valuations carried out by analysts and othersector observers at that time, showed that there had actually been a decline inthe value of SEC. We decided to request a reinvestigation from the same localtax authority and an explanation of the grounds for their decision, which thetax authorities made in December 2004.

In October 2005 Tele2 submitted a supplementarystatement since the tax authorities did not provide their own statement. Noinformation has been presented changing Tele2’s opinion that they fulfill therequirements for submission of evidence. Tele2’s opinion is still that thededuction claimed will be finally approved, and we have now lodged an appealwith the country administrative court.

Loss carry-forwards in Tele2 questioned by the taxauthorities with regard to this correspond to a tax effect of SEK 3,910million. We are of the opinion that the disputes will be settled in our favor,which is why a contingent tax liability has not been recorded for the amount oflosses utilized. Nonetheless, we cannot be certain of a favorable result, andour financial results would be adversely impacted by an unfavorable result inthis matter.

Other tax disputes involving Tele2 AB amount to SEK 21million (2004: SEK 183 million) at December 31, 2005. We are convincedthat these disputes will be settled in Tele2’s favor and, accordingly, acontingent tax liability has not been recorded for the amount of lossesutilized.

***Foreign Exchange***

Our results are affected by fluctuations in exchangerates. Currently, companies reporting in Swedish kronor account for 21% (2004:23%) of the Group’s operating revenue. Companies using Euro account for 52%(2004: 52%). See Note 12 of the Notes to the Consolidated Financial Statements.

In telecommunications operations a currency riskarises in connection with international call traffic, since a liability or areceivable is created between Tele2 companies and foreign operators. In mobiletelephony these transactions are calculated in SDRs (Special Drawing Rights, acurrency substitute) but are invoiced and paid in EUR.

Currency exposure arising as a result of thetranslation of foreign operations is limited by the Group’s borrowings incurrencies that reflect the net investment in these operations. The five-yearloan facility is denominated in USD, SEK, EUR and GBP. The currency exposureregarding net investments in foreign operations/subsidiaries is covered andinsured in part through a loan facility in the same currency.

***Off Balance Sheet Arrangements***

Except for the financial guarantee issued for SvenskaUMTS-nät AB’s loan facility agreement discussed above in “Contractual Obligations”there are no off-balance sheet arrangements that have or are reasonably likelyto have a current or future effect on our financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources that is material to investors.

**Trend Information**

Our continental European operations are in adevelopment stage during which we expect them to produce lower margins than ourmore mature operations. In the longer term, however, we anticipate that ourcontinental European margins will improve as these operations mature. We alsohope to see the continuation of the trend to lower interconnection rates. Webelieve that the negative effects resulting from a decrease in our interconnectrevenues in respect of our mobile networks will be offset by the reducedinterconnect costs in respect of our fixed and mobile networks, as well as ouroperations in general, and by the trend toward higher internal efficiencythrough synergies across our businesses.

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The markets in which we operate are evolving. Certainof our markets have experienced significant consolidation among competitors inrecent periods. As a result, the extreme competitive pressures that have been ahallmark of the European telephony markets have eased to some extent. We expectthis trend toward consolidation to continue.

A number of countries in which we operate joined theEuropean Union on May 1, 2004, and other countries where we operate mayjoin the EU in the future. When countries outside the EU prepare for potentialmembership, one area of preparation is the deregulation of thetelecommunications sector. Countries inside the EU still have additional stagesof deregulation to undertake in connection with fully adopting EU policies. Weexpect these trends towards telecommunications deregulation to benefit ouroperations.

**Inflation**

Management believes that the effect of inflation wasnot material to our results of operations or financial condition during the twoyears ended December 31, 2005.

 

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**Item 6: Directors, SeniorManagement and Employees**

**Directors**

Under the Swedish Companies Act, our board ofdirectors is responsible for the organization of Tele2 and the management ofits affairs. The board of directors is also responsible for ensuring thatsatisfactory controls exist in the areas of accounting and the management ofassets. The president is appointed by our board of directors and is in chargeof day-to-day management of Tele2 according to guidelines and instructionsissued by the board of directors. The members of the board of directors areelected at the annual general meeting of our shareholders and serve for aperiod that expires at the end of the next annual general meeting. The chairmanis elected by the board of directors. Each year the board of directors isrequired to adopt rules of procedure to govern its activities, guidelinessetting forth the division of responsibilities between the board of directorsand the president, Lars-Johan Jarnheimer, and guidelines for reportingfinancial results to the board of directors.

Jan Hugo Stenbeck was chairman of our board ofdirectors for nine years, from 1993 to 2002. He was also chairman of InvestmentAB Kinnevik, Invik & Co AB, Modern Times Group MTG AB, MillicomInternational Cellular S.A., Metro International S.A. and Transcom WorldWideS.A., each of which is a related party. Mr. Stenbeck passed away on August 19,2002. Bruce Grant served as chairman of the board of directors of Tele2 from August 2002to the annual general meeting in May 2003, when a member of our board,Sven Hagströmer, was appointed as the new chairman of the board. At the sametime John Shakeshaft and Cristina Stenbeck, the daughter of the late Jan HugoStenbeck, were appointed new members, and Lars Wohlin and Pelle Törnberg leftthe Board. In August 2003, Bruce Grant left the Board. In March 2004,Board member Håkan Ledin passed away, and Jan Loeber was appointed a new memberof the Board at the annual general meeting in May 2004. At the annualgeneral meeting in May 2005 John Hepburn was appointed as a new member ofthe Board. At the general meeting in May 2006 Vigo Carlund was appointedas the new chairman of the board, Mia Brunell, Donna Cordner and DanielJohannesson were appointed as new Board Members, and Sven Hagströmer and MarcBeuls left the Board.

The members of our board of directors and ourexecutive officers, and their respective years of birth, positions, and yearsof appointment, are as follows:

**Board Members**
| **Name**                          | ** ** | ** **                                                         | ** ** | **Position in Tele2**                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **    | ** ** | **Other Positions** | ** ** | ** ** | ** ** | **Current   Term Expires** |
|-----------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|---------------------|------------|------------|------------|----------------------------|
| Vigo Carlund  (born in 1946)      |       | Chairman of the board  since 2006. Member of the board since 1995. |       | Mr. Carlund serves  as president and CEO of Investment AB Kinnevik until August 1, 2006,  thereafter active as Board member in the company, as chairman of the board of  Metro International S.A. and Korsnäs AB, and as member of the board of  Millicom International Cellular S.A., Transcom Worldwide S.A., Modern Times  Group MTG AB and Invik & Co AB. |       | May 2007 |
| Cristina Stenbeck  (born in 1977) |       | Member of the board  since 2003.                                   |       | Mrs. Stenbeck  serves as chairman of the board of Investment AB Kinnevik and  Invik & Co AB, and board member of Metro International S.A.,  Millicom Interna-tional Cellular S.A., Modern Times Group MTG AB and Transcom  Worldwide S.A.                                                                                                                               |       | May 2007 |
| John Shakeshaft  (born in 1954)   |       | Member of the board  since 2003.                                   |       | Mr. Shakeshaft  serves as president of the Financial Institutions of ABN AMRO, chairman of  the board of the Alternative Theatre Company Ltd, board member of the Economy  Bank NV and Questair Inc., and as member of the Audit Committee of Cambridge  University.                                                                                                             |       | May 2007 |

 

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| **Name**                           | ** ** | ** **                                | ** ** | **Position in Tele2**                                                                                                                                                                                                    | ** ** | ** **    | ** ** | **Other Positions** | ** ** | ** ** | ** ** | **Current   Term Expires** |
|------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|---------------------|------------|------------|------------|----------------------------|
| Jan Loeber  (born in 1943)         |       | Member of the board  since 2004.          |       | Mr. Loeber serves  as advisor to and chairman of Interxion —SAMI, board member of Newfound  Communicaiton Inc., VinoVia B.V. and Interxion Holding B.V.                                                        |       | May 2007 |
| John Hepburn  (born in 1949)       |       | Member of the board  since May 2005. |       | Mr. Hepburn serves  as adviser to Morgan Stanley (Europe) Ltd, as chairman of the Board of  Sportfact Ltd, vice chairman of UKRD Ltd, and as member of the board of Grand  Hotel Holding AB                         |       | May 2007 |
| Mia Brunell  (born in 1965)        |       | Member of the board  since May 2006. |       | Mrs. Brunell will  serve as president and CEO of Investment AB Kinnevik as of August 1,  2006. Serves as board member of Invik & Co. AB and CTC Media, a  Russian broadcast associate company of MTG. |       | May 2007 |
| Donna Cordner  (born in 1956)      |       | Member of the board  since May 2006. |       | Mrs. Cordner  serves as board member of Millicom International Cellular S.A. and consultant  for Global Leadership Council; USAID, Private Sector and Partnership, NY                                               |       | May 2007 |
| Daniel Johannesson  (born in 1943) |       | Member of the board since May 2006.  |       | Mr. Johannesson serves as chairman of the board  of Millicom International Cellular S.A., and Carmen Systems AB, and board  member of Unibet Plc. UK and Kentor AB.                                                 |       | May 2007 |

 

**Senior Executives**

Senior executives of the operations of Tele2 are asfollows:
| **Name**                                  | ** ** | ** **                                                                                                                                   | ** ** | **Position** | ** ** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|------------|
| Lars-Johan  Jarnheimer  (born in 1960)    |       | President and chief  executive officer of Tele2 AB since 1999, and employed since 1992.                                                      |
| Håkan Zadler  (born in 1960)         |       | Executive vice  president and chief financial officer. Employed by Tele2 since 2000.                                                         |
| Anders Olsson  (born in 1969)             |       | Executive vice president,  Sales & Marketing coordinator and market area director of Central  Europe. Employed by Tele2 since 1997. |
| Johnny Svedberg  (born in 1962)           |       | Executive vice  president, chief operating officer and market area director of  Baltic & Russia. Employed by Tele2 since 1990.      |
| Niclas  Palmstierna  (born in 1973)       |       | Market area director of  Nordic and president of Tele2 Sweden. Employed by Tele2 since 1999.                                                 |
| Andrea  Filippetti  (born in 1960)        |       | Market area director of  Southern Europe and president of Tele2 Italy. Employed by Tele2 since 2000.                                         |
| Per Borgklint  (born in 1972)             |       | Market area director of  UK & Benelux and president of Tele2 Netherlands and Versatel.  Employed by Tele2 since 2000.               |
| Fredrik Linton  (born in 1966)            |       | Market area director of  Services and coordinator for Mergers & Acquisitions. Employed by  Tele2 since 2005.                        |
| Ene Raja  (born in 1964)                  |       | Director Customer  Servoces. Employed by Tele2 since 1998.                                                                                   |
| Jan Tjernell  (born in 1963)              |       | Director Legal,  Regulatory and Purchasing. Employed by Tele2 since 1994.                                                                    |
| Karl-Johan  Nybell  (born in 1968)        |       | Director Product  Implementation and New Markets. Employed by Tele2 since 1995.                                                              |
| Roger Mobrin  (born in 1968)              |       | Director Billing  Operations. Employed by Tele2 since 1995.                                                                                  |
| Björn Lundström  (born in 1965) |       | Technical Director.  Employed by Tele2 since 1991.                                                                                           |
| Ib Andersen  (born in 1955)               |       | Director Carrier Business and Revenue Assurance.  Employed by Tele2 since 2000.                                                              |

 

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**Compensation of Directors andSenior Executives**

The total aggregate salary and remuneration paid tosenior executives for the year ended December 31, 2005, was SEK 60 million(2004: SEK 53 million). In addition to the costs stated, we also incurred costsrelating to social security expenses. See Note 34 of the Notes to theConsolidated Financial Statements.

***Board of Directors***

We paid total board fees of SEK 3.4 million to ourdirectors in 2005, as decided by the annual general shareholders’ meeting in May 2005.Our service contracts with our directors have no provision for benefits upontermination of employment.

***President and CEO***

In 2005, Lars-Johan Jarnheimer, President and CEO ofTele2, received a fixed salary of SEK 11.2 million (2004: SEK 10.5 million) anda bonus of SEK 3.3 million (2004: SEK 3.3 million). The bonus was based onindividualized targets. In addition, the company made a contribution to Mr. Jarnheimer’sdefined contribution pension plan in an amount equal to 20% of his fixed basicsalary. Mr. Jarnheimer may begin to collect his pension at age 65. Theperiod of notice of termination of Mr. Jarnheimer’s employment when servedby the company is a minimum of 12 and a maximum of 18 months. Salary for aperiod of notification of 12 months would be paid to Mr. Jarnheimer in theevent he were to serve notice of termination of employment to the company.Salary and remuneration for our president are determined annually by the boardof directors following proposals from the compensation committee. See Note 34of the Notes to the Consolidated Financial Statements for additionalinformation.

***Senior Executives***

The “senior executives” group consists of 13 people(2004: 12 people) not including the president. The salaries of these executivesconsist of a fixed salary and variable bonus. During 2005, these individualscollectively received a fixed salary of SEK 25.4 million (2004: SEK 22.1 million).Their bonuses, which were based on financial benchmarks and individualizedtargets, totalled SEK 13.2 million (2004: SEK 10.5 million). Our pension plancontributions on behalf of these executives equalled SEK 2.7 million in 2005(2004: SEK 2.4 million) with SEK 2.4 million (2004: SEK 2.1 million) paid to adefined-contribution plan and SEK 0.3 million (2004: SEK 0.3 million)paid to a defined-benefit plan. These executives may begin collectingtheir pensions at age 65. The period of notice of termination of employmentwhen served by the company is a minimum of six and a maximum of 12 months.Salary for a period of notification of six months is received if a seniorexecutive serves notice of termination of employment to the company.

During 2005, provision of SEK 14 million (2004: SEK 13million) was made for bonuses to senior executives and key personnel in theGroup. For additional information on executive compensation see Note 34 to theNotes of the Consolidated Financial Statements.

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**Share and Option Ownership**

The following table sets forth information known to uswith respect to the ownership of our ordinary shares by each of the members ofthe board and our senior executives as of December 31, 2005.
| ** **                | ** ** | **Number of Shares** | ** ** | **Percentage**    | ** ** | ** **        | ** ** |
|---------------------------|------------|--------------------------------|------------|-------------------|------------|-------------------|------------|
| **Name**                  | ** ** | ** **                     | ** ** | **Series A** | ** ** | **Series B** | ** ** | **Capital** | ** ** | **Voting** | ** ** | **Number of  Options** | ** ** |
| ***Board***               |       |                           |       |              |       |              |       |   |   |   |   |
| Sven Hagströmer      |       | —                         |       | 1,215,000         |       | —            |       | — |   | — |   |
| Vigo Carlund              |       | —                         |       | 24,191            |       | —            |       | — |   | — |   |
| Cristina  Stenbeck        |       | —                         |       | —            |       | —            |       | — |   | — |   |
| Marc J.A. Beuls           |       | —                         |       | 2,820             |       | —            |       | — |   | — |   |
| John Shakeshaft           |       | —                         |       | —            |       | —            |       | — |   | — |   |
| Jan Loeber                |       | —                         |       | 22,500            |       | —            |       | — |   | — |   |
| John Hepburn              |       | —                         |       | 95,015            |       | —            |       | — |   | — |   |
| ***Senior  executives***  |       |                           |       |              |       |              |       |   |   |   |   |
| Lars-Johan  Jarnheimer    |       | —                         |       | 156,000           |       | —            |       | — |   | 47,100 |   |
| Håkan Zadler         |       | —                         |       | 21,000            |       | —            |       | — |   | 47,100 |   |
| Anders Olsson             |       | —                         |       | —            |       | —            |       | — |   | 47,100 |   |
| Johnny Svedberg           |       | 3                              |       | 27,717            |       | —            |       | — |   | — |   |
| Niclas  Palmstierna       |       | —                         |       | 3,771             |       | —            |       | — |   | — |   |
| Andrea  Filippetti        |       | —                         |       | —            |       | —            |       | — |   | — |   |
| Per Borgklint             |       | —                         |       | —            |       | —            |       | — |   | — |   |
| Fredrik Linton            |       | —                         |       | —            |       | —            |       | — |   | — |   |
| Ene Raja                  |       | —                         |       | —            |       | —            |       | — |   | — |   |
| Jan Tjernell              |       | —                         |       | 5,412             |       | —            |       | — |   | — |   |
| Karl-Johan  Nybell        |       | —                         |       | 7,804             |       | —            |       | — |   | 47,100 |   |
| Roger Mobrin              |       | —                         |       | —            |       | —            |       | — |   | — |   |
| Björn Lundström |       | —                         |       | —            |       | —            |       | — |   | — |   |
| Ib Andersson              |       | —                         |       | —            |       | —            |       | — |   | — |   |
| **Total**                 | ** ** | **3**                          | ** ** | **1,581,230**     | ** ** | **—**        | ** ** | **—** | ** ** | **188,400** | ** ** |
|                           |            |                                |            |                   |            |                   |            |  |  |  |  |  |  |

 

As of December 31, 2005, 3 Series A Sharesand 1,581,230 Series B Shares were owned either directly or through NCIntressenter by members of our board of directors and our senior executives asa group, representing an aggregate of approximately 0.18% of our votingcapital. In addition, as of December 31, 2005, our senior executives heldoptions to acquire 188,400 Series B Shares.

The estate of Jan Stenbeck held 2,742,471 Series Ashares at December 31, 2005, representing a 0.6% share of capital and a3.2% share of votes in Tele2. The estate of Mr. Stenbeck is currentlyunder administration in Luxembourg and Sweden. A notary and an administratorhave been appointed in Luxembourg, and an attorney has been elected by theStockholm City Court as Swedish legal administrator of the estate. Theadministrators in Luxembourg and Sweden shall consult and inform each other aswell as the heirs of any decisions or acts taken regarding the estate. No datehas been set for the distribution of the estate.

**Options to Purchase Securities**

***Incentive Program 2002-2007***

At the annual general meeting in 2002, it was decidedto adopt an incentive program through which current and future key employeescould acquire up to 3,312,700 Series B shares after the 2005 share splitand redemption process. These persons are to be offered the opportunity, viawarrants, to subscribe for Series B shares during a period of three to fiveyears after allotment, at a price equal to the market value of the Series Bshares plus 10% at the time of allotment, on condition that they remainemployed by the Group. No premium is to be paid. Warrants corresponding to2,630,378 shares were issued in 2002, with forfeited warrants in 2002-2005totaling 353,250. In 2005 warrants totaling to 972,307 shares were exercised.On December 31, 2005, we had outstanding warrants corresponding to1,304,821 (2004: 2,418,428) shares. All of these had a redemption price of 

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SEK 60.80 per share.Included in above, allotments corresponding to 482,618 shares were implementedin 2002 to a wholly owned Group company to secure future cash flow for socialinsurance costs, of which 162,187 was exercised in 2005 and 320,431 are outstanding as of December 31,2005.

***Incentive Program 2006-2011***

The Extraordinary General Meeting on February 21,2006 resolved to adopt an incentive program for a maximum of 32 seniorexecutives and key employees in the Tele2 Group, resulting in a combinedoffering of a maximum of 1,059,000 warrants and a maximum of 2,118,000 stockoptions. As a result of the acquisition price for 752,000 issued warrants,shareholders’ equity has increased by SEK 7 million in 2006. For each acquiredwarrant, the participant is entitled to two free stock options, each entitlingthe holder to subscribe for one new Class B-share. At March 31, 2006,outstanding warrants and stock options related to the 2006/2011 incentiveprogram corresponded to 2,256,000 Class B shares in Tele2 AB. Subscriptionfor Class B shares through the warrants may take place during February 25— May 25, 2009. The stock options run over approximately five years andcan be exercised three years from allotment, at the earliest. The subscriptionprice for the warrants and the exercise price for the stock options is SEK94.80, corresponding to 110% of the average last trading price for Tele2’s Class Bshare during the period from February 22 to March 7, 2006.

**Nomination Committee**

The Nomination Committee is a body of the annualgeneral meeting (AGM) that prepares the Meeting’s recommendations onappointments with the aim of creating a good basis for the Meeting’sconsideration of these issues. The Nomination Committee’s tasks include makingan evaluation of the Board’s composition and work; submitting proposals to theAGM regarding the election of directors of the board and chairman of the Board;preparing proposals regarding election of auditors in cooperation with theAudit committee, when necessary; preparing proposals regarding fees to thedirectors of the board and to auditors, as well as preparing proposals ofchairman for the AGM.

The principles for appointing members for the company’sNomination Committee were determined at the AGM 2006. The Nomination Committeewhich will consist of at least three representatives of larger shareholders,will be formed during September 2006 in consultation with the largestshareholders in the company at that time. Cristina Stenbeck will act as theconvenor of the Committee.

**Remuneration Committee**

The Board appoints the chairman and members of theRemuneration Committee. The work of the compensation committee includesremuneration principles, including suggestions of incentive programs, and otherterms of employment for the CEO and other senior executives in the Group. At astatutory meeting of the Board following the annual general meeting held on May 10,2006, Donna Cordner, Vigo Carlund and Mia Brunell were appointed members of thecompensation committee, with Donna Cordner as chairman of the committee.

**Audit Committee**

The Audit Committee’s main tasks is to relieve andassist the Board in its supervision and review of the internal and externalaudit process as well as to review and ensure the quality of the company’sfinancial reporting. Besides the supervision of the financial reporting andaudit, the committee has been monitoring the company’s internal controlfunctions. At a statutory meeting of the Board following the annual generalmeeting held on May 10, 2006, John Shakeshaft, John Hepburn and Jan Loeberwere appointed members of the audit committee, with John Shakeshaft as chairmanof the committee.

**Employees**

During 2005, we had an average number of 3,909employees. We believe that relations with our employees are good. The followingtable sets out the average number of employees in each market area for the pastthree years.

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| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| **Market Area**      | ** ** | ** **                                 | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| Nordic                    |       | 1,024                                      |       | 973 |   | 975 |   |
| Baltic &  Russia |       | 1,318                                      |       | 998 |   | 1,027 |   |
| Central Europe            |       | 166                                        |       | 188 |   | 576 |   |
| Southern Europe           |       | 137                                        |       | 140 |   | 360 |   |
| UK &  Benelux    |       | 298                                        |       | 251 |   | 538 |   |
| Services                  |       | 331                                        |       | 378 |   | 433 |   |
|                      | ** ** | **3,274**                                  | ** ** | **2,928** | ** ** | **3,909** | ** ** |
|                           |            |                                            |            |  |  |  |  |  |  |

 

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**Item 7: Major Shareholders andRelated Party Transactions**

**Major Shareholders**

As a result of substantial direct and indirectshareholdings by the Jan Hugo Stenbeck estate in the Tele2 Group, Investment ABKinnevik Group, Invik & Co AB Group, Invik & Co AB Group,Transcom Worldwide Group, Millicom Group, Modern Holdings Inc Group, MTG Group,Metro Group, Viking Telecom Group and other companies, this estate has thepotential to exert considerable influence on financial and operationaldecisions regarding activities by these companies. Tele2’s associated companiesand joint ventures and the companies listed above are regarded as relatedparties to Tele2.

The estate of Mr. Stenbeck also has direct orindirect holdings in us that are greater than those of any other shareholderand could therefore be deemed under the U.S. federal securities laws to controlsuch companies. See Item 3: “Key Information—Risk Factors.” The estate of Mr. Stenbeckis currently under administration in Luxembourg and Sweden. A notary and anadministrator have been appointed in Luxembourg, and an attorney has beenelected by the Stockholm City Court as Swedish legal administrator of theestate. The administrators in Luxembourg and Sweden shall consult and informeach other as well as the heirs of any decisions or acts taken regarding theestate. No date has been set for the distribution of the estate.

As far as we are aware, we are neither directly norindirectly owned or controlled by another corporation or any government, andthere are no arrangements in place, the operation of which may result in achange in control of us. However, Investment AB Kinnevik may, given the size ofits holding of our shares and the other relationships described below, bedeemed to control us. Except as set forth below, we are not aware of anypersons who own more than a 5% voting interest in us. The table below setsforth certain information regarding the holdings of our Series A Sharesand Series B Shares as of December 31, 2005.
| ** **                                      | ** ** | **Number of Shares** | ** ** | **Percentage at  December 31, 2005(1)** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|--------------------------------------------------------|------------|
| **Identity of  Person or Group** | ** ** | ** **                     | ** ** | **A Shares**                                      | ** ** | **B Shares** | ** ** | **Capital** | ** ** | **Votes** | ** ** |
| Investment AB  Kinnevik(2)                      |       | 33,830,229                     |       | 91,651,296                                             |       | 28.3 |   | 49.8 |   |
| EMESCO(3)                                       |       | 7,365,000                      |       | 2,251,137                                              |       | 2.2 |   | 8.8 |   |
| Jan H. Stenbeck (Estate)(2)                     |       | 2,742,471                      |       | —                                                 |       | 0.6 |   | 3.2 |   |
|                                                 |            |                                |            |                                                        |            |  |  |  |  |  |  |

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(1)           Basedon 46,549,989 Series A shares and 397,102,843 Series B sharesoutstanding after the 2005 share split and redemption (excluding warrants),with 465,499,890 and 397,102,843 votes, respectively.

(2)           Mr. Stenbeckwas the chairman of the Board of Directors of Investment AB Kinnevik. Theestate of Mr. Stenbeck is currently under administration in Luxembourg andSweden. A notary and an administrator have been appointed in Luxembourg, and anattorney has been elected by the Stockholm City Court as Swedish legaladministrator of the estate. The administrators in Luxembourg and Sweden shallconsult and inform each other as well as the heirs of any decisions or actstaken regarding the estate. No date has been set for the distribution of theestate.

(3)           The majorityowner of Emesco is a charitable irrevocable trust established under the laws ofLiechtenstein, Sapere Aude Trust reg. The trustees (persons unrelated to thelate Mr. Stenbeck and his heirs) have full voting and investment powerwith respect to the shares.

As a result of its ownership interests described above,the estate of Jan Stenbeck could be deemed to be the beneficial owner of theshares of Tele2 owned by Investment AB Kinnevik, although the estate of JanStenbeck, in accordance with Rule 13d-4 under the U.S. SecuritiesExchange Act of 1934, disclaims such beneficial ownership.

Our Series A shares and Series B shares carryten and one votes per share, respectively. None of our major shareholders havevoting rights different from any other of our shareholders.

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**Significant Changes in MajorShareholders**

During the past three years, there has been nosignificant change in the percentage ownership held by any major shareholderexcept as described above.

**Shareholder Information**

As of December 31, 2005, 443,652,832 shares wereissued, including 46,549,989 Series A shares and 397,102,843 Series Bshares, excluding warrants. During the year, 2005, 972,307 Series B shareswere issued due to exercised warrants related to incentive program 2002-2007.During 2006 additional 547,186 Series B shares were issued due toexercised warrants related to the same incentive program.

At our annual general meeting in may 2006, ourshareholders voted to allow reclassification from Series A shares to Series Bshares during the period May 30, 2006 up to June 13, 2006. The boardof directors was also authorized to pass a resolution on one or more occasionsfor the period up to the next Annual General Meeting on purchasing so manySerie B shares that the company’s holing does not at any time exceed 5 percentof the total number of shares in the company. The share price intervalregistered at that time, where share price interval means the differencebetween the highest buying price and lowest selling price. Further, the Board ofDirectors was authorized to pass a resolution on one or more occasions for theperiod up until the next Annual General Meeting on transferring the company’sown Class B shares on the Stockholm Stock Exchange or in connection withan acquisition of companies or businesses. The transfer of shares on theStockholm Stock Exchange may only occur at a price within the share priceinterval registered at that time.

The Extraordinary General Meeting on February 21,2006 resolved to adopt an incentive program for a maximum of 32 seniorexecutives and key employees in the Tele2 Group, resulting in a combinedoffering of a maximum of 1,059,000 warrants and a maximum of 2,118,000 stockoptions. As a result of the acquisition price for 752,000 issued warrants,shareholders’ equity has increased by SEK 7 million in 2006. For each acquiredwarrant, the participant is entitled to two free stock options, each entitlingthe holder to subscribe for one new Class B-share. At March 31, 2006,outstanding warrants and stock options related to the 2006/2011 incentiveprogram corresponded to 2,256,000 Class B shares in Tele2 AB. Subscriptionfor Class B shares through the warrants may take place during February 25— May 25, 2009. The stock options run over approximately five years andcan be exercised three years from allotment, at the earliest. The subscriptionprice for the warrants and the exercise price for the stock options is SEK94.80, corresponding to 110% of the average last trading price for Tele2’s Class Bshare during the period from February 22 to March 7, 2006.

At the annual general meeting in May 2005, ourshareholders approved a 4:1 share split, comprising three ordinary shares andone so-called redemption share, in combination with a mandatory redemptionprocedure through which the redemption shares were to be redeemed for a paymentof SEK 10 per share. The decision meant that a total of some SEK 1.5 billionwas distributed to shareholders in June 2005. After the share split, thepar value of a share, irrespective of class, became SEK 1.25. In order toachieve a time efficient redemption procedure without requiring court approval,the annual general meeting decided to amend the Articles of Association toallow for a new class of shares to be introduced, class C shares, and to issueno more than 147,560,175 C shares. The new C shares have been subscribed for bya securities company at a subscription price equal to the par value of theshares. The C shares were redeemed for an equivalent amount adjusted withinterest, and an amount equivalent to the reduced share capital was transferredto the company’s reserves.

During 2004, Tele2 reclassified 18,519,423 A shares to18,519,423 B shares as per the decision made at the annual general meeting in May 2004.See Note 23 of the Notes to the Consolidated Financial Statements.

As of April 28, 2006, there were 1,803 registeredshareholders of our Series A shares and 46,628 registered shareholders ofour Series B shares with addresses in Sweden. The Swedish shareholderscollectively held 43,556,339, or 93.6%, of our Series A shares and283,790,967, or 71.4%, of our Series B shares as of April 28, 2006.

As of April 28, 2006, 14 registered shareholderswith addresses in the U.S. held an aggregate of 33,570, or 0.1% of our Series Ashares and 196 registered shareholders with addresses in the United States heldan aggregate of 37,648,410, or 9.5% of our Series B shares.

We terminated our ADR deposit agreement with The Bankof New York (the “Depositary”) on April 25, 2005. As o April 25, 2006,the Depositary was entitled to sell any remaining deposited securities and holduninvested the net proceeds of any 

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such sale, together withany other cash then held by it, for the pro rata benefit of the holders of ADRswhich had not yet been surrendered**.**

**Related Party Transactions**

As a result of substantial direct and indirectshareholdings by the Jan Hugo Stenbeck estate in the Tele2 Group, Investment ABKinnevik Group, Invik & Co AB Group, Transcom Worldwide Group,Millicom Group, Modern Holdings Inc Group, MTG Group, Metro Group, VikingTelecom Group and other companies, this estate has the potential to exertconsiderable influence on financial and operational decisions regardingactivities by these companies. Tele2’s associated companies and joint venturesand the above companies are regarded as related parties to us. Businessrelations between us and all related parties are conducted on commercial termsand conditions.

The estate of Mr. Stenbeck is currently underadministration in Luxembourg and Sweden. A notary and an administrator havebeen appointed in Luxembourg, and an attorney has been elected by the StockholmCity Court as Swedish legal administrator of the estate. The administrators inLuxembourg and Sweden shall consult and inform each other as well as the heirsof any decisions or acts taken regarding the estate. No date has been set forthe distribution of the estate.

Transactions with related parties are set forth inNote 38 of the Notes to the Consolidated Financial Statements.

***Operational Agreements***

We supply telephony and data services subject toprinciples based on commercial terms to related parties. We are also one of twoturnkey contractors for planning, expansion and operation in the joint ventureSvenska UMTS-nät AB’s 3G-network. For additional financial and otherinformation regarding our obligations with regards to related parties, see Note38 of the Notes to the Consolidated Financial Statements.

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**Item 8: Financial Information**

**Consolidated Statements and otherFinancial Information**

See Item 17: “Financial Statements.”

**Dividends and Dividend Policy**

Our income is principally derived from the operationsof our subsidiaries and associated companies and joint ventures. Shareholders’agreements also impose limitations on our ability to pay dividends.

In 2006 we paid a distribution equivalent to an amountof SEK 1.75 per share in respect of the fiscal year 2005 (2004: SEK 5.00 pershare, of which SEK 1.67 is a cash payment and SEK 3.33 due to a 4:1 sharesplit and redemption procedure), or an aggregate amount of SEK 777 million(2004: SEK 2,213 million).

We may pay dividends in the future, although thepayment of future dividends in any given year will depend on our earnings,financial condition and business prospects in addition to other factorsrelating to our business. Dividends in respect of a fiscal year, if proposed byour board of directors and if approved by our shareholders at the annualgeneral meeting of shareholders after the end of such fiscal year, will bepayable following the receipt of such approval. Under Swedish law, no dividendsmay be paid in respect of a fiscal year as to which audited financialstatements have not been adopted by the annual general meeting of shareholders.Dividends may not, except in limited circumstances, exceed the amountrecommended by the board of directors and may only be paid from funds availablefor dividends. Under the Swedish Companies Act, dividends to shareholders maynot exceed the parent company’s restricted equity. There are also limitationsthat need to be considered such as the nature and size of the business andrisks in the group related to equity, liquidity, need to strengthen the balancesheet and the group’s financial situation in general.

Any dividends may be subject to Swedish withholdingtax. See Item 10: “Additional Information—Taxation.”

**Legal Proceedings**

In December 2003, we announced that the taxauthorities’ review of our financial accounts for 2001 had been completed andthat the Swedish tax authorities wished to change our taxation. In 2000, weacquired a majority interest in the listed company Société Européenne deCommunication S.A. (“SEC”). Because SEC’s operations were restructured, anexternal valuation was carried out, and this indicated a fall in value. Theoperations in SEC were therefore transferred at this reduced value. It was forthis realized loss that we claimed a deduction.

The tax authorities’ announcement about changing ourtaxation was expected, as large sums are involved. However, We considered itremarkable that the assessment was made with the reference that there shouldnot have been an actual fall in the value of SEC, despite the fact that theindependent valuation, as well as valuations carried out by analysts and othersector observers at that time, showed that there had actually been a decline inthe value of SEC. We decided to request a reinvestigation from the same localtax authority and an explanation of the grounds for their decision, which thetax authorities made in December 2004.

In October 2005 Tele2 submitted a supplementarystatement since the tax authorities did not provide their own statement. Noinformation has been presented changing Tele2’s opinion that they fulfill therequirements for submission of evidence. Tele2’s opinion is still that thededuction claimed will be finally approved, and we have now lodged an appealwith the country administrative court.

Loss carry-forwards in Tele2 questioned by the taxauthorities with regard to this correspond to a tax effect of SEK 3,910million. We are of the opinion that the disputes will be settled in our favor,which is why a contingent tax liability has not been recorded for the amount oflosses utilized. Nonetheless, we cannot be certain of a favorable result, andour financial results would be adversely impacted by an unfavorable result inthis matter.

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Other tax disputes involving Tele2 AB amount to SEK 21million (2004: SEK 183 million) at December 31, 2005. We are convincedthat these disputes will be settled in Tele2’s favor and, accordingly acontingent tax liability has not been recorded for the amount of lossesutilized

In January 2000, we made an application to the *Post och Telestyrelsen* (“PTS”) that it decide that: (1) TeliaSonera,in its capacity as transit operator, should remunerate us for all traffic thatTeliaSonera transits through its network for termination on our mobile networkfrom other Swedish operators with which we did not have interconnect agreementsat such time; and (2) that the remuneration be determinable at fair marketvalue. PTS ruled in our favor in respect of both claims. The ruling also setsforth that the rates charged by us for the termination of calls on our mobilenetwork may not exceed an amount equivalent to 10% above the cost-oriented feethat Telia Mobile was allowed to charge for terminating calls on its network.We appealed this decision, requesting the court to determine that we have theright to charge an amount equivalent to market rates when terminating calls onour network and that such market rates should not be linked to the cost of acompetitor for producing similar services. The Administrative Court ruled inour favor. Both the PTS and TeliaSonera appealed this decision to theAdministrative Court of Appeal. The Administrative Court of Appeal ruled infavor of Tele2 in regard of (1) above, but due to a formal error of thePTS during its proceedings the court sent part (2) of the case back to thePTS for correction. There are now several cases regarding different timeperiods pending at the PTS and in court regarding what price Tele2 is allowedto charge for terminating calls on its mobile network, i.e. what is a fairmarket price.

In connection with the above dispute, Tele2 Sverige ABhas sued TeliaSonera AB for payment of approximately SEK 840 million, claimingfailure to make due payments of interconnect fees (no deduction of paymentspassed on by TeliaSonera has been made in this amount). The proceedings havebeen suspended by the District Court pending a final decision regarding theterminating price in the above-referenced case between Tele2, TeliaSoneraand the PTS.

Tele2 is a party to legal proceedings as a result ofour normal business operations. As these proceedings can be complex, it may bedifficult to predict their outcome. An unfavorable result can have an extremelynegative effect on our business operations, operating profit or financialposition. .

In 2005 Tele2 provided SEK 161 million related to aVAT-dispute in he prepaid card operations. The dispute relates to the period2003 until the first quarter of 2005 and the provision correspond to theestimated probable outcome, which is estimated at 75% of the maximum worst caseoutcome.

Telecom Italy has sued Tele2 for damages for EUR 200million which the company claims it has suffered due to misleading marketing byTele2. The claim has been made jointly against Tele2 Italy S.p.A. and Tele2 AB,since Tele2 Italy, according to Telecom Italia, has acted on instructions fromTele2 AB. Tele2 disputes the claim. Even if Telecom Italia should succeed,Tele2 believes that the damages will only result in a fraction of the amountclaimed.

In addition to the cases described above, variousTele2 companies are parties to litigation incidental to the normal conduct oftheir businesses. Also, certain of our subsidiaries are and may in the futurebe involved in investigations involving value-added taxes and relatedmatters in certain European jurisdictions. We cannot be sure that theseinvestigations will not lead to reassessment of taxes or penalties by therelevant tax authorities. We do not believe that liabilities related to thelitigation and investigations described above, in the aggregate, are likely tohave a significant effect on the financial position of the Tele2 Group.

**Significant Changes**

Other than as disclosed above or elsewhere in thisannual report, no significant change has occurred since the date of our mostrecent audited financial statements.

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**Item 9: The Offer and the Listing**

**Price History of Our Stock**

The principal trading market for our shares is the *Stockholmsbörsen*. The *Stockholmsbörsen*consists of shares quoted on two lists: the A-list and the O-list. The O-listis primarily intended for smaller companies, companies with short operatinghistories and companies intending to join the A-list but not yet able tosatisfy the requirements of the A-list. Our Shares began trading on the O-listof the *Stockholmsbörsen* on May 14, 1996.

On January 24, 1997, our ADSs, began trading onNASDAQ. The Bank of New York was the depository of our ADSs, which traded onNASDAQ under the symbols “TLTOA” and “TLTOB”. On April 8, 2005, wedelisted our American Depositary Shares from the NASDAQ national exchange inthe United States. ADSs representing our Series A shares and Series Bshares therefore no longer trade publicly in the United States. The decision todelist was based on the fact that the costs of listing outweighed the limitedbenefits of remaining listed on NASDAQ. Of our total traded volume during 2004,less than 0.1% was on NASDAQ. The last trading day for our ADSs on NASDAQ was April 8,2005.

We terminated our ADR deposit agreement with The Bankof New York (the “Depositary”) on April 25, 2005. As of April 25,2006, one year from the termination date, the Depositary was entitled to sellany remaining deposited securities and hold uninvested the net proceeds of anysuch sale, together with any other cash then held by it, for the pro ratabenefit of the holders of ADRs which had not yet been surrendered. All feescharged to the shareholders by the Depositary for the termination of the Tele2ADR facility have been paid by Tele2.

Tele2 carried out a 4:1 share split, whereby everyshare, irrespective of share class, was split into three ordinary shares andone redemption share. The record date for the share split was May 23,2005. Trading in the redemption shares took place on the*Stockholmsbörsen* during the period from May 24 to June 10,2005, after which all redemption shares were automatically redeemed. The recorddate for the redemption was June 17, 2005. Payment for the redemptionshares, corresponding to SEK 10 per share, is expected to take place on June 22,2005.

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The following table sets forth the range of high and lowclosing prices for the common shares on the *Stockholmsbörsen*for the periods indicated.

 
| ** ** | ** ** | ** **     | ** ** | **Series A Shares** | ** ** | **Series B Shares** | ** ** |
|------------|------------|----------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** ** | ** ** | ** **     | ** ** | **High**                      | ** ** | **Low**                       | ** ** | **High** | ** ** | **Low** | ** ** |
| ** ** | ** ** | ** **     | ** ** | **(SEK)**                     | ** ** | **(SEK)**                     | ** ** |
| 2001       |       | Whole year     |       | 152.83                        |       | 66.00                         |       | 163.33 |   | 75.50 |   |
| 2002       |       | Whole year     |       | 96.33                         |       | 42.00                         |       | 104.83 |   | 40.67 |   |
| 2003       |       | Whole year     |       | 133.33                        |       | 72.00                         |       | 135.00 |   | 72.33 |   |
| 2004       |       | First quarter  |       | 138.33                        |       | 114.00                        |       | 140.83 |   | 114.67 |   |
|       |       | Second quarter |       | 124.17                        |       | 103.33                        |       | 123.83 |   | 104.83 |   |
|       |       | Third quarter  |       | 109.67                        |       | 88.17                         |       | 109.33 |   | 87.17 |   |
|       |       | Fourth quarter |       | 94.33                         |       | 77.33                         |       | 93.17 |   | 74,83 |   |
| 2005       |       | First quarter  |       | 90.67                         |       | 79.00                         |       | 89.83 |   | 79.67 |   |
|       |       | Second quarter |       | 83.33                         |       | 70.25                         |       | 83.50 |   | 68.50 |   |
|       |       | Third quarter  |       | 89.00                         |       | 71.50                         |       | 87.50 |   | 69.00 |   |
|       |       | Fourth quarter |       | 89.25                         |       | 74.75                         |       | 86.75 |   | 73.50 |   |
| 2006       |       | January        |       | 87.25                         |       | 81.25                         |       | 85.50 |   | 79.50 |   |
|       |       | February       |       | 92.00                         |       | 83.00                         |       | 91.00 |   | 81.50 |   |
|       |       | March          |       | 98.75                         |       | 86.00                         |       | 98.00 |   | 84.50 |   |
|       |       | April          |       | 98.25                         |       | 92.25                         |       | 98.00 |   | 91.25 |   |
|       |       | May            |       | 93.50                         |       | 72.00                         |       | 93.00 |   | 71.50 |   |
|       |       | June(1)        |       | 81.00                         |       | 74.25                         |       | 81.50 |   | 72.25 |   |

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(1)           Theprice range set forth for June 2006 covers the period between June 1and June 12.

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**Item 10: Additional Information**

**Memorandum and Articles ofAssociation**

**Articles of Association**

Set forth below is certain information concerning ourshare capital and related summary information concerning certain provisions ofour articles of association and applicable Swedish law. The following summarydoes not purport to be complete and is qualified in its entirety by referenceto our articles of association and to applicable Swedish law.

***General***

We are registered in Sweden, No. 556410-8917,with the Swedish Companies Registration Office (*Bolagsverket*).Our principal objectives are set out in full in Clause 3 of our articles ofassociation and include managing the transmission of mobile and fixed telephonyand similar businesses.

***Directors***

Directors and deputy directors are appointed byshareholders at an annual general meeting for the period until the end of thenext annual general meeting. Pursuant to our articles of association, we musthave no fewer than five directors and no more than nine directors. UnderSwedish law, a director may not be under-age, bankrupt, under the supervisionof a trustee or prohibited from carrying out business by law.

The total fee of the Board of Directors is decided bythe shareholders at an annual general meeting and the allocation thereof toeach director is resolved by the Board of Directors. A director or deputydirector may retire or be removed prematurely by the shareholders at a GeneralMeeting at any time.

The Swedish Act on Board Representation for thePrivately Employed (*lag 1987:1245 omstyrelserepresentation for de privatanställda*) gives a right totrade unions to appoint two additional directors in all companies with morethan 25 employees (three directors if the company is active in more than oneindustry and has more than 1,000 employees in Sweden) and a correspondingnumber of deputy directors for such union directors should there be acollective bargaining agreement in force between a trade union and theemployer. There are presently no union directors and no deputy union directorson our board of directors.

Up to three auditors and up to three deputy auditorsare appointed at the annual general meeting for a period of four years, withthe possibility of early removal by a decision taken at a general meeting. Anauthorized Audit Company may be appointed as auditor.

A chairman of the board and a managing director areappointed by the Board of Directors.

Although our articles of association do not addressvoting by directors on matters in which they are interested, under Swedish law,a director may not take part in matters regarding:

·                  Agreementsbetween a director and the company;

·                  Agreementsbetween the company and third parties, where a director has a material interestin the matter that may conflict with the interests of the company; or

·                  Agreementsbetween the company and a legal entity that the director may represent, exceptwhere the legal entity contracting with the company is within the same group ofcompanies.

There are no specific limitations of the borrowing powersof the Board of Directors set out in our articles of association or in theSwedish Companies Act.

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***Issuance of Shares***

We have issued class A shares and class B shares. Eachclass A share carries 10 votes, and each class B share carries one vote.Neither of these classes of shares provide for any preference over the otherclass of shares as regards the assets or profits of Tele2. Our articles ofassociation provide for the possibility to issue another class of shares, classC shares. No class C shares have been issued..

***Meetings of Shareholders***

According to the Swedish Companies Act, a shareholder’sright to take part in decisions related to our affairs is exercised at thegeneral meeting of shareholders.

Annual general meetings shall be held within sixmonths of the end of each financial year and will consider statutory accountsand reports, disposition of profit or loss, discharging the directors and themanaging director from liability, electing directors and, if applicable,auditors and related matters. We must provide four to six weeks’ notice of ourannual general meetings and two to six weeks’ notice of our extraordinarygeneral meetings. We must provide four to six weeks’ notice of an extraordinarygeneral meeting if the articles of association are to be amended at suchmeeting. Notice of a general meeting of shareholders shall be made byannouncement in Post- och Inrikes Tidningar and in Svenska Dagbladet.Extraordinary general meetings may be held when the board of directorsconsiders appropriate and must be held upon written request by the auditors orby shareholders representing at least one-tenth of all of our issued shares.

Under Swedish law, a shareholder may attend and voteat a general meeting in person or by proxy. Shareholders wishing to vote byproxy may submit their own forms of proxy to us. A form of proxy, which must besigned and dated, cannot be valid for more than one year from the date ofissue. Our articles of association provide that a shareholder must give usnotice of his intention to attend the general meeting not later than the datespecified in the notice convening the meeting. Under Swedish law, a persondesignated on the register of shareholders as a nominee is not entitled to voteat a general meeting. To be entitled to vote, a beneficial owner whose sharesare registered in the name of a nominee must arrange to have the sharesregistered in his or her own name on the register of shareholders not laterthan on the fifth day prior to the date of the meeting and also notify us. Ashareholder may bring advisors to a general meeting, however the shareholdershall have notified the company of the number of advisors that shall attend themeeting. Our articles of association does not provide for a possibility tocollect proxies at the company’s expense.

Resolutions are passed by a simple majority of thevotes cast, except in certain circumstances provided by law, including, but notlimited to:

·                  A resolution toamend the articles of association requires a majority of at least two-thirds ofthe votes cast as well as at least two-thirds of the shares represented at themeeting;

·                  A resolution toamend the articles of association that reduces any existing shareholder’srights to profits or other assets, restricts the transferability of issuedshares or alters the legal relationship between issued shares, normallyrequires the unanimous approval of the shareholders present at the meeting andthat the present shareholders represent at least nine-tenths of all sharesissued;

·                  A resolution toamend the articles of association for the purpose of limiting the number ofshares which a shareholder may vote for at a general meeting, or requiring usto retain a larger amount of the net profit than required by the SwedishCompanies Act, or amending shareholders’ rights in a winding-up of Tele2,normally requires the approval of shareholders representing at least two-thirdsof the votes cast and at least nine-tenths of the shares represented at themeeting; and

·                  A resolution tochange the company from a public to a private company requires the unanimousapproval of the shareholders present at the meeting and that the presentshareholders represent at lease nine-tenths of all shares issued.

Special rules also apply for voting in connectionwith a reduction of share capital, mergers or the disapplication of preemptionrights (see “ —Preferential Rights to Subscribe for Shares”).

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The Swedish Companies Act stipulates, in addition tothe rules in the articles of association, that a written notice must besent to each shareholder whose address is known to us when a general meeting isconvened to deal with, inter alia, amendments to the articles of association asdescribed under the second and third bullet points above or with thecommencement or discontinuance of our winding -up.

There are no limitations under Swedish law or underour articles of association on the right of foreigners to hold or vote ourshares.

***Dividends***

Decisions regarding payment of dividends are made bythe general meeting of shareholders. Our articles of association stipulate thatall classes of shares carry equal rights regarding entitlement to dividends,assets and capital distribution. The Swedish Companies Act stipulates thatinterim dividends are not permitted. The Companies Act furthermore stipulatesthat owners of not less than one-tenth of all shares have the right to in somesituations demand the distribution of limited dividends.

*VPC AB,*or VPC, the Swedish Central Securities Depository,administers dividend payments on behalf of Tele2. Dividends unclaimed for aperiod of 10 years from the due date are forfeited and revert to us.

The amount of any dividends paid is limited by, amongother things, reference to our profits and non-restricted reserves available atthe end of the preceding financial year and may normally not exceed the amountproposed or approved by the board of directors or be of such amount as, havingregard to our cash requirements and financial position, would be contrary togood business practice.

***Preferential Rights to Subscribe for Shares***

Under the Swedish Companies Act and our articles ofassociation, existing shareholders have preferential rights to subscribe fornew shares, convertible debt instruments or similar instruments issued for cashin proportion to their existing holdings unless the articles of associationprovide otherwise or the annual general meeting deciding on the issuestipulates that the shareholders shall not have such preferential rights. Thereis however no liability upon the shareholders for further capital calls by thecompany set out in the articles of association or in the Companies Act. Adecision by the general meeting on a share issue deviating from theshareholders’ preferential right requires approval of shareholders representingat least two-thirds of the votes cast as well as at least two-thirds of theshares represented at the meeting. Our articles of association do not limit theshareholders’ preferential rights to subscribe.

***Disclosure of Change in Ownership***

The Swedish Industry and Commerce Stock ExchangeCommittee (*Näringslivets Börskommitté*, or NBK) hasissued rules according to which any seller and purchaser of shares in aSwedish company listed on the Stockholm Stock Exchange and companies whoseshares are listed on another Swedish stock exchange or authorized marketplaceis required to disclose transactions to such company and to the relevant stockexchange if such purchaser, as a result of the purchase, holds directly orindirectly 5% or more of either the total voting rights for all shares or thetotal number of shares in the company, or the seller ceases to own thatthreshold amount or the holdings of a 5% holder subsequently reach, exceed orfall below any of the thresholds of 10%, 15%, 20% and further increments of 5%,up to 90%. The rules are also applicable to certain sales and purchases ofconvertible debt instruments, options and futures contracts regarding thepurchase of shares.

Disclosure in accordance with the rules shall bemade to the issuing company, the stock exchange, an established news agency andto at least one nationally published newspaper, no later than 9:00 a.m. onthe first day of stock exchange trading after the date of the transaction.

The 1991 Swedish Financial Instruments Trading Act (*lag 1991:980 om handel med finansiella instrument*) alsoprovides that when a natural person or legal entity acquires or disposes ofshares in a Swedish limited liability company which has issued shares that areregistered on a securities exchange situated or operating in one or moreEuropean Economic Area Countries, or shares that without being registered arelisted on a securities exchange or authorized marketplace in Sweden, andfollowing that acquisition or disposal the proportion of voting rights heldreaches, exceeds or falls below one of the thresholds of 10%, 20%, 33 1¤3%, 50% or 66 2¤3%, that person shall notify both thecompany and such stock exchange in writing or if the shares 

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are not listed in Sweden,the Swedish Financial Supervisory Authority (*Finansinspektionen*)within seven calendar days of the acquisition or disposal.

The Swedish Act Concerning Reporting (Obligations forCertain Holdings of Financial Instruments *lagen 2000:1087 omanmälningsskydighet för vissa innehav av finansiella instrument)* callsfor a person holding an insider position, that is a person deemed to enjoyespecially good conditions to obtain access to confidential informationregarding the company, to report in writing to the Financial SupervisoryAuthority the shareholdings and other financial instruments in the company heldby him and by closely affiliated natural or legal entities. Changes in suchholdings must also be reported to the Financial Supervisory Authority withinfive days of the change. Where the change relates to closely affiliatedpersons, the report must be made within five calendar days from the date onwhich the insider became aware of the change. Stock market companies areobliged to report to the Financial Supervisory Authority the identity ofpersons in the company and its subsidiaries who hold insider positions. Thereport must be received by the Financial Supervisory Authority within 14calendar days from the date on which the insider position arose.

A party holding less than 30% of the total number ofvoting rights in a Swedish publicly listed company, which then, by way ofpurchase, subscription, conversion or other form of acquisition of shares inthe company alone, or together with an affiliated party, reaches or exceeds 30%of the total number of voting rights in the company, is required, pursuant tothe NBK Rules Concerning Public Offers for the Acquisition of Shares(2003) to offer to acquire all outstanding shares and other securities issuedby the company. There are exemptions and modifications of this mandatory bid rule thatapply to shareholders who already owned shares in excess of the 30% thresholdas of the date the mandatory bid rule was introduced. Furthermore, theSwedish Securities Council (*Aktiemarknadsnämnden*)may, upon application by a shareholder, grant exemptions from the mandatory bidrule.

***Rights of Redemption and Repurchase ofShares***

Under Swedish law, we may not subscribe for, orreceive as security, our own shares. We may, however, redeem our own sharesthrough a statutory redemption procedure pursuant to the Swedish Companies Act,which will normally require (among other things) court approval when suchredemption would result in the repayment of paid-up capital to shareholders.

Swedish listed companies may under certaincircumstances buy and sell their own shares. A resolution authorizing a companyto repurchase its own shares must be passed by the general meeting of thecompany’s shareholders, or, following authorization by the general meeting, bythe board of directors. The resolution by the shareholders must be passed by atwo-thirds majority of the votes cast as well as at least two-thirds of theshares represented at the meeting.

Company share repurchases may only take place on thestock market or pursuant to an offer to all shareholders (or all shareholdersof a specified class of shares) and may not exceed 10 percent of the issuedshares. We may not repurchase our own shares by way of direct negotiations withany of our shareholders. To buy our own shares on a stock exchange or marketplaceoutside the European Economic Area, we must obtain permission from the SwedishFinancial Supervisory Authority.

Share buybacks may only take place to the extent theydo not impair our restricted equity after the buyback. We may not record ourown shares as assets on our balance sheet. Further, the proportions of a sharebuyback may not be so large as to violate sound business practice consideringour need of consolidation, liquidity or financial position in other respects.We may not hold more than one-tenth of all our issued shares. In this context,shares held by any of our subsidiaries are deemed to belong to us.

We may hold repurchased shares for an unlimited periodof time. We may not vote these shares, and these shares do not confer a rightto dividends or preferential rights to new shares in connection with an issueof new shares. However, if we hold our own shares, we may receive new shares byway of a bonus issue.

As a public company, if we hold our own shares, we mayeither reduce the share capital and cancel the shares or sell the shares tosomeone else. If we buy or sell our own shares, we must notify the stockexchange or the marketplace where the shares are listed, and announce theinformation through two established news agencies and at least three newspapersthat circulate throughout the country as well as on our website.

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***Miscellaneous***

Under Swedish law, a general meeting of shareholdersmay not adopt any resolution that is likely to give an undue advantage to ashareholder or a third party to our detriment or to the detriment of our othershareholders, nor may our board of directors or other representatives enterinto legal transactions or undertake other measures that are likely to give anundue advantage to a shareholder or to a third party to our detriment or to thedetriment of our other shareholders.

Under Swedish law, where a Swedish parent companyalone or together with one or more subsidiaries owns more than nine-tenths ofall the shares in a subsidiary and these shares represent more than nine-tenthsof the votes, the parent company is entitled to purchase the remaining sharesin the subsidiary (compulsory acquisition of shares). A person whose shares aresubject to such a right of purchase may require the parent company to purchaseits shares.

**Material Contracts**

On October 10, 2005 , Tele2 Sverige AB enteredinto an agreement with a number of banks regarding a loan facility of SEK 19.1billion. The loan facility is financed by ABN Amro, Citigroup Internationalplc, Calyon Bank SA, DnB Nor Bank ASA, Nordea Bank AB (publ), SkandinaviskaEnskilda Banken AB, Société Générale, Royal Bank of Scotland plc, WestLB AG,Svenska Handelsbanken AB, Cooperatieve Centrale Raiffeisen-Boerenleenbank BA,Danske Bank A/S, HSBC Bank plc and ING Bank NV.

**Exchange Controls**

There is no Swedish legislation affecting a) theimport or export of capital or b) the remittance of dividends, interest orother payments to non-resident holders of our securities except that, subjectto the provisions in any tax treaty, dividends are subject to withholding tax.

**Taxation**

The following is a summary of certain Swedish and U.S.federal tax considerations relevant to the ownership and disposition of sharesor ADSs. The summary does not purport to be a comprehensive description of allof the tax considerations that may be relevant to any particular holder,including tax considerations that arise from rules of general applicationor that are generally assumed to be known by holders. In particular, thesummary deals only with holders that hold shares or ADSs as capital assets anddoes not address the tax treatment of holders that are subject to specialrules, such as banks, insurance companies, tax-exempt organizations, financialinstitutions, dealers in securities or currencies, persons that elect mark tomarket treatment, persons that hold shares or ADSs as a position in a straddle,conversion transaction, synthetic security or other integrated financialtransaction and persons that own, or will own, directly or indirectly, 10% ormore of our outstanding stock.

The summary is based on laws, treaties and regulatoryinterpretations in effect on the date hereof, all of which are subject tochange. Holders should consult their own advisers regarding the taxconsequences of the ownership and disposition of shares or ADSs in light oftheir particular circumstances, including the effect of any state, local orother national laws.

***Swedish Tax Considerations***

The following is a summary of the Swedish taxconsiderations for non-Swedish holders, as defined below, of the acquisition,ownership and disposition of shares or ADSs. The following discussion ofSwedish tax considerations does not address the tax considerations that arerelevant to holders who are subject to special rules, such as investmentcompanies, mutual funds, pension funds and holders who hold shares or ADSsthrough a partnership or as current assets in a business operation. Forpurposes of this discussion, a non-Swedish holder is a holder that is notresident in Sweden for Swedish tax purposes and does not hold shares or ADSsthrough a permanent establishment in Sweden.

For purposes of the income tax treaty between Swedenand the United States and for Swedish income tax purposes, holders of ADSs willbe treated as owning the shares represented by those ADSs.

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*Sale or Other Disposition ofShares or ADSs*

A non-Swedish holder generally is not liable to paySwedish taxes in respect of gain realized on the sale or other disposition ofshares or ADSs. Special regulations, however, apply to persons who have residedin Sweden at some time during the ten years prior to the disposition.

*Dividends on Shares or ADSs*

Non-Swedish holders will be subject to withholding taxwith respect to any dividends paid on shares or ADSs at a 30% or lower ratepursuant to the applicable provisions of income tax treaties with othercountries. For example, the income tax treaty between the United States andSweden reduces the rate of withholding for certain eligible holders to 15%. InSweden, VPC normally performs the withholding of tax, with the exception ofnominee registered shares, for which the tax is withheld by the nominee. VPC,or the nominee generally, will withhold at a lower treaty rate with respect tocash dividends paid on shares or ADSs to a non-Swedish holder entitled to thebenefits of such treaty, as long as the person entitled to the dividend isregistered as a non-resident and sufficient information regarding the taxresidency of the beneficial owner is available to the VPC or the nominee. Inthose cases where Swedish withholding tax is withheld at the rate of 30% andthe person who received the dividends is entitled to a reduced rate ofwithholding tax under a tax treaty, a refund may be claimed from the Swedishtax authorities before the end of the fifth calendar year following thedistribution.

*Estate and Wealth Taxation*

Non-Swedish holders will not be subject to wealth taxin Sweden. No gift, estate or inheritance taxes will arise in Sweden.

***U.S. Federal Income Tax Considerations***

The following discussion of U.S. tax considerationsapplies to you if your functional currency is the U.S. dollar and you are acitizen or resident of the United States, a U.S. corporation or otherwisesubject to U.S. federal income taxation on a net income basis in respect ofyour investment in shares, or ADSs.

In general, for U.S. federal income tax purposes andfor purposes of the income tax treaty entered into between Sweden and theUnited States, beneficial owners of ADSs will be treated as owning the shares representedby those ADSs.

*Dividends on Shares and ADSs*

A holder generally will be entitled to benefits underthe income tax treaty between the United States and Sweden, including thereduced 15% Swedish withholding rate on dividends, if it (i) is an individualU.S. resident, a U.S. corporation, or a partnership, estate, or trust to theextent its income is subject to taxation in the United States as the income ofa U.S. resident, either in its hands or in the hands of its partners orbeneficiaries; (ii) is not also a resident of Sweden for Swedish taxpurposes; (iii) is not subject to an anti-treaty shopping article thatapplies in limited circumstances; and (iv) does not hold shares or ADSs inconnection with the conduct of business in Sweden through a permanentestablishment or the performance of personal services in Sweden through a fixedbase.

The gross amount of dividends received by you(including amounts withheld in respect of Swedish withholding tax) generallywill be subject to U.S. federal income taxation as foreign source income andwill not be eligible for the dividends received deduction allowed tocorporations. Dividends paid in a currency other than the U.S. dollar will beincluded in your income in a U.S. dollar amount calculated by reference to theexchange rate in effect on the date of receipt by the Depositary, ifapplicable, or you, regardless of whether the payment is in fact converted intoU.S. dollars. Subject to certain exceptions for short-term and hedgedpositions, the U.S. dollar amount of dividends received by non-corporateholders prior to January 1, 2011 with respect to our ADSs will be subjectto taxation at a maximum rate of 15% if the dividends are “qualified dividends.”Dividends paid on our ADSs will be treated as qualified dividends if (i) weare eligible for the benefits of a comprehensive income tax treaty with theUnited States that the IRS has approved for the purposes of the qualifieddividend rules and (ii) we are not a passive foreign investmentcompany (“PFIC”) in the year the dividend is paid and is not a PFIC in the yearprior to which the dividend is paid. The income tax treaty between Sweden andthe United States has been approved for the purposes of the qualified dividendrules. Based on our audited financial statements and relevant market andshareholder data, we believe that we were not treated as a PFIC for U.S.federal income tax purposes with respect to our 2004 or 2005 taxable year. Inaddition, based 

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on our audited financialstatements and our current expectations regarding the value and nature of ourassets, the sources and nature of our income, and relevant market andshareholder data, we do not anticipate becoming a PFIC for our 2006 taxableyear.

Swedish withholding tax at the rate applicable to youunder the Sweden-U.S. income tax treaty will be treated as a foreign income taxthat, subject to generally applicable limitations, is eligible for creditagainst your U.S. federal income tax liability or, at your election, may bededucted in computing your taxable income.

*Sale or Other Disposition ofShares or ADSs*

You generally will realize gain or loss on the sale orother disposition of shares or ADSs equal to the difference between the amountrealized on the disposition and your adjusted tax basis in the shares or ADSs.Any such gain or loss will be subject to U.S. federal income taxation ascapital gain or loss, and will be long-term gain or loss if your holding periodfor the shares or ADSs is more than one year at the time of disposition. If youare an individual, the net amount of long-term capital gain realized by yougenerally is subject to taxation at reduced rates.

Deposits and withdrawals of shares in exchange forADSs will not be subject to U.S. federal income tax.

*Information Reporting and BackupWithholding*

Dividends on shares or ADSs that are paid in theUnited States or through a U.S. related financial intermediary and proceedsfrom the sale or other disposition of shares or ADSs may be subject toinformation reporting and backup withholding unless you (i) are acorporation or other exempt recipient, or (ii) provide a taxpayeridentification number and certify that no loss of exemption from backupwithholding has occurred.

Holders that are not U.S. persons generally are notsubject to information reporting or backup withholding. However, a non-U.S.person may be required to provide a certification to establish its non-U.S.status in connection with payments received within the United States or throughcertain U.S.-related financial intermediaries.

**Documents On Display**

We are subject to certain informational requirementsof the Securities Exchange Act of 1934 and, in accordance therewith, filereports and other information with the Securities and Exchange Commission. Suchreports and other information filed by us can be inspected and copied at thepublic reference facilities maintained by the Securities and ExchangeCommission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 atprescribed rates. Reports and other information concerning us also may beinspected at the National Association of Securities Dealers, Inc. at 1735K Street, N.W., Washington, D.C. 20006. Any filings we make electronically inthe future will be available to the public over the Internet at the Securityand Exchange Commission’s website at *http://www.sec.gov*.

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**Item 11: Quantitative andQualitative Disclosures about Market Risks**

The Tele2 Group faces primary market risk exposures inthree categories: exchange rate fluctuations, interest rate fluctuations andcreditworthiness of customers.

**Risk of Variations in ExchangeRates**

We are affected by fluctuations in exchange rates.Currently, companies reporting in Swedish kronor account for 21% of ouroperating revenue (2004: 23%) and companies using EUR account for 52% (2004: 52%).In telephony operations a currency risk arises in connection with internationalcall traffic as a liability or a receivable created between Tele2 companies andforeign operators. In mobile telephony, these transactions are calculated inSDRs (Special Drawing Rights, a currency substitute) but are invoiced and paidin EUR. See Note 36 of the Notes to the Consolidated Financial Statements.

Currency exposure arising as a result of thetranslation of foreign operations is limited by the Group’s borrowings incurrencies that reflect the net investments in these operations. Our SEK 19.1billion five-year loan facility can be used in several currencies, at presentUSD, SEK, EUR and GBP. The currency exposure regarding net investments inforeign operations/subsidiaries is covered and insured in part through a loanfacility in the same currency. No hedging is undertaken against other types ofcurrency risk.

Our net foreign exchange difference reported in theincome statement amounted to SEK -160 million in 2005 (2004: SEK -3million). We believe that some of the risks of our operations in multiplecurrencies are mitigated by structural matching. This structural matchingoccurs because we incur many of our operating expenses in the same currency inwhich we invoice the services relating to such costs.

Although we maintain our books and report our resultsin Swedish kronor, we conduct a material portion of our operations throughsubsidiaries outside Sweden (corresponding to approximately 79% of consolidatedoperating revenues in 2005). We record the assets and liabilities in the booksof such subsidiaries in reporting currencies other than Swedish kronor.Financial items in income statement include currency differences of SEK -198million (2004: SEK -9 million), of which SEK -124 million refer tointernal currency differences that have previously been included inshareholders’ equity. Exchange currency differences not included in the incomestatement but appear as a component of shareholders’ equity, accounting for SEK1,836 million in 2005 (2004: SEK -458 million). The translation risksassociated with currency fluctuations may have an adverse effect on ourfinancial condition in the future. Currency risks in our internationaloperations are limited by denominating loans to group companies in thesubsidiary’s local currency.

**Risk of Variations in FloatingInterest Rates**

Our total loan liability to financial institutions andother interest-bearing liabilities that carried a variable rate ofinterest at December 31, 2005 was SEK 14,096 million, or 90% of our totalliability to financial institutions and other interest-bearingliabilities (2004: SEK 4,651 million, 94%). An increase in interest rates of100 basis points would entail an additional interest expense of SEK 141 million(2004: SEK 47 million) with a net income effect of approximately SEK 99 million(2004: SEK 13 million), calculated on the basis of variable interest-bearingliabilities at December 31, 2005. However, we are monitoring trends oninterest-rate markets and decisions regarding the interest-rate fixing strategyare assessed regularly. See Note 24 of the Notes to the Consolidated FinancialStatements.

A table summarizing our debt obligations as of December 31,2005, which are sensitive to changes in interest rates, is set forth in Note 24of Notes to the Consolidated Financial Statements. The table presents principalpayment obligations by maturity date, and indicates that 36% of total interest-bearingliabilities with variable interest rates of SEK 14,096 million mature forpayment within one year.

**Liquidity Risk**

The Group’s cash is placed in short-term investmentsand the goal is that the surplus cash shall be used to decrease the outstandingloan balance. According to current financial policy, the risk of refinancing ismitigated by subscribing to long-term binding credit facilities. At end of2005, the Group had a available liquidity of SEK 8.9 billion. For additionalinformation, see Note 22 to the Notes to the Consolidated Financial Statements

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**Credit Risk**

Credit risk entails the book loss that would bereported on the closing date if counterparties completely neglected to fulfilltheir payment obligations in accordance with agreements. We have limited ourcredit risk in respect of receivables by continually conducting creditassessments of the customer stock. Since we have a highly varied customer stockthat includes individuals as well as companies, our credit risk is more limitedthan it might otherwise be. We make provisions for any credit losses, and thesehave remained within management’s expectations.

Fair values for Tele2’s liabilities with fixedinterest rates do not deviate significantly from the book value. The fairvalues of the other financial assets and liabilities also do not deviate significantlyfrom the book value.

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**Item 12: Description OfSecurities Other Than Equity Securities**

This item is not applicable.

**PART II**

**Item 13. Defaults, DividendArrearages And Delinquencies**

None.

**Item 14. Material ModificationsTo The Rights Of Security Holders And Use Of Proceeds**

None.

**Item 15. Controls and Procedures**

We carried out an evaluation under the supervision andwith the participation of our management, including our chief executive officerand chief financial officer, of the effectiveness of the design and operationof our disclosure controls and procedures as of December 31, 2005. Basedupon our evaluation, our chief executive officer and chief financial officerconcluded that the disclosure controls and procedures as of December 31,2005 were effective to provide reasonable assurance that information requiredto be disclosed in the reports we file and submit under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported as andwhen required.

There has been no change in our internal control overfinancial reporting during 2005 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

**Item 16. Reserved**

**Item 16A. Audit CommitteeFinancial Expert**

Our board of directors has determined that auditcommittee member John Shakeshaft, who it believes is considered “independent,”qualifies as an “audit committee financial expert” within the meaning of thisItem 16A.

**Item 16B. Code of Ethics**

We have not adopted a code of ethics, as defined inItem 16B of Form 20-F under the Securities Exchange Act of 1934, asamended, because our senior executive and financial officers are bound bySwedish mandatory ethics rules and a number of internal rules andguidelines, which we believe have collectively a purpose and function that issubstantially similar to a code of ethics within the meaning of Item 16B.

Such Swedish mandatory ethics rules includevarious Swedish corporate laws, Swedish securities laws and related listing rules ofthe Stockholm Stock Exchange, providing detailed rules regarding insider-tradingand disclosure requirements. In addition, Tele2 has detailed internal insidertrading rules and we have implemented a number of compliance programmesand policies. Moreover, many of our employment contracts for our directors andexecutive managers include provisions regarding conflict of interests. Finally,we have developed corporate principles that describe our vision and values,which have been implemented throughout Tele2 and which form the basis for ourbusiness conduct.

**Item 16C. Principal AccountantFees and Services**

The Sarbanes-Oxley Act of 2002 requires thataudit committees pre-approve all services provided by the company’s independentauditor, except in limited circumstances where approval is waived under theprovisions of paragraph (c)(7)(i) of Rule 2-01 of RegulationS-X. This process is critical to the auditor maintaining independence. Thecompany’s process requires that all services provided by the independentauditor be pre-approved by the audit committee.

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During 2005 we paid SEK 26 million to Deloitte (2004:SEK 18 million) and SEK 25 million (2004: SEK 21 million) to our otherauditors. All services provided by our auditors were pre-approved pursuant tothe company’s pre-approval policy. These amounts were spent on audit services,audit-related services, tax services and other services as follows.

The following table presents the aggregate fees forprofessional services and other services rendered by Deloitte for 2005 and2004.

 
| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(SEK in millions)**            | ** ** |
| Audit fees(1)          |       | 15                                         |       | 21 |   |
| Audit-related  fees(2) |       | 3                                          |       | 4 |   |
| Tax fees(3)            |       | —                                     |       | 1 |   |
| Total                  | ** ** | **18**                                     | ** ** | **26** | ** ** |

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(1)           Auditfees consist of fees billed for the annual audit of the company’s consolidatedfinancial statements and the statutory financial statements of the company’ssubsidiaries. They also include fees billed for other audit services, which arethose services that only the external auditor reasonably can provide, andinclude the review of documents filed with the Securities and ExchangeCommission.

(2)           Audit-relatedfees consist of fees billed for assurance and related services that arereasonably related to the performance of the audit or review of the company’sfinancial statements or that are traditionally performed by the externalauditor, and include consultations concerning financial accounting andreporting standards.

(3)           Taxfees include: fees billed for tax compliance services; tax consultations, suchas assistance and representation in connection with tax audits and appeals, taxadvice related to mergers and acquisitions and transfer pricing, and requestsfor rulings or technical advice from taxing authorities; and tax planningservices.

**Item 16D: Exemptions from theListing Standards for Audit Committees**

This item is not applicable.

**Item 16E. Purchases of EquitySecurities by the Issuer and Affiliated Purchasers**

Neither we nor any affiliated purchaser have purchasedany of our equity securities during the year ended December 31, 2004.

**PART III**

**Item 17. Financial Statements.**

The financial statements listed in the Index toFinancial Statements are filed or incorporated by reference as a part of thisAnnual Report.

**Item 18. Financial Statements.**

The registrant has responded to Item 17 in lieu of respondingto this item.

**Item 19. Exhibits**

The following is a list of exhibits filed as part ofthis Annual Report, including exhibits incorporated by reference.

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| Number     | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1   |       | Articles of Association of Tele2 AB (as amended and  adopted on May 17, 2001) (unofficial translation).(1)                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1   |       | Deposit Agreement, dated as of January 17,  1997, among NetCom, The Bank of New York as Depositary and the Owners and  Beneficial Owners from time to time of American Depositary Receipts evidencing  American Depositary Shares representing Series B Shares of NetCom.(2)                                                                                                                                                                                                                       |
| 2.2   |       | Specimen form of American Depositary Receipt  representing NetCom’s American Depositary Shares evidencing the right to  receive one Series B Share (nominal value SEK 5 per share) (included as  Exhibit A to Exhibit 2.1).(2)                                                                                                                                                                                                                                                           |
| 2.3   |       | Deposit Agreement, dated as of August 24, 2000,  among NetCom, The Bank of New York as Depositary and the Owners and  Beneficial Owners from time to time of American Depositary Receipts  evidencing American Depositary Shares representing Series A Shares of  NetCom.(3)                                                                                                                                                                                                                       |
| 2.4   |       | Specimen form of American Depositary Receipt  representing NetCom’s American Depositary Shares evidencing the right to  receive one Series A Share (nominal value SEK 5 per share) (included as  Exhibit A to Exhibit 2.3).(3)                                                                                                                                                                                                                                                           |
| 4.1   |       | License of Millicom Luxembourg S.A. to establish and  operate a cellular digital network for mobile communications, granted by the  Communications Minister of the Grand Duchy of Luxembourg on November 30,  1997.(5)                                                                                                                                                                                                                                                                                  |
| 4.2   |       | License of Tele2 AG, dated February 22, 2000,  to establish and operate a mobile communications network and mobile  communications services granted by the Government of the Principality of  Liechtenstein.(6)                                                                                                                                                                                                                                                                                         |
| 4.3   |       | License to render wireless telecommunications  services in the Republic of Latvia, dated August 29, 2000, granted by  the Minister of transport of the Republic of Latvia.(1)                                                                                                                                                                                                                                                                                                                           |
| 4.4   |       | License to establish and operate a public national  mobile digital cellular GSM-900 radio telecommunication network and to  provide services via the network, granted by the Minister of transport of the  Republic of Lithuania.(1)                                                                                                                                                                                                                                                                         |
| 4.5   |       | Operating License for a Mobile Communication Network  of General Use, issued by the Communications Board of Estonia, dated as of  November 24, 2000.(1)                                                                                                                                                                                                                                                                                                                                                 |
| 4.6   |       | Agreement between Industriförvaltnings AB Kinnevik  and Comviq GSM AB regarding the Banverket Rights, dated April 15,  1994.(4)                                                                                                                                                                                                                                                                                                                                                                    |
| 4.7   |       | Agreement between Industriförvaltnings AB Kinnevik  and Tele2 AB regarding the Banverket Rights, dated January 1995.(4)                                                                                                                                                                                                                                                                                                                                                                            |
| 4.8   |       | Agreement, dated October 28, 1998, between  Millicom Holding B.V. and NetCom AB for the acquisition of the entire issued  share capital of Beleggingsmaatschappij Belmus B.V.(7)                                                                                                                                                                                                                                                                                                                        |
| 4.9   |       | Shareholders’ Agreement, dated January 29,  1999, among Tele2 AB, Levicom International Holdings B.V., Levicom  Investments Curacao N.V., the shareholders of Levicom Investments Curacao  N.V. and NetCom AB relating to AS Levicom Cellular.(7)                                                                                                                                                                                                                                                  |
| 4.10       |       | Share Purchase Agreement, dated January 29,  1999, between Levicom International Holdings B.V. and Tele2 AB.(7)                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.11       |       | Framework Agreement, dated as of March 15,  2001, between TeliaSonera AB (publ), Telia Mobile AB, NetCom AB (publ) and  Tele2 AB.(8)                                                                                                                                                                                                                                                                                                                                                                    |
| 4.12       |       | Shareholder Agreement, dated as of March 15,  2001, between TeliaSonera AB (publ), Telia Mobile AB, NetCom AB (publ) and  Tele2 AB.(8)                                                                                                                                                                                                                                                                                                                                                                  |
| 4.13       |       | Amendment and restated Agreement, dated as of  November 28, 2001, among Tele2 Sverige AB, SociétéEuropéenne de  Communication S.A., ABN AMRO Bank N.V., CIBC World Markets plc, ING Bank  N.V., Nordbanken AB (publ), Royal Bank of Scotland plc and Westdeutsche  Landesbank Girozentrale, London Branch, amending and restating the Facility  Agreement, dated as of August 22, 2001, including as Annex A the amended  and restated form of the Facility Agreement.(9)           |
| 4.14       |       | Share Purchase Agreement, dated as of  November 30, 2001, between Millicom International Operations B.V., and  Tele2 AB.(9)                                                                                                                                                                                                                                                                                                                                                                             |
| 4.15       |       | Share Purchase Agreement, dated as of  December 28, 2001, between Levicom International Holdings B.V. and Tele2  Sverige AB.(9)                                                                                                                                                                                                                                                                                                                                                                         |
| 4.16       |       | Amendment Agreement, dated December 20, 2002,  among Tele2 Sverige AB, Tele2 Holding AB, the Security Providers, the  Original Cross-Guarantors, the Original Guarantors (as such terms are  defined in the Amendment Agreement), Tele2 AB (publ), ABN AMRO Bank N.V.,  CIBC World Markets plc, ING Bank N.V., Nordea Markets, the Royal Bank of  Scotland plc and WestLB, London Branch, amending and restating the amended  and restated Senior Loan Facility dated as of November 28, 2001.(10) |
| 4.17       |       | Amendment and Restatement Agreement dated  October 10, 2005 among Tele2 Sverige AB, Tele2 AB (publ) as Original  Guarantor, the Mandated Lead Arrangers, the Original Lenders and the Facility  Agent (as such terms are defined in the Credit Facility Agreement).                                                                                                                                                                                                                                     |
| 4.18       |       | Credit Facility Agreement, dated November 23,  2004, among Tele2 Sverige AB, Tele2 AB (publ) as Original Guarantor, the  Mandated Lead Arrangers, the Original Lenders and the Facility Agent (as such  terms are defined in the Credit Facility Agreement) as amended and restated  by an Amendment and Restatement Agreement dated October 10, 2005.                                                                                                                                             |
| 8.1   |       | List of subsidiaries and other associated companies  of Tele2 AB as of December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                               |
| 12.1  |       | Certification of CEO Pursuant to 17 C.F.R. 240.13a-14  or 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                 |
| 12.2  |       | Certification of CFO Pursuant to 17 C.F.R. 240.13a-14  or 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                 |
| 13.1  |       | Certification of CEO and CFO Pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                            |

 

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(1)           Previouslyfiled with the Securities and Exchange Commission in connection with the annualreport on form 20-F for the year ended December 31, 2000.

(2)           Previouslyfiled with the Securities and Exchange Commission in connection with theRegistration Statement on Form F-1 on March 12, 1997 (No. 333-6516).

(3)           Previouslyfiled with the Securities and Exchange Commission in connection with the RegistrationStatement on Form F-6 on August 24, 2000 (No. 333-12420).

(4)           Previouslyfiled with the Securities and Exchange Commission in connection with the annualreport on Form 20-F for the year ended December 31, 1996.

(5)           Previouslyfiled with the Securities and Exchange Commission in connection with theRegistration Statement on Form F-1 (No. 333-8952).

(6)           Previouslyfiled with the Securities and Exchange Commission in connection with theRegistration Statement on Form F-1 (No. 333-11782).

(7)           Previouslyfiled with the Securities and Exchange Commission in connection with the annualreport on Form 20-F for the year ended December 31, 1998.

(8)           Certainconfidential portions of this agreement have been omitted from the filedexhibit under Rule 24b-2 under the Securities Exchange Act of 1934.In accordance with this rule, the full text of the agreement has been filedseparately with the Securities and Exchange Commission.

(9)           Previouslyfiled with the Securities and Exchange Commission in connection with the annualreport on Form 20-F for the year ended December 31, 2001.

(10)         Previouslyfiled with the Securities and Exchange Commission in connection with the annualreport on Form 20-F to be filed for the year ended December 31,2002.

**SIGNATURES**

Pursuant to the requirements of Section 12 of theSecurities Exchange Act of 1934, the registrant hereby certifies that it meetsall of the requirements for filing on Form 20-F and that it has dulycaused and authorized the undersigned to sign this annual report on its behalf.

 
|        | Tele2 AB                                |
|--------|-----------------------------------------|
|   | */s/*Lars-Johan Jarnheime               |
|   | * *                                |
|   | *Lars-Johan Jarnheimer*                 |
|   | *President and Chief Executive Officer* |

Date: June 16, 2006

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**Index tothe Consolidated Financial Statements of Tele2 AB and Subsidiaries**
| Report of Independent  Registered Public Accounting Firm                                                         |   |   |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                             |   |   |   |
| Consolidated  Income Statements for the years ended December 31, 2005, 2004                                      |   |   |   |
|                                                                                                             |   |   |   |
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                                    |   |   |   |
|                                                                                                             |   |   |   |
| Consolidated Cash Flow Statements for the years ended  December 31, 2005, 2004                                   |   |   |   |
|                                                                                                             |   |   |   |
| Consolidated Statements of Changes in Shareholders’  Equity for the years ended December 31, 2005, and 2004 |   |   |   |
|                                                                                                             |   |   |   |
| Notes to Consolidated Financial Statements                                                                       |   |   |   |

 

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Shareholders of Tele2AB:

We have audited the accompanying consolidated balancesheets of Tele2 AB and subsidiaries (the “Company”) as of December 31, 2005 and2004, and the related consolidated statements of income, changes inshareholders’ equity and cash flow for the years then ended (all expressed inSwedish kronor). These consolidated financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of Tele2 ABand subsidiaries as of December 31, 2005 and 2004, and the results of theiroperations and their cash flows for the years then ended, in conformity withInternational Financial Reporting Standards as adopted by the European Union.

International Financial Reporting Standards as adoptedby the European Union vary in certain significant respects from accountingprinciples generally accepted in the United States of America. Informationrelating to the nature and effect of such differences is presented in Note 39to the consolidated financial statements

Our audit also comprehended the translation of Swedishkronor amounts into U.S. dollar amounts and, in our opinion, such translationhas been made in conformity with the basis stated in Note 1. Such U.S. dollaramounts are presented solely for the convenience of readers in the UnitedStates of America.

Deloitte ABStockholm, Sweden

June 15, 2006

F-2

----

**TELE2AB AND SUBSIDIARIESCONSOLIDATED INCOME STATEMENTS**(inmillions except share and per share data)
| ** **                                                    | ** ** | **Note**   | ** ** | **2004**    | ** ** | **2005**    | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | **SEK**     | ** ** | **SEK**     | ** ** | **USD**    | ** ** |
| Operating revenue                                             |       | (4         | )          | 43,033      |       | 49,943      |       | 6,292      |       |
| Cost of services sold                                         |       |       |       | (24,889     | )          | (29,701     | )          | (3,742     | )          |
|                                                          |       |       |       |        |       |        |       |       |       |
| **Gross profit**                                              | ** ** | ** ** | ** ** | **18,144**  | ** ** | **20,242**  | ** ** | **2,550**  | ** ** |
| Selling expenses                                              |       |       |       | (10,738     | )          | (12,569     | )          | (1,584     | )          |
| Administrative expenses                                       |       |       |       | (3,157      | )          | (4,254      | )          | (536       | )          |
| Other operating revenue                                       |       | (6         | )          | 92          |       | 231         |       | 29         |       |
| Other operating expenses                                      |       | (7         | )          | (40         | )          | (40         | )          | (5         | )          |
| Result from shares in associated companies and joint ventures |       | (8         | )          | 17          |       | (100        | )          | (12        | )          |
|                                                          |       |       |       |        |       |        |       |       |       |
| **Operating profit**                                          |       | (5         | )          | **4,318**   | ** ** | **3,510**   | ** ** | **442**    | ** ** |
| *Profit/loss on financial investments:*                       |       |       |       |        |       |        |       |       |       |
| Interest income                                               |       | (9         | )          | 99          |       | 89          |       | 11         |       |
| Interest costs                                                |       | (10        | )          | (372        | )          | (286        | )          | (36        | )          |
| Other financial items                                         |       | (11        | )          | 162         |       | (186        | )          | (23        | )          |
|                                                          |       |       |       |        |       |        |       |       |       |
| **Profit after financial items**                              | ** ** | ** ** | ** ** | **4,207**   | ** ** | **3,127**   | ** ** | **394**    | ** ** |
| Tax on profit for the year                                    |       | (13        | )          | (779        | )          | (786        | )          | (99        | )          |
|                                                          |       |       |       |        |       |        |       |       |       |
| **Net profit**                                                | ** ** | **(2,3**   | **)**      | **3,428**   | ** ** | **2,341**   | ** ** | **295**    | ** ** |
| ** **                                                    | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Attributable to:**                                          |       |       |       |        |       |        |       |       |       |
| Equity holders of the parent company                          |       |       |       | 3,428       |       | 2,347       |       | 296        |       |
| Minority interest                                             |       |       |       | —      |       | (6          | )          | (1         | )          |
|                                                          |       |       |       |        |       |        |       |       |       |
| **Net profit**                                                |       |       | ** ** | **3,428**   | ** ** | **2,341**   | ** ** | **295**    | ** ** |
|                                                          |       |       |       |        |       |        |       |       |       |
| Earnings per share                                            |       | (23        | )          | SEK 7.74    |       | SEK 5.30    |       | USD 0.67   |       |
| Earnings per share after dilution                             |       | (23        | )          | SEK 7.73    |       | SEK 5.29    |       | USD 0.67   |       |
|                                                          |       |       |       |        |       |        |       |       |       |
| Number of shares                                              |       | (23        | )          | 442,680,525 |       | 443,652,832 |       |       |       |
| Number of shares weighted average                             |       | (23        | )          | 442,680,525 |       | 442,842,576 |       |       |       |
| Number of shares after dilution                               |       | (23        | )          | 443,714,392 |       | 443,980,845 |       |       |       |
| Number of shares after dilution, weighted average             |       | (23        | )          | 443,741,574 |       | 443,391,246 |       |       |       |

 

Solely for the convenience of the reader, the 2005financial statements have been translated into United States Dollars (USD)using the December 30, 2005 noon buying rate of the Federal Reserve Bank of NewYork of USD 1 = SEK 7.9370. See Note 1. Such translations should not beconstrued as representations that the SEK amounts could be converted into U.S.dollars at the above or any other rate.

The accompanying notes are an integral part of theseconsolidated financial statements.

F-3

----

**TELE2AB AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(in millions)**
| ** **                                         | ** ** | **At December 31,** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **Note**                      | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | ** **                    | ** ** | **SEK** | ** ** | **SEK** | ** ** | **USD** | ** ** |
| ASSETS                                             |       |                          |       |   |   |   |   |   |   |
| **Fixed assets**                                   |       |                          |       |   |   |   |   |   |   |
| *Intangible assets*                                |       |                          |       |   |   |   |   |   |   |
| Goodwill                                           |       | (14                           | )          | 22,450 |   | 26,702 |   | 3,364 |   |
| Other intangible assets                            |       | (14                           | )          | 1,566 |   | 4,377 |   | 552 |   |
|                                               |       |                          |       |   |   |   |   |   |   |
| *Total intangible assets*                          |       |                          | ** ** | **24,016** | ** ** | **31,079** | ** ** | **3,916** | ** ** |
| *Tangible assets*                                  |       |                          |       |   |   |   |   |   |   |
| Machinery and technical  plant                     |       | (15                           | )          | 8,190 |   | 12,302 |   | 1,550 |   |
| Other tangible assets                              |       | (15                           | )          | 917 |   | 1,980 |   | 249 |   |
| * *                                           |       |                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Total tangible assets*                            |       |                          | ** ** | **9,107** | ** ** | **14,282** | ** ** | **1,799** | ** ** |
| *Financial assets*                                 |       |                          |       |   |   |   |   |   |   |
| Shares in associated  companies and joint ventures |       | (17                           | )          | 531 |   | 431 |   | 54 |   |
| Other financial assets                             |       | (18                           | )          | 93 |   | 75 |   | 10 |   |
| * *                                           |       |                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Total financial assets*                           |       |                          | ** ** | **624** | ** ** | **506** | ** ** | **64** | ** ** |
| *Deferred tax assets*                              |       | (13                           | )          | 3,218 |   | 5,281 |   | 665 |   |
| * *                                           |       |                          |       |   |   |   |   |   |   |
| **Total fixed assets**                             | ** ** | ** **                    | ** ** | **36,965** | ** ** | **51,148** | ** ** | **6,444** | ** ** |
| ** **                                         |       |                          |       |   |   |   |   |   |   |
| **Current assets**                                 |       |                          |       |   |   |   |   |   |   |
| *Materials and supplies*                           |       |                          |       | 308 |   | 516 |   | 65 |   |
| *Current receivables*                              |       |                          |       |   |   |   |   |   |   |
| Accounts receivable                                |       | (19                           | )          | 5,945 |   | 6,726 |   | 847 |   |
| Current tax receivables                            |       |                          |       | 6 |   | 149 |   | 19 |   |
| Other receivables                                  |       | (20                           | )          | 562 |   | 1,172 |   | 148 |   |
| Prepaid expenses and  accrued income               |       | (21                           | )          | 3,931 |   | 4,593 |   | 579 |   |
| * *                                           |       |                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| * *                                           |       |                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Total current receivables*                        |       |                          | ** ** | **10,444** | ** ** | **12,640** | ** ** | **1,593** | ** ** |
| *Cash and cash equivalents*                        |       | (22                           | )          | 2,148 |   | 3,979 |   | 501 |   |
| ** **                                         | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total current assets**                           | ** ** | ** **                    | ** ** | **12,900** | ** ** | **17,135** | ** ** | **2,159** | ** ** |
| ** **                                         |       |                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total assets**                                   |       | (2, 3)                        | ** ** | **49,865** | ** ** | **68,283** | ** ** | **8,603** | ** ** |

 

Solely for the convenience of the reader, the 2005financial statements have been translated into United States Dollars (USD) usingthe December 30, 2005 noon buying rate of the Federal Reserve Bank of New Yorkof USD 1 = SEK 7.9370. See Note 1.

The accompanying notes are an integral part of theseconsolidated financial statements.

F-4

----

**TELE2 AB AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

(in millions)
| ** **                                                | ** ** | ** ** | ** ** | **At December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|--------------------------|------------|------------|------------|
| ** **                                                | ** ** | **Note**   | ** ** | **2004**                 | ** ** | **2005**   | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | **SEK**                  | ** ** | **SEK**    | ** ** | **USD** | ** ** |
|                                                      |       |       |       |                     |       |       |       |   |   |
| EQUITY AND LIABILITIES                                    |       |       |       |                     |       |       |       |   |   |
| **Shareholders’ equity**                             |       | (23        | )          |                     |       |       |       |   |   |
| Share capital                                             |       |       |       | 738                      |       | 555        |       | 70 |   |
| Other paid-in capital                                     |       |       |       | 16,577                   |       | 16,819     |       | 2,119 |   |
| Reserves                                                  |       |       |       | 199                      |       | 2,035      |       | 256 |   |
| Retained earnings                                         |       |       |       | 15,384                   |       | 15,556     |       | 1,960 |   |
|                                                      |       |       |       |                     |       |       |       |   |   |
| **Attributable to equity holders of the parent  company** | ** ** | ** ** | ** ** | **32,898**               | ** ** | **34,965** | ** ** | **4,405** | ** ** |
| *Minority interests*                                      | ** ** | ** ** | ** ** | **2**                    | ** ** | **403**    |       | 51 |   |
| **Total shareholders’ equity**                       | ** ** | ** ** | ** ** | **32,900**               | ** ** | **35,368** | ** ** | **4,456** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Long-term liabilities**                                 |       |       |       |                     |       |       |       |   |   |
| *Interest-bearing*                                        |       |       |       |                     |       |       |       |   |   |
| Liabilities to financial institutions                     |       | (24        | )          | 1,258                    |       | 8,633      |       | 1,088 |   |
| Provisions                                                |       | (25        | )          | 19                       |       | 97         |       | 12 |   |
| Other liabilities                                         |       | (26        |       | 451                      |       | 819        |       | 103 |   |
| **Total interest-bearing**                                | ** ** | ** ** | ** ** | **1,728**                | ** ** | **9,549**  | ** ** | **1,203** | ** ** |
| *Non interest-bearing*                                    | * *   | * *   | * *   | * *                 | * *   | * *   | * *   | * * | * * |
| Deferred tax liability                                    |       | (13        | )          | 475                      |       | 1,759      |       | 222 |   |
| Provisions                                                |       | (25        | )          | 34                       |       | 114        |       | 14 |   |
| **Total non- interest-bearing**                           | ** ** | ** ** | ** ** | **509**                  | ** ** | **1,873**  | ** ** | **236** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total long-term liabilities**                           | ** ** | ** ** | ** ** | **2,237**                | ** ** | **11,422** | ** ** | **1,439** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Short-term liabilities**                                |       |       |       |                     |       |       |       |   |   |
| *Interest-bearing*                                        |       |       |       |                     |       |       |       |   |   |
| Liabilities to financial institutions                     |       | (24        | )          | 3,207                    |       | 5,812      |       | 733 |   |
| Provisions                                                |       | (25        | )          | 4                        |       | 17         |       | 2 |   |
| Other liabilities                                         |       | (26        | )          | 97                       |       | 447        |       | 56 |   |
|                                                      |       |       |       |                     |       |       |       |   |   |
| *Total interest-bearing*                                  | ** ** | ** ** | ** ** | **3,308**                | ** ** | **6,276**  | ** ** | **791** | ** ** |
| *Non-interest-bearing*                                    |       |       |       |                     |       |       |       |   |   |
| Accounts payable                                          |       |       |       | 5,060                    |       | 6,581      |       | 829 |   |
| Current tax liabilities                                   |       |       |       | 226                      |       | 396        |       | 50 |   |
| Provisions                                                |       | (25        | )          | 6                        |       | 234        |       | 29 |   |
| Other liabilities                                         |       | (27        | )          | 494                      |       | 585        |       | 74 |   |
| Accrued expenses and deferred income                      |       | (28        | )          | 5,634                    |       | 7,421      |       | 935 |   |
| *Total non-interest-bearing*                              | ** ** | ** ** | ** ** | **11,420**               | ** ** | **15,217** | ** ** | **1,917** | ** ** |
| **Total short-term liabilities**                          | ** ** | ** ** | ** ** | **14,728**               | ** ** | **21,493** | ** ** | **2,708** | ** ** |
| **Total shareholders’ equity and liabilities**       |       | (2,3       | )          | **49,865**               | ** ** | **68,283** | ** ** | **8,603** | ** ** |

 

Solely for the convenience of the reader, the 2005financial statements have been translated into United States Dollars (USD)using the December 30, 2005 noon buying rate of the Federal Reserve Bankof New York of USD 1 = SEK 7.9370. See Note 1.

The accompanying notes are an integral part of theseconsolidated financial statements.

F-5

----

**TELE2 AB AND SUBSIDIARIES**

**CONSOLIDATED CASH FLOW STATEMENTS**

(in millions)
| ** **                                                       | ** ** | **Note**   | ** ** | **2004**   | ** ** | **2005**    | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | **SEK**    | ** ** | **SEK**     | ** ** | **USD**    | ** ** |
| **Operating activities**                                         |       |       |       |       |       |        |       |       |       |
| Operating profit                                                 |       |       |       | 4,318      |       | 3,510       |       | 442        |       |
| *Adjustments for non-cash items:*                                |       |       |       |       |       |        |       |       |       |
| Depreciation and  amortization                                   |       |       |       | 2,328      |       | 2,968       |       | 374        |       |
| Result from shares in  associated companies and joint ventures   |       |       |       | (17        | )          | 100         |       | 12         |       |
| Capital gain/loss on  sale of fixed assets                       |       |       |       | (24        | )          | (130        | )          | (16        | )          |
| Finance leases                                                   |       |       |       | (39        | )          | (3          | )          | (—    | )          |
| Exchange rate differences                                        |       |       |       | (9         | )          | (74         | )          | (9         | )          |
| Interest received                                                |       |       |       | 133        |       | 70          |       | 9          |       |
| Interest paid                                                    |       |       |       | (301       | )          | (225        | )          | (28        | )          |
| Finance cost paid                                                |       |       |       | (9         | )          | (6          | )          | (1         | )          |
| Dividend received                                                |       |       |       | —     |       | 1           |       | —     |       |
| Taxes paid                                                       |       |       |       | (152       | )          | (552        | )          | (70        | )          |
| **Cash flow from operations before changes in  working capital** |       | (32        | )          | **6,228**  | ** ** | **5,659**   | ** ** | **713**    | ** ** |
| Changes in working capital:                                      |       |       |       |       |       |        |       |       |       |
| Materials and supplies                                           |       |       |       | 28         |       | (158        | )          | (20        | )          |
| Operating assets                                                 |       |       |       | (597       | )          | (918        | )          | (116       | )          |
| Operating liabilities                                            |       |       |       | 217        |       | 904         |       | 114        |       |
| **Changes in working capital**                                   |       | (32        | )          | **(352**   | **)**      | **(172**    | **)**      | **(22**    | **)**      |
| **Cash flow from operating activities**                          |       |       | ** ** | **5,876**  | ** ** | **5,487**   | ** ** | **691**    | ** ** |
|                                                             |       |       | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Investing activities**                                         |       |       |       |       |       |        |       |       |       |
| Acquisition of intangible assets                                 |       |       |       | (56        | )          | (740        | )          | (93        | )          |
| Sale of intangible assets                                        |       | (32        | )          | —     |       | 7           |       | 1          |       |
| Acquisition of tangible assets                                   |       | (32        | )          | (1,529     | )          | (2,915      | )          | (367       | )          |
| Sale of tangible assets                                          |       | (32        | )          | 23         |       | 8           |       | 1          |       |
| Acquisition of shares in Group companies (excluding cash)        |       | (32        | )          | (2,065     | )          | (7,720      | )          | (973       | )          |
| Sale of shares in Group companies                                |       | (16        | )          | 33         |       | 148         |       | 19         |       |
| Acquisition of other securities                                  |       |       |       | (737       | )          | —      |       | —     |       |
| Sale of other securities                                         |       |       |       | 899        |       | 22          |       | 3          |       |
| Other long-term lending                                          |       |       |       | (17        | )          | (12         | )          | (2         | )          |
| Other payments from long-term lending                            |       |       |       | 32         |       | 26          |       | 3          |       |
| **Cash flow from investing activities**                          |       |       | ** ** | **(3,417** | **)**      | **(11,176** | **)**      | **(1,408** | **)**      |
| **Cash flow after investing activities**                         |       |       | ** ** | **2,459**  | ** ** | **(5,689**  | **)**      | **(717**   | **)**      |
| **Financing activities**                                         |       |       |       |       |       |        |       |       |       |
| Proceeds from credit institutions                                |       |       |       | 7,403      |       | 11,306      |       | 1,425      |       |
| Repayment of loans from credit institutions                      |       |       |       | (9,554     | )          | (2,049      | )          | (258       | )          |
| Proceeds from other interest-bearing liabilities                 |       |       |       | 28         |       | 443         |       | 56         |       |
| Repayment of other interest-bearing liabilities                  |       |       |       | (508       | )          | (189        | )          | (24        | )          |
| Dividend/redemption                                              |       |       |       | (443       | )          | (2,213      | )          | (279       | )          |
| Proceeds from new shares issued                                  |       |       |       | —     |       | 59          |       | 7          |       |
| Shareholder contribution from minority owners                    |       |       |       | —     |       | 38          |       | 5          |       |
| **Cash flow from financing activities**                          |       |       | ** ** | **(3,074** | **)**      | **7,395**   | ** ** | **932**    | ** ** |
| **Net change in cash and cash equivalents**                      |       |       | ** ** | **(615**   | **)**      | **1,706**   | ** ** | **215**    | ** ** |
| Cash and cash equivalents at beginning of the year               |       | (22        | )          | 2,773      |       | 2,148       |       | 271        |       |
| Exchange rate differences in cash                                |       | (22        | )          | (10        | )          | 125         |       | 15         |       |
| **Cash and cash equivalents at end of the year***                |       | (22        | )          | **2,148**  | ** ** | **3,979**   | ** ** | **501**    | ** ** |
| **of which, restricted funds*                                    |       | (22        | )          | *365*      | * *   | *892*       | * *   | *112*      | * *   |
| For additional cash flow information, please refer to:           |       | (32        | )          |       |       |        |       |       |       |

 

Solely for the convenience of the reader, the 2005financial statements have been translated into United States Dollars (USD)using the December 30, 2005 noon buying rate of the Federal Reserve Bankof New York of USD 1 = SEK 7.9370. See Note 1.

The accompanying notes are an integral part of theseconsolidated financial statements.

F-6

----

**TELE2 AB AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

(in millions)
| ** **                                                      | ** ** | **Attributable to equity holders of the parent company** | ** ** | ** **                        | ** ** | ** **         | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **Share  capital**                                                                          | ** ** | **Other   paid-in  capital** | ** ** | **Hedge  reserve** | ** ** | **Trans-  lation  reserve** | ** ** | **Retained  earnings** | ** ** | **Total** | ** ** | **Minority  interest** | ** ** | **Total  equity** | ** ** |
| ** **                                                      | ** ** | **(SEK million)**                                                                      | ** ** |
| Shareholders’  equity at January 1, 2004              |       | 738                                                                                         |       | 16,577                            |       | 26                 |       | 631                         |       | 12,399 |   | 30,371 |   | 7 |   | 30,378 |   |
| *Items  recognized directly in shareholders’ equity:*      | * *   | * *                                                                                    | * *   | * *                          | * *   | * *           | * *   | * *                    | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Exchange rate difference                                        |       | —                                                                                      |       | —                            |       | 55                 |       | (487                        | )          | — |   | (432 | ) | (5 | ) | (437 | ) |
| Exchange rate difference, tax effect                            |       | —                                                                                      |       | —                            |       | (22                | )          | (4                          | )          | — |   | (26 | ) | — |   | (26 | ) |
| *Total  items recognized directly in shareholders’ equity* | * *   | *—*                                                                                    | * *   | *—*                          | * *   | *33*               | * *   | *(491*                      | *)*        | *—* | * * | *(458* | *)* | *(5* | *)* | *(463* | *)* |
| *Net  profit for the year:*                                     | * *   | * *                                                                                    | * *   | * *                          | * *   | * *           | * *   | * *                    | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Net profit                                                      |       | —                                                                                      |       | —                            |       | —             |       | —                      |       | 3,428 |   | 3,428 |   | — |   | 3,428 |   |
| * *                                                        | * *   | * *                                                                                    | * *   | * *                          | * *   | * *           | * *   | * *                    | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| **Total  for the year**                                         | ** ** | **—**                                                                                  | ** ** | **—**                        | ** ** | **33**             | ** ** | **(491**                    | **)**      | **3,428** | ** ** | **2,970** | ** ** | **(5** | **)** | **2,965** | ** ** |
| *Other  changes in shareholders’ equity:*                  | * *   | * *                                                                                    | * *   | * *                          | * *   | * *           | * *   | * *                    | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Dividend                                                        |       | —                                                                                      |       | —                            |       | —             |       | —                      |       | (443 | ) | (443 | ) | — |   | (443 | ) |
| **Shareholders’  equity at December 31, 2004**        | ** ** | **738**                                                                                     | ** ** | **16,577**                        | ** ** | **59**             | ** ** | **140**                     | ** ** | **15,384** | ** ** | **32,898** | ** ** | **2** | ** ** | **32,900** | ** ** |
| Shareholders’  equity at January 1, 2005              |       | 738                                                                                         |       | 16,577                            |       | 59                 |       | 140                         |       | 15,384 |   | 32,898 |   | 2 |   | 32,900 |   |
| *Items  recognized directly in shareholders’ equity:*      | * *   | * *                                                                                    | * *   | * *                          | * *   | * *           | * *   | * *                    | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Exchange rate difference                                        |       | —                                                                                      |       | —                            |       | (183               | )          | 1,917                       |       | — |   | 1,734 |   | (1 | ) | 1,733 |   |
| Exchange rate difference, tax effect                            |       | —                                                                                      |       | —                            |       | 60                 |       | 42                          |       | — |   | 102 |   | — |   | 102 |   |
| *Total  items recognized directly in shareholders’ equity* | * *   | *—*                                                                                    | * *   | *—*                          | * *   | *(123*             | *)*        | *1,959*                     | * *   | *—* | * * | *1,836* | * * | *(1* | *)* | *1,835* | * * |
| **Net  profit for the year:**                                   | ** ** | ** **                                                                                  | ** ** | ** **                        | ** ** | ** **         | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net profit                                                      |       | —                                                                                      |       | —                            |       | —             |       | —                      |       | 2,347 |   | 2,347 |   | (6 | ) | 2,341 |   |
| **Total  for the year**                                         |       | —                                                                                      |       | —                            |       | (123               | )          | 1,959                       |       | 2,347 |   | 4,183 |   | (7 | ) | 4,176 |   |
| *Other  changes in shareholders’ equity:*                  | * *   | * *                                                                                    | * *   | * *                          | * *   | * *           | * *   | * *                    | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| New share issues                                                |       | 1                                                                                           |       | 58                                |       | —             |       | —                      |       | — |   | 59 |   |   |   | 59 |   |
| Dividends and redemption procedures                             |       | (184                                                                                        | )          | 184                               |       | —             |       | —                      |       | (2,213 | ) | (2,213 | ) | — |   | (2,213 | ) |
| Minority’s share in acquired companies                     |       | —                                                                                      |       | —                            |       | —             |       | —                      |       | — |   | — |   | 408 |   | 408 |   |
| Shareholder contribution from minority                          |       | —                                                                                      |       | —                            |       | —             |       | —                      |       | 38 |   | 38 |   | — |   | 38 |   |
| **Shareholders’  equity at December 31, 2005**        | ** ** | **555**                                                                                     | ** ** | **16,819**                        | ** ** | **(64**            | **)**      | **2,099**                   | ** ** | **15,556** | ** ** | **34,965** | ** ** | **403** | ** ** | **35,368** | ** ** |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

F-7

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**TELE2 AB AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(in SEK millions unless otherwisestated)**

**CONTENTS**
| Note 1  |   | Accounting principles and  other information                   |   | F-9  |
|---------|--------|----------------------------------------------------------------|--------|------|
| Note 2  |   | Market areas                                                   |   | F-16 |
| Note 3  |   | Business areas..                                               |   | F-18 |
| Note 4  |   | Operating revenue..                                            |   | F-19 |
| Note 5  |   | Operating profit and  depreciation/amortization                |   | F-21 |
| Note 6  |   | Other operating revenue                                        |   | F-24 |
| Note 7  |   | Other operating expenses                                       |   | F-24 |
| Note 8  |   | Result from shares in  associated companies and joint ventures |   | F-25 |
| Note 9  |   | Interest income                                                |   | F-26 |
| Note 10 |   | Interest costs.                                                |   | F-26 |
| Note 11 |   | Other financial items                                          |   | F-26 |
| Note 12 |   | Exchange rate effects                                          |   | F-26 |
| Note 13 |   | Taxes                                                          |   | F-27 |
| Note 14 |   | Intangible assets                                              |   | F-29 |
| Note 15 |   | Tangible assets                                                |   | F-31 |
| Note 16 |   | Business acquisitions and  divestments                         |   | F-33 |
| Note 17 |   | Shares in associated  companies and joint ventures             |   | F-36 |
| Note 18 |   | Other financial assets                                         |   | F-37 |
| Note 19 |   | Accounts receivable                                            |   | F-38 |
| Note 20 |   | Other current receivables                                      |   | F-38 |
| Note 21 |   | Prepaid expenses and accrued  income.                          |   | F-39 |
| Note 22 |   | Cash and cash equivalents  and overdraft facilities            |   | F-39 |
| Note 23 |   | Number of shares and  earnings per share.                      |   | F-40 |
| Note 24 |   | Liabilities to financial  institutions.                        |   | F-41 |
| Note 25 |   | Provisions                                                     |   | F-43 |
| Note 26 |   | Other interest-bearing  liabilities                            |   | F-43 |
| Note 27 |   | Other short-term liabilities                                   |   | F-44 |
| Note 28 |   | Accrued expenses and  deferred income                          |   | F-45 |
| Note 29 |   | Pledged assets.                                                |   | F-45 |
| Note 30 |   | Contingent liabilities                                         |   | F-45 |
| Note 31 |   | Operating leases and other commitments                         |   | F-46 |
| Note 32 |   | Supplementary cash flow information                            |   | F-47 |
| Note 33 |   | Number of employees                                            |   | F-48 |
| Note 34 |   | Personnel costs                                                |   | F-48 |
| Note 35 |   | Remuneration of auditors                                       |   | F-51 |
| Note 36 |   | Financial risk management                                      |   | F-52 |
| Note 37 |   | Transition to IFRS                                             |   | F-52 |
| Note 38 |   | Transactions with related parties                              |   | F-55 |
| Note 39 |   | Summery of significant differences between IFRS  and US GAAP   |   | F-57 |
| Note 40 |   | Significant events subsequent to the balance  sheet date       |   | F-63 |

##  

F-8

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## **NOTE1 ACCOUNTING PRINCIPLES AND OTHER INFORMATION**

**OPERATIONS**

References to “Tele2”, the “Group” or the “Tele2 Group”in theses notes to the financial statements pertain to Tele2 AB (the parent)and its subsidiaries in accordance with the description below, unlessspecifically indicated otherwise.

Tele2 is a European alternative telecom operator. Tele2strives to offer the market’s best prices and to provide cheap and simpletelecoms for all Europeans in the markets in which we operate. We have over to30 million customers in 23 countries. Tele2 offers products and services withinfixed and mobile telephony, broadband and cable-TV. Our main competitors arethe former government monopolies. Tele2 was founded in 1993 by Jan Stenbeck andhas been listed on Stockholmbörsen since 1996. In 2005, we had an operatingrevenue of SEK 49.9 billion and a profit before income taxes of 3.1 billion.

**GENERALACCOUNTING PRINCIPLES**

The consolidated financialstatements have been prepared in accordance with the International FinancialReporting Standards (IFRS) and the interpretations of the InternationalFinancial Reporting Interpretations Committee (IFRIC) of January 1, 2005,as adopted by the EU. The IFRS transition date is January 1, 2004. Thismeans that comparative figures for 2004 have been restated according to the newstandards. The Group also applies the Swedish Financial Accounting StandardsCouncil’s recommendation RR30, *SupplementaryRules for Consolidated Financial Statements*, which specifiesadditional information required under the Swedish Annual Accounts Act.

The financial reports have been prepared on the basisof historic acquisition value, apart from financial instruments which arenormally based on the amortized cost method, with the exception of otherlong-term securities which are measured at fair value.

Further information on the transition to IFRS canbe found in Note 37.

**New regulations**

IFRS 6 *Explorationfor and Evaluation of Mineral Resources*, IFRIC 4 *Determining Whether an Arrangement Contains a Lease* andIFRIC 5 *Rights to Interests Arising From Decommissioning,Restoration and Environmental Rehabilitation Funds* are applied as ofJanuary 1, 2006. IFRS 7 *Financial InstrumentsDisclosures* will be applied as of January 1, 2007. Earlierapplication is encouraged.

IFRIC 4 will be appliedprospectively and provides guidelines for determining whether an arrangementwhich does not legally constitute a lease should still be reported inaccordance with IAS 17 *Leases*.

IFRS 7 will be appliedprospectively and does not involve any change to reporting and measurement offinancial instruments. However, there will be certain additional disclosurerequirements compared with previous requirements under IAS 32.

IFRS 6 and IFRIC 5 are notapplicable to Tele2’s operations.

**CONSOLIDATION**

The consolidated accountsinclude the parent company and the companies where the parent company directlyor indirectly holds more than 50% of the voting rights or in any other way hascontrol.

The consolidated accounts areprepared in accordance with the purchase method. This means that consolidatedshareholders’ equity only includes the subsidiary’s equity that arose after theacquisition and the consolidated income statements only include earnings fromthe date of acquisition until the date of divestment, if the subsidiary issold. The difference between the acquisition value of shares in subsidiariesand the fair value of the subsidiary’s identifiable assets, liabilities andcontingent liabilities at the time of acquisition is reported as goodwill.

Accounts of all foreign groupcompanies are in the currency used in the primary economic environment of eachcompany’s main activity, which is normally the local currency.

The assets and liabilities offoreign group companies are translated to Tele2’s reporting currency (SEK) atthe closing exchange rate, while income and expenses are translated at the year’saverage exchange rates. Exchange rate differences arising from translation arereported as a translation reserve in shareholders’ equity. When foreign groupcompanies are divested, the accumulated exchange rate difference attributableto the sold group company is recognised in the income statement.

Goodwill and adjustments tofair value which arise from the acquisition of a foreign entity are treated asassets and liabilities of the acquired entity and are translated at the closingrate.

F-9

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**ASSOCIATED COMPANIES AND JOINTVENTURES**

Associated companies arecompanies in which the holding is considered to be long-term and Tele2 hasvoting power of between 20% and 50% or in some other way has significantinfluence. Joint ventures are companies over which the owners have a jointcontrol.

Associated companies and jointventures are accounted for in accordance with the equity method. This meansthat the group’s carrying amount of the shares in the company correspond to thegroup’s share of shareholders’ equity as well as any residual value ofconsolidated surplus values after application of the group’s accountingprinciples. The share of the company’s profit or loss after net financial itemsis reported as a part of “Operating profit” as “Result from shares inassociated companies and joint ventures”, along with depreciation of theacquired surplus value. The share of the company’s tax expense/income isincluded in the income statement on the line “Tax on profit for the year”. Thecompany’s tax assets/liabilities are reported in the balance sheet as “Sharesin associated companies and joint ventures”.

In the event of an increase ordecrease in the group’s equity share in associated companies and joint venturesthrough share issues, the gain or loss is reported in the consolidated incomestatement as result from shares in associated companies and joint ventures. Inthe event of negative equity in an associated company and joint venture, wherethe company has committed to contribute additional capital, the negativeportion is reported as a liability.

Group surplus values relatingto foreign associated companies and joint ventures are reported as assets inforeign currencies. These values are translated in accordance with the sameprinciples as the income statements and balance sheets for associated companiesand joint ventures.

**REVENUE RECOGNITION**

Operating revenue includescustomer-related revenues from mobile and fixed telephony services such asconnection charges, subscription charges, call charges, data and informationservices and other services. Operating revenue also includes interconnectrevenue from other operators and income from the sale of products such asmobile phones and modems. Revenues are reported at the selling value, lessdiscounts and VAT.

Connection charges arerecognized at the time of the sale. Subscription charges for mobile and fixedtelephony services, cable TV, ADSL, dial-up internet, leased capacity andinternet connection for direct access customers are recognized in the periodcovered by the charge. Call charges and interconnect revenue are recognized inthe period during which the service is provided. Revenue from the sale ofproducts is recognized at the time the product is supplied to the customer.Revenue from the sale of cash cards is recognized based on actual use of thecard or when the expiry date has passed.

Revenue from data andinformation services such as text messages and ring tones is recognized whenthe service is provided. When Tele2 acts as agent for another supplier, therevenue is reported net, i.e. only that part of the revenue that is allocatedto Tele2 is reported as revenue.

**OPERATING EXPENSES**

Operating expenses areclassified according to function, as described below. Depreciation andamortization and personnel costs are stated by function. Total costs fordepreciation and amortization are presented in Note 5 and the total personnelcosts are presented in Note 34.

**Cost of services sold**

Cost of services sold consistsof costs for renting and leasing networks and capacity as well as interconnectcharges. The cost of services sold also includes the part of the cost forpersonnel, premises, purchased services and depreciation and amortization offixed assets attributable to production of sold services.

**Selling expenses**

Selling expenses include costsfor internal sales organization, purchased services, personnel costs, rentalcosts, as well as depreciation and amortization of fixed assets attributable tosales activities. Advertising and other marketing activities are also includedand are expensed continuously.

**Administrative expenses**

Administrative expensesconsist of the part of the personnel costs, rental costs, purchased services aswell as depreciation and amortization of fixed assets attributable to the otherjoint functions. Costs associated with Board of Directors, business management and stafffunctions are included in administrative expenses.

**Other operating revenues and otheroperating expenses**

Other operating revenues andother operating expenses apply to secondary activities, exchange ratedifferences in operating items and capital profit/loss on the sale of tangibleassets. The group accounts also include capital profit/loss on the sale ofsubsidiaries and associated companies and joint ventures.

F-10

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**NUMBER OF EMPLOYEES, SALARY ANDREMUNERATION**

The average number ofemployees (Note 33) as well as salaries and remunerations (Note 34) forcompanies acquired during each year is reported in relation to how long thecompany has been a part of the Tele2 Group.

The number of employees aswell as salaries and remunerations are not reported per country, butcategorized and presented per market area in order to promote clarity andprovide a more true and fair view which complies with other parts of the annualreport and therefore to facilitate a comparison with operating revenue andother income statement items.

**SHARE-BASED PAYMENTS**

Tele2 grants options and othershare-based instruments to certain employees.

Tele2 has chosen to use IFRS 1’sexemption rule with regard to share-based payments. IFRS 2 *Share-based payments*are therefore notapplied to the incentive programmes that were granted before November 7,2002 and were vested prior to January 1, 2005. For these incentiveprogrammes, previous accounting principles are applied which means that thepremium paid by the employees upon exercise is reported directly againstshareholders’ equity. To the extent that the instrument’s actual value exceedsthe premium, no cost has been charged to the income statement.

For other incentiveprogrammes, the fair value, calculated at the date of grant, of the allottedoptions and other share-based instruments arecharged over the vesting period. Possible influence of non market-relatedconditions for earnings has been excluded. Payments received, after deductionsfor any costs directly related to transactions, are credited shareholders’equity.

**PENSIONS**

The Group has a number ofpension schemes, where the main part of Tele2’s pension plans consist ofdefined-contribution plans (Note 34) for which the Group makes payments topublic and private pension institutions. The regular payments represent thepension expenses for the year and are included in personnel costs. Paymentsmade by the Group with regard to defined-contribution pension plans arereported as an expense during the period in which the employees performed theservices to which the contribution relates. Only a small part of the Group’spension commitments relate to defined-benefit plans.

The defined-contribution plansensure a certain predefined payment of premiums and changes of the value ofinvestments is not compensated by Tele2. Therefore Tele2 does not bear the riskat the time of pension payment.

**CORPORATE INCOME TAX**

When accounting for incometaxes, the balance sheet method is applied. The method involves deferred taxliabilities and assets for all temporary differences between the carryingamount of an asset or liability in the balance sheet and its tax base as wellas other tax-related deductions or deficits. An item which alters the time whenan item is taxable or deductible is considered a temporary difference. Deferredtax liabilities and assets are calculated based on the expected tax rate at thetime of reversal of the temporary difference.

Profit or loss for the year ischarged with the tax on taxable income for the year (“current tax”), and withestimated tax/tax reduction for temporary differences (“deferred tax”).

The calculation of deferredtax assets takes into account the loss carry-forwards and temporary differenceswhere it is likely that losses will be utilized toward future gains. In caseswhere a company reports losses, an assessment is made of whether sufficienttaxable profits will be available against which loss carry-forwards can beutilized. When Tele2 launches in new markets by making use of a common businessmodel applicable for the group, a continuous comparison can be made betweenactual and expected development according to the model. When newly establishedcompanies are showing they will generate a positive result and therefore willlikely utilize tax loss carry-forwards that have accrued during theestablishment period, deferred tax assets are recorded to the company’s losscarry-forward amount, including positive temporary differences, with thementioned model as a basis.

Valuation and accounting fordeferred taxes in connection with the acquisition of companies is done as partof the valuation of assets and liabilities to the fair value at the time ofacquisition. In these circumstances, the deferred tax assets are assessed at avalue corresponding to what the company expects to utilize. When an acquiredcompany has loss carry-forwards and Tele2, at the time of acquisition, has madean assessment that the related tax assets are not realizable, but a subsequentassessment results in tax assets being recorded and reported in the incomestatement as a tax benefit, an amount corresponding to the reported value ofthe original loss carry-forward will reduce the book value of goodwill by meansof an expense in the income statement.

Deferred tax assets anddeferred tax liabilities are netted only among group companies within the sametax jurisdiction.

F-11

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**EARNINGS PER SHARE**

Earnings per share afterdilution (Note 23) are calculated according to a method where the redemptionprice of outstanding options is compared to the average market value of Tele2’sshares during the financial period.

**FIXED ASSETS**

Intangible assets (Note 14)and tangible assets (Note 15) with a finite useful life are reported at theacquisition value with deductions for accumulated depreciation andamortization. Depreciation and amortization is based on the acquisition valueof the assets less the estimated residual value at the end of the useful life andis done on a straight-line basis throughout the asset’s estimated useful life.Useful lives and residual values are subject to annual review. Useful lives forfixed assets are illustrated below.

| *Intangible assets:*                      |   |            |
|-------------------------------------------|--------|-----------------|
| Licenses, utilization rights and software |   | 1—23 years |
| Interconnection agreements                |   | 5—10 years |
| Customer agreements                       |   | 4 years         |
|                                      |   |            |
| *Tangible assets:*                        |   |            |
| Buildings                                 |   | 5—40 years |
| Modem                                     |   | 3 years         |
| Machinery and technical plant             |   | 2—25 years |
| Equipment and installations               |   | 2—10 years |

 

At the end of each reportingperiod an assessment is made of whether there is any indication of reducedvalue with regard to the Group’s assets. If there is any indication that afixed asset has declined in value, a calculation of its recoverable amount ismade.

The recoverable amount is thehigher of the assets value in use in the operations and the value that isachieved if the asset is divested to an independent party, the net sales value.The value in use consists of the present value of all cash flows from the assetduring the utilization period as well as the addition of the present value ofthe net sales value at the end of the utilization period. If the estimatedrecoverable amount is less than the carrying amount, the asset is written downto its recoverable amount.

Impairments are reported inthe income statement. Impairments that have been recorded are reversed ifchanges are made in the assumptions that led to the original impairment. Theimpairment reversal is limited to the carrying amount, net of depreciationaccording to plan, had the original impairment not occurred. A reversal ofimpairment is reported in the income statement. Impairment of goodwill is notreversed.

**Intangible assets**

Tele2 holds a number oflicenses entitling it to conduct telephony operations. The costs related to theacquisition of these licenses are reported and amortized on a straight-linebasis through the duration of the license agreements.

Goodwill is measured as thedifferences between the fair value of the identifiable assets, the liabilitiesand contingent liabilities and the total purchase price of the acquisition.Goodwill is reported at acquisition value with deduction for any write-downs.Where the fair value of the acquired net assets exceeds the purchase cost, thesurplus is immediately reported as income in the income statement.

Goodwill has been allocated tothe cash generating units that are expected to obtain benefits as a result ofthe acquisition and is, along with the intangible assets with indefinite livesand intangible assets that are not put to use, subject to annual impairmenttesting even if there is no indication of a fall in value. The impairment testof goodwill has been made at the lowest level where separable cash flows areidentified. The value of the respective cash generating unit is based on theestimated value in use. The most important factors that influenced the year’simpairment testing are presented in Note 14.

In the case of reorganizationor divestment involving the change of the composition of cash generating unitsto which goodwill has been allocated, the goodwill shall be allocated to therelevant units. The allocation is based on the value of the part of the cashgenerating unit which the reorganization or divestment relates to, and the partthat remains after the reorganization or the divestment.

Customer agreements are valuedin conjunction with business acquisitions. Tele2 applies a model where theaverage cost of acquiring new customers or alternatively, expected future cashflows, is applied to value customer agreements. The customer agreements areamortized during their useful life on a straight-line basis.

Tele2 capitalizes externaldirect development expenses for software which are specific to its operations.These costs are amortized over the utilization period, which begins when theasset is ready for use. Costs relating to the planning phase of the projects aswell as costs of maintenance and training are expensed as incurred. Otherexpenses relating to development work are expensed as they arise, since they donot meet the criteria for being reported as an asset.

F-12

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**Tangible assets**

Landand buildings relate to assets intended for use in operations. Buildings aredepreciated on a straight-line basis during the utilization period withdeductions for estimated residual value at the end of the utilization period.The acquisition value includes the direct costs attributable to the building.

Machineryand technical plant include equipment and machinery intended for use inoperations, such as network installations. Depreciation of the asset is made ona straight-line basis over the utilization period. The acquisition valueincludes the direct expenses attributable to the construction and installationof networks.

Additionalexpenses for extension and value-increasing improvements to the assets originalcondition are capitalized, while additional expenses for repairs andmaintenance are charged to income during the period in which they arise.

Equipmentand installations comprise assets used in administration, sales and operations.

**Expenses attributable to modem**

Tele2charges modem-related expenses over the period in use. Other expenses, such asinstallation costs, are expensed as incurred.

**Loan expenses**

Loanexpenses which are directly attributable to acquisition, construction orproduction of an asset which of necessity requires considerable time tocomplete for the intended usage are included in the acquisition value of theasset. Other interest expenses are expensed in the period in which they arise.

**Leases**

Leasesare classified as finance or operating leases. A lease is classified as afinance lease if it transfers substantially all the economic risks and rewardsof ownership of an asset tothe lessee. When reporting a financial lease in the consolidated accounts, eachasset is recorded as a tangible asset, and a corresponding amount is entered asa lease obligation under liabilities (Note 15 and 26). The asset is depreciatedon a straight-line basis over the utilization period, with the estimatedresidual value deducted at the end of the utilization period. A lease isclassified as an operating lease if substantially all the economic risks andrewards of ownership of an asset remain with the leasing company. Payments areexpensed in the income statement on a straight-line basis over the leasingperiod.

**Dismantling costs**

Insofaras there is a commitment to a third party, the estimated cost of dismantlingand removing an asset and restoring the site/area is included in theacquisition value. Any change to the estimated cost of dismantling and removingan asset and restoring the site is added to or subtracted from the carryingamount of the particular asset. Tele2 does not consider there to be any suchmaterial commitments in respect of the company’s assets at the present time.

**FINANCIAL ASSETS AND LIABILITIES**

Acquisitionsand sales of financial assets are reported on the trading date, which is thedate that the Group has an undertaking to acquire or sell the asset. Financialinstruments are initially recognized at acquisition value and then updated on acontinuous basis to the fair value or amortized cost based on the initialcategorization.

**Other long-term securities**

Tele2’sother long-term securities are classified as assets at fair value throughprofit or loss. Assets in this category are initially reported at acquisitionvalue, i.e. fair value at the time of acquisition, and valued thereafter on acontinuous basis at fair value. The change in values is reported in the incomestatement. If Tele2 has not obtained a reliable valuation, the securities arevalued its acquisition cost.

**Receivables**

Tele2’saccounts receivable and other receivables are categorized as “Loan receivablesand other receivables” and reported on a continuous basis at accruedacquisition value, which corresponds to their nominal amounts. On each closingday, a revaluation is done of these assets.

**Cash and cash equivalents**

Cashand cash equivalents consist of cash and bank balances as well as currentinvestments with a maturity of less than three months. Cash and cashequivalents according to the cash flow statement and balance sheet includerestricted funds (Note 22). Restricted funds can be made available within 3months.

**Financial liabilities**

Financialliabilities not included by the hedge accounting are reported and valued atamortized cost. Direct costs related to the origination of loans are includedin the acquisition value. Financial liabilities in foreign currency aretranslated at the closing exchange rate.

**Hedge accounting of financialliabilities in foreign currency**

Changesin fair values for loans in foreign currency fulfilling the hedge accountingrequirements of net investment in 

F-13

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foreign operations arereported on a continuous basis as hedge reserve in shareholders’ equity. Whendivesting foreign subsidiaries, the accumulated exchange rate differenceattributable to the divested subsidiary is recorded in the income statement.

**Receivables and liabilities inforeign currency**

Receivables and liabilities ofgroup companies denominated in foreign currencies have been translated intoSwedish kronor applying the year-end rates.

Gains or losses on foreignexchanges relating to regular operations are included in the income statementunder Other operating revenues/expenses. Differences in financial assets and liabilitiesare reported within profit/loss from financial items. A summary of the exchangerate differences charged directly to shareholders’ equity is presented in thestatement “Change in consolidated shareholders’ equity” and the differenceswhich affected profit/loss of the year are presented in Note 12.

When long-term lendingto/borrowing from Tele2’s foreign operations is regarded as a permanent part ofthe parent company’s financing of/borrowing from foreign operations, and thusas an expansion/reduction of the parent company’s investment in the foreignoperations, the lending/borrowing is translated at the historical rate ofexchange if the borrowing is denominated in the foreign company’s currency. Inthese cases, the consequence is that the exchange rate changes of theintra-group transactions in the group accounts are reported directly to thetranslation reserve in shareholders’ equity.

**INVENTORIES**

Inventories of materials andsupplies are valued in accordance with the first-in, first-out principle at thelower of acquisition value and net realizable value. Tele2’s inventoriesessentially consist of SIM cards, telephones and modems.

**SHAREHOLDERS’ EQUITY**

Shareholders’ equity consistsof the registered share capital, other paid-in capital, hedge reserve,translation reserve, retained earnings, profit/loss for the year and minorityinterests.

Other paid-in capital relatesto capital injections through issues of new shares. Additional direct costsattributable to the issue of new shares are reported directly againstshareholders’ equity as a reduction, net after taxes, of proceeds from theshare issue.

Hedge reserve involvestranslation differences on external loans in foreign currencies which are usedto secure net investments in foreign subsidiaries.

Translation reserves involvetranslation differences attributable to translation of foreign subsidiaries toTele2’s reporting currency as well as translation differences on intra-grouptransactions which are considered an expansion/reduction of the parent company’snet investment in foreign operations.

Minority interest involves thevalue of minority shares in net assets for subsidiaries included in theconsolidated accounts at the time of the original acquisition and the minorityshareholders’ share of changes in equity after the acquisition.

**PROVISIONS**

Provisions are reported when acompany within the Group, as a result of the events that have occurred, has alegal or constructive obligation, when it is probable that payments will berequired in order to fulfil the commitments and a reliable estimate can be doneof the amount to be paid.

**SEGMENTS**

Tele2’s operations are dividedinto market areas and business areas. Since the risks in the operationsprimarily are controlled by the various markets where Tele2 operates, themarket areas constitute the primary segment and business areas the secondary.Market area grouping follows the method of internal reporting to the board andmanagement and is divided into six market areas of which five are geographic.

Assets in each segment includeall operating assets that are utilized by the segment and consist mainly ofintangible and tangible assets, shares in associated companies and jointventures, materials and supplies, accounts receivable, other receivables,prepaid expenses and accrued revenues. Goodwill is distributed among the Group’scash generating units, identified in accordance with Note 14.

Liabilities in each segmentinclude all operating liabilities that are utilized by the segment and consistmainly of accounts payable, other non-interest-bearing liabilities, accruedexpenses and deferred income.

Assets and liabilities notdivided into segments include current and deferred taxes and items of afinancial or interest-bearing nature.

F-14

----

For the secondary segment it isnot practical to distribute accounts receivable and other current assets bybusiness area and therefore, these assets are reported as undistributed assets.

Segment information by marketarea is provided in Note 2 and segment information by business area ispresented in Note 3. Segment information for operating revenue, operatingprofit and investments are presented in Note 4, Note 5 and Note 32, where theintra-group sales eliminated under each market area relate to sales tocompanies in the Tele2 Group.

**Internal pricing**

The sale of services in theTele2 Group is made on market terms. Group-wide costs are invoiced tooperations that have used the services.

**CHOICE OF ACCOUNTING PRINCIPLES**

When choosing and applyingTele2’s accounting principles, the board and the president have made thefollowing choices.

**Reporting of joint ventures**

Tele2 reports joint venturesaccording to the equity method of accounting. Another accepted method is theproportional method, which means that the consolidated balance sheet includesthe Group’s share of assets and liabilities in joint ventures as well as anyresidual value of consolidated surplus value when the Group’s accountingprinciples have been applied. The consolidated income statement includes theGroup’s share of joint venture’s revenues and expenses.

Application of theproportional method would increase Tele2’s total assets and liabilities whilethe net income would be unchanged.

**ASSESSMENTS AND ESTIMATES**

The group financial reportsare partly based on assumptions and estimates related to the preparation of thegroup accounts. The estimates and calculations are based on historicalexperience and a number of other assumptions to result in a decision regardingthe value of the assets or liabilities which cannot be determined in any otherway. The actual outcome may vary from these estimates and assessments.

The most critical assessmentsand estimates used in preparing the Group’s financial reports are as follows:

**Valuation of acquired intangibleassets**

When acquiring businesses,intangible assets are valued at fair value. If there is an active market forthe acquired assets, the fair value is defined based on the prices on thismarket. Since there is often no active markets for these assets, valuationmodels have been developed to estimate the fair value. Examples of valuationmodels are discounting of future cash flows and estimates of Tele2’s historiccosts to acquire corresponding assets.

**Valuation of goodwill**

When estimating cashgenerating units’ recoverable amount for the evaluation of goodwill impairment,the assumption of future values and estimates of parameters are made. Theseassumptions are presented in Note 14.

**Valuation of property, plant andequipment with a finite useful life**

If the recoverable amountfalls below the book value, an impairment is recognized. The decision ofwhether the existing factors indicating that an asset is exposed to animpairment is based on management’s evaluation of future cash flows includingdiscounting factors.

**Useful lives for fixed assets**

Depreciation rates are basedon the acquisition value of the fixed assets and the estimated utilizationperiod with deduction for calculated residual value at the end of theutilization period. If technology is developed faster than expected or thecompetition, regulating or market conditions are developed differently thanexpected, the company’s evaluation of utilization periods and residual valueswill be influenced.

**Valuation of deferred income tax**

Deferred income tax accountingtakes into consideration temporary differences, including a valuation ofunutilized loss carry-forwards. Deferred tax assets are reported for losscarry-forwards only to the extent that it is considered likely that the losscarry-forward can be utilized to offset future profits. Management updates itsassessments at regular intervals. The valuation of deferred tax assets is basedon expectations of future results and market conditions, which in turn aresubjective.

**Valuation of disputes and damages**

Tele2 is party to a number ofdisputes. For each separate dispute an assessment is made of the most likelyoutcome, and the income statement is affected by the estimated expenses.

 

F-15

----

**Valuation of receivables**

Receivables are valuedcontinuously and are reported at accrued acquisition value. Reserves fordoubtful accounts are based on various assumptions as well as historicexperience.

**Translation ofSwedish kronor Statements to U.S. Dollar Statements**

**The financial statements are statedin Swedish kronor (SEK), the currency of the country in which the company isincorporated and operates. The translations of SEK amounts to U.S. dollaramounts are included solely for the convenience of the readers in the UnitedStates of America and have been made at the December 30, 2005 noon buyingrate of the Federal Reserve Bank of New York of USD 1=SEK 7.9370.**

**NOTE 2 MARKETAREAS**

The Nordic market area includes operations in Sweden,Norway and Denmark. The Baltic & Russia market area comprisesoperations in Estonia, Latvia, Lithuania, Russia and Croatia. The CentralEurope market area comprises operations in Germany, Austria, Poland, the CzechRepublic and Hungary. The Southern Europe market area includes operations inFrance, Italy, Spain, Switzerland and Portugal. The UK & Beneluxmarket area includes operations in the Netherlands, Luxembourg, Liechtenstein,Belgium, Alpha Telecom and C3 operations. The Services market area includes 3C,Datametrix, ProcureITright, Radio Components and UNI2, where a number of theseare operating in several countries. In 2005 Tele2 has changed reporting of themarket area structure where a number of companies which previously wereincluded in the market areas Southern Europe and Services respectively are nowincluded in UK & Benelux. The Datametrix operations have also beenmoved from Nordic to Services. The change is primarily a consequence of alteredareas of responsibility in connection with the replacement of the Market AreaDirectors as well as Services. This change has been applied retrospectively forearlier periods.
| ** **                                           | ** ** | **Year ended December 31, 2004** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **Nordic**                                           | ** ** | **Baltic &  Russia** | ** ** | **Central  Europe** | ** ** | **Southern  Europe** | ** ** | **UK &  Benelux** | ** ** | **Services** | ** ** | **Un-  distributed  as well as  internal  elimination** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **(SEK in millions)**                      | ** ** |
|                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income  statement**                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  revenue                                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                                             |       | 13,467                                               |       | 3,297 |   | 5,058 |   | 14,152 |   | 6,536 |   | 523 |   | — |   | 43,033 |   |
| Internal                                             |       | 169                                                  |       | 1 |   | 420 |   | 85 |   | 176 |   | 207 |   | (1,058 | ) | — |   |
| **Operating  revenue**                               | ** ** | **13,636**                                           | ** ** | **3,298** | ** ** | **5,478** | ** ** | **14,237** | ** ** | **6,712** | ** ** | **730** | ** ** | **(1,058** | **)** | **43,033** | ** ** |
| Result from  associated companies and joint ventures |       | 17                                                   |       | — |   | — |   | — |   | — |   | — |   | — |   | 17 |   |
| Operating profit                                     |       | 2,315                                                |       | 457 |   | (397 | ) | 1,023 |   | (898 | ) | (9 | ) | 1,827 |   | 4,318 |   |
| Interest income                                      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   | 99 |   | 99 |   |
| Interest costs                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   | (372 | ) | (372 | ) |
| Other financial  items                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   | 162 |   | 162 |   |
| Tax on profit  for the year                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   | (779 | ) | (779 | ) |
| **Net  profit**                                      | ** ** | **2,315**                                            | ** ** | **457** | ** ** | **(397** | **)** | **1,023** | ** ** | **(898** | **)** | **(9** | **)** | **937** | ** ** | **3,428** | ** ** |
|                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ** Other information**                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments,  intangible assets                      |       | 13                                                   |       | 16 |   | 17 |   | — |   | 1 |   | 9 |   | — |   | 56 |   |
| Investments,  tangible assets                        |       | 415                                                  |       | 683 |   | 145 |   | 123 |   | 129 |   | 53 |   | (19 | ) | 1,529 |   |
| *Non-cash  generating profit/loss items:*            | * *   | * *                                             | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Depreciation/amortization                            |       | (901                                                 | )          | (483 | ) | (572 | ) | (154 | ) | (175 | ) | (43 | ) | — |   | (2,328 | ) |
| Sales of fixed assets                                |       | (4                                                   | )          | 25 |   | (1 | ) | — |   | 4 |   | — |   | — |   | 24 |   |
| Finance leases                                       |       | 32                                                   |       | 3 |   | — |   | — |   | 4 |   | — |   | — |   | 39 |   |

 

F-16

----

 
| ** **                                         | ** ** | **At December 31, 2004** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **Nordic**                              | ** ** | **Baltic &  Russia** | ** ** | **Central  Europe** | ** ** | **Southern  Europe** | ** ** | **Benelux** | ** ** | **Services** | ** ** | **Un-  distributed  and internal  elimination** | ** ** | **Total** | ** ** |
| ** **                                         | ** ** | **(SEK in millions)**         | ** ** |
| Shares in  associated companies and joint ventures |       | 509                                     |       | — |   | — |   | — |   | 22 |   | — |   | — |   | 531 |   |
| Assets                                             |       | 12,172                                  |       | 5,999 |   | 9,402 |   | 12,340 |   | 6,338 |   | 554 |   | 3,060 |   | 49,865 |   |
| Liabilities                                        |       | 4,237                                   |       | 746 |   | 2,809 |   | 3,923 |   | 2,170 |   | 248 |   | 2,832 |   | 16,965 |   |

 

Investments in market areas in accordance with thecash flow analysis are presented in Note 32. Operating revenue and operatingprofit per market area based on elimination of internal sales to companies inthe other market areas are presented in Note 4 and Note 5.
| ** **                                           | ** ** | **Year ended December 31, 2005** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **Nordic**                                           | ** ** | **Baltic &  Russia** | ** ** | **Central  Europe** | ** ** | **Southern  Europe** | ** ** | **UK &  Benelux** | ** ** | **Services** | ** ** | **Un-  distributed  as well as  internal  elimination** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **(SEK in millions)**                      | ** ** |
|                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income  statement**                                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  revenue                                   |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| External                                             |       | 15,074                                               |       | 4,234 |   | 8,378 |   | 14,258 |   | 7,406 |   | 593 |   | — |   | 49,943 |   |
| Internal                                             |       | 331                                                  |       | 26 |   | 441 |   | 503 |   | 188 |   | 233 |   | (1,722 | ) | — |   |
| **Operating  revenue**                               | ** ** | **15,405**                                           | ** ** | **4,260** | ** ** | **8,819** | ** ** | **14,761** | ** ** | **7,594** | ** ** | **826** | ** ** | **(1,722** | **)** | **49,943** | ** ** |
| Result from associated  companies and joint ventures |       | (100                                                 | )          | — |   | — |   | — |   | — |   | — |   | — |   | (100 | ) |
| Operating profit                                     |       | 2,300                                                |       | 472 |   | (38 | ) | 429 |   | (1,116 | ) | (50 | ) | 1,513 |   | 3,510 |   |
| Interest income                                      |       |                                                 |       |   |   |   |   |   |   |   |   |   |   | 89 |   | 89 |   |
| Interest costs                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   | (286 | ) | (286 | ) |
| Other financial  items                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   | (186 | ) | (186 | ) |
| Tax on profit  for the year                          |       |                                                 |       |   |   |   |   |   |   |   |   |   |   | (786 | ) | (786 | ) |
| **Net  profit**                                      | ** ** | **2,300**                                            | ** ** | **472** | ** ** | **(38** | **)** | **429** | ** ** | **(1,116** | **)** | **(50** | **)** | **344** | ** ** | **2,341** | ** ** |
|                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other  information**                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investments,  intangible assets                      |       | 45                                                   |       | 252 |   | 72 |   | 602 |   | 1 |   | 12 |   | — |   | 984 |   |
| Investments,  tangible assets                        |       | 556                                                  |       | 1,393 |   | 207 |   | 255 |   | 307 |   | 48 |   | — |   | 2,766 |   |
| *Non-cash  generating profit/loss items:*            |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation/amortization                            |       | (882                                                 | )          | (445 | ) | (515 | ) | (294 | ) | (780 | ) | (52 | ) | — |   | (2,968 | ) |
| Sales of fixed assets                                |       | (4                                                   | )          | — |   | 43 |   | 153 |   | (67 | ) | 5 |   | — |   | 130 |   |
| Finance leases                                       |       | —                                               |       | 1 |   | — |   | — |   | 2 |   | — |   | — |   | 3 |   |

 

F-17

----

 
| ** **                                         | ** ** | **At December 31, 2005** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **Nordic**                              | ** ** | **Baltic &  Russia** | ** ** | **Central  Europe** | ** ** | **Southern  Europe** | ** ** | **UK &  Benelux** | ** ** | **Services** | ** ** | **Un-  distributed  as well as  internal  elimination** | ** ** | **Total** | ** ** |
| ** **                                         | ** ** | **(SEK in millions)**         | ** ** |
| Shares in associated  companies and joint ventures |       | 408                                     |       | — |   | — |   | — |   | 23 |   | — |   | — |   | 431 |   |
| Assets                                             |       | 13,410                                  |       | 8,331 |   | 9,606 |   | 15,943 |   | 15,370 |   | 512 |   | 5,111 |   | 68,283 |   |
| Liabilities                                        |       | 4,828                                   |       | 1,217 |   | 2,684 |   | 4,988 |   | 3,070 |   | 290 |   | 15,838 |   | 32,915 |   |

 

**NOTE 3 BUSINESS AREAS**

In the business area *Mobile telephony*,there are various types of subscriptions for individuals as well as businessesand prepaid cards. Either Tele2 owns the networks or we rent from otheroperators a set-up called MVNO (Mobile Virtual Network Operator). The businessarea *Fixed telephony & internet*partly includes broadband ( ADSL and data network services), as well as otherfixed telephony which also includes dial-up internet and carrier operations.Tele2’s product portfolio for fixed telephony consists of fixed preselection(dialing the number without any prefix), subscription and IP-telephony (VoIP).The most important service for internet connection is offered via ADSL(broadband via copper wire). Also other solutions with various prices andspeeds are offered, such as dial-up internet, wireless broadband, metropolitanarea networks and broadband via cable TV. The *Cable TV*business area encompasses Cable TV and IP-TV. The business area *Other operations* includes IT-outsourcing via UNI2, systemintegration through Datametrix, internet payment, cash card transactions, aswell as call phone services through 3C and cash card transactions for fixedtelephony through C3.
| ** **                                 | ** ** | **Year ended December 31, 2004** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                 | ** ** | **Mobile  telephony**                                | ** ** | **Fixed  telephony &  Internet** | ** ** | **Cable TV** | ** ** | **Other  operations** | ** ** | **Un-  distributed  and internal  elimination** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **(SEK in millions)**                      | ** ** |
|                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenue from external customers |       | 11,870                                               |       | 30,450 |   | 211 |   | 502 |   | — |   | 43,033 |   |
| Investments in  intangible assets          |       | 17                                                   |       | 30 |   | — |   | 9 |   | — |   | 56 |   |
| Investments in  tangible assets            |       | 1,048                                                |       | 421 |   | 7 |   | 53 |   | — |   | 1,529 |   |
| Total assets,  December 31            |       | 8,589                                                |       | 23,652 |   | 593 |   | 289 |   | 16,742 |   | 49,865 |   |

 
| ** **                                 | ** ** | **Year ended December 31, 2005** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                 | ** ** | **Mobile  telephony**                                | ** ** | **Fixed  telephony &  Internet** | ** ** | **Cable TV** | ** ** | **Other  operations** | ** ** | **Un-  distributed  and internal  elimination** | ** ** | **Total** | ** ** |
| ** **                                 | ** ** | **(SEK in millions)**                      | ** ** |
|                                       |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenue from external customers |       | 14,676                                               |       | 34,473 |   | 214 |   | 580 |   | — |   | 49,943 |   |
| Investments in  intangible assets          |       | 281                                                  |       | 691 |   | — |   | 12 |   | — |   | 984 |   |
| Investments in  tangible assets            |       | 1,742                                                |       | 959 |   | 17 |   | 48 |   | — |   | 2,766 |   |
| Total assets,  December 31            |       | 10,244                                               |       | 34,252 |   | 560 |   | 305 |   | 22,922 |   | 68,283 |   |

 

 

F-18

----

**NOTE 4 OPERATINGREVENUE**

**Market areasby business areas:**

|                                  | ** ** | **Operating revenue**                 | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|
| ** **                       | ** ** | **Year ended December 31,** | ** ** |
| ** **                       | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(SEK in millions)**            | ** ** |
| ***Nordic:***                    |       |                                       |       |   |   |
| Mobile telephony                 |       | 7,480                                      |       | 8,561 |   |
| Fixed telephony and  Internet    |       | 6,627                                      |       | 7,084 |   |
| * of which broadband*       | * *   | *855*                                      | * *   | *952* | * * |
| * of which fixed telephony* | * *   | *5,772*                                    | * *   | *6,132* | * * |
| Cable TV                         |       | 201                                        |       | 210 |   |
| Non-recurring item               |       | —                                     |       | 134 |   |
| Intra-Group sales                |       | (841                                       | )          | (915 | ) |
|                             | ** ** | **13,467**                                 | ** ** | **15,074** | ** ** |
| ***Baltic &  Russia:*** |       |                                       |       |   |   |
| Mobile telephony                 |       | 3,178                                      |       | 4,126 |   |
| Fixed telephony and  Internet    |       | 108                                        |       | 130 |   |
| * of which broadband*       | * *   | *16*                                       | * *   | *15* | * * |
| * of which fixed telephony* | * *   | *92*                                       | * *   | *115* | * * |
| Cable TV                         |       | 16                                         |       | 12 |   |
| Intra-Group sales                |       | (5                                         | )          | (34 | ) |
|                             | ** ** | **3,297**                                  | ** ** | **4,234** | ** ** |
| ***Central  Europe:***           |       |                                       |       |   |   |
| Mobile telephony                 |       | 88                                         |       | 184 |   |
| Fixed telephony and  Internet    |       | 5,461                                      |       | 8,753 |   |
| * of which broadband*       | * *   | *40*                                       | * *   | *535* | * * |
| * of which fixed telephony* | * *   | *5,421*                                    | * *   | *8,218* | * * |
| Intra-Group sales                |       | (491                                       | )          | (559 | ) |
|                             | ** ** | **5,058**                                  | ** ** | **8,378** | ** ** |
| ***Southern  Europe:***          |       |                                       |       |   |   |
| Mobile telephony                 |       | 31                                         |       | 105 |   |
| Fixed telephony and  Internet    |       | 14,668                                     |       | 14,818 |   |
| * of which broadband*       | * *   | *769*                                      | * *   | *1,081* | * * |
| * of which fixed telephony* | * *   | *13,899*                                   | * *   | *13,737* | * * |
| Other operations                 |       | —                                     |       | 11 |   |
| Intra-Group sales                |       | (547                                       | )          | (676 | ) |
|                             | ** ** | **14,152**                                 | ** ** | **14,258** | ** ** |
| ***UK &  Benelux:***    |       |                                       |       |   |   |
| Mobile telephony                 |       | 1,197                                      |       | 1,696 |   |
| Fixed telephony and  Internet    |       | 6,079                                      |       | 6,460 |   |
| * of which broadband*       |       | —                                     | * *   | *450* | * * |
| * of which fixed telephony* | * *   | *6,079*                                    | * *   | *6,010* | * * |
| Cable TV                         |       | 7                                          |       | 14 |   |
| Other operations                 |       | 6                                          |       | — |   |
| Intra-Group sales                |       | (753                                       | )          | (764 | ) |
|                             | ** ** | **6,536**                                  | ** ** | **7,406** | ** ** |
| ***Services***                   |       |                                       |       |   |   |
| Fixed telephony and  Internet    |       | 35                                         |       | 32 |   |
| * of which broadband*       | * *   | *5*                                        | * *   | *—* | * * |
| * of fixed telephony*       | * *   | *30*                                       | * *   | *32* | * * |
| Other operations                 |       | 736                                        |       | 848 |   |
| Intra-Group sales                |       | (248                                       | )          | (287 | ) |
|                             | ** ** | **523**                                    | ** ** | **593** | ** ** |
| **Total**                        | ** ** | **43,033**                                 | ** ** | **49,943** | ** ** |

 

F-19

----

 

|                                   | ** ** | **Operating revenue**                 | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **Year ended December 31,** | ** ** |
| ** **                        | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(SEK in millions)**            | ** ** |
|                              |       |                                       |       |   |   |
| Mobile telephony                  |       | 11,974                                     |       | 14,672 |   |
| Fixed telephony  and Internet     |       | 32,978                                     |       | 37,277 |   |
| * of which  broadband*       | * *   | *1,685*                                    | * *   | *3,033* | * * |
| * of which  fixed telephony* | * *   | *31,293*                                   | * *   | *34,244* | * * |
| Cable TV                          |       | 224                                        |       | 236 |   |
| Other operations                  |       | 742                                        |       | 859 |   |
| Non-recurring  item               |       | —                                     |       | 134 |   |
| Intra-Group  sales                |       | (2,885                                     | )          | (3,235 | ) |
| **Total**                         | ** ** | **43,033**                                 | ** ** | **49,943** | ** ** |

 

|                                   | ** ** | **Operating revenue**                 | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **Year ended December 31,** | ** ** |
| **Tele2 in Sweden:**    | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(SEK in millions)**            | ** ** |
|                              |       |                                       |       |   |   |
| Mobile telephony                  |       | 6,306                                      |       | 6,776 |   |
| Fixed telephony  and Internet     |       | 3,867                                      |       | 4,188 |   |
| * of which  broadband*       | * *   | *404*                                      | * *   | *387* | * * |
| * of which fixed  telephony* | * *   | *3,463*                                    | * *   | *3,801* | * * |
| Cable TV                          |       | 201                                        |       | 210 |   |
| Non-recurring  item               |       | —                                     |       | 134 |   |
| **Total Tele2 in Sweden**         | ** ** | **10,374**                                 | ** ** | **11,308** | ** ** |

 

Tele2 in Sweden includes Tele2 Sverige AB, OptimalTelecom AB, cable TV operations in Sweden and the result from jointventure-company Svenska UMTS-nät AB.

|                  | ** ** | **Operating revenue**                 | ** ** |
|------------------|------------|--------------------------------------------|------------|
| ** **       | ** ** | **Year ended December 31,** | ** ** |
| **Russia:**      | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **       | ** ** | **(SEK in millions)**            | ** ** |
|             |       |                                       |       |   |   |
| Russia           |       | 538                                        |       | 1,058 |   |
| **Total Russia** | ** ** | **538**                                    | ** ** | **1,508** | ** ** |

 

Tele2 Sweden has for a number of years had severaldisputes with TeliaSonera regarding interconnect rates. Tele2 has had claimsagainst TeliaSonera and TeliaSonera has had claims against Tele2. Tele2’s viewon these claims has, accounting wise, been relatively prudent, and Tele2 hascontinuously made assessments regarding the most likely outcomes. Thelikelihood of an, accounting wise, positive outcome has further increased overthe years. Based on this, Tele2 has booked an amount equivalent to MSEK 134 inthe operating revenue in 2005, related to one of the disputes.

In the operating revenue for Tele2 in Sweden, a sum ofSEK 96 (2004: 24) million is included regarding mobile telephony in accordancewith the MVNO agreement with Telenor. At group-level this agreement is to beregarded as a change of capacity transaction with Telenor, after which therevenue of the swap transaction is netted against the expense.

Sales of telephones are included in the operatingrevenue for the year, which amounted to SEK 406 (2004: 286) million.

F-20

----

**NOTE 5 OPERATING PROFIT AND DEPRECIATION/AMORTIZATION**

**Market areasplit by business areas***:*

|                                        | ** ** | **Operating Profit**                  | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **Year ended December 31,** | ** ** |
| ** **                             | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(SEK in millions)**            | ** ** |
|                                   |       |                                       |       |   |   |
| ***Nordic:***                          |       |                                       |       |   |   |
| Mobile telephony                       |       | 2,422                                      |       | 2,346 |   |
| Fixed telephony and  Internet          |       | 633                                        |       | 426 |   |
| * of which broadband*             | * *   | *(90*                                      | *)*        | *(232* | *)* |
| * of which fixed telephony*       | * *   | *723*                                      | * *   | *658* | * * |
| Cable TV                               |       | (68                                        | )          | (22 | ) |
| Non-recurring item                     |       | —                                     |       | 134 |   |
| ** **                             | ** ** | **2,987**                                  | ** ** | **2,884** | ** ** |
| ***Baltic &  Russia:***       |       |                                       |       |   |   |
| Mobile telephony                       |       | 451                                        |       | 497 |   |
| Fixed telephony and  Internet          |       | (13                                        | )          | (16 | ) |
| * of which broadband*             | * *   | *2*                                        | * *   | *9* | * * |
| * of fixed telephony*             | * *   | *(15*                                      | *)*        | *(25* | *)* |
| Cable TV                               |       | 23                                         |       | (1 | ) |
| ** **                             | ** ** | **461**                                    | ** ** | **480** | ** ** |
| ***Central  Europe:***                 |       |                                       |       |   |   |
| Mobile telephony                       |       | (66                                        | )          | (82 | ) |
| Fixed telephony and  Internet          |       | 118                                        |       | 162 |   |
| * of which broadband*             | * *   | *(16*                                      | *)*        | *(227* | *)* |
| * of which fixed telephony*       | * *   | *134*                                      | * *   | *389* | * * |
| Non-recurring item                     |       | (378                                       | )          | — |   |
| ** **                             | ** ** | **(326**                                   | **)**      | **80** | ** ** |
| ***Southern  Europe:***                |       |                                       |       |   |   |
| Mobile telephony                       |       | (15                                        | )          | (353 | ) |
| Fixed telephony and  Internet          |       | 1,500                                      |       | 955 |   |
| * of which broadband*             | * *   | *(619*                                     | *)*        | *(662* | *)* |
| * of which fixed telephony*       | * *   | *2,119*                                    | * *   | *1,617* | * * |
| ** **                             | ** ** | **1,485**                                  | ** ** | **602** | ** ** |
| ***UK &  Benelux:***          |       |                                       |       |   |   |
| Mobile telephony                       |       | 52                                         |       | 47 |   |
| Fixed telephony and  Internet          |       | (339                                       | )          | (272 | ) |
| * of which broadband*             |       | —                                     | * *   | *(251* | *)* |
| * of which fixed telephony*       | * *   | *(339*                                     | *)*        | *(21* | *)* |
| Cable TV                               |       | (25                                        | )          | (28 | ) |
| Other operations                       |       | (9                                         | )          | — |   |
| Non-recurring items                    |       | —                                     |       | (287 | ) |
| ** **                             | ** ** | **(321**                                   | **)**      | **(540** | **)** |
| ***Services:***                        |       |                                       |       |   |   |
| Fixed telephony and  Internet          |       | (4                                         | )          | (2 | ) |
| * of which broadband*             | * *   | *(3*                                       | *)*        | — |   |
| * of which fixed telephony*       | * *   | *(1*                                       | *)*        | *(2* | *)* |
| Other operations                       |       | 36                                         |       | 6 |   |
| ** **                             | ** ** | **32**                                     | ** ** | **4** | ** ** |
| ** **                             | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| **Total**                              | ** ** | **4,318**                                  | ** ** | **3,510** | ** ** |
| ** **                             | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Adjustment for  write-down of goodwill |       | 378                                        |       | 278 |   |

 

F-21

----

 

|                           | ** ** | **Operating Profit Margin**      | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **Year ended December 31,** | ** ** |
| ** **                | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
|                      |       |                                       |       |   |   |
| Nordic                    |       | 22                                         | %          | 19 | % |
| Baltic &  Russia |       | 14                                         | %          | 11 | % |
| Central Europe            |       | (6                                         | )%         | 1 | % |
| Southern Europe           |       | 10                                         | %          | 4 | % |
| UK & Benelux     |       | (5                                         | )%         | (7 | )% |
| Services                  |       | 6                                          | %          | 1 | % |
| **Total**                 | ** ** | **10**                                     | **%**      | **7** | **%** |

 

|                                  | ** ** | **Operating profit**                  | ** ** | **Operating profit margin** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **Year ended December 31,** | ** ** |
| ** **                       | ** ** | **2004**                                   | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(SEK in millions)**            | ** ** |
|                             |       |                                       |       |                                  |       |   |   |   |   |
| Mobile telephony                 |       | 2,844                                      |       | 2,455                                 |       | 24 | % | 17 | % |
| Fixed telephony and  Internet    |       | 1,895                                      |       | 1,253                                 |       | 6 | % | 3 | % |
| * of which broadband*       | * *   | *(726*                                     | *)*        | *(1,363*                              | *)*        | *(43* | *)%* | *(45* | *)%* |
| * of which fixed telephony* | * *   | *2,621*                                    | * *   | *2,616*                               | * *   | *8* | *%* | *8* | *%* |
| Cable TV                         |       | (70                                        | )          | (51                                   | )          | (31 | )% | (22 | )% |
| Other operations                 |       | 27                                         |       | 6                                     |       | 4 | % | 1 | % |
| Non-recurring items              |       | (378                                       | )          | (153                                  | )          |   |   |   |   |
|                             |       |                                       |       |                                  |       |   |   |   |   |
| **Total**                        | ** ** | **4,318**                                  | ** ** | **3,510**                             | ** ** | **10** | **%** | **7** | **%** |

 

F-22

----

 

|                                  | ** ** | **Operating profit**       | ** ** | **Operating profit  margin** | ** ** |
|----------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|
| **Tele2 in Sweden*):** | ** ** | **2004**                        | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(SEK in millions)** | ** ** |
| Mobile telephony                 |       | 2,444                           |       | 2,497                                  |       | 39 | % | 37 | % |
| Fixed telephony and  internet    |       | 490                             |       | 295                                    |       | 13 | % | 7 | % |
| * of which broadband*       | * *   | *(64*                           | *)*        | *(129*                                 | *)*        | *(16* | *)%* | *(33* | *)%* |
| * of which fixed telephony* | * *   | *554*                           | * *   | *424*                                  | * *   | *16* | *%* | *11* | *%* |
| Cable TV                         |       | (65                             | )          | (19                                    | )          | (32 | )% | (9 | )% |
| Non-recurring item               |       | —                          |       | 134                                    |       | — |   | — |   |
| **Total Tele2 in Sweden**        | ** ** | **2,869**                       | ** ** | **2,907**                              | ** ** | **28** | **%** | **26** | **%** |

 

Tele2 in Sweden includes Tele2 Sverige AB, OptimalTelecom AB, cable TV operations in Sweden and the result from jointventure-company Svenska UMTS-nät AB.

|                                | ** ** | **Operating profit**       | ** ** | **Operating profit  margin** | ** ** |
|--------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|
| **Tele2 in Russia:** | ** ** | **2004**                        | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(SEK in millions)** | ** ** |
| **Total Russia**               | ** ** | **(479**                        | **)**      | **(359**                               | **)**      | **(89** | **)%** | **(34** | **)%** |

 

For 2005, the market area UK & Beneluxreported a capital gain on sale of the operations in Tele2 UK and Tele2 Irelandof SEK 137 million and reported a reserve of SEK 161 million, relating to aVAT-dispute in the prepaid card operations. The dispute is related to 2003until the first of 2005 and the reserve corresponds to the estimated probableoutcome, which amounts to 75% of the maximum worst case outcome. During theyear, UK & Benelux recorded an impairment of goodwill related to AlphaTelecom of SEK 263 million.

The tax effects of the year’s valued losscarry-forwards relate to acquired loss carry-forwards which were valued at zeroat the time of acquisition. This value has reduced the previous year’s bookvalue of goodwill by SEK -378 million (Note 13).

Sales of telephones are included in the operatingprofit for the year which amounted to SEK -773 (2004: -492)million.

**Depreciation/amortizationby function:**

|                                                               | ** **   | **Year ended December 31,** | ** **   |
|---------------------------------------------------------------|--------------|--------------------------------------------|--------------|
| ** **                                                    | ** **   | **2004**                                   | ** **   | **2005** | ** ** |
| ** **                                                    | ** **   | **(SEK in millions)**            | ** **   |
| *Depreciation/amortization:*                                  | * *     | * *                                   | * *     | * * | * * |
| Cost of services sold                                         |         | (1,609                                     | )            | (2,222 | ) |
| Selling expenses                                              |         | (57                                        | )            | (36 | ) |
| Administrative expenses                                       |         | (284                                       | )            | (406 | ) |
| **Total depreciation**                                        | ** **   | **(1,950**                                 | **)**        | **(2,664** | **)** |
|                                                          |         |                                            |         |  |   |
|                                                          |         |                                       |         |   |   |
| ***Impairment:***                                             | *** *** | *** ***                               | *** *** | *** *** | *** *** |
| Cost of services sold                                         |         | (378                                       | )            | (304 | ) |
| **Total impairment**                                          | ** **   | **(378**                                   | **)**        | **(304** | **)** |
| **Total depreciation/amortization  for the year by function** | ** **   | **(2,328**                                 | **)**        | **(2,968** | **)** |

 

F-23

----

 

**Depreciation/amortization******bytype of asset:**

|                                                                    | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **2004**                         | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **(SEK in millions)**            | ** ** |
| *Depreciation/amortization:*                                       | * *   | * *                         | * *   | * * | * * |
| Licenses, utilization rights and software                          |       | (122                             | )          | (311 | ) |
| Interconnection agreements                                         |       | —                           |       | (97 | ) |
| Customers agreements                                               |       | —                           |       | (280 | ) |
| Buildings                                                          |       | (24                              | )          | (23 | ) |
| Machinery and technical plant                                      |       | (1,667                           | )          | (1,777 | ) |
| Equipment and installations                                        |       | (137                             | )          | (176 | ) |
| **Total depreciation/amortization**                                | ** ** | **(1,950**                       | **)**      | **(2,664** | **)** |
|                                                               |       |                                  |       |  |   |
|                                                               |       |                             |       |   |   |
| *Impairment:*                                                      | * *   | * *                         | * *   | * * | * * |
| Licenses, utilization rights and software                          |       | —                           |       | (8 | ) |
| Goodwill                                                           |       | (378                             | )          | (278 | ) |
| Machinery and technical plant                                      |       | —                           |       | (18 | ) |
| **Total impairment**                                               | ** ** | **(378**                         | **)**      | **(304** | **)** |
| **Total depreciation/amortization for the year by  type of asset** | ** ** | **(2,328**                       | **)**      | **(2,968** | **)** |

 

**NOTE 6 OTHEROPERATING REVENUE**

|                                     | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2004**                         | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(SEK in millions)**            | ** ** |
|                                |       |                             |       |   |   |
| Sale of operations                  |       | 26                               |       | 147 |   |
| Exchange rate gains from operations |       | 35                               |       | 57 |   |
| Sale of fixed assets                |       | 5                                |       | 1 |   |
| Other revenue                       |       | 26                               |       | 26 |   |
| **Total other operating revenue**   | ** ** | **92**                           | ** ** | **231** | ** ** |

 

In 2005 Tele2 has divested the shares in Tele2 UK,Tele2 Ireland, Proceedo Solution in Sweden as well as Trigger Software in Estonia.The cable TV operations in Estonia were divested in 2004. For additionalinformation, please refer to Note 16.

**NOTE 7 OTHER OPERATING EXPENSES**

|                                     | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(SEK in millions)**            | ** ** |
|                                |       |                                       |       |   |   |
| Exchange rate loss from  operations |       | (29                                        | )          | (19 | ) |
| Sale/scrapping of fixed  assets     |       | (7                                         | )          | (17 | ) |
| Other expenses                      |       | (4                                         | )          | (4 | ) |
| **Total other operating expenses**  | ** ** | **(40**                                    | **)**      | **(40** | **)** |

 

 

F-24

----

**NOTE 8 RESULT FROM FROM SHARES IN ASSOCIATED COMPANIES AND JOINTVENTURES**
| ** **                                                             | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **Sv UMTS nät**             | ** ** | **Other** | ** ** | **Sv UMTS nät** | ** ** | **Other** | ** ** |
| ** **                                                             | ** ** | **(SEK in millions)**            | ** ** |
|                                                                   |       |                                       |       |   |   |   |   |   |   |
| Profit/loss before  taxes in associated companies and joint ventures   |       | 26                                         |       | 20 |   | (205 | ) | 1 |   |
| Holdings                                                               |       | 50                                         | %          | 9.1%-50% |   | 50 | % | 9.1%-50% |   |
| Share of profit/loss  before tax                                       |       | 13                                         |       | 4 |   | (102 | ) | — |   |
| Correction of share of  profit/loss from preceding year                |       | —                                     |       | — |   | 3 |   | (1 | ) |
| ** **                                                             | ** ** | **13**                                     | ** ** | **4** | ** ** | **(99** | **)** | **(1** | **)** |
|                                                                   |       |                                            |       |  |   |  |   |  |   |
| **Total result of shares in  associated companies and joint ventures** | ** ** | ** **                                 | ** ** | **17** | ** ** | ** ** | ** ** | **(100** | **)** |

 

**Extracts from the balance sheets and income statements of associatedcompanies and joint ventures:**
| ** **             | ** ** | **Year ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **             | ** ** | **Sv UMTS nät**             | ** ** | **Other** | ** ** | **Sv UMTS nät** | ** ** | **Other** | ** ** |
| ** **             | ** ** | **(SEK in millions)**            | ** ** |
|                   |       |                                       |       |   |   |   |   |   |   |
| *Income statement:*    |       |                                       |       |   |   |   |   |   |   |
| Revenue                |       | 97                                         |       | 43 |   | 551 |   | 228 |   |
| Operating profit       |       | 35                                         |       | 20 |   | (89 | ) | 13 |   |
| Profit/loss before tax |       | 26                                         |       | 20 |   | (205 | ) | 1 |   |
| Net profit/loss        |       | 24                                         |       | 20 |   | (205 | ) | 1 |   |

 
| ** **                                           | ** ** | **At December 31,**   | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **Sv UMTS nät**  | ** ** | **Other** | ** ** | **Sv UMTS nät** | ** ** | **Other** | ** ** |
| ** **                                           | ** ** | **(SEK in millions)** | ** ** |
|                                                 |       |                            |       |   |   |   |   |   |   |
| *Balance  sheet*                                     |       |                            |       |   |   |   |   |   |   |
| Intangible and  financial assets                     |       | —                          |       | 19 |   | — |   | — |   |
| Tangible assets                                      |       | 3,009                           |       | — |   | 3,471 |   | — |   |
| Current assets                                       |       | 398                             |       | 35 |   | 374 |   | 126 |   |
| **Total  assets**                                    | ** ** | **3,407**                       | ** ** | **54** | ** ** | **3,845** | ** ** | **126** | ** ** |
|                                                 |       |                                 |       |  |   |   |   |   |   |
|  Shareholders’ equity                      |       | 1,001                           |       | 49 |   | 796 |   | 40 |   |
| Long-term  liabilities                               |       | 2,016                           |       | 1 |   | 2,951 |   | 2 |   |
| Current  liabilities                                 |       | 390                             |       | 4 |   | 98 |   | 84 |   |
| **Total  shareholders’ equity and liabilities** | ** ** | **3,407**                       | ** ** | **54** | ** ** | **3,845** | ** ** | **126** | ** ** |

 

F-25

----

**NOTE 9 INTEREST INCOME**

|                                             | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                  | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(SEK in millions)**            | ** ** |
|                                        |       |                                       |       |   |   |
| Interest, bank  balances                    |       | 81                                         |       | 62 |   |
| Interest,  penalty interest                 |       | 16                                         |       | 25 |   |
| Interest, other  securities and receivables |       | 2                                          |       | 2 |   |
| **Total  other interest income**            | ** ** | **99**                                     | ** ** | **89** | ** ** |

 

**NOTE 10 INTEREST COSTS**

|                                | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(SEK in millions)**            | ** ** |
|                           |       |                                       |       |   |   |
| Interest, credit  institutions |       | (282                                       | )          | (213 | ) |
| Interest, other  liabilities   |       | (14                                        | )          | (29 | ) |
| Interest,  penalty interest    |       | (12                                        | )          | (38 | ) |
| Other financial  expenses      |       | (64                                        | )          | (6 | ) |
| **Total  interest costs**      | ** ** | **(372**                                   | **)**      | **(286** | **)** |

 

Other financial expenses for 2004 include anon-recurring cost related to expensing of the previous loan facility’sremaining prepaid financing costs of SEK -55 million.

**NOTE 11 OTHER FINANCIAL ITEMS**
| ** **                                                     | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **(SEK in millions)**            | ** ** |
| ** **                                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Exchange rate  differences on financial assets and liabilities |       | (9                                         | )          | (198 | ) |
| Gain on sale of  shares in Travellink AB                       |       | —                                     |       | 12 |   |
| Gain on sale of  shares in Song Networks                       |       | 171                                        |       | — |   |
| **Total  other financial items**                               | ** ** | **162**                                    | ** ** | **(186** | **)** |

 

**NOTE 12 EXCHANGE RATE EFFECTS**

Exchange rate differences which arise in operationsare reported in the income statement and amount to:

|                                                          | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(SEK in millions)**            | ** ** |
| ** **                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Other operating  revenue                                 |       | 35                                         |       | 57 |   |
| Other operating  expenses                                |       | (29                                        | )          | (19 | ) |
| Other financial  items                                   |       | (9                                         | )          | (198 | ) |
| **Total  exchange rate differences in Income Statement** | ** ** | **(3**                                     | **)**      | **(160** | **)** |

 

F-26

----

The consolidated balance sheet and income statementare affected by fluctuations in subsidiaries’ currencies against the Swedishkrona. Group operating revenues are distributed among the following currencies.

**Operating revenue:**

|            | ** ** | **Year ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** ** | ** ** | **(SEK in millions)**            | ** ** |
| ** ** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| SEK        |       | 9,718                                      |       | 23 | % | 10,527 |   | 21 | % |
| EUR        |       | 22,305                                     |       | 52 | % | 25,874 |   | 52 | % |
| Other      |       | 11,010                                     |       | 25 | % | 13,542 |   | 27 | % |
| **Total**  | ** ** | **43,033**                                 | ** ** | **100** | **%** | **49,943** | ** ** | **100** | **%** |

 

A 1% currency movement against the Swedish kronaaffects the Group’s operating revenue on an annual basis by SEK 394 (2004: 333)million. Tele2’s operating profit for the year was mainly affected byfluctuations in EUR, NOK, PLN and LVL. Tele2’s operating revenues have beenaffected positively by SEK 843 (2004: -227) million in 2005, as opposedto if the exchange rates had not been changed at all during the year.

**NOTE 13 TAXES**

**Tax expense/income for the year:**

|                                                                   | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                        | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **(SEK in millions)**            | ** ** |
|                                                              |       |                                       |       |   |   |
| Current tax  expense                                              |       | (271                                       | )          | (744 | ) |
| Deferred tax  expense                                             |       | (508                                       | )          | (42 | ) |
| **Total  tax expense (-) /tax income (+) on profit for the year** | ** ** | **(779**                                   | **)**      | **(786** | **)** |

 

**Theoretical tax expense:**

The difference between recorded tax expense for theGroup and the tax expense based on prevailing tax rates in each country consistof the following components:
| ** **                                                                       | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                                                       | ** ** | **(SEK in millions)**            | ** ** |
|                                                                             |       |                                       |       |   |   |   |   |   |   |
| Profit before  tax                                                               |       | 4,207                                      |       |   |   | 3,127 |   |   |   |
| Theoretic tax  according to prevailing tax rate in each country                  |       | (1,193                                     | )          | (28.4 | )% | (917 | ) | (29.3 | )% |
|                                                                             |       |                                       |       |   |   |   |   |   |   |
| *Tax  effect of:*                                                                | * *   | * *                                   | * *   | * * | * * | * * | * * | * * | * * |
| Impairment of  goodwill, non-tax affecting                                       |       | (86                                        | )          | (2.0 | )% | (78 | ) | (2.5 | )% |
| Sale of shares  in subsidiaries, non-taxable                                     |       | —                                     |       | — |   | 515 |   | 16.5 | % |
| Write-down of  shares in group companies                                         |       | (483                                       | )          | (11.5 | )% | — |   | — |   |
| Tax dispute from  previous years expensed                                        |       | (23                                        | )          | (0.5 | )% | (162 | ) | (5.2 | )% |
| Other non-deductible  expense/non-taxable revenue                                |       | (110                                       | )          | (2.6 | )% | 32 |   | 1.0 | % |
| Valuation of  tax-assets relating to loss carry-forwards etc from previous years |       | 1,404                                      |       | 33.4 | % | 300 |   | 9.6 | % |
| Adjustment of  tax assets from previous years                                    |       | —                                     |       | — |   | (180 | ) | (5.8 | )% |
| Reserve for the  year’s additional loss carry-forwards                      |       | (288                                       | )          | (6.8 | )% | (296 | ) | (9.5 | )% |
| **Tax  expense/income and effective tax rate**                                   | ** ** | **(779**                                   | **)**      | **(18.5** | **)%** | **(786** | **)** | **(25.1** | **)%** |

 

F-27

----

The weighted average tax rate was 29.3% (2004: 28.4%).The increase compared with the previous year is due to the fact thatincreasingly more subsidiaries in continental Europe with a higher tax ratethan more mature operations in Nordic and Baltic are starting to reportpositive results.

In 2005 a reserve for tax disputes of SEK -162million has been reported. Tax costs regarding write-down of shares in groupcompanies of SEK -483 million in 2004 relate to companies where we havechanged our previous estimate that we can utilize tax loss carry-forwards.

**Deferred tax assets and liabilities:**

Deferred tax assets and liabilities are attributableto the following items:
| ** **                                         | ** ** | **At December 31,**   | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(SEK in millions)** | ** ** |
| *Deferred  tax assets:*                            | * *   | * *                        | * *   | * * | * * |
| Unutilized loss  carry-forwards                    |       | 3,255                           |       | 4,566 |   |
| Tangible assets                                    |       | (63                             | )          | 480 |   |
| Other                                              |       | 26                              |       | 235 |   |
| **Total  deferred tax assets**                     | ** ** | **3,218**                       | ** ** | **5,281** | ** ** |
|                                               |       |                                 |       |  |   |
| ** **                                         | ** ** | ** **                      | ** ** | ** ** | ** ** |
| *Deferred  tax liabilities:*                       | * *   | * *                        | * *   | * * | * * |
| Intangible  assets                                 |       | —                          |       | (543 | ) |
| Tangible assets                                    |       | (458                            | )          | (880 | ) |
| Other                                              |       | (17                             | )          | (336 | ) |
| **Total  deferred tax liabilities**                | ** ** | **(475**                        | **)**      | **(1,759** | **)** |
|                                               |       |                            |       |   |   |
| **Total  deferred tax assets and tax liabilities** | ** ** | **2,743**                       | ** ** | **3,522** | ** ** |

 

**Loss carry-forwards:**

Deferred tax assets are reported for losscarry-forwards only to the extent that it is considered likely that the losscarry-forwards can be utilized against future profits. According to thisprinciple, losses in newly started operations are not netted against profits inmore mature operations.

As a result of continued improved results incontinental Europe, a deferred tax asset of net SEK 182 (2004: 729) million hasbeen reported in the income statement. The net includes SEK 340 (2004: 1,212)million relating primarily to companies that have started reporting a positiveresult during the year and where accumulated losses are considered likely to beused against future profits, and SEK -158 (2004: -483) millionrelating to companies where we are changing our previous evaluation that we canutilize the accumulated losses.

The tax effect of prior year’s valuation of losscarry-forwards relates to acquired loss carry-forwards which were valued atzero at the time of acquisition. This value has reduced last year’s book valueof goodwill by SEK -378 million.

The Group’s total loss carry-forwards as of December 31,2005 were 17,679 (2004: 13,275) million of which SEK 15,053 (2004: 10,582)million has been recorded as a deferred tax asset and the remaining part, SEK2,626 (2004: 2,693) million has been valued at zero. Of the total losscarry-forwards, SEK 1,399 (2004: 917) million expires in five years and theremaining part, SEK 16,280 (2004: 12,358) million, expires after five years or maycontinue to apply in perpetuity.

F-28

----

**Tax disputes:**

In December 2003, Tele2 announced that the taxauthorities’ investigation of Tele2’s financial year 2001 had been completedand that the authorities wished to change Tele2’s tax assessment. In 2000,Tele2 acquired the outstanding majority of the listed company SEC SA. Becausethe operations had been restructured an external valuation was carried out,which indicated a decline in value, and the operations were transferred to thisvalue. Tele2 has claimed a deduction for this realized loss.

The authorities’ notification that they wished tochange Tele2’s tax assessment was expected, since it involved a significantamount. However, Tele2 considered it remarkable that the assessment was madesaying that there should not have been an actual decline in the value of SECSA, in spite of the fact that the independent valuation that was made as wellas the analysts’ and other sector observers’ valuations at this time showedthat there had actually been a decline in the value of SEC SA. Tele2 chose torequest a reconsideration by the same local tax authority to enable them toexplain the grounds for their decision, which the tax authority made in December 2004.

In October 2005 Tele2 submitted a supplementarystatement since the tax authorities did not provide their own statement. Noinformation has been presented changing Tele2’s opinion that they fulfil therequirements for submission of evidence. Tele2’s opinion is still that thededuction claimed will be finally approved, and we have now lodged an appealwith the county administrative court.

Loss carry-forwards in Tele2 questioned by the taxauthorities with regard to this correspond to a tax effect of SEK 3,910million. Other disputes in Tele2 AB amount to SEK 21 (2004: 183) million. Tele2is of the opinion that the disputes will be settled in Tele2’s favour, which iswhy a contingent tax liability has not been recorded for the amount of lossesutilized.

**NOTE 14 INTANGIBLE ASSETS**
| ** **                                            | ** ** | **At December 31, 2004**                     | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Licenses,  rights of use  & software** | ** ** | **Inter-  connection  agree-  ments** | ** ** | **Customer  agreements** | ** ** | **Total other  intangible  assets** | ** ** | **Goodwill** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **(SEK in millions)**                             | ** ** |
|                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| *Acquisition  value*                                  |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition  value at January 1                  |       | 838                                                         |       | — |   | — |   | 838 |   | 23,076 |   | 23,914 |   |
| Acquisition  value in acquired companies              |       | 57                                                          |       | — |   | 674 |   | 731 |   | 320 |   | 1,051 |   |
| Investments for  the year                             |       | 56                                                          |       | — |   | — |   | 56 |   | — |   | 56 |   |
| Sales and  scrapping                                  |       | (18                                                         | )          | — |   | — |   | (18 | ) | — |   | (18 | ) |
| Reclassification                                      |       | 477                                                         |       | 175 |   | — |   | 652 |   | (242 | ) | 410 |   |
| Translation  differences for the year                 |       | (43                                                         | )          | (10 | ) | (8 | ) | (61 | ) | (326 | ) | (387 | ) |
| *Total  acquisition value at December 31*        | ** ** | **1,367**                                                   | ** ** | **165** | ** ** | **666** | ** ** | **2,198** | ** ** | **22,828** | ** ** | **25,026** | ** ** |
| *Accumulated  amortizations:*                         |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Accumulated  amortization at January 1           |       | (358                                                        | )          | — |   | — |   | (358 | ) |   |   | (358 | ) |
| Amortization  according to plan                       |       | (122                                                        | )          | — |   | — |   | (122 | ) |   |   | (122 | ) |
| Sale and  scrapping                                   |       | 17                                                          |       | — |   | — |   | 17 |   |   |   | 17 |   |
| Reclassification                                      |       | (195                                                        | )          | — |   | — |   | (195 | ) |   |   | (195 | ) |
| Translation  differences for the year                 |       | 26                                                          |       | — |   | — |   | 26 |   |   |   | 26 |   |
| *Total  accumulated amortization at December 31* | ** ** | **(632**                                                    | **)**      | **—** | ** ** | **—** | ** ** | **(632** | **)** | ** ** | ** ** | **(632** | **)** |
|                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| *Accumulated  write-downs:*                           | * *   | * *                                                    | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Write-downs  during the year                          |       | —                                                      |       | — |   | — |   | — |   | (378 | ) | (378 | ) |
| *Total  accumulated write-downs at December 31*  | ** ** | **—**                                                  | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **(378** | **)** | **(378** | **)** |
| **Total  intangible assets at December 31**      | ** ** | **735**                                                     | ** ** | **165** | ** ** | **666** | ** ** | **1,566** | ** ** | **22,450** | ** ** | **24,016** | ** ** |

 

An adjustment has been made of the accumulatedamortization in acquired companies for 2004 to be netted against theacquisition value.

F-29

----

 
| ** **                                            | ** ** | **At December 31, 2005**                     | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Licenses,  rights of use  & software** | ** ** | **Inter-  connect  agree-  ments** | ** ** | **Customer  agreements** | ** ** | **Total other  intangible  assets** | ** ** | **Goodwill** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **(SEK in millions)**                             | ** ** |
|                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| *Acquisition  value:*                                 |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition  value at January 1                  |       | 1,367                                                       |       | 165 |   | 666 |   | 2,198 |   | 22,828 |   | 25,026 |   |
| Acquisition  value in acquired companies              |       | 283                                                         |       | 303 |   | 1,802 |   | 2,388 |   | 3,438 |   | 5,826 |   |
| Acquisition  value in divested companies              |       | —                                                      |       | — |   | — |   | — |   | (13 | ) | (13 | ) |
| Investments for  the year                             |       | 395                                                         |       | 589 |   |   |   | 984 |   | — |   | 984 |   |
| Sales and  scrapping                                  |       | (39                                                         | )          | (2 | ) | — |   | (41 | ) | (2 | ) | (43 | ) |
| Reclassification                                      |       | 20                                                          |       | — |   | — |   | 20 |   | — |   | 20 |   |
| Translation  differences for the year                 |       | 127                                                         |       | 27 |   | 58 |   | 212 |   | 1,111 |   | 1,323 |   |
| *Total  acquisition value at December 31*        | ** ** | **2,153**                                                   | ** ** | **1,082** | ** ** | **2,526** | ** ** | **5,761** | ** ** | **27,362** | ** ** | **33,123** | ** ** |
| *Accumulated  amortization:*                          |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Accumulated  amortization at January 1           |       | (632                                                        | )          | — |   | — |   | (632 | ) |   |   | (632 | ) |
| Amortization according  to plan                       |       | (311                                                        | )          | (97 | ) | (280 | ) | (688 | ) |   |   | (688 | ) |
| Sales and  scrapping                                  |       | 36                                                          |       | — |   | — |   | 36 |   |   |   | 36 |   |
| Reclassification                                      |       | (6                                                          | )          | — |   | — |   | (6 | ) |   |   | (6 | ) |
| Translation  differences for the year                 |       | (80                                                         | )          | (1 | ) | (4 | ) | (85 | ) |   |   | (85 | ) |
| *Total  accumulated amortization at December 31* | ** ** | **(993**                                                    | **)**      | **(98** | **)** | **(284** | **)** | **(1,375** | **)** | ** ** | ** ** | **(1,375** | **)** |
|                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| *Accumulated  write-downs:*                           | * *   | * *                                                    | * *   | * * | * * | * * | * * | * * | * * | * * | * * | * * | * * |
| Accumulated  write-downs at January 1            |       | —                                                      |       | — |   | — |   | — |   | (378 | ) | (378 | ) |
| Write-downs  during the year                          |       | (8                                                          | )          | — |   | — |   | (8 | ) | (278 | ) | (286 | ) |
| Translation  differences for the year                 |       | (1                                                          | )          | — |   | — |   | (1 | ) | (4 | ) | (5 | ) |
| *Total  accumulated write-downs at December 31*  | ** ** | **(9**                                                      | **)**      | **—** | ** ** | **—** | ** ** | **(9** | **)** | **(660** | **)** | **(669** | **)** |
| **Total  intangible assets at December 31**      | ** ** | **1,151**                                                   | ** ** | **984** | ** ** | **2,242** | ** ** | **4,377** | ** ** | **26,702** | ** ** | **31,079** | ** ** |

 

Of this year’s total acquisition value in acquiredcompanies of SEK 5,826 million, SEK 5,536 million refers to the acquisitions ofVersatel and Comunitel. SEK 806 million of the year’s total investments of SEK984 million relates to the signing of the interconnection agreement in Franceand the license in Croatia.

Goodwill is distributed among the Group’s cashgenerating units identified per market area.

|                        | ** ** | **At December 31, 2005** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **(SEK in millions)**         | ** ** |
|                   |       |                                    |       |
| Nordic                 |       | 762                                     |       |
| Baltic                 |       | 2,822                                   |       |
| Russia                 |       | 421                                     |       |
| Central Europe         |       | 4,405                                   |       |
| Southern Europe        |       | 12,391                                  |       |
| UK &  Benelux |       | 5,817                                   |       |
| Services               |       | 84                                      |       |
| **Total  Goodwill**    | ** ** | **26,702**                              | ** ** |

 

In connection with the acquisition of operations,goodwill is allocated to the cash generating units or groups that expect toachieve future financial benefits of the acquired operations. In the event thatseparate cash generating units cannot be identified, goodwill is allocated tothe lowest level at which it is controlled and monitored internally. Tele2monitors and controls its operations and acquisition primarily based on marketareas and therefore allocates goodwill to each market area.

F-30

----

The most important assumptions for impairmentcalculations are discount rates, growth rates, profit margins and investmentrequirements. The discount rate is determined considering the prevailing andspecific risk in the respective cash generating unit. Expected future growthrates, profit margins and investment requirements are based on industry data,expected changes in the market, management’s experience from similar markets aswell as management’s assessment of each market.

Tele2 calculates the future cash flows based on themost recently approved three year plan combined with the expected growth ratesduring another seven years based on Tele2’s general business model. Thisbusiness model, built on experience from telecom operations in various stagesof maturity, has an assumption of growth which initially exceeds the averagegrowth for the industry as a whole. Based on experiences with the businessmodel, Tele2 regards this to be justified. Similarly, the business modelcontains assumptions on profit and investment levels that reflect the stages ofmaturity for the operations in the various cash generating units from year fourto ten. For the period following, a growth of 2-3% is expected, whichdoes not exceed the average long-term growth for the industry as a whole. Thediscount rate has been set between 10-13%, depending on the specific riskin the respective cash-generating unit. It is Tele2’s assessment thatreasonable, possible changes in the above-mentioned conditions should not havesuch significant effects that they individually should reduce the value in useto a value that is lower than the carrying value.

At the end of 2005, a SEK 263 million impairment ofgoodwill was recorded for Alpha Telecom. The reason for this impairment wasprimarily a change in the rate of VAT, which resulted in lower margins.

**NOTE 15 TANGIBLE ASSETS**
| ** **                                      | ** ** | **As at December 31, 2004** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                      | ** ** | **Buildings  & land**                  | ** ** | **Equipment** | ** ** | **Construction  in progress** | ** ** | **Other total  tangible  assets** | ** ** | **Machinery,  & technical  plant** | *** *** | ***of which  finance  leases*** | ** ** | **Total** | ** ** |
|                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Acquisition  value:*                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjusted  acquisition value at January 1   |       | 188                                             |       | 1,105 |   | 293 |   | 1,586 |   | 16,539 |   | 454 |   | 18,125 |   |
| Acquisition  value in acquired companies        |       | —                                          |       | 55 |   | 1 |   | 56 |   | 587 |   | 261 |   | 643 |   |
| Acquisition  value in divested companies        |       | —                                          |       | (1 | ) | — |   | (1 | ) | (42 | ) | — |   | (43 | ) |
| Investments for  the year                       |       | 7                                               |       | 105 |   | 656 |   | 768 |   | 761 |   | — |   | 1,529 |   |
| Sales and  scrapping                            |       | (6                                              | )          | (36 | ) | (1 | ) | (43 | ) | (297 | ) | (11 | ) | (340 | ) |
| Reclassification                                |       | 11                                              |       | (46 | ) | (390 | ) | (425 | ) | 15 |   | — |   | (410 | ) |
| Translation  differences for the year           |       | (6                                              | )          | (21 | ) | (33 | ) | (60 | ) | (177 | ) | (6 | ) | (237 | ) |
| *Total  acquisition value*                      | ** ** | **194**                                         | ** ** | **1,161** | ** ** | **526** | ** ** | **1,881** | ** ** | **17,386** | ** ** | **698** | ** ** | **19,267** | ** ** |
| *Accumulated  depreciation:*                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accumulated  depreciation at January 1     |       | (80                                             | )          | (804 | ) |   |   | (884 | ) | (7,934 | ) | (131 | ) | (8,818 | ) |
| Accumulated  depreciation in divested companies |       | —                                          |       | 1 |   |   |   | 1 |   | 31 |   | — |   | 32 |   |
| Depreciation  according to plan                 |       | (24                                             | )          | (137 | ) |   |   | (161 | ) | (1,667 | ) | (27 | ) | (1,828 | ) |
| Sales and  scrapping                            |       | 6                                               |       | 34 |   |   |   | 40 |   | 280 |   | 11 |   | 320 |   |
| Reclassification                                |       | —                                          |       | 24 |   |   |   | 24 |   | 171 |   | — |   | 195 |   |
| Translation  differences for the year           |       | 3                                               |       | 13 |   |   |   | 16 |   | 94 |   | 1 |   | 110 |   |
| *Total  accumulated depreciation*               | ** ** | **(95**                                         | **)**      | **(869** | **)** | ** ** | ** ** | **(964** | **)** | **(9,025** | **)** | **(146** | **)** | **(9,989** | **)** |
|                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Accumulated  write-downs:*                     | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accumulated  write-downs at January 1      |       | —                                          |       | — |   |   |   | — |   | (172 | ) | — |   | (172 | ) |
| Translation  differences for the year           |       | —                                          |       | — |   |   |   | — |   | 1 |   | — |   | 1 |   |
| Total  accumulated write-downs                  |       | —                                          |       | — |   |   | ** ** | — | ** ** | **(171** | **)** | — | ** ** | **(171** | **)** |
| **Total  tangible assets**                      | ** ** | **99**                                          | ** ** | **292** | ** ** | **526** | ** ** | **917** | ** ** | **8,190** | ** ** | **552** | ** ** | **9,107** | ** ** |

 

An adjustment has been made of accumulateddepreciation in acquired companies for 2004 to be netted against acquisitionvalue.

F-31

----

 
| ** **                                      | ** ** | **As at December 31, 2005** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                      | ** ** | **Buildings  & land**                  | ** ** | **Equipment** | ** ** | **Construction  in progress** | ** ** | **Other  total  tangible  assets** | ** ** | **Machinery  &  technical  plant** | *** *** | ***of  which  finance  leases*** | ** ** | **Total** | ** ** |
| ** **                                      | ** ** | **(SEK in millions)**                 | ** ** |
|                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Acquisition  value:*                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition  value at January 1            |       | 194                                             |       | 1,161 |   | 526 |   | 1,881 |   | 17,386 |   | 698 |   | 19,267 |   |
| Acquisition  value in acquired companies        |       | 11                                              |       | 144 |   | 426 |   | 581 |   | 3,422 |   |   |   | 4,003 |   |
| Acquisition  value in divested companies        |       |                                            |       | (24 | ) |   |   | (24 | ) |   |   |   |   | (24 | ) |
| Investments for  the year                       |       | 16                                              |       | 159 |   | 1,031 |   | 1,206 |   | 1,560 |   |   |   | 2,766 |   |
| Sales and  scrapping                            |       | (2                                              | )          | (45 | ) | (1 | ) | (48 | ) | (188 | ) |   |   | (236 | ) |
| Reclassification                                |       |                                            |       | (27 | ) | (607 | ) | (634 | ) | 613 |   |   |   | (21 | ) |
| Translation  differences for the year           |       | 13                                              |       | 74 |   | 89 |   | 176 |   | 707 |   | 10 |   | 883 |   |
| *Total  acquisition value*                      | ** ** | **232**                                         | ** ** | **1,442** | ** ** | **1,464** | ** ** | **3,138** | ** ** | **23,500** | ** ** | **708** | ** ** | **26,638** | ** ** |
| *Accumulated  depreciation:*                    |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Accumulated  depreciation at January 1     |       | (95                                             | )          | (869 | ) |   |   | (964 | ) | (9,025 | ) | (146 | ) | (9,989 | ) |
| Accumulated depreciation  in divested companies |       |                                            |       | 23 |   |   |   | 23 |   |   |   |   |   | 23 |   |
| Depreciation  according to plan                 |       | (23                                             | )          | (176 | ) |   |   | (199 | ) | (1,777 | ) | (59 | ) | (1,976 | ) |
| Sales and  scrapping                            |       |                                            |       | 42 |   |   |   | 42 |   | 156 |   |   |   | 198 |   |
| Reclassification                                |       |                                            |       | 6 |   |   |   | 6 |   | 1 |   |   |   | 7 |   |
| Translation  differences for the year           |       | (7                                              | )          | (59 | ) |   |   | (66 | ) | (360 | ) | (1 | ) | (426 | ) |
| *Total  accumulated depreciation*               | ** ** | **(125**                                        | **)**      | **(1,033** | **)** |   | ** ** | **(1,158** | **)** | **(11,005** | **)** | **(206** | **)** | **(12,163** | **)** |
|                                            |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| *Accumulated  write-downs:*                     | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |
| Accumulated  write-downs at January 1      |       |                                            |       |   |   |   |   |   |   | (171 | ) |   |   | (171 | ) |
| Write-downs  during the year                    |       |                                            |       |   |   |   |   |   |   | (18 | ) |   |   | (18 | ) |
| Translation  differences for the year           |       |                                            |       |   |   |   |   |   |   | (4 | ) |   |   | (4 | ) |
| Total  accumulated write-downs                  |       |                                            |       |   |   |   |   |   | ** ** | **(193** | **)** | ** ** | ** ** | **(193** | **)** |
| **Total  tangible assets**                      | ** ** | **107**                                         | ** ** | **409** | ** ** | **1,464** | ** ** | **1,980** | ** ** | **12,302** | ** ** | **502** | ** ** | **14,282** | ** ** |

 

SEK 1,093 million of the year’s total investment ofSEK 2,766 million relates to Russia. Construction in progress primarilyinvolves projects in Russia and Sweden. Finance leases relate to assetsreported according to Note 26.

Tele2 has not capitalized any interest expenses infixed assets as of December 31, 2005 (2004: SEK 6 million).

 

F-32

----

**NOTE 16 BUSINESS ACQUISITIONS ANDDIVESTMENTS**

Acquisitions and sale of share and participationsaffecting cash flow refer to the following:
| ** **                                            | ** ** | **As at December 31, 2005** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                            | ** ** | **(SEK in millions)**                 | ** ** |
| Comunitel Spain                                       |       | 2,258                                           |       |
| Versatel  Netherlands/Belgium                         |       | 5,203                                           |       |
| Other acquisitions                                    |       | 255                                             |       |
| Divestments                                           |       | (148                                            | )          |
| Other cash flow changes  in shares and participations |       | (18                                             | )          |
| **Cash flow effect of acquisitions and divestments**  | ** ** | **7,550**                                       | ** ** |

 

**ACQUISITIONS**

**Comunitel Spain (Southern Europe)**

On September 30, 2005,Tele2 acquired 99.96% of the share capital in Comunitel Global S.A., a Spanishtelecom operator, for SEK 2.3 billion with 81,000 fixed telephony and internetcustomers. Tele2’s results for 2005 include operating revenue of SEK 397million and a net loss of SEK —65 million related to Comunitel. Goodwill inconnection with the acquisition of Comunitel relates to our expectation tostrengthening our position in the Spanish market via reduced costs, vastlyimproved coverage of the consumer market and a breakthrough in the corporate market.The acquisition is also an important milestone for Tele2’s pan-Europeanbroadband offerings.

**Versatel Netherlands/Belgium (UK &Benelux)**

On July 18 2005, Tele2announced its intention to acquire the public company Versatel TelcomInternational N.V., a leading alternative telecom operator in the Netherlandsand Belgium with 434,000 fixed telephony and internet customers. On October 142005, and November 1 2005, collectively, Tele2 acquired a total of 80.29%of the shares in the company for SEK 6.6 billion. Tele2’s result for 2005includes operating revenue of SEK 942 million and a net loss of SEK —65 millionrelated to Versatel. Goodwill in connection with the acquisition of Versatelrelates to an expectation of obtaining economies of scale from the merger ofVersatel and Tele2’s existing operations in the Netherlands and Belgium. Therewill be a migration of Tele2’s traffic to Versatel’s infrastructure.

**Other acquisitions**

On January 31, 2005 Tele2acquired 100% of the shares in Tiscali in Denmark for SEK 165 million with76,000 fixed telephony and internet customers. July 20, 2005 Tele2acquired 100% of the shares in Econophone AG, the third largest alternativeSwiss fixed network operator, for SEK 116 million with 128,000 fixed telephonyand internet customers. November 10, 2005 Tele2 acquired 100% of theshares in Lipetsk Mobile CJSC, a mobile telephony operator in Russia, for SEK 3million.

The three above-mentionedacquisitions are included by SEK 347 million in Tele2’s operating revenue ofSEK 347 million and by approximately SEK —44 million in the net profit. SinceTiscali has merged with Tele2 Denmark, only an estimate has been made of howlarge a share relates to the acquired Tiscali operations. Goodwill inconnection with the acquisition of Econophone relates to an expectation that wewill strengthen our position through lowered costs and by increasing our marketshare in the Swiss market.

F-33

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*The assets,liabilities and contingent liabilities that were included in the acquiredoperations amount to the following:*

 
| ** **                                     | ** ** | **Comunitel Spain**        | ** ** | **Versatel  Netherlands/Belgium** | ** ** | **Other acquisitions** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|-----------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **Reported**               | ** ** | ** **                        | ** ** | ** **             | ** ** | **Reported** | ** ** | ** ** | ** ** | ** ** | ** ** | **Reported** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **value at the** | ** ** | **Adjustment**                    | ** ** | ** **             | ** ** | **value at the** | ** ** | **Adjustment** | ** ** | ** ** | ** ** | **value at the** | ** ** | **Adjustment** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **time of**           | ** ** | **to fair **            | ** ** | **Fair**               | ** ** | **time of** | ** ** | **to fair ** | ** ** | **Fair** | ** ** | **time of** | ** ** | **to fair ** | ** ** | **Fair** | ** ** |
| ** **                                     | ** ** | **acquisition**            | ** ** | **value**                         | ** ** | **value**              | ** ** | **acquisition** | ** ** | **value** | ** ** | **value** | ** ** | **acquisition** | ** ** | **value** | ** ** | **value** | ** ** |
| ** **                                     | ** ** | **(SEK in millions)**      | ** ** |
| Customer  agreements                           |       |                       |       | 436                               |       | 436                    |       |   |   | 1,309 |   | 1,309 |   |   |   | 152 |   | 152 |   |
| Interconnection  agreements                    |       | 303                        |       |                              |       | 303                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Licenses                                       |       |                       |       |                              |       |                   |       | 747 |   | (539 | ) | 208 |   | 1 |   | 7 |   | 8 |   |
| Brands                                         |       |                       |       |                              |       |                   |       |   |   |   |   |   |   |   |   | 5 |   | 5 |   |
| Software                                       |       | 60                         |       |                              |       | 60                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Tangible assets                                |       | 337                        |       |                              |       | 337                    |       | 3,591 |   |   |   | 3,591 |   | 28 |   | 45 |   | 73 |   |
| Deferred tax  assets                           |       | 533                        |       |                              |       | 533                    |       | 446 |   |   |   | 446 |   |   |   | 116 |   | 116 |   |
| Other financial  assets                        |       | 66                         |       |                              |       | 66                     |       |   |   |   |   |   |   | 10 |   |   |   | 10 |   |
| Material and  supplies                         |       | 2                          |       |                              |       | 2                      |       |   |   |   |   |   |   | 2 |   |   |   | 2 |   |
| Current  receivables                           |       | 231                        |       |                              |       | 231                    |       | 7,238 |   |   |   | 7,238 |   | 88 |   |   |   | 88 |   |
| Cash and cash  equivalents                     |       | 4                          |       |                              |       | 4                      |       | 1,373 |   |   |   | 1,373 |   | 28 |   |   |   | 28 |   |
| Deferred tax  liabilities                      |       |                       |       | (131                              | )          | (131                   | )          |   |   | (231 | ) | (231 | ) |   |   | (28 | ) | (28 | ) |
| Other long-term  liabilities                   |       | (1,223                     | )          |                              |       | (1,223                 | )          | (3,125 | ) |   |   | (3,125 | ) | (22 | ) | (21 | ) | (43 | ) |
| Short-term  liabilities                        |       | (597                       | )          |                              |       | (597                   | )          | (8,814 | ) |   |   | (8,814 | ) | (178 | ) | (5 | ) | (183 | ) |
| Minority interest                              |       |                       |       |                              |       |                   |       | (295 | ) | (106 | ) | (401 | ) |   |   |   |   |   |   |
| *Acquired  net assets*                         | ** ** | **(284**                   | **)**      | **305**                           | ** ** | **21**                 | ** ** | **1,161** | ** ** | **433** | ** ** | **1,594** | ** ** | **(43** | **)** | **271** | ** ** | **228** | ** ** |
| Goodwill                                       |       |                       |       |                              |       | 1,073                  |       |   |   |   |   | 2,094 |   |   |   |   |   | 3 |   |
| *Purchase  price for shares in subsidiary*     |       |                       |       |                              | ** ** | **1,094**              |       |   |   |   | ** ** | **3,688** |   |   |   |   | ** ** | **231** | ** ** |
| Payment of debts  in acquired operations       |       |                       |       |                              |       | 1,168                  |       |   |   |   |   | 2,888 |   |   |   |   |   | 53 |   |
| *Acquisition  value*                           |       |                       |       |                              | ** ** | **2,262**              |       |   |   |   | ** ** | **6,576** |   |   |   |   | ** ** | **284** | ** ** |
| Liabilities to  former owners                  |       |                       |       |                              |       |                   |       |   |   |   |   |   |   |   |   |   |   | (1 | ) |
| Less: cash in  acquired operations             |       |                       |       |                              |       | (4                     | )          |   |   |   |   | (1,373 | ) |   |   |   |   | (28 | ) |
| **Effect on group cash and cash  equivalents** |       |                       | ** ** | ** **                        |       | **2,258**              | ** ** | ** ** |   |   | ** ** | **5,203** | ** ** | ** ** | ** ** | ** ** | ** ** | **255** | ** ** |

 

As a consequence of the sizeand complexity of the acquisitions, and since they took place so late in theyear, the reviews of the acquired operations’ accounting principles andvaluation of acquired assets, liabilities and contingent liabilities are notcomplete. The above-mentioned information and the pro forma below are thereforeonly preliminary.

**Divestments**

In September 14, 2005Tele2 divested all of its shares in Proceedo Solutions AB, a Swedish companywith electronic solutions to gather information on different suppliers’products and prices, for SEK 19 million. The sale of Proceedo has affectedTele2’s operating revenue by SEK 14 million and net profit by SEK —1 millionbeyond the capital gain recorded of SEK 5 million.

On October 31, 2005,Tele2 divested all of its shares in OU Trigger software, along with theoperations in Estonia, for SEK 18 million. Trigger has affected Tele2’soperating revenue with SEK 12 million and net profit by SEK 2 million beyondthe capital gain recorded of SEK 5 million.

On December 16, 2005,Tele2 divested all of its shares in Tele2 UK Communication Ltd and Tele2telecommunication Service Ltd, with operations in fixed telephony in the UK andIreland with a total of 274,000 fixed telephony customers, for SEK 157 million.Tele2 UK and Tele2 Ireland have affected Tele2’s operating revenue with SEK 517million and net profit by SEK —318 million beyond the capital gain of SEK 137million.

F-34

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The assets, liabilities andcontingent liabilities that were included in the divested operations amount tothe following:
| ** **                                             | ** ** | **Net assets at the  time of  divestment** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                             | ** ** | **(SEK in millions)**                                | ** ** |
|                                                   |       |                                                           |       |
| Goodwill                                               |       | 13                                                             |       |
| Tangible assets                                        |       | 2                                                              |       |
| Current  receivables                                   |       | 111                                                            |       |
| Cash and cash  equivalents                             |       | 46                                                             |       |
| Exchange rate  difference in shareholders’ equity |       | (6                                                             | )          |
| Short-term  liabilities                                |       | (119                                                           | )          |
| *Divested  net assets*                                 | ** ** | **47**                                                         | ** ** |
| Capital gain                                           |       | 147                                                            |       |
| *Sales  price*                                         | ** ** | **194**                                                        | ** ** |
| Less: cash in  divested operations                     |       | (46                                                            | )          |
| **Effect  on group cash and cash equivalents**         | ** ** | **148**                                                        | ** ** |

 

**Pro forma**

Presented below is a pro formaanalysis of how the operations acquired throughout the year and the divestedoperations respectively would have affected Tele2’s operating revenue andoperating profit before amortization, depreciation and result from shares inassociated companies and joint ventures if they had been acquired and divestedrespectively as of January 1, 2005. Since Tiscali has merged with Tele2Denmark, only an estimate has been made of how large a share relates to theacquired Tiscali operations.

Since the year’s divestedoperations do not constitute a significant part of the Tele2 Group’s result andfinancial position, disclosure in the income statement has not been doneaccording to IFRS 5 *Non-current assets heldfor sale and discontinued operations.*
| ** **                                                                                                             | ** ** | **2005**                        | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                             | ** ** | **Tele2 Group**            | ** ** | **Acquired  operations  before the  time of  acquisition** | ** ** | **Less  divested  operations** | ** ** | **Tele2  Group**(pro forma) | ** ** |
| ** **                                                                                                             | ** ** | **(SEK in millions)** | ** ** |
|                                                                                                                   |       |                            |       |   |   |   |   |   |   |
| Operating  revenue                                                                                                     |       | 49,943                          |       | 4,040 |   | (543 | ) | 53,440 |   |
| Operating profit before  amortization, depreciation and result from shares in associated companies and  joint ventures |       | 6,578                           |       | 464 |   | 173 |   | 7,215 |   |

 

F-35

----

**NOTE 17SHARES IN ASSOCIATED COMPANIES AND JOINT VENTURES**

 
| ** **                                                                                  | ** ** | ** **                      | ** ** | ** **               | ** ** | ** **                | ** ** | **Net Book Value**  | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|---------------------------|------------|-------------------------------|------------|
| ** **                                                                                  | ** ** | **Number of**              | ** ** | **Total par ** | ** ** | ** **                | ** ** | **At December 31,** | ** ** |
| ** **                                                                                  | ** ** | **shares**                      | ** ** | **value**                | ** ** | **Holding**               | ** ** | **2004**                      | ** ** | **2005** | ** ** |
| ** **                                                                                  | ** ** | **(SEK in millions)** | ** ** |
|                                                                                        |       |                            |       |                     |       |                      |       |                          |       |   |   |
| Svenska UMTS nät  AB, 556606-7996, Stockholm, Sweden                                   |       | 501,000                         |       | tSEK 50,100              |       | 50                        | %          | 500                           |       | 401 |   |
| ZAO Setevaya  Kompanya, 104 779 674, 3312, Moskva, Russia                                   |       | 300                             |       | tRUR 3,000               |       | 50                        | %          | —                        |       | — |   |
| SCD Invest AB,  556353-6753, Stockholm, SwedenSweden                                        |       | 1,058,425 A                     |       | tSEK 5,292               |       | equity 9,1%   votes 49,6% |       | —                        |       | — |   |
| Managest Media  SA, RCB87091, Luxembourg                                                    |       | 12,000 B                        |       | tEURO 120                |       | 40                        | %          | 22                            |       | 23 |   |
| SNPAC Swedish  Number Portability Administrative Centre AB, 556595-2925, Stockholm,  Sweden |       | 400                             |       | tSEK 40                  |       | 20                        | %          | 6                             |       | 4 |   |
| GH Giga Hertz HB  and 15 other partnerships with licensess                                  |       |                            |       |                     |       | 33,3                      | %          | 3                             |       | 3 |   |
| **Total  shares in associated companies and joint ventures**                                | ** ** | ** **                      | ** ** | ** **               | ** ** | ** **                | ** ** | **531**                       | ** ** | **431** | ** ** |

 

None of the associated companies and joint venturesare listed on stock exchanges.
| ** **                                                   | ** ** | **Net book value**    | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **At December 31,**   | ** ** |
| ** **                                                   | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(SEK in millions)** | ** ** |
| *Acquisition:*                                               |       |                            |       |   |   |
| Acquisition  value at Jan 1                                  |       | 851                             |       | 874 |   |
| Investments                                                  |       | 3                               |       | — |   |
| Repayment of  capital invested                               |       | (1                              | )          | — |   |
| Share of  profit/loss                                        |       | 15                              |       | (100 | ) |
| Reclassifications                                            |       | 6                               |       | — |   |
| *Total  acquisition value*                                   | ** ** | **874**                         | ** ** | **774** | ** ** |
| *Write-downs:*                                               |       |                            |       |   |   |
| Accumulated  write-downs at Jan 1                            |       | (343                            | )          | (343 | ) |
| *Total  accumulated write-downs at Jan 1*                    | ** ** | **(343**                        | **)**      | **(343** | **)** |
| * *                                                     | * *   | * *                        | * *   | * * | * * |
| **Total  shares in associated companies and joint ventures** | ** ** | **531**                         | ** ** | **431** | ** ** |

 

F-36

----

**Contribution of each associated company and joint venture to Groupequity:**
| ** **                                    | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **Sv UMTS nät**             | ** ** | **Other** | ** ** | **Sv UMTS nät** | ** ** | **Other** | ** ** |
| ** **                                    | ** ** | **(SEK in millions)**            | ** ** |
|                                          |       |                                       |       |   |   |   |   |   |   |
| *Share  of shareholders’ equity:*        |       |                                       |       |   |   |   |   |   |   |
| Equity share,  January 1                 |       | 489                                        |       | 19 |   | 500 |   | 31 |   |
| Acquired  operations’ opening balance    |       | —                                     |       | 3 |   | — |   | — |   |
| Repayment of  capital invested                |       | —                                     |       | (1 | ) | — |   | — |   |
| Share of  profit/loss                         |       | 11                                         |       | 4 |   | (99 | ) | (1 | ) |
| Reclassification                              |       | —                                     |       | 6 |   | — |   | — |   |
| * *                                      | ** ** | **500**                                    | ** ** | **31** | ** ** | **401** | ** ** | **30** | ** ** |
| **Total share of shareholders’  equity** | ** ** | ** **                                 | ** ** | **531** | ** ** | ** ** | ** ** | **431** | ** ** |

 

**NOTE 18 OTHER FINANCIAL ASSETS**
| ** **                                          | ** ** | **At December 31,**   | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(SEK in millions)** | ** ** |
|                                                |       |                            |       |   |   |
| Receivables from  SCD Invest AB, associated company |       | 16                              |       | — |   |
| Receivables from  LCC Peoples Mobile                |       | —                          |       | 3 |   |
| Receivable from  Modern Holdings Inc                |       | 10                              |       | 11 |   |
| Pension fund                                        |       | 14                              |       | 9 |   |
| Other long-term  securities                         |       | 48                              |       | 39 |   |
| Other                                               |       | 5                               |       | 13 |   |
| **Total other financial assets**                    | ** ** | **93**                          | ** ** | **75** | ** ** |

 

Other long-term securities consist of shares in thefollowing companies:
| ** **                                                                         | ** ** | ** **                      | ** ** | ** **         | ** ** | ** ** | ** ** | **Net Book Value**  | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|--------------------|------------|------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **Number of**              | ** ** | **Total par** | ** ** | ** ** | ** ** | **At December 31,** | ** ** |
| **(Company, registration number, and registered office)** | ** ** | ** **                      | ** ** | **shares**         | ** ** | **value**  | ** ** | **Holding**                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(SEK in millions)** | ** ** |
| Modern Holdings  Inc., USA                                                         |       | 1,806,575                       |       | tUSD 18            |       | 11.88      | %          | 36                            |       | 36 |   |
| Travellink AB,  556596-2650, Stockholm, Sweden                                     |       | 18,607                          |       | tSEK 1,861         |       | 15         | %          | 11                            |       | — |   |
| LCC Peoples  Mobile, 1047796469973, Moscow, Russia                                 |       |                            |       | tRUR 0.2           |       | 2          | %          | —                        |       | 1 |   |
| Radio National  Luleå AB, 556475-0411, Stockholm, Sweden                      |       | 55                              |       | tSEK 5             |       | 5.5        | %          | 1                             |       | 1 |   |
| Other                                                                              |       |                            |       |               |       |       |       | —                        |       | 1 |   |
| **Total  other long-term securities**                                              | ** ** | ** **                      | ** ** | ** **         | ** ** | ** ** | ** ** | **48**                        | ** ** | **39** | ** ** |
|                                                                                    |            |                                 |            |                    |            |            |            |                               |            |  |  |  |  |

 

 

F-37

----

**NOTE 19 ACCOUNTS RECEIVABLE**

|                                | ** ** | **At December 31,**   | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(SEK in millions)** | ** ** |
|                           |       |                            |       |   |   |
| Accounts receivable            |       | 7,428                           |       | 8,521 |   |
| Reserve for doubtful  accounts |       | (1,483                          | )          | (1,795 | ) |
| **Total accounts receivable**  | ** ** | **5,945**                       | ** ** | **6,726** | ** ** |

 

|                                                  | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(SEK in millions)**            | ** ** |
| Reserve for doubtful  accounts at January 1 |       | 1,406                                      |       | 1,483 |   |
| Reserves in companies  acquired during the year  |       | 37                                         |       | 165 |   |
| Reserves in companies  divested during the year  |       | —                                     |       | (27 | ) |
| Provisions during the  year                      |       | 379                                        |       | 395 |   |
| Recovery of previous  provisions                 |       | (323                                       | )          | (301 | ) |
| Translation differences                          |       | (16                                        | )          | 80 |   |
| **Total reserve for doubtful  accounts**         | ** ** | **1,483**                                  | ** ** | **1,795** | ** ** |

 

**NOTE 20 OTHER CURRENT RECEIVABLES**

|                                        | ** ** | **At December 31,**   | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(SEK in millions)** | ** ** |
|                                   |       |                            |       |   |   |
| VAT receivable                         |       | 366                             |       | 734 |   |
| Receivable from APAX  Partners         |       | —                          |       | 187 |   |
| Receivable from  suppliers             |       | 63                              |       | 122 |   |
| Receivable from Svenska  UMTS-nät |       | 59                              |       | — |   |
| Receivable from seller  of UTA         |       | 30                              |       | — |   |
| Other                                  |       | 44                              |       | 129 |   |
| **Total other current receivables**    | ** ** | **562**                         | ** ** | **1,172** | ** ** |

 

F-38

----

**NOTE 21 PREPAID EXPENSES AND ACCRUED INCOME**

|                                                 | ** ** | **At December 31,**   | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(SEK in millions)** | ** ** |
|                                            |       |                            |       |   |   |
| Traffic revenues, from  customers               |       | 2,113                           |       | 2,882 |   |
| Traffic revenues, from  other telecom operators |       | 1,024                           |       | 534 |   |
| Interest income                                 |       | 60                              |       | 88 |   |
| Accrued income, other                           |       | 62                              |       | 259 |   |
| Rental costs                                    |       | 155                             |       | 139 |   |
| Retailers’ commission,  prepaid cards      |       | 131                             |       | 119 |   |
| Fixed subscription  charges                     |       | 73                              |       | 173 |   |
| Prepaid expenses, other                         |       | 313                             |       | 399 |   |
| **Total prepaid expenses and  accrued income**  | ** ** | **3,931**                       | ** ** | **4,593** | ** ** |

 

SEK 7 million of the balance sheet items is estimatedto be paid more than 12 months after the closing date.

**NOTE 22 CASH AND CASH EQUIVALENTS AND OVERDRAFT FACILITIES**

**Available liquidity:**

|                                                   | ** ** | **At December 31,**   | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **(SEK in millions)** | ** ** |
|                                              |       |                            |       |   |   |
| Cash and cash  equivalents                        |       | 2,148                           |       | 3,979 |   |
| Restricted funds                                  |       | (365                            | )          | (892 | ) |
| Unutilized overdraft  facilities and credit lines |       | 3,330                           |       | 5,854 |   |
| **Total available liquidity**                     | ** ** | **5,113**                       | ** ** | **8,941** | ** ** |

 

**Overdraft facilities:**

|                                                             | ** ** | **At December 31,**   | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | **(SEK in millions)** | ** ** |
|                                                        |       |                            |       |   |   |
| Overdraft facilities  granted                               |       | 229                             |       | 238 |   |
| Overdraft facilities  utilized                              |       | (21                             | )          | — |   |
| *Total unutilized overdraft  facilities*                    | ** ** | **208**                         | ** ** | **238** | ** ** |
|                                                        |       |                            |       |   |   |
| Unutilized credit lines                                     |       | 3,122                           |       | 5,616 |   |
| **Total unutilized overdraft  facilities and credit lines** | ** ** | **3,330**                       | ** ** | **5,854** | ** ** |

 

No specific collateral is provided for overdraftfacilities.

F-39

----

**Exchange rate difference in cash and cash equivalents:**

|                                                                  | ** ** | **At December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                       | ** ** | **2004**                 | ** ** | **2005** | ** ** |
| ** **                                                       | ** ** | **(SEK in millions)**    | ** ** |
|                                                             |       |                     |       |   |   |
| Cash and cash equivalents at January 1                      |       | (27                      | )          | 142 |   |
| Cash flow for the year                                           |       | 17                       |       | (17 | ) |
| **Total exchange rate difference in cash and cash  equivalents** | ** ** | **(10**                  | **)**      | **125** | ** ** |

 

**NOTE 23 NUMBER OF SHARES AND EARNINGS PER SHARE**

The share capital in Tele2 AB is divided into twoclasses of shares: Class A and B shares. Both types of shares have a quotavalue of SEK 1.25 per share and have the same rights on the company’s netassets and profits. Shares of class A-shares, however, entitle the holder to 10voting rights per share and class B-shares to one voting right per share.

The Annual General Meeting of May 11, 2005decided on a share split and a redemption procedure where each share wasdivided into 3 ordinary shares and 1 redemption share. Redemption shares havebeen automatically redeemed for SEK 10 per share, corresponding to a total of1,476 million. Together with the ordinary dividend of SEK 5 per share, theshareholders have received SEK 2,213 million.

**Number of shares:**
| ** **                                               | ** ** | **A-shares** | ** ** | **B-shares**   | ** ** | **Total**  | ** ** |
|----------------------------------------------------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                               | ** ** | **Change**   | ** ** | **Total**      | ** ** | **Change** | ** ** | **Total** | ** ** | **number** | ** ** |
|                                                     |       |         |       |           |       |       |       |   |   |   |   |
| As of January 1,  2003                              |       |         |       | 65,069,412     |       |       |       | 377,311,113 |   | 442,380,525 |   |
| New shares issued,  convertibles                         |       | —       |       | 65,069,412     |       | 300,000    |       | 377,611,113 |   | 442,680,525 |   |
| **December 31, 2003**                               |       |         | ** ** | **65,069,412** | ** ** | ** ** | ** ** | **377,611,113** | ** ** | **442,680,525** | ** ** |
|                                                     |       |         |       |           |       |       |       |   |   |   |   |
| Restamping of A-shares  to B-shares                      |       | (18,519,423  | )          | 46,549,989     |       | 18,519,423 |       | 396,130,536 |   | 442,680,525 |   |
| **December 31, 2004**                               |       |         | ** ** | **46,549,989** | ** ** | ** ** | ** ** | **396,130,536** | ** ** | **442,680,525** | ** ** |
|                                                     |       |         |       |           |       |       |       |   |   |   |   |
| New share issue,  convertibles                           |       | —       |       | 46,549,989     |       | 972,307    |       | 397,102,843 |   | 443,652,832 |   |
| **Total number of shares as of  December 31, 2005** |       |         | ** ** | **46,549,989** | ** ** | ** ** | ** ** | **397,102,843** | ** ** | **443,652,832** | ** ** |

 

**Number of shares after dilution:**
| ** **                                 | ** ** | **At December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **2004**                      | ** ** | **2005** | ** ** |
|                                       |       |                          |       |   |   |
| Number of outstanding  shares              |       | 442,680,525                   |       | 443,652,832 |   |
| Warrants, 2002-2007                        |       | 1,033,867                     |       | 328,013 |   |
| **Total number of shares after  dilution** | ** ** | **443,714,392**               | ** ** | **443,980,845** | ** ** |

 

As of December 31, 2005, Tele2 has outstandingwarrants corresponding to 1,304,821 (2004: 2,418,428) B-shares in Tele2 AB at asubscription price of SEK 60.80 per share and a subscription period 2005-2007.Further information is provided in Note 34.

F-40

----

**Earnings per share:**
| ** **                                                      | ** ** | **Earnings per share**                                               | ** ** | **Earnings per share after dilution** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                      | ** ** | **Year ended December 31,**                                     | ** ** |
| ** **                                                      | ** ** | **2004**                                                                       | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(SEK in millions, except earnings per share)** | ** ** |
| Net profit                                                      |       | 3,428                                                                          |       | 2,347                                                     |       | 3,428 |   | 2,347 |   |
| Weighted average number  of shares                              |       | 442,680,525                                                                    |       | 442,842,576                                               |       | 442,680,525 |   | 442,842,576 |   |
| Effect of warrants                                              |       |                                                                           |       |                                                      |       | 1,061,049 |   | 548,670 |   |
| *Weighted average number of  outstanding shares after dilution* | ** ** | ** **                                                                     | ** ** | ** **                                                | ** ** | **443,741,574** | ** ** | **443,391,246** | ** ** |
| **Earnings per share**                                          | ** ** | **SEK 7.74**                                                                   | ** ** | **SEK 5.30**                                              | ** ** | **SEK 7.73** | ** ** | **SEK 5.29** | ** ** |

 

**Dividend:**

The dividends that were determined at the AnnualGeneral Meeting and paid in 2005 were SEK 5 (2004: 1) per share including redemptionprocedures. At the General Meeting in May 2006, a dividend for 2005 of SEK1.75 per share has been approved, a total of SEK 777 million.

**NOTE 24 LIABILITIES TO FINANCIAL INSTITUTIONS**

**Short-term liabilities:**
| ** **                                                                                   | ** ** | ** **                      | ** ** | ** **                        | ** ** | **At December 31,**   | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | ** **                      | ** ** | ** **                        | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| **Creditors  collateral provided)**                                                     | ** ** | ** **                      | ** ** | **Interest rate terms** | ** ** | **Maturity  date**              | ** ** | **Short-term  liabilities** | ** ** | **Long-term  liabilities** | ** ** | **Short-term  liabilities** | ** ** | **Long-term  liabilities** | ** ** |
| ** **                                                                                   | ** ** | ** **                      | ** ** | ** **                        | ** ** | **(SEK in millions)** | ** ** |
| 5-year syndicated  loan facility                                                             |       | EURIBOR  et. al.  +0.20%-0.50%. |       | 2009                              |       | 2,855                           |       | 1,085 |   | 4,921 |   | 8,491 |   |
| * (collateral: guarantee from Tele2 AB)*                                                |       |                            |       |                              |       |                            |       |   |   |   |   |   |   |
| * *                                                                                     |       |                            |       |                              |       |                            |       |   |   |   |   |   |   |
| Banque Invik                                                                                 |       | margin:  +0.07%-  0.50%.        |       | 2006                              |       | 300                             |       | — |   | 822 |   | — |   |
| * (collateral: restricted bank funds in Tele2  Russia Telecom BV and Tele2 Sverige AB)* |       |                            |       |                              |       |                            |       |   |   |   |   |   |   |
| * *                                                                                     |       |                            |       |                              |       |                            |       |   |   |   |   |   |   |
| SEB.                                                                                         |       | EURIBOR  +0.75-  3.00%          |       | 2006-2011                         |       | 52                              |       | 173 |   | 69 |   | 137 |   |
| * (collateral: guarantee from Tele2 Sverige  AB)*                                       |       |                            |       |                              |       |                            |       |   |   |   |   |   |   |
| * *                                                                                     |       |                            |       |                              |       |                            |       |   |   |   |   |   |   |
| Other                                                                                        |       |                            |       |                              |       | —                          |       | — |   | — |   | 5 |   |
|                                                                                         |       |                            |       |                              |       |                            |       |   |   |   |   |   |   |
| *Total short-term and long-term  liabilities to financial institutions*                      | ** ** | ** **                      | ** ** | ** **                        | ** ** | **3,207**                       | ** ** | **1,258** | ** ** | **5,812** | ** ** | **8,633** | ** ** |
|                                                                                         | ** ** | ** **                      | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total liabilities to financial  institutions**                                             | ** ** | ** **                      | ** ** | ** **                        | ** ** | ** **                      | ** ** | **4,465** | ** ** | ** ** | ** ** | **14,445** | ** ** |
|                                                                                              |            |                                 |            |                                   |            |                                 |            |  |  |  |  |  |  |  |  |

 

On October 10, 2005, the existing loan facilitywas increased from SEK 7.0 billion SEK 19.1 billion, divided into SEK 14.1billion expiring in November 2009 and SEK 5.0 billion expiring in November 2006with the opportunity of extending one year at a time. The interest margin ofthe long-term portion amounts to 25-50 basis points, depending on thedebt/equity ratio, and on the short-term part amounting to 20 basis points.

The loan can be used in most currencies, at presentUSD, SEK, EUR and GBP. The facility allows a debt/equity ratio and netliabilities to operating profit excluding depreciation and amortization, of upto 3.5. The five-year loan facility is based on requirements involving thefulfilment of certain financial ratios. Tele2 expects to fulfil theserequirements.

The loan facility is financed by ABN Amro, CitigroupInternational plc, Caylon Bank SA, DnB NOR Bank ASA, Nordea 

F-41

----

Bank AB (publ),Skandinaviska Enskilda Banken AB (publ), Société Générale, the Royal Bank ofScotland plc, WestLB AG, Svenska Handelsbanken AB (publ), Cooperatieve CentraleRaiffeisen-Boerenleenbank BA, Danske Bank A/S, HSBC Bank plc and ING Bank NV.

The loan in Banque Invik relates to loans to Tele2’soperations in Russia, Croatia and Turkey. Tele2 has deposited a correspondingamount in Banque Invik. The margin between the interest on bank funds andinterest on loan liabilities respectively is 0.07%-0.50%.

The average interest rate on loans during the year was3.7% (2004: 4.4%).

**Collateral provided:**

|                                                 | ** ** | **At December 31,**   | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(SEK in millions)** | ** ** |
|                                            |       |                            |       |   |   |
| Bank deposits                                   |       | 300                             |       | 831 |   |
| **Total collateral provided for  liabilities.** | ** ** | **300**                         | ** ** | **831** | ** ** |

 

**Maturities for the outstanding debt are as follows:**
| ** **                                       | ** ** | **At December 31,**   | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(SEK in millions)** | ** ** |
|                                             |       |                            |       |   |   |
| Within 1 year                                    |       | 3,207                           |       | 5,812 |   |
| Within 1-2 years                                 |       | 59                              |       | 60 |   |
| Within 2-3 years                                 |       | 60                              |       | 12 |   |
| Within 3-4 years                                 |       | 1,110                           |       | 8,530 |   |
| Within 4-5 years                                 |       | 16                              |       | 19 |   |
| Within 5-10 years                                |       | 13                              |       | 12 |   |
| Within 10-15  years                              |       | —                          |       | — |   |
| **Total liabilities to financial  institutions** | ** ** | **4,465**                       | ** ** | **14,445** | ** ** |

 

**Interest rate risk:**

Of the total loan liabilities as of December 31,2005 partly to financial institutions (above) and partly other interest-bearingliabilities (as in Note 26), are SEK 14,096 million, corresponding to 90%,(2004: SEK 4,651 million, 94%) with variable interest rates. An increase of theinterest level of 1% should involve additional interest expenses of SEK 141million, calculated on the basis of interest-bearing liabilities as of December 31,2005.

Interest-bearing liabilities to financial institutionsand other liabilities with variable interest rates fall due for payment asfollows:
| ** **                                | ** ** | **Within  1 year**         | ** ** | **Within  1-2 years** | ** ** | **Within  2-3 years** | ** ** | **Within  3-4 years** | ** ** | **Within  4-5 years** | ** ** | **Within  5-10 years** | ** ** | **Total**  | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                | ** ** | **(SEK in millions)** | ** ** |
| Liabilities with  variable interest rates |       | 5,069                           |       | 137                        |       | 58                         |       | 8,580                      |       | 71                         |       | 181                         | ** ** | **14,096** | ** ** |
| Liabilities with fixed  interest rates    |       | 1,190                           |       | 279                        |       | 146                        |       | —                     |       | —                     |       | —                      | ** ** | **1,615**  | ** ** |
| **Total interest-bearing liabilities**    | ** ** | **6,259**                       | ** ** | **416**                    | ** ** | **204**                    | ** ** | **8,580**                  | ** ** | **71**                     | ** ** | **181**                     | ** ** | **15,711** | ** ** |

 

 

F-42

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**NOTE 25   PROVISIONS**
| ** **                                   | ** ** | **At December 31, 2005** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **Rented  buildings**                   | ** ** | **Legal  requirements** | ** ** | **Pensions and  similar  commitments** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(SEK in millions)**         | ** ** |
|                                         | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provisions as of  January 1             |       | 17                                      |       | 40 |   | 6 |   | 63 |   |
| Provisions in  acquired companies            |       | 76                                      |       | 54 |   | — |   | 130 |   |
| Additional  provisions                       |       | 14                                      |       | 269 |   | 3 |   | 286 |   |
| Utilized  provisions                         |       | —                                  |       | (14 | ) | (1 | ) | (15 | ) |
| Exchange rate  differences                   |       | (1                                      | )          | (1 | ) | — |   | (2 | ) |
|                                         | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total  provisions as of December 31** | ** ** | **106**                                 | ** ** | **348** | ** ** | **8** | ** ** | **462** | ** ** |

 

|                                 | ** ** | **At December 31,**   | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(SEK in millions)** | ** ** |
|                            |       |                            |       |   |   |
| Provisions,  short-term portion |       | 10                              |       | 251 |   |
| Provisions,  long-term portion  |       | 53                              |       | 211 |   |
| **Total provisions**            | ** ** | **63**                          | ** ** | **462** | ** ** |

 

In 2005 Tele2 provided SEK 161 million related toVAT-dispute in the prepaid card operations. The dispute relates to the period2003 until the first quarter of 2005 and the provision corresponds to theestimated probable outcome, which is estimated at 75% of the maximum worst caseoutcome. Furthermore, acquired companies during the year also have provisionsfor VAT-disputes of SEK 53 million. Other disputes relate to provisions inTele2 Italy and Tele2 Spain, mainly relating to disputes with other operatorsand tax disputes.

Telecom Italia has sued Tele2 for damages for MEUR 200which the company claims it has suffered due to misleading marketing by Tele2.The claim has been made jointly against Tele2 Italy S.p.A. and Tele2 AB, sinceTele2 Italy, according to Telecom Italia, has acted on instructions from Tele2AB. Tele2 disputes the claim. Even if Telecom Italia should succeed, Tele2believes that the damages will only result in a fraction of the amount claimed.

Provisions have been made for unutilized premises.

**NOTE 26   OTHERINTEREST-BEARING LIABILITIES**
| ** **                                                           | ** ** | **At December 31,**   | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                                           | ** ** | **Short-term  liabilities**     | ** ** | **Long-term  liabilities** | ** ** | **Short-term  liabilities** | ** ** | **Long-term  liabilities** | ** ** |
| ** **                                                           | ** ** | **(SEK in millions)** | ** ** |
|                                                                 |       |                            |       |   |   |   |   |   |   |
| Eredivisie CV                                                        |       | —                          |       | — |   | 228 |   | 364 |   |
| Samsung                                                              |       | —                          |       | — |   | 124 |   | 56 |   |
| Finance leasing                                                      |       | 64                              |       | 441 |   | 66 |   | 384 |   |
| Other                                                                |       | 33                              |       | 10 |   | 29 |   | 15 |   |
|                                                                 |       |                            |       |   |   |   |   |   |   |
| *Total  other short-term and long-term interest-bearing liabilities* | ** ** | **97**                          | ** ** | **451** | ** ** | **447** | ** ** | **819** | ** ** |
|                                                                 |       |                                 |       |   |   |   |   |  |   |
| **Total  other interest-bearing liabilities**                        | ** ** | ** **                      | ** ** | **548** | ** ** | ** ** | ** ** | **1,266** | ** ** |

F-43

----

**Collateralprovided:**

|                                                                      | ** ** | **At December 31,**   | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                                           | ** ** | **(SEK in millions)** | ** ** |
|                                                                 |       |                            |       |   |   |
| Net assets in  subsidiaries                                          |       | 52                              |       | 52 |   |
| **Total  pledged collateral for other interest-bearing liabilities** | ** ** | **52**                          | ** ** | **52** | ** ** |

 

**Otherinterest-bearing liabilities fall due:**
| ** **                                    | ** **   | ** **                       | ** **   | **2004**                                                          | ** **   | ** **                                                   | ** **   | ** **                       | ** **   | **2005**                                                     | ** **   | ** **                                                   | ** **   |   |
|-----------------------------------------------|--------------|----------------------------------|--------------|-------------------------------------------------------------------|--------------|--------------------------------------------------------------|--------------|----------------------------------|--------------|--------------------------------------------------------------|--------------|--------------------------------------------------------------|--------------|--------|
| ** **                                    | ** **   | **Total loan  liabilities** | *** *** | ***of which   finance lease  present value*** | *** *** | ***of which  finance lease,  nominal value*** | ** **   | **Total loan  liabilities** | *** *** | ***of which  finance lease,  present value*** | *** *** | ***of which  finance lease,  nominal value*** | *** *** |   |
| ** **                                    | ** **   | **(SEK in millions)**  | *** *** |
| Within 1 year                                 |         | *97*                             | * *     | 79                                                                | * *     | 81                                                           | * *     | 447                              | * *     | 80                                                           | * *     | 81                                                           | * *     |
| Within 1-2  years                             |         | 96                               | * *     | 95                                                                | * *     | 100                                                          | * *     | 356                              | * *     | 73                                                           | * *     | 77                                                           | * *     |
| Within 2-3  years                             |         | 53                               | * *     | 61                                                                | * *     | 66                                                           | * *     | 192                              | * *     | 53                                                           | * *     | 58                                                           | * *     |
| Within 3-4  years                             |         | 56                               | * *     | 57                                                                | * *     | 65                                                           | * *     | 50                               | * *     | 52                                                           | * *     | 59                                                           | * *     |
| Within 4-5  years                             |         | 54                               | * *     | 54                                                                | * *     | 63                                                           | * *     | 52                               | * *     | 51                                                           | * *     | 59                                                           | * *     |
| Within 5-10  years                            |         | 192                              | * *     | 156                                                               | * *     | 189                                                          | * *     | 161                              | * *     | 136                                                          | * *     | 164                                                          | * *     |
| Within 10-15  years                           | * *     | * *                         | * *     | 3                                                                 | * *     | 4                                                            | * *     | 8                                | * *     | 5                                                            | * *     | 8                                                            | * *     |
| *Total  loan liability and interest*          | *** *** | *** ***                     | *** *** | *** ***                                                      | *** *** | **568**                                                      | *** *** | ** **                       | *** *** | ** **                                                   | *** *** | **506**                                                      | *** *** |
| Less interest  portion                        | * *     |                             |         |                                                              |         | (63                                                          | )            |                             | * *     |                                                         | * *     | (56                                                          | )            |
| ** **                                    | ** **   | *** ***                     | *** *** | *** ***                                                      | *** *** |                                                         |         | ** **                       | *** *** | ** **                                                   | *** *** |                                                         |         |
| **Total other interest-bearing  liabilities** | ** **   | **548**                          | ** **   | **505**                                                           | ** **   | **505**                                                      | *** *** | **1,266**                        | *** *** | **450**                                                      | *** *** | **450**                                                      | ** **   |

 

Finance leases relate to the expansion of transmissioncapacity in Sweden and Austria. The portion of the liability that includesvariable interests totals to SEK 264 million and has during the year resultedin interest expense of SEK 18 (2004: 0) million.

**NOTE 27**   OTHERSHORT-TERM LIABILITIES

|                                                | ** ** | **At  December 31,** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                     | ** ** | **2004**                            | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(SEK in millions)**     | ** ** |
| VAT liability                                  |       | 306                                 |       | 340 |   |
| Employee  withholding tax                      |       | 37                                  |       | 46 |   |
| Other taxes                                    |       | 78                                  |       | 40 |   |
| Additional  earn-out payment for Alpha Telecom |       | 27                                  |       | — |   |
| Customer  deposits                             |       | 25                                  |       | 30 |   |
| Other                                          |       | 21                                  |       | 129 |   |
|                                           |       |                                |       |   |   |
| **Total other short-term  liabilities**        | ** ** | **494**                             | ** ** | **585** | ** ** |

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----

**NOTE 28 ACCRUED EXPENSES ANDDEFERRED INCOME**

|                                                 | ** ** | **At December 31,**   | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(SEK in millions)** | ** ** |
|                                            |       |                            |       |   |   |
| Traffic expenses  to other telecom operators    |       | 2,064                           |       | 2,476 |   |
| External service  expenses                      |       | 782                             |       | 1,065 |   |
| Personnel-related  expenses                     |       | 270                             |       | 431 |   |
| Expenses for  dealers                           |       | 140                             |       | 133 |   |
| Interest  expenses                              |       | 84                              |       | 174 |   |
| Leasing and  rental expenses                    |       | 227                             |       | 97 |   |
| Other accrued  expenses                         |       | 148                             |       | 432 |   |
| Deferred income,  prepaid cards                 |       | 884                             |       | 821 |   |
| Other deferred  income                          |       | 1,035                           |       | 1,792 |   |
|                                            |       |                            |       |   |   |
| **Total  accrued expenses and deferred income** | ** ** | **5,634**                       | ** ** | **7,421** | ** ** |

 

**NOTE 29 PLEDGED ASSETS**

|                                | ** ** | **At December 31,**   | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(SEK in millions)** | ** ** |
| Net assets in  group companies |       | 52                              |       | 52 |   |
| Material and  supplies         |       | 13                              |       | 19 |   |
| Bank deposits                  |       | 365                             |       | 892 |   |
|                           |       |                            |       |   |   |
| **Total  pledged assets**      | ** ** | **430**                         | ** ** | **963** | ** ** |

 

Pledged shares are reported at an amountcorresponding to the carrying amount of the net assets which each subsidiaryrepresents in the group balance sheet.

**NOTE 30 CONTINGENT LIABILITIES**

|                                     | ** ** | **At December 31,**   | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(SEK in millions)** | ** ** |
| Guarantee  related to joint venture |       | 1,007                           |       | 1,475 |   |
| Future  commitments                 |       | 6                               |       | 163 |   |
|                                |       |                            |       |   |   |
| **Total  contingent liabilities**   | ** ** | **1,013**                       | ** ** | **1,638** | ** ** |

 

Svenska UMTS-nät AB, a joint venture to Tele2, has anapproved loan facility of SEK 5.3 (2004: SEK 7) billion, where Tele2 guaranteesutilized amounts up to its 50 percent holding or a maximum of SEK 2.7 (2004:3.5) billion. As of December 31, 2005, Tele2’s guarantee amounted to SEK1,475 (2004: 1,007) million.

F-45

----

**NOTE 31 OPERATING LEASES AND OTHER COMMITMENTS**

**Annualexpenses:**

|                                                   | ** ** | **Year  ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                         | ** ** | **2005** | ** ** |
| ** **                                        | ** ** | **(SEK in millions)**                  | ** ** |
| **Annual  leasing expenses for operating leases** | ** ** | **2,057**                                        | ** ** | **1,999** | ** ** |

 

The cost of operating leases relates mainly to leased capacity. Otherassets that are owned under operating leases relate to rented premises,machines and office equipment. Tele2 has a multitude of agreements relating torented connections. The majority of these involve some type of initiation feeand thereafter monthly or quarterly fees. Most of the agreements have termsranging from six months to three years with the option of extending terms.Generally these agreements have no index clauses or possibilities to acquirethe asset.

**Contractual future lease payments due for payment:**

|                                                       | ** ** | **At December 31,**   | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **2004**                        | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(SEK in millions)** | ** ** |
| Due for payment:                                      |       |                            |       |   |   |
| Within 1 year                                         |       | 847                             |       | 1,462 |   |
| Within 1-2  years                                     |       | 322                             |       | 575 |   |
| Within 2-3  years                                     |       | 283                             |       | 468 |   |
| Within 3-4  years                                     |       | 210                             |       | 234 |   |
| Within 4-5  years                                     |       | 155                             |       | 128 |   |
| Within 5-10  years                                    |       | 286                             |       | 383 |   |
| Within 10-15  years                                   |       | 187                             |       | 239 |   |
| More than 15  years                                   |       | 120                             |       | 93 |   |
|                                                  |       |                            |       |   |   |
| **Total  future lease payments for operating leases** | ** ** | **2,410**                       | ** ** | **3,582** | ** ** |

 

**Contractual commitments/commercial pledges:**

|                                                       | ** ** | **At December 31, 2005** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **Within 1  year**                 | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5  years** | ** ** | **Total** | ** ** |
| ** **                                            | ** ** | **(SEK in millions)**         | ** ** |
| ** **                                            | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liabilities to  financial institutions                |       | 5,812                                   |       | 72 |   | 8,549 |   | 12 |   | 14,445 |   |
| Other interest-bearing  liabilities                   |       | 447                                     |       | 548 |   | 102 |   | 169 |   | 1,266 |   |
| Contractual and  other commitments                    |       | 366                                     |       | — |   | — |   | — |   | 366 |   |
| Operating leases                                      |       | 1,462                                   |       | 1,043 |   | 362 |   | 715 |   | 3,582 |   |
|                                                  |       |                                    |       |   |   |   |   |   |   |   |   |
| **Total  contractual commitments/commercial pledges** | ** ** | **8,087**                               | ** ** | **1,663** | ** ** | **9,013** | ** ** | **896** | ** ** | **19,659** | ** ** |

F-46

----

**NOTE 32 SUPPLEMENTARY CASH FLOW INFORMATION**

Ofthe year’s investment in intangible assets and tangible assets, SEK 439 millionis unpaid at December 31, 2005 and has therefore not been reported asinvestments in the cash flow statement. Payment of the previous year’sinvestment of SEK 343 million has been reported as investment in the cash flowfor 2005.

**Cash flow from operating activities based on the net result:**

|                                                                | ** ** | **Year ended December 31,** | ** ** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|------------|
| ** **                                                     | ** ** | **2004**                         | ** ** | **2005**   | ** ** | ** ** |
| ** **                                                     | ** ** | **(SEK in millions)**            | ** ** | ** ** |
| *The operating activities:*                                    |       |                             |       |       |   |   |
| Net profit                                                     |       | 3,428                            |       | 2,341      |   |   |
| *Adjustments for non-cash items:*                              |       |                             |       |       |   |   |
| Depreciation/amortization                                      |       | 2,328                            |       | 2,968      |   |   |
| Result from shares in associated companies and joint  ventures |       | (17                              | )          | 100        |   |   |
| Net capital gain/loss on sale of fixed assets                  |       | 2                                |       | 17         |   |   |
| Net capital gain/loss on sale of shares                        |       | (197                             | )          | (159       | ) |   |
| Finance leases                                                 |       | (39                              | )          | (3         | ) |   |
| Unpaid financial items                                         |       | 95                               |       | 160        |   |   |
| Unpaid tax                                                     |       | 120                              |       | 192        |   |   |
| Dividend from associated companies                             |       | —                           |       | 1          |   |   |
| Deferred tax expense                                           |       | 508                              |       | 42         |   |   |
| *Cash flow from operations*                                    | ** ** | **6,228**                        | ** ** | **5,659**  | ** ** | ** ** |
| Changes in  working capital                                    |       | (352                             | )          | (172       | ) |   |
| **Cash  flow from operating activities**                       | ** ** | **5,876**                        | ** ** | **5,487**  | ** ** | ** ** |

 

**Investments according to the cashflow statement by market and business area:**

|                                                          | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(SEK in millions)**            | ** ** |
| Nordic                                                   |       | 427                                        |       | 596 |   |
| Baltic &  Russia                                |       | 684                                        |       | 1,539 |   |
| Central Europe                                           |       | 156                                        |       | 272 |   |
| Southern Europe                                          |       | 119                                        |       | 685 |   |
| UK &  Benelux                                   |       | 117                                        |       | 500 |   |
| Services                                                 |       | 59                                         |       | 48 |   |
|                                                     |       |                                       |       |   |   |
| **Total  investments in intangible and tangible assets** | ** ** | **1,562**                                  | ** ** | **3,640** | ** ** |

 

|                                                          | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| ** **                                               | ** ** | **(SEK in millions)**            | ** ** |
| Mobile telephony                                         |       | 1,063                                      |       | 1,807 |   |
| Fixed telephony  and internet                            |       | 432                                        |       | 1,768 |   |
| Cable-TV                                                 |       | 7                                          |       | 17 |   |
| Other operations                                         |       | 60                                         |       | 48 |   |
|                                                     |       |                                       |       |   |   |
| **Total investments in intangible  and tangible assets** | ** ** | **1,562**                                  | ** ** | **3,640** | ** ** |

 

Further information on the segments is provided in Note 2 and Note 3.

F-47

----

**NOTE 33 NUMBER OF EMPLOYEES**
| ** **                    | ** ** | **Average number of employees**  | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **Year ended December 31,** | ** ** |
| ** **                    | ** ** | **2004**                         | ** ** | **of which men** | ** ** | **2005** | ** ** | **of which men** | ** ** |
| Nordic                        |       | 973                              |       | 68 | % | 975 |   | 68 | % |
| Baltic &  Russia     |       | 998                              |       | 52 | % | 1,027 |   | 53 | % |
| Central Europe                |       | 188                              |       | 66 | % | 576 |   | 71 | % |
| Southern Europe               |       | 140                              |       | 62 | % | 360 |   | 56 | % |
| UK & Benelux         |       | 251                              |       | 75 | % | 538 |   | 75 | % |
| Services                      |       | 378                              |       | 81 | % | 433 |   | 79 | % |
| **Total number of employees** | ** ** | **2,928**                        | ** ** | **64** | **%** | **3,909** | ** ** | **65** | **%** |

 
| ** **                                                    | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **2004**                         | ** ** | **2004** | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **Women**                        | ** ** | **Men** | ** ** | **Women** | ** ** | **Men** | ** ** |
| Proportion of Board  members in all group companies           |       | 3                                | %          | 97 | % | 4 | % | 96 | % |
| Proportion of other  Senior Executives in all group companies |       | 17                               | %          | 83 | % | 19 | % | 81 | % |
| **Total share of Board members and other senior  executives** | ** ** | **12**                           | **%**      | **88** | **%** | **14** | **%** | **86** | **%** |

 

**NOTE 34 PERSONNEL COSTS**
| ** **                          | ** ** | **Salaries and remuneration**    | ** **   | ** **        | *** *** | *** ***  | ** ** | ** **         | ** **   |
|-------------------------------------|------------|----------------------------------|--------------|-------------------|--------------|---------------|------------|--------------------|--------------|
| ** **                          | ** ** | **Year ended December 31,** | ** **   | ** **        | *** *** | *** ***  | ** ** | ** **         | ** **   |
| ** **                          | ** ** | **2004**                         | ** **   | **2005**          | ** **   |
| ** **                          | ** ** | **Board and**               | *** *** | **of which** | ** **   | **Other**     | ** ** | **Board and** | *** *** | **of which** | ** ** | **Other** | ** ** |
| ** **                          | ** ** | **President**                    | *** *** | **bonus**         | ** **   | **employees** | ** ** | **President**      | *** *** | **bonus** | ** ** | **employees** | ** ** |
| ** **                          | ** ** | **(SEK in millions)**            | ** **   | ** **        | *** *** | *** ***  | ** ** | ** **         | ** **   |
| Nordic                              |       | 28                               | * *     | *5*               |         | 470           |       | 30                 | * *     | *4* |   | 494 |   |
| Baltic &  Russia           |       | 15                               | * *     | *1*               |         | 98            |       | 18                 | * *     | *3* |   | 115 |   |
| Central Europe                      |       | 8                                | * *     | *3*               |         | 96            |       | 8                  | * *     | *3* |   | 282 |   |
| Southern Europe                     |       | 11                               | * *     | *3*               |         | 86            |       | 13                 | * *     | *2* |   | 149 |   |
| UK & Benelux               |       | 19                               | * *     | *3*               |         | 160           |       | 19                 | * *     | *3* |   | 299 |   |
| Services                            |       | 11                               | * *     | *3*               |         | 160           |       | 5                  |         | — |   | 159 |   |
| **Total salaries and remuneration** | ** ** | **92**                           | *** *** | ***18***          | ** **   | **1,070**     | ** ** | **93**             | *** *** | ***15*** | ** ** | **1,498** | ** ** |

 

During the year, provision has been made of SEK 14 (2004: SEK 13)million for bonus to key personnel in the Group and costs for social security,SEK 5 (2004: SEK 4) million. Distribution of the amount will be decided in2006.

F-48

----

 
| ** **                          | ** ** | **Year ended December 31,**    | *** *** | *** ***                   | ** **   | *** ***                       | *** *** |
|-------------------------------------|------------|-------------------------------------|--------------|--------------------------------|--------------|------------------------------------|--------------|
| ** **                          | ** ** | **2004**                            | *** *** | *** ***                   | ** **   | **2005**                           | *** *** |
| ** **                          | ** ** | **Salaries and  remuneration** | ** **   | **Social  security  expenses** | *** *** | ***of  which  pension  expenses*** | ** **   | **Salaries and  remuneration** | ** ** | **Social  security  expenses** | *** *** | ***of  which  pension  expenses*** | *** *** |
| ** **                          | ** ** | **(SEK in millions)**               | ** **   | ** **                     | ** **   | ** **                         | *** *** | *** *** | *** *** |
| Board and  President                |       | 92                                  |         | 26                             | * *     | *7*                                |         | 93 |   | 23 | * * | *6* | * * |
| Other employees                     |       | 1,070                               |         | 331                            | * *     | *67*                               |         | 1,498 |   | 412 | * * | *86* | * * |
| **Total salaries and remuneration** | ** ** | **1,162**                           | ** **   | **357**                        | *** *** | ***74***                           | ** **   | **1,591** | ** ** | **435** | *** *** | ***92*** | *** *** |

 

|                                                           | ** ** | **Pension expenses**             | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **Year ended December 31,** | ** ** |
| ** **                                                | ** ** | **2004**                         | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(SEK in millions)**            | ** ** |
| Defined-benefit  plans, retirement pension                |       | 3                                |       | 19 |   |
| Defined-benefit  plans, compliance and disability pension |       | 4                                |       | 5 |   |
| Defined-contribution  plans                               |       | 67                               |       | 68 |   |
| **Total pension expenses**                                | ** ** | **74**                           | ** ** | **92** | ** ** |

 

**Remunerationof senior executives:**
| ** **                                   | ** ** | **Year ended December 31,**       | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **2004**                               | ** ** |
| ** **                                   | ** ** | **Basic salary/  board fee** | ** ** | **Variable  remuneration** | ** ** | **Option   program** | ** ** | **Other  benefits** | ** ** | **Other  remuneration** | ** ** | **Pension  expenses** | ** ** | **Total  remuneration** | ** ** |
| ** **                                   | ** ** | **(SEK in millions)**                  | ** ** |
| *Chairman  of the Board:*                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Sven Hagströmer                         |       | 0.8                                    |       |   |   |   |   |   |   | — |   |   |   | 0.8 |   |
| *President  and CEO:*                        |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Lars-Johan  Jarnheimer                       |       | 10.5                                   |       | 3.3 |   | — |   | 0.0 |   | — |   | 2.7 |   | 16.5 |   |
| Other Senior  Executives                     |       | 22.1                                   |       | 10.5 |   | — |   | 0.7 |   | — |   | 2.4 |   | 35.7 |   |
| **Total remuneration to Senior  executives** | ** ** | **33.4**                               | ** ** | **13.8** |   |   | ** ** | **0.7** |   |   | ** ** | **5.1** | ** ** | **53.0** | ** ** |

F-49

----

 
| ** **                                   | ** ** | **Year ended December 31,**            | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **2005**                               | ** ** |
| ** **                                   | ** ** | **Basic salary/  board fee** | ** ** | **Variable  remuneration** | ** ** | **Option  program** | ** ** | **Other  benefits** | ** ** | **Other  remuneration** | ** ** | **Pension  expenses** | ** ** | **Total  remuneration** | ** ** |
| ** **                                   | ** ** | **(SEK in millions)**                  | ** ** |
| *Chairman  of the Board:*                    |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Sven Hagströmer                         |       | 0.8                                    |       |   |   |   |   |   |   | — |   |   |   | 0.8 |   |
| *President  and CEO:*                        |       |                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Lars-Johan  Jarnheimer                       |       | 11.2                                   |       | 3.3 |   | — |   | 0.1 |   | — |   | 2.1 |   | 16.7 |   |
| Other Senior  Executives                     |       | 25.4                                   |       | 13.2 |   | — |   | 1.1 |   | — |   | 2.7 |   | 42.4 |   |
| **Total remuneration to Senior  executives** | ** ** | **37.4**                               | ** ** | **16.5** |   |   | ** ** | **1.2** |   |   | ** ** | **4.8** | ** ** | **59.9** | ** ** |

 

The group Other SeniorExecutives comprises 13 (2004: 12) persons. In addition to the expenses mentionedabove, Tele2 has also had social security expenses.
| ** **                             | ** ** | ** **        | ** ** | **Warrants program,**            | ** ** | ** **                 | ** ** |
|----------------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | ** **        | ** ** | **2002/2007**                    | ** ** | ** **                 | ** ** |
| ** **                             | ** ** | ** **        | ** ** | **Year ended December 31,** | ** ** | ** **                 | ** ** |
| ** **                             | ** ** | ** **        | ** ** | **2005**                         | ** ** | ** **                 | ** ** |
| ** **                             | ** ** | **Previous year** | ** ** | **The year’s allotment**    | ** ** | **Total**                  | ** ** |
| ** **                             | ** ** | **Number of**     | ** ** | ** **                       | ** ** | **Market value  at issue** | ** ** | **Acquisition  price** | ** ** | **Benefit** | ** ** | **Number** | ** ** |
| Group President and CEO                |       | 47,100            |       | —                           |       | —                     |       | — |   | — |   | 47,100 |   |
| Other Senior Executives                |       | 376,800           |       | —                           |       | —                     |       | — |   | — |   | 376,800 |   |
| **Total warrants to Senior Executive** | ** ** | **423,900**       | ** ** | **—**                       | ** ** | **—**                 | ** ** | **—** | ** ** | **—** | ** ** | **423,900** | ** ** |

 

*Board ofDirectors:*

Total fees to the Board of Directors in 2005 were SEK 3.4 millionfollowing a decision by the Annual General Meeting in May 2005.

*President/CEO:*

In addition to afixed salary, the President and CEO of Tele2 AB, Lars-Johan Jarnheimer,received a bonus of SEK 3.3 (2004: SEK 3.3) million. The bonus is based onindividual targets. Pension benefit, which is a defined-contribution pension,is 20% of his fixed basic salary. The retirement age is 65. The period ofnotice when served by the company is a minimum of 12 and a maximum of 18months. If the President serves notice of termination of employment to thecompany, salary is paid during a 12 month period. No other remuneration ispaid. The President’s salary and remuneration are determined annually by theBoard of Directors following proposals from the Remuneration Committee.

*OtherSenior executives:*

Variable salary to other Senior executives includes a bonus of 0%—50% of fixedsalary and based on profit benchmarks and other individual targets. Pensionsare paid in accordance with a public pension plan, of which SEK 2.4 (2004: 2.1)million relates to defined-contribution plans and SEK 0.3 (2004: 0.3) millionto defined-benefit plans. The retirement age is 65. The period of notice whenserved by the company is a minimum of 6 and a maximum of 12 months. If theperson serves notice of termination of employment to the company, salary ispaid during a 6 month period. No other remuneration is made.

F-50

----

**Share-basedpayments:**

Change in the number of outstanding warrantsand their weighted average redemptionprice:
| ** **                                                    | ** ** | **2004**                                                        | ** ** | **2005**               | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **Weighted   redemption  price per share,  SEK** | ** ** | **Warrants  (number)** | ** ** | **Weighted  redemption  price per share,  SEK** | ** ** | **Warrants  (number)** | ** ** |
| ** **                                                    | ** ** | **(SEK in millions)**                                           | ** ** |
| Outstanding as  of January 1                             |       | 60.80                                                           |       | 2,503,208              |       | 60.80 |   | 2,418,428 |   |
| Forfeited                                                     |       | 60.80                                                           |       | (84,780                | )          | 60.80 |   | (141,300 | ) |
| Exercised                                                     |       | —                                                          |       | —                 |       | 60.80 |   | (972,307 | ) |
| **Total  outstanding warrants as of December 31*)**      | ** ** | **60.80**                                                       | ** ** | **2,418,428**          | ** ** | **60.80** | ** ** | **1,304,821** | ** ** |
| **)of  which may be exercised as of December 31*         |       |                                                            |       | —                 |       |   | * * | *1,304,821* | * * |
| * of which may not be exercised as of  December 31* |       |                                                            | * *   | *2,418,428*            | * *   | * * |   | — |   |

 

Outstanding warrants at the end of the year have the followingexpiration date and exercise price:
| ** **            | ** ** | **Shares**              | ** ** |
|-----------------------|------------|-------------------------|------------|
| ** **            | ** ** | **Exercise price** | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Expiration  date:** |       |                    |       |   |   |   |   |
| 2007                  |       | 60.80                   |       | 2,418,428 |   | 1,304,821 |   |

 

## **IncentiveProgram 2002-2007**

The Annual General Meeting in 2002 approved anincentive program corresponding to a maximum of 3,312,700 B-shares for presentand additional key personnel in the Group converted after the split andredemption procedure in 2005. These people are entitled to subscribe to Class B-sharesby means of warrants over a period of three to five years corresponding to amarket value +10% for B-shares at the time of allotment, provided that theyremain in the Group’s employment. No premium is to be paid. Warrantscorresponding to 2,630,378 shares were issued in 2002, with forfeited warrantsin 2002 — 2005 totalling 353,250. In 2005 warrants totalling to 972,307 shareswere exercised. As of December 31, 2005, Tele2 has outstanding warrantscorresponding to 1,304,821 (2004: 2,418,428) shares. All warrants have aredemption price of SEK 60.80/share. Included in the above, an allotmenttotalling to 482,618 shares was issued in 2002 to a wholly-owned group companyto secure future cash flow for social expenses, of which 162,187 was exercisedin 2005 and 320,431 is outstanding as of December 31, 2005.

**NOTE 35 REMUNERATION TOAUDITORS**
| ** **                         | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2004**                         | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **Deloitte**                     | ** ** | **Other auditors** | ** ** | **Deloitte** | ** ** | **Other auditors** | ** ** |
| ** **                         | ** ** | ** **                       | ** ** | **(SEK in millions)** | ** ** | ** ** | ** ** |
| Audit  assignments                 |       | 15                               |       | 4 |   | 21 |   | 5 |   |
| Other  assignments:                |       |                             |       |   |   |   |   |   |   |
| Audit-related                      |       | 3                                |       | 2 |   | 4 |   | 1 |   |
| Taxes                              |       | —                           |       | 14 |   | 1 |   | 18 |   |
| Other                              |       | —                           |       | 1 |   | — |   | 1 |   |
|                               | ** ** | **18**                           | ** ** | **21** | ** ** | **26** | ** ** | **25** | ** ** |
| **Total remuneration to auditors** | ** ** | ** **                       | ** ** | **39** | ** ** | ** ** | ** ** | **51** | ** ** |

 

F-51

----

Audit assignments refer to the fees and expensesfor auditing the financial statements of the parent company and the Group, andstatutory auditing of subsidiaries. This also includes the fees for otherauditing services related to services which only can normally be performed bythe appointed auditor, and the examination of documents relating to the Nasdaqstock market.

The item Other assignments, “Audit-related”,includes fees for analyses and other similar investigations which are closelyrelated to the auditing of the company’s annual accounts or which are normallyperformed by the appointed auditor and consultations relating to accountingprinciples.

The item “Taxes” includes expenses for checkingtax computations, services connected with tax audits and appeals, tax advicerelating to mergers, acquisitions and intra-group pricing as well asconsultation concerning fiscal regulations.

The item “Other” covers all other assignments,including the costs for investigations and analyses in conjunction withcorporate acquisitions (due diligence).

**NOTE 36 FINANCIAL RISK MANAGEMENT**

Through its operations, the Group is exposed tovarious financial risks such as exchange risk, interest rate risk, liquidityrisk and credit risk. Handling of financial risks is mainly centralised to thecorporate management. The aim is to minimise the Group’s capital costs throughappropriate financing and the effective handling and controlling of the Group’sfinancial risks.

**Foreign currency exchange risk**

The foreign currency exchange risk consists ofexchange risk influencing the Group’s profit and equity in a negative way. Theexchange exposure arises in connection with the payment flow in foreigncurrency (transaction exposure) and when translating foreign subsidiaries’balance sheets and income statements to SEK.

In telephony operations there is currency riskin connection with international call traffic, as a liability or a receivableis created between Tele2 and foreign operators. In mobile telephony thesetransactions are calculated in SDR’s (Special Drawing Rights, a currencysubstitute) but are invoiced and paid in EUR. The Group’s policy is not tohedge transaction exposures.

Currency exposure arising as a result of thetranslation of foreign operations is limited by the Group’s borrowings incurrencies that reflect the net investment in these operations. Our loanfacility is in USD, SEK, EUR and GBP. The currency exposure regarding netinvestments in foreign operations/subsidiaries is covered and insured in partthrough a loan facility in the same currency. In 2005 21% (2004: 23%) of theoperating revenue constitutes SEK and 55% (2004: 55%) EUR. During the yearTele2’s result has primarily been influenced by fluctuations in EUR, PLN, NOKand LVL. For additional information,refer to Note 12.

**Interest rate risk**

Tele2 follows the development on the interestrate market and decisions regarding the strategy for the amount of fixed versusvariable rate debt are assessed continually. The Group utilizes at present nointerest rate hedging instruments. At the end of 2005 90% (2004: 94%) of theGroup’s interest-bearing liabilities carried a variable rate of interest. Foradditional information, refer to Note 24.

**Liquidity risk**

The Group’s cash is placed in short-terminvestments and the goal is that the surplus cash shall be used to decrease theoutstanding loan balance. According to current financial policy, the risk ofrefinancing is mitigated by subscribing to long-term binding credit facilities.At the end of 2005, the Group had available liquidity of SEK 8.9 billion. Foradditional information, refer to Note 22.

**Credit risk**

Tele2’s credit risk primarily relates toaccounts receivable and cash. The Group assesses its credit risk on acontinuous basis. Since the customer base is very differentiated and includesindividuals as well as businesses, the exposure and thus the credit risk arelimited as a whole. The Group makes provisions for expected customer losses.

Fair values for Tele2’s liabilities with fixedinterest rates do not deviate significantly from the book value. The fairvalues of the other financial assets and liabilities also do not deviatesignificantly from the book value.

**NOTE 37 TRANSITION TO IFRS**

As of January 1, 2005 Tele2 has preparedits consolidated financial statements in accordance with InternationalFinancial Reporting Standards (IFRS). There has been a gradual transition toIFRS over a number of years in Sweden, with most of the recommendations of theSwedish Financial Accounting Standards Council having been revised to complywith IFRS. Tele2 has been applying all the recommendations issued by the SwedishFinancial Accounting Standards Council for some time, which means that themajority of its accounting already complies with IFRS. In spite of this gradualtransition, the requirement for full transition to IFRS will have an effect onTele2’s financial statements.

F-52

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The date for the transition to IFRS has been setto January 1, 2004, as IFRS requires that one year be restated andreported in accordance with IFRS for comparison. The transition to IFRS isreported in accordance with IFRS 1 *First-timeadoption of International Financial Reporting Standards*. The main rule ofIFRS 1 is that all recommendations are to be implemented retrospectively.However, IFRS 1 allows optional exceptions to the principle of retrospectiveapplication, with Tele2 having elected to apply the following exceptions:

— Only company acquisitions and combinations occurringon and after the transition date, January 1, 2004, have been restatedaccording to IFRS 3.

—Share-based payments will be accounted for according to IFRS 2 for theincentive program allotted after November 7, 2002 and not utilized as of January 1,2005. Tele2 has elected not to retrospectively apply IFRS 2 prior to this date,and consequently no plans have been restated.

—Tele2 has chosen to apply IAS 19 from the transition date, which means thatactuarial gains and losses that occurred prior to this date are reportedagainst opening shareholders’ equity. These effects are small, which is whythey have not been included in the table below.

There has been no requirement to restatefinancial information relating to financial years prior to 2004.

**Income Statement:**
| ** **                                                       | ** ** | **2004**              | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **According**         | ** ** | ** ** | ** ** | **b)** | ** ** | **c)** | ** ** | **Total** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **to Swedish**   | ** ** | **a)** | ** ** | **Financial** | ** ** | **Other** | ** ** | **IFRS-** | ** ** | **According** | ** ** |
| ** **                                                       | ** ** | **GAAP**              | ** ** | **Goodwill** | ** ** | **leasing** | ** ** | **IFRS items** | ** ** | **adjustments** | ** ** | **to IFRS** | ** ** |
| ** **                                                       | ** ** | **(SEK in millions)** | ** ** |
| Operating  revenue                                               |       | 43,033                |       | — |   | — |   | — |   | — |   | 43,033 |   |
| Operating costs                                                  |       | (40,261               | )          | 1,525 |   | 4 |   |   |   | 1,529 |   | (38,732 | ) |
| The result of  shares in associated companies and joint ventures |       | 17                    |       | — |   | — |   | — |   | — |   | 17 |   |
| **Operating  profit**                                            | ** ** | **2,789**             | ** ** | **1,525** | ** ** | **4** |   | — | ** ** | **1,529** | ** ** | **4,318** | ** ** |
| Financial items                                                  |       | (108                  | )          | — |   | (3 | ) | — |   | (3 | ) | (111 | ) |
| **Operating  profit after financial items**                      | ** ** | **2,681**             | ** ** | **1,525** | ** ** | **1** |   | — | ** ** | **1,526** | ** ** | **4,207** | ** ** |
| Taxed                                                            |       | (779                  | )          | — |   | — |   | — |   | — |   | (779 | ) |
| Minority  interest                                               |       | —                |       | — |   | — |   | — |   | — |   | — |   |
| **Net  profit**                                                  | ** ** | **1,902**             | ** ** | **1,525** | ** ** | **1** |   | — | ** ** | **1,526** | ** ** | **3,428** | ** ** |
| * *                                                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| *Attributable  to:*                                              | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|  - Equity  holders of the parent company                    |       | 1,902                 |       | 1,525 |   | 1 |   | — |   | 1,526 |   | 3,428 |   |
|  - Minority  interest                                       |       | —                |       | — |   | — |   | — |   | — |   | — |   |
| Earnings per  share                                              |       | 4.30                  |       | 3.44 |   | — |   | — |   | 3.44 |   | 7.74 |   |
| Earnings per share,  after dilution                              |       | 4.29                  |       | 3.44 |   | — |   | — |   | 3.44 |   | 7.73 |   |

 

F-53

----

**Balance sheet:**

 
| ** **                                     | ** ** | **2004**                                | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                     | ** ** | **According**                           | ** ** | ** ** | ** ** | **b)** | ** ** | ** ** | ** ** | **Total** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **to Swedish**                          | ** ** | **a)** | ** ** | **Financial** | ** ** | **c)** | ** ** | **IFRS-** | ** ** | **According** | ** ** |
| ** **                                     | ** ** | **GAAP**                                | ** ** | **Goodwill** | ** ** | **leasing** | ** ** | **Other** | ** ** | **adjustments** | ** ** | **to IFRS** | ** ** |
| ** **                                     | ** ** | **(SEK in millions)**                   | ** ** |
| Intangible assets                              |       | 22,526                                  |       | 1,490 |   | — |   | — |   | 1,490 |   | 24,016 |   |
| Tangible assets                                |       | 9,015                                   |       | — |   | 92 |   | — |   | 92 |   | 9,107 |   |
| Financial assets (1)                           |       | 3,846                                   |       | — |   | (4 | ) | — |   | (4 | ) | 3,842 |   |
| Current assets                                 |       | 12,914                                  |       | — |   | — |   | (14 | ) | (14 | ) | 12,900 |   |
| **Assets**                                     | ** ** | **48,301**                              | ** ** | **1,490** | ** ** | **88** |   | — | ** ** | **1,564** | ** ** | **49,865** | ** ** |
| Shareholders’ equity January 1, 2004 |       | 31,396                                  |       | 1,490 |   | 12 |   | 2 |   | 1,504 |   | 32,900 |   |
| Minority interest                              |       | 2                                       |       | — |   | — |   | (2 | ) | (2 | ) |   |   |
| Provisions (1)                                 |       | 538                                     |       | — |   | — |   | (538 | ) | (538 | ) |   |   |
| Long-term liabilities                          |       | 1,651                                   |       | — |   | 68 |   | 518 |   | 586 |   | 2,237 |   |
| Short-term liabilities                         |       | 14,714                                  |       | — |   | 8 |   | 6 |   | 14 |   | 14,728 |   |
| **Shareholders’ equity and liabilities**  | ** ** | **48,301**                              | ** ** | **1,490** | ** ** | **88** |   | (14 | ) | **1,564** | ** ** | **49,865** | ** ** |
| ** **                                     | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** |   |   |   | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Change in shareholders’ equity** | ** ** |
| Shareholders’ equity January 1, 2004 |       | 30,360                                  |       | — |   | 11 |   | 7 |   | 18 |   | 30,378 |   |
| Translation differences                        |       | (423                                    | )          | (35 | ) | — |   | (5 | ) | (40 | ) | (463 | ) |
| Dividend                                       |       | (443                                    | )          | — |   | — |   | — |   | — |   | (443 | ) |
| Net profit                                     |       | 1,902                                   |       | 1,525 |   | 1 |   | — |   | 1,526 |   | 3,428 |   |
| **Shareholders’ equity and liabilities**  | ** ** | **31,396**                              | ** ** | **1,490** | ** ** | **12** | ** ** | **2** | ** ** | **1,504** | ** ** | **32,900** | ** ** |

----

(1) Certain reclassifications of deferred tax assetsand deferred tax liabilities have been made to the 2004 Swedish GAAP financialstatements in order for the presentation to be consistent with the currentpresentation in 2005.

**a)             Goodwill**

According to IFRS, intangible assets are dividedinto assets with a definite useful life and assets with an indefinite usefullife. According to IFRS 3, goodwill is to be classified as an asset with anindefinite useful life and should therefore not be amortized, but undergoannual impairment tests. Since IFRS 3 applies from the date of acquisition,goodwill amortization for 2004 will be reversed in accordance with IFRS. Inaccordance with the transitional provisions, Tele2 performed the requiredimpairment tests on January 1 and December 31, 2004. The testsindicate that no impairment had occurred.

IFRS clarifies the criteria for identifying andreporting certain classes of assets in conjunction with business acquisitions.IFRS 3 requires disclosure of different acquired intangible assets, such ascustomer relationships, patents, licenses, trademarks, agreements, etc., whichare to be assessed at fair value at the acquisition date and reportedseparately from goodwill. Tele2 has analyzed the acquisitions made in 2004 andis satisfied that the acquisition analyses meet the requirements outlined byIFRS.

**b)             Financeleasing**

Tele2 has certain rental agreements whichpreviously were reported as operating leasing agreements, as they were enteredinto before January 1, 1997, and according to a transitional rule, werenot covered by the Swedish Financial Accounting Standards Council’srecommendations RR6:99. In accordance with IAS 17, such agreements are howeverto be reported as financial leasing agreements.

**c) Other**

*Minority interest*

Minority interest shall be reported as aseparate item under shareholders’ equity in the balance sheet. This differsfrom the prior regulations applied under Swedish GAAP whereby minority interestis reported as an item between liabilities and shareholders’ equity. Underthese previous regulations, minority interest was included as an item inprofit/loss on the income statement. Instead, profit/loss attributable toequity holders of the parent company and minority equity holders insubsidiaries is separately specified under net profit.

F-54

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*Provisions*

Provisions are reported as aseparate component among short-term and long-term liabilities respectively inthe balance sheet. This differs from the previous regulations applied underSwedish GAAP whereby provisions were to be reported as a separate item betweenliabilities and shareholders’ equity.

*Loan expenses*

In connection with theborrowings of the Group, the debt issuance costs shall be reported as adeduction of the loan liability in the balance sheet. This differs from theprevious regulations of reporting as prepaid expenses. In the incomestatements, the amortization of these costs is reported as interest expense.This differs from previous regulations whereby this was reported as otherfinancial expenses.

**Distribution of group depreciation/amortization**

In the segment reporting, thegroup depreciation/amortization has previously been reported on a separateline. According to IFRS, the group depreciation/amortization is alsodistributed by respective market area.

**NOTE 38 TRANSACTIONS WITH RELATED PARTIES**

As a result of substantialdirect and indirect shareholdings by the Jan Hugo Stenbeck estate in the Tele2,Kinnevik, Invik & Co AB, Transcom Worldwide, Millicom, Modern HoldingsInc, MTG, Metro and Viking Telecom groups as well as certain other companies,said estate has the potential to exert considerable influence in terms offinancial and operational decisions regarding activities by these companies.The above companies, including associated companies and joint venturesaccording to Note 17, are regarded as related parties to Tele2. Businessrelations and pricing between Tele2 and all related parties are subject toprinciples based on commercial terms and conditions.

**Operatingagreements between Tele2 and related parties**

Tele2 supplies of telephonyand data services are subject to principles based on commercial terms toclosely related corporate groups.

*Invik Group*

Tele2 Group’s telephonyoperations are, with the exception of certain of the companies acquired duringthe year, insured by Moderna Försäkringar AB. Banque Invik provides certainfinancial services for the Tele2 Group. Banque Invik is also the credit cardsupplier and conducts credit card transactions arising via the 3C equipment.

*Transcom Worldwide Group*

Transcom provides customerservices and telemarketing for Tele2. CIS Collection AB providesdebt-collection services for Tele2.

*Millicom Group*

Millicom Group purchasescertain consulting services from the Tele2 company ProcureITright.

*Modern Holdings Inc Group*

The Basset Group provides anoperator settlement and anti-fraud system for Tele2.

*MTG, Modern Times Group*

Tele2 buys advertising time onradio and TV channels owned by MTG. Tele2 purchases cable TV programs from MTGGroup.

*Viking Telecom Group*

Viking Telecom provides Tele2with most of the line routers that Tele2 supplies to its end customers.

*Associated companies and joint ventures*

Tele2 is also one of twoturnkey contractors for the planning, expansion and operation of the jointventure Svenska UMTS-nät. Transactions with associated companies and jointventures are subject to principles based on market terms.

F-55

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**Transactions between Tele2 and related parties:**

|                                          | ** ** | **Operating revenue**                 | ** ** | **Operating expenses** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **Year ended December 31,** | ** ** |
| ** **                               | ** ** | **2004**                                   | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(SEK in millions)**            | ** ** |
|                                     |       |                                       |       |                        |       |   |   |   |   |
| Kinnevik Group                           |       | 7                                          |       | 6                           |       | 2 |   | 3 |   |
| Invik Group                              |       | 3                                          |       | 3                           |       | 25 |   | 18 |   |
| Transcom  Worldwide Group                |       | 49                                         |       | 52                          |       | 2,314 |   | 2,896 |   |
| Millicom Group                           |       | 9                                          |       | 12                          |       | — |   | — |   |
| Modern Holdings  Inc. Group              |       | 3                                          |       | 3                           |       | 253 |   | 145 |   |
| MTG, Modern  Times Group                 |       | 30                                         |       | 33                          |       | 50 |   | 56 |   |
| Metro  International Group               |       | 2                                          |       | 5                           |       | 16 |   | 17 |   |
| Viking Telecom  Group                    |       | 1                                          |       | 1                           |       | 5 |   | 5 |   |
| Associated  companies and joint ventures |       | 51                                         |       | 252                         |       | 46 |   | 252 |   |
| Other related companies                  |       | 1                                          |       | 1                           |       | 30 |   | 36 |   |
| **Total**                                | ** ** | **156**                                    | ** ** | **368**                     | ** ** | **2,741** | ** ** | **3,428** | ** ** |

 

|                                          | ** ** | **Interest revenue**                  | ** ** | **Interest expense** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|---------------------------|------------|
| ** **                               | ** ** | **Year ended December 31,** | ** ** |
| ** **                               | ** ** | **2004**                                   | ** ** | **2005**                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(SEK in millions)**            | ** ** |
|                                     |       |                                       |       |                      |       |   |   |   |   |
| Invik Group                              |       | 27                                         |       | 26                        |       | 38 |   | 30 |   |
| Modern Holdings  Inc Group               |       | 1                                          |       | 1                         |       | — |   | — |   |
| Associated  companies and joint ventures |       | 1                                          |       | —                    |       | — |   | — |   |
|                                     |       |                                       |       |                      |       |   |   |   |   |
| **Total**                                | ** ** | **29**                                     | ** ** | **27**                    | ** ** | **38** | ** ** | **30** | ** ** |
|                                     |       |                                            |       |                           |       |  |   |  |   |
|                                     |       |                                       |       |                      |       |   |   |   |   |

 

**Balances between Tele2 and related parties:**
| ** **                               | ** ** | **Restricted cash**        | ** ** | **Other receivables** | ** ** | **Interest-bearing receivables** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **At December 31,**   | ** ** |
| ** **                               | ** ** | **2004**                        | ** ** | **2005**                   | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(SEK in millions)** | ** ** |
|                                     |       |                            |       |                       |       |                                  |       |   |   |   |   |   |   |
| Kinnevik Group                           |       | —                          |       | —                     |       | —                                |       | 1 |   | — |   | — |   |
| Invik Group                              |       | 300                             |       | 831                        |       | —                                |       | — |   | — |   | — |   |
| Transcom  Worldwide Group                |       | —                          |       | —                     |       | 7                                     |       | 31 |   | — |   | — |   |
| Millicom Group                           |       | —                          |       | —                     |       | 1                                     |       | 4 |   | — |   | — |   |
| Modern Holdings  Inc. Group              |       | —                          |       | —                     |       | 1                                     |       | 1 |   | 10 |   | 11 |   |
| MTG, Modern  Times Group                 |       | —                          |       | —                     |       | 11                                    |       | 12 |   | — |   | — |   |
| Metro  International Group               |       | —                          |       | —                     |       | 1                                     |       | 1 |   | — |   | — |   |
| Associated  companies and joint ventures |       | —                          |       | —                     |       | 99                                    |       | 45 |   | 17 |   | — |   |
| Other related  companies                 |       | —                          |       | —                     |       | 25                                    |       | 21 |   | — |   | — |   |
| **Total**                                | ** ** | **300**                         | ** ** | **831**                    | ** ** | **145**                               | ** ** | **116** | ** ** | **27** | ** ** | **11** | ** ** |

 

F-56

----

 

|                             | ** ** | **Non-interest- bearing liabilities** | ** ** | **Interest-bearing liabilities** | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | **At December 31,**                   | ** ** |
| ** **                  | ** ** | **2004**                                        | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(SEK in millions)**                 | ** ** |
|                        |       |                                            |       |                                  |       |   |   |   |   |
| Invik Group                 |       | 26                                              |       | 92                                    |       | 300 |   | 822 |   |
| Transcom  Worldwide Group   |       | 300                                             |       | 557                                   |       | — |   | — |   |
| Modern Holdings  Inc. Group |       | 34                                              |       | 33                                    |       | — |   | — |   |
| MTG, Modern  Times Group    |       | 6                                               |       | 9                                     |       | — |   | — |   |
| Metro  International Group  |       | 3                                               |       | 4                                     |       | — |   | — |   |
| Viking Telecom  Group       |       | 1                                               |       | —                                |       | — |   | — |   |
| Associated  companies       |       | 9                                               |       | 13                                    |       | — |   | — |   |
| **Total**                   | ** ** | **379**                                         | ** ** | **708**                               | ** ** | **300** | ** ** | **822** | ** ** |

 

**NOTE 39 SUMMARY OFSIGNIFICANT DIFFERENCES BETWEEN IFRS AND US GAAP**

The consolidated financial statements are prepared inaccordance with IFRS and IFRIC of January 1, 2005, as adopted by the EU,which differ in certain significant respects from US GAAP. The principaldifferences between IFRS and US GAAP are presented below together withexplanations of certain adjustments that affect consolidated net profit andtotal shareholders’ equity.

References to Swedish GAAP refer to accountingpolicies applied by Tele2 according to the exceptions allowed by IFRS 1. Suchexceptions are discussed in Note 37 and primarily relate to accounting foracquisitions.

**Net profit for the year**

The application of US GAAP would have had thefollowing effect on consolidated net profit:

|                                                           | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **SEK**                                    | ** ** | **SEK** | ** ** | **USD** | ** ** |
| ** **                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net profit for the  year according to IFRS:               |       | 3,428                                      |       | 2,341 |   | 295 |   |
| *Adjustments  required for compliance with US GAAP:*      | * *   | * *                                   | * *   | * * | * * | * * | * * |
| a) Valuation of  acquired loss carry-forwards             |       | (105                                       | )          | — |   | — |   |
| e) Accounting  for surplus value of acquisitions          |       | (47                                        | )          | — |   | — |   |
| f) Connection  charges                                    |       | (70                                        | )          | (7 | ) | (1 | ) |
| g) Minority  interest                                     |       | —                                     |       | 8 |   | 1 |   |
| h) Other                                                  |       | (1                                         | )          | 1 |   | — |   |
| *Net  adjustment before income tax effects*               |       | (223                                       | )          | 2 |   | — |   |
| Deferred income  tax effects on above US GAAP adjustments |       | 32                                         |       | — |   | — |   |
| *Net  adjustments*                                        |       | (191                                       | )          | 2 |   | — |   |
| **Net  profit for the year according to US GAAP**         | ** ** | **3,237**                                  | ** ** | **2,343** | ** ** | **295** | ** ** |

 

**Earnings per share**

|                                                             | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                  | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                  | ** ** | **SEK**                                    | ** ** | **SEK** | ** ** | **USD** | ** ** |
|                                                        |       |                                       |       |   |   |   |   |
| Net profit for  the year according to US GAAP (in millions) |       | 3,237                                      |       | 2,343 |   | 295 |   |
| Weighted-average  number of shares outstanding              |       | 442,680,525                                |       | 442,842,576 |   | — |   |
| **Earnings per share according to  US GAAP**                | ** ** | **SEK 7.31**                               | ** ** | **SEK 5.29** | ** ** | **USD 0.67** | ** ** |

 

F-57

----

 

|                                                               | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **SEK**                                    | ** ** | **SEK** | ** ** | **USD** | ** ** |
|                                                          |       |                                       |       |   |   |   |   |
| Net profit for  the year according to US GAAP (in millions)   |       | 3,237                                      |       | 2,343 |   | 295 |   |
| Weighted-average  number of shares outstanding after dilution |       | 443,421,255                                |       | 443,391,246 |   |   |   |
| **Earnings  per share after dilution**                        | ** ** | **SEK 7.30**                               | ** ** | **SEK 5.28** | ** ** | **USD 0.67** | ** ** |

 

**Shareholders’ equity**

The application of US GAAP would have had thefollowing effect on consolidated shareholders’ equity:

|                                                           | ** ** | **At December 31,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **SEK**                       | ** ** | **SEK** | ** ** | **USD** | ** ** |
| ** **                                                | ** ** | **(in millions)**        | ** ** |
|                                                      |       |                          |       |   |   |   |   |
| Shareholders’  equity according to IFRS              |       | 32,900                        |       | 35,368 |   | 4,456 |   |
| *Adjustments  required for compliance with US GAAP:*      | * *   | * *                      | * *   | * * | * * | * * | * * |
| a) Valuation of  acquired loss carry-forwards             |       | (174                          | )          | (174 | ) | (22 | ) |
| b) Amortization  of goodwill                              |       | 3,112                         |       | 3,112 |   | 392 |   |
| c) Accounting  for acquisitions through non-cash issue    |       | 6,370                         |       | 6,667 |   | 840 |   |
| d) Accounting  for step acquisitions                      |       | (102                          | )          | (103 | ) | (13 | ) |
| e) Accounting  for surplus value of acquisitions          |       | (89                           | )          | (89 | ) | (11 | ) |
| f) Connection  charges                                    |       | (183                          | )          | (190 | ) | (24 | ) |
| g) Minority  interest                                     |       | (2                            | )          | (401 | ) | (51 | ) |
| h) Other                                                  |       | 6                             |       | 7 |   | 1 |   |
| *Net  adjustment before income tax effects*               |       | 8,938                         |       | 8,829 |   | 1,112 |   |
| Deferred income  tax effects on above US GAAP adjustments |       | 74                            |       | 74 |   | 10 |   |
| *Net  adjustments*                                        |       | 9,012                         |       | 8,903 |   | 1,122 |   |
| **Shareholders’  equity according to US GAAP**       | ** ** | **41,912**                    | ** ** | **44,271** | ** ** | **5,578** | ** ** |

 

F-58

----

**Change in US GAAP shareholders’ equity**

|                                                                        | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **SEK**                                    | ** ** | **SEK** | ** ** | **USD** | ** ** |
| ** **                                                             | ** ** | **(in millions)**                     | ** ** |
|                                                                   |       |                                       |       |   |   |   |   |
| Shareholders’  equity, January 1, according to US GAAP       |       | 39,602                                     |       | 41,912 |   | 5,281 |   |
|                                                                   |       |                                       |       |   |   |   |   |
| *Items  reported directly against shareholders’ equity*           |       |                                       |       |   |   |   |   |
| Exchange rate differences, according to US GAAP                        |       | (484                                       | )          | 2,132 |   | 269 |   |
| Total items reported directly against shareholders’  equity       |       | (484                                       | )          | 2,132 |   | 269 |   |
| * *                                                               | * *   | * *                                   | * *   | * * | * * | * * | * * |
| *Other  changes in shareholders’ equity*                          |       |                                       |       |   |   |   |   |
| New shares issues                                                      |       | —                                     |       | 59 |   | 7 |   |
| Dividends                                                              |       | (443                                       | )          | (2,213 | ) | (279 | ) |
| Shareholder contribution from minority                                 |       | —                                     |       | 38 |   | 5 |   |
| Net profit for the year, according to US GAAP                          |       | 3,237                                      |       | 2,343 |   | 295 |   |
| **Shareholders’  equity, December 31, according to US GAAP** | ** ** | **41,912**                                 | ** ** | **44,271** | ** ** | **5,578** | ** ** |

 

**Comprehensive income**

Items which are reporteddirectly against shareholders’ equity and which do not represent transactionswith the owners (comprehensive income), include the net profit for the year,translation adjustments and changes in fair values associated with hedges ofnet investments in foreign operations.
| ** **                                                                      | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                                      | ** ** | **SEK**                                    | ** ** | **SEK** | ** ** | **USD** | ** ** |
| ** **                                                                      | ** ** | **(in millions)**                     | ** ** |
| *Comprehensive  income:*                                                        | * *   | * *                                   | * *   | * * | * * | * * | * * |
| Net profit for  the year according to US GAAP                                   |       | 3,237                                      |       | 2,343 |   | 295 |   |
| Changes in fair  value associated with hedges, net of tax, according to US GAAP |       | 33                                         |       | (123 | ) | (15 | ) |
| Changes in  translation adjustments, net of tax, according to US GAAP           |       | (517                                       | )          | 2,255 |   | 284 |   |
| **Comprehensive  Income according to US GAAP**                                  | ** ** | **2,753**                                  | ** ** | **4,475** | ** ** | **564** | ** ** |

 

**Explanation of currentdifferences between IFRS and US GAAP**

References to Swedish GAAP refer to accountingpolicies applied by Tele2 according to the exceptions allowed by IFRS 1. Suchexceptions are discussed in Note 37 and primarily relate to accounting foracquisitions.

As of January 1, 2005 Tele2 has prepared itsconsolidated financial statements in accordance with IFRS, using the 1st of January 2004 as the transition date.As a result, the US GAAP adjustments for amortization of goodwill in 2004 andadjustments for financial leases in 2004 are not shown separately, since theseadjustments are included in the reported values of Tele2 according to IFRS.

*a) Valuation of acquired losscarry-forwards*

According to IFRS, an amount representing acquiredloss carry-forwards, which on the date of acquisition is valued at zero, butwhich in subsequent years is valued and recognized as an income tax benefit, isreported as a write-down of goodwill in the income statements after anadjustment for the remaining amortization period of the original acquisition.According to US GAAP, acquired loss carry-forwards subsequently recognized arenot reported as an income tax benefit, but instead directly reduce goodwillrelated to the acquisition when a valuation allowance was recognized for therelated deferred tax asset at the acquisition date.

*b) Amortization of goodwill*

Since Tele2 now is complying with IFRS, goodwill is nolonger amortized but is tested yearly for impairment. The Tele2 

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transition date was the 1st of January 2004, while similar accountingtreatment for goodwill amortization has been used according to US GAAP since January 1,2002. The primary difference is related to the cumulative reversal of goodwillamortization between January 1, 2002 and December 31, 2003, sinceTele2 chose to apply the exemptions in IFRS 1 not to restate acquisitions andcombinations occurring before the transition date. US GAAP also requires annualimpairment tests where the book value of a reporting unit is compared with itsfair value. If the fair value is lower than the book value, an impairment ofgoodwill is recognized, equivalent to the difference between the book value ofgoodwill and the implied goodwill of the reporting unit. This implied goodwillis the difference between the reporting unit’s fair value and the fair value ofthe reporting unit’s assets and liabilities. At year end, the Group performsits annual impairment tests on the goodwill balances which have been allocatedto seven of the group’s reporting units. As of December 31, 2005, therehave been no additional impairments recorded for US GAAP purposes.

*c) Accounting for acquisitionsthrough non-cash issue*

Société Européenne de Communication SA (SEC) wasacquired in 2000 by means of a non-cash share issue, in which newly issuedshares in Tele2 were offered in exchange for the remaining shares in SEC. Inaccordance with Swedish GAAP, the acquisition price is calculated at a valuecorresponding to Tele2’s market price on the transaction date. Under US GAAP,the acquisition price is based on the market price over a reasonable period oftime before and after the terms of the acquisition are agreed to and announced.Also, prior to 2004, there were also some differences between acquired netassets in accordance with US GAAP and Swedish GAAP. See also d) relating to theaccounting for the acquisition of SEC as a step acquisition.

*d) Accounting for stepacquisitions*

During 2000 and 2001, the Group acquired 100%ownership of SEC and Levicom Broadband, respectively, increasing its shareownership in the companies (“step acquisitions”) from its initial investmentownerships of less than 20%.

In accounting for the step acquisitions under SwedishGAAP, direct adjustments to Group equity were made in the period in which theGroup acquired control. The adjustments were made to account for the Group’sequity in the net profit/loss of the companies under the equity method ofaccounting (see Note 1) based on the Group’s ownership during previous periods.Swedish GAAP does not require any amortization of the equity-method goodwillwhich is implicit in the original cost of the-less-than 20% investment untilafter control was attained.

Under US GAAP, instead of making direct adjustments toGroup equity in the period in which control was acquired, prior periods’results are restated to reflect the Group’s equity in the net profit/loss ofthe companies under the equity method of accounting based on the Group’sownership in the respective periods restated. In addition, for US GAAP,amortization of goodwill implicit in the original cost of the less-than-20%investment is required to be recognized in the periods which are restated.

As a result of the above differences, goodwillamortization was recorded under US GAAP which was not recorded under SwedishGAAP. However, since the amortization of goodwill ceased on January 1,2002 as described in b) above, the cumulative amount of the difference betweenSwedish GAAP and US GAAP has essentially been unchanged since December 31,2001.

*e) Accounting for surplus valueof acquisition*

Under Swedish GAAP, Tele2 recorded the entire surplusvalue from the acquisition of Alpha Telecom in 2003 as goodwill which issubject to amortization. At December 31, 2004, Tele2 reclassified theunamortized goodwill balance to the intangible assets brand names andinterconnection agreements which are subject to amortization beginning in 2005.Under US GAAP, the surplus was assigned to the intangible assets brand namesand interconnection agreements since the 2003 acquisition date.

The Swedish GAAP goodwill amortization has been reversedfor US GAAP in item b) above. The adjustment shown as item e) is to record theUS GAAP amortization of the intangible assets brand names and interconnectionagreements which were not recorded for Swedish GAAP or IFRS until December 31,2004.

*f) Connectioncharges*

According to IFRS, connection charges may berecognized as revenue when collected at the inception of a contract.

According to US GAAP, for all contracts entered intoprior to 2004, connection charges collected at the inception of a service contractwere deferred and recognized as revenue over the period in which there is acustomer relationship which is approximately three years. Effective for newcontracts entered into from January 1, 2004, US GAAP changed in regards tothe Group’s accounting for revenue arrangements containing multiple elementswhich are required to be treated as separate units of accounting as a result ofthe adoption of Emerging Issues Task Force Issue 00-21, “RevenueArrangements with Multiple Deliverables” (“EITF 00-21”). Where a revenuearrangement contains multiple elements which are determined to require separateaccounting, total revenue under the contract is allocated and measured usingunits of accounting within the arrangement based on relative fair values.

The application of EITF 00-21 by the Group torevenue arrangements containing multiple elements which are required to betreated as separate units of accounting generally results in the connectioncharges being recognized as revenue at the inception of the contract, togetherwith any proceeds received pertaining to the delivery of a mobile handset.

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EITF 00-21 did not change the Group’s US GAAPaccounting for connection charges collected on revenue arrangements which aredetermined not to contain multiple elements which require separate accounting -that is, the Group continues to defer and amortize connection charges.

Connection charges received on all contracts prior to2004 continue to be deferred and amortized over the estimated life of thecustomer relationship. The adoption of EITF 00-21 during 2004 did nothave a significant effect on the Group’s consolidated financial position orresult of operations under US GAAP.

*g)Minority interest*

In accordance with IFRS minority interests arepresented as an item within equity and the profit attributable to minorityinterests is specified below the net profit line. Under US GAAP, minorityinterests are shown as a separate category from equity and liabilities in thebalance sheet and the share of profit attributable to minority interests isshown as a separate line in the income statement prior to net profit.

Under IFRS minority interests are recorded on the fairvalue adjustments associated with accounting for acquisitions. The minorityinterests recorded under IFRS on fair value adjustments related to acquisitionswas SEK 103 millions at December 31, 2005 (2004: 0). Under US GAAPminority interest are not recognized on fair value adjustments associated withaccounting for acquisitions.

*h) Other*

Through 2003, minor differences in the accounting forwarrants issued under the 1997 incentive program and related social costsexisted. No differences exist after 2003.

In addition, certain minor differences in pensionaccounting under US GAAP compared to IFRS exist.

**Effects of new US GAAPaccounting pronouncements**

*SFAS 123(R)*

In December 2004, the FASB issued SFAS No. 123R,Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123,Accounting for Stock Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. Among other items, SFAS No. 123Rfocuses primarily on accounting for transactions in which an entity obtainsemployee services in share-based payment transactions. SFAS No. 123Rrequires a public entity to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award (with limited exceptions). That cost will be recognized over theperiod during which an employee is required to provide service in exchange forthe award. As permitted by SFAS No. 123, Tele2 accounted for share-basedpayments to employees using the intrinsic value method prescribed in APBOpinion No. 25 and, as such, generally recognize no compensation cost foremployee stock options.

SFAS No. 123R generally requires public companiesto adopt its requirements using the “modified prospective” method. Under the “modifiedprospective” method, compensation cost is recognized in the financialstatements beginning with the effective date, based on the requirements of SFASNo. 123R for all share-based payments granted after that date, and basedon the requirements of SFAS No. 123 for all unvested awards granted priorto the effective date of SFAS No. 123R. Based on our current unvestedstock options at December 31, 2005, and an estimate of stock options to begranted to employees in 2006, we expect that the adoption of SFAS No. 123Rwill reduce 2006 net income with approximately SEK 4 million. SFAS No. 123Ralso requires the benefits of tax deductions in excess of recognizedcompensation cost to be reported as a financing cash flow, rather than as anoperating cash flow as required under current literature. This requirement willreduce net operating cash flows and increase net financing cash flows in periodsafter adoption.

In August 2005, FASB released FASB Staff Position(FSP) SFAS 123(R)-1, “Classification and Measurement of FreestandingFinancial Instruments Originally Issued in Exchange for Employee Services underFASB Statement No. 123(R)”. The FSP is effective upon initial adoption ofStatement 123(R). Tele2 is in the process of evaluating the impact, if any, ofSFAS No. 123 (R)-1, on the Company’s consolidated financialstatements.

In October 2005, FASB released FASB StaffPosition (FSP) SFAS 123(R)-2, “Practical Accommodation to the Applicationof Grant Date as Defined in FASB Statement No. 123(R)”. FSP FAS 123(R)-2clarifies that for purposes of determining grant date, a mutual understandingbetween the employer and employee is presumed to exist at the date the award isapproved by the board of directors or management with relevant authority, ifthe following conditions are met: (a) the recipient does not have theability to negotiate the key terms and conditions of the award with theemployer, (b) the key terms and conditions are expected to be communicatedto all recipients within a relatively short time period from the approval date,and (c) all other criteria for determining the grant date have been met.The FSP is effective upon initial adoption of Statement 123(R). Tele2 is in theprocess of evaluating the impact, if any, of SFAS No. 123 (R)-2, onthe Company’s consolidated financial statements.

In December 2005, the FASB released FASB StaffPosition (FSP) SFAS 123(R)-3, “Transition Election Related to Accountingfor the Tax Effects of Share-Based Payment Awards,” which provides a practicaltransition election related to accounting 

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for the tax effects ofshare-based payment awards to employees. Tele2 is currently reviewing thetransition alternatives and will elect the appropriate alternative within oneyear of the adoption of SFAS 123(R).

*SFAS 151*

In November 2004, the FASB issued SFAS No. 151“Inventory Costs—an amendment of ARB No. 43, Chapter 4” (SFAS No. 151)was issued. SFAS No. 151is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. Earlier application ispermitted for inventory costs incurred during fiscal years beginning after November 24,2004. SFAS No. 151 should be applied prospectively. The provisions of SFASNo. 151 do not have a material effect on Tele2’s earnings and financialposition under U.S. GAAP.

*SFAS 153*

In November 2004, the FASB issued SFAS No. 153,“Exchanges of Non-monetary Assets—An Amendment of APB No. 29” (“SFAS No. 153”).The provisions of SFAS No. 153 are effective for asset exchanges occurringin financial periods beginning after June 15, 2005. SFAS No. 153eliminates the exception to the fair value requirements, which applied toexchanges of similar productive assets and replaces it with a general exceptionfor exchange transactions that do not have commercial substance (i.e.,transactions that are not expected to result in significant changes in the cashflows of the reporting entity). Tele2 does not believe that the adoption ofSFAS No. 153 will have a significant effect on its future consolidatedfinancial statements under U.S. GAAP.

*SFAS 154*

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections, A Replacement of APB Opinion No. 20 andFASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requiresretrospective application of changes in accounting principles to prior periods’financial statements, unless it is impracticable to determine either theperiod-specific effects or the cumulative effect of the change. SFAS No. 154also requires that the retrospective application of a change in accountingprinciple be limited to the direct effects of the change. Indirect effects of achange in accounting principle, such as a change in non-discretionary profit-sharingpayments resulting from an accounting change, should be recognized in theperiod of the accounting change. SFAS No. 154 also requires that a changein depreciation, amortization, or depletion method for non-current,non-financial assets be accounted for as a change in accounting estimateaffected by a change in accounting principle. SFAS No. 154 is effectivefor accounting changes and corrections of errors made in financial yearsbeginning after December 15, 2005. Tele2 will apply SFAS No. 154 on aprospective basis as required.

*FIN 45-3*

In November 2005, the FASB issued FSP FIN 45-3,“Application of FASB Interpretation No.45 to Minimum Revenue Guarantees Grantedto a Business or Its Owners” (“FIN 45-3”). FIN 45-3 requiresprovisions for guarantees granted to a business or its owner(s) that therevenue of the business (or a specific portion of the business) for a specifiedperiod of time will be at least a specified amount. Tele2 is in the process ofevaluating the impact, if any, of FIN 45-3 on the Company’s consolidatedfinancial statements under U.S. GAAP.

*FIN 47*

In March 2005, FASB Interpretation No. 47 “Accountingfor Conditional Asset Retirement Obligations” (FIN 47) was issued. FIN 47clarifies that FASB Statement No. 143 “Accounting for Asset RetirementObligations” requires that a liability for the fair value of a conditionalasset retirement obligation is recognized when incurred if the liability’s fairvalue can be reasonably estimated. FIN 47 is effective no later than at the endof fiscal years ending after December 15, 2005. The adoption of FIN 47 didnot have a material impact on Tele2’s financial position or results ofoperations under U.S. GAAP.

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**NOTE 40SIGNIFICANT EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE**

At the Extraordinary GeneralMeeting held on February 21, 2006 the shareholders decided to adopt anincentive program for a maximum of 32 senior executives and key personsemployed in the Tele2 Group, a combined offer of warrants and stock options.For each warrant the participant acquires free of charge a maximum of two stockoptions, each of which gives the right to subscribe to one B share in thecompany. For 2006, the meeting decided to issue a maximum of 1,059,000warrants. At the meeting it was also decided that the Board should beauthorized to issue a maximum of 2,118,000 warrants closer to the time of thenext General Meeting, to be used to secure the delivery of B shares accordingto the stock options in the incentive program described above. Supported by thesubscription warrants, B shares may be subscribed for in the period February 25—May 25,2009, and the duration for the stock options are five years and can beexercised first after approximately three years after allotment. Thesubscription price for the warrants and the acquisition price at time forexercise of the stock options will be 110% of the averages of last prices paidfor the company’s B-share during the period of February 22 to March 7,2006. The intention of the Board is to leave consideration of the annualallocation proposal, as per the above, to the Annual General Meetings in 2007and 2008.

In May 2006 Tele2 hasagreed to sell its operation in the Czech Republic due to the lack ofimprovement in regulatory environments.

 

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