MANAGEMENT REPORT General information The presented report shows AS Järvevana's economic activities and financial indicators before the division. Up until 1 August 2008, AS Järvevana operated in Estonia, Latvia and Lithuania as a construction group providing integrated construction solutions. Largest companies of the Group were SIA Merks (100%), UAB Merko Statyba (100%), Tallinna Teede AS (100%), AS Gustaf (75%), OÜ Gustaf Tallinn (80%), AS Merko Tartu (66%), OÜ Woody (100%) and AS Tartu Maja Betoontooted (25%). On 1 August 2008, the registration department of Harju County Court made an entry in the Commercial Register registering the division of AS Merko Ehitus (registry code 10068022, with the new business name ‘Aktsiaselts Järvevana') into the limited companies Merko Ehitus (registry code 11520257) and Järvevana (registry code 10068022). Pursuant to the division plan (http://www.merko.ee/upload/File/ Restruktureerimise%20dokumendid/AS%20Merko%20Ehitus%20jagunemiskava%20ENG.pdf), upon the division, AS Järvevana transferred to AS Merko Ehitus the entire set of assets related to the economic activities of the building company, including all concluded building, subcontracting and supply contracts; the equipment, machinery and employees; all professional know-how and cash-flows without interrupting the continuing economic activities. The limited company's only remaining activity is ensuring the fast acquittal, which is in the shareholders' interests, in the criminal case No 05913000055 (http://www.baltic.omxnordicexchange.com/market/?pg=news&news_id=226059). On 3 June the Annual General Meeting (http://www.baltic.omxnordicexchange.com/ market/?pg=news&news_id=226094) approved the division of the company to into the limited companies new Merko Ehitus (registry code 11520257) and Järvevana (registry code 10068022). At May 21 2008 AS Merko Ehitus transferred the 50-percent holding in the company OÜ Tornimäe Apartments (registry code 11016607) to the copartner AS EKE Invest. The sale price of the company was 58 million kroons (http://www.baltic.omxnordicexchange.com/market/?pg=news&news_id=223709). At May 2 2008 AS Merko Ehitus transferred the 100-percent holding in the company OÜ Karulaugu Kinnisvara (registry code 11034491) to AS E.L.L. Kinnisvara. The sale price of the company was 42 million kroons; from this amount, 4.12 million kroons, the balance of company's financial obligations and current assets, were deducted (http://www.baltic.omxnordicexchange.com/ arket/?pg=details&instrument=EE3100003559&list=2&tab=news&news_id=223284). At 15 April 2008, the management of AS Merko Ehitus presented the Company's restructuring plan (http://www.baltic.omxgroup.com/market/?pg=details& instrument=EE3100003559&list=2&tab=news&news_id=222602), according to which AS Merko Ehitus was split up/demerged so that AS Merko Ehitus, e.g. assets (other than liquid assets in the amount of 250 million kroons), liabilities and contracts as well as the business name was separated and transferred to the new company being set up (hereinafter AS Uus Merko). The exact description of assets and the division plan were published in the materials announcing the general meeting of shareholders http://www.merko.ee/eng/investor/generalmeeting/2008. At a joint meeting held at 14 March 2008, the Management Board and the Supervisory Board of AS Merko Ehitus adopted a resolution to restructure the Company and separate operating activities from the criminal proceedings related to the land swap. The Company's management estimates that the restructuring of the Company is the best way to ensure its sustainable development and protect the interests of shareholders and employees in the long-lasting criminal proceedings related to the land swap. Business operations Group's revenue for the 6 months in 2008 was 2372.3 million kroons, which constitutes an annual decrease of 4.9%. 61.0% of the sales originated from Estonia, 23.1% from Latvia and 15.9% from Lithuania. As compared with the respective period in 2007, company's sales in Lithuania increased by 1.6%, and decreased in Latvia by 5.5% and in Estonia by 6.3%. Group's revenue in the second quarter of 2008 were 1252.7 million having decreased by 228.2 million kroons as compared to the same period in 2007. The decrease in the period's revenue was the result of the low activity in the building sector, caused by the overall economic slump. Companies of the Group 6M 2008 consolidated revenue (sales outside the Group) were (in thousand kroons and euros): 6M 2008 6M 2007 EEK EUR EEK EUR Estonian companies AS Merko Ehitus (parent company) 973 059 62 190 1 020 003 65 190 AS Gustaf (75% partnership) 98 371 6 287 70 117 4 481 OÜ Gustaf Tallinn (80% partnership) 69 626 4 450 65 958 4 215 AS Merko Tartu (66% partnership) 100 733 6 438 111 607 7 133 Tallinna Teede AS (100% partnership) 176 607 11 287 118 159 7 552 OÜ Woody (100% partnership) 58 170 3 718 182 716 11 678 Latvian company SIA Merks (100% partnership) 527 491 33 713 507 653 32 445 Lithuanian company UAB Merko Statyba (100% partnership) 361 165 23 083 342 945 21 918 In one year, the Group's cost of goods sold decreased by 12.6%, whereas the marketing and general administrative expenses increased by 26.2%, constituting 80.6% and 5.0% of the revenue respectively. The successful development activities enabled the company to compensate the impact of the rapid growth of the costs of services and labour and as a result Group's net profit margin increased from 9.7% to 12.2%. The Group's net profit in the six months of 2008 was 290.2 million kroons, having increased by 19.9% compared to the last year and profit before tax was 333.8 million kroons, having increased by 27.0% compared to six months 2007. Profitability was positively influenced by the warm winter which boosted 1st quarter sales and by the big share of housing and property developments in the sales of the 1st and 2nd quarters. The net profit for the first 6 months of 2008 turned out to be the highest profit ever received within the concern for the first half of the year. Since the property and housing development projects have a long preparation period, the achieved results reflect the good performance in previous periods and do not give an adequate idea of the current slump on the construction market. Group's net cash flow of the six months of the year was +502.5 million kroons, including cash flow from operating activities +552.0 million kroons, from investing activities +39.8 million kroons and financing activities -89.3 million kroons. The cash flow from operating activities were mostly influenced by operating profit +338.9 million kroons, the change in trade and other receivables related to operating activities (+216.3 million kroons), change in trade and other payables (-143.3 million kroons) and adjustments of revenue from construction contracts under stage of completion method +158.3 million kroons. As at 30 June 2008, the group has 704.6 million kroons of funds on the group's bank accounts. The ratios and calculation methods characterizing the operating activities of the Group 2008 6 months 2007 6 months Net profit margin 12,2 % 9,7 % Operating profit margin 14,3 % 8,5 % Return on equity per annum 26,9 % 29,3 % Return on assets per annum 14,5 % 14,2 % Current ratio 2,3 2,1 Equity ratio 56,2 % 47,7 % General expense ratio 5,0 % 3,8 % Personnel expense ratio 10,1 % 10,1 % Average number of full-time employees 1070 948 Net profit margin: Net profit* / Revenue Operating profit margin: Operating profit / Revenue Return on equity: Net profit x 2* / Average equity during the period* Return on assets: Net profit x 2* / Average assets during the period Current ratio: Current assets / Current liabilities Equity ratio: Owners equity* / Total assets General expense ratio: General expenses / Revenue Personnel expense ratio: Personnel expenses / Revenue * calculated as attributable to the equity holders of the parent company In 30.06.2008, the number of employees in the Group's service was 1068, including 1036 full-time employees. The number of the Group's employees increased by 0.6% (6 new employees were recruited). The gross remuneration paid to employees in 6 months 2008 amounted to 214.4 million kroons an increase of 12.7% compared to previous year. INCOME STATEMENT II quarter 2008 consolidated, unaudited in thousand EEK and EUR EEK EUR IIq 2008 IIq 2007 IIq 2008 IIq 2007 Revenue 1 252 733 1 480 887 80 064 94 646 Cost of goods sold (1 028 871) (1 303 771) (65 757) (83 326) GROSS PROFIT 223 862 177 116 14 307 11 320 Marketing expenses (9 603) (6 851) (614) (438) Administrative and general expenses(51 647) (45 845) (3 301) (2 930) Other operating income 4 236 387 271 25 Other operating expenses (5 874) (1 907) (375) (122) OPERATING PROFIT 160 974 122 900 10 288 7 855 Financial income and expenses from stocks of associate companies and joint ventures (1 078) 45 943 (69) 2 936 Interest expense (2 095) (3 795) (134) (243) Foreign exchange gain (4 178) 3 585 (267) 229 Other financial income 5 283 1 814 338 116 Other financial expenses (1 291) (1) (83) (0) Total financial income and expenses (3 359) 47 546 (215) 3 038 PROFIT BEFORE TAX 157 615 170 446 10 073 10 893 Corporate income tax expense (20 485) (14 197) (1 309) (907) NET PROFIT FOR FINANCIAL YEAR 137 130 156 249 8 764 9 986 incl. net profit attributable to equity holders of the parent company 135 296 153 550 8 647 9 814 minority interest 1 834 2 699 117 172 Earnings per share for profit attributable to the equity holders of the parent company (basic and diluted, in EEK and EUR) 7,64 8,68 0,49 0,55 INCOME STATEMENT 6M 2008 consolidated, in thousand EEK and EUR EEK EUR 6M 2008 6M 2007 6M 2008 6M 2007 Revenue 2 372 305 2 495 751 151 618 159 507 Cost of goods sold (1 913 248) (2 190 123) (122 279) (139 974) GROSS PROFIT 459 057 305 628 29 339 19 533 Marketing expenses (17 491) (12 456) (1 118) (796) Administrative and general expen. (101 020) (81 456) (6 456) (5 206) Other operating income 5 929 2 490 379 159 Other operating expenses (7 601) (2 945) (486) (188) OPERATING PROFIT 338 874 211 261 21 658 13 502 Financial income and expenses from stocks of associate companies and joint ventures 1 202 52 775 77 3 373 Interest expense (7 678) (6 528) (491) (417) Foreign exchange gain (5 870) 138 (375) 9 Other financial income 8 523 5 070 545 324 Other financial expenses (1 297) (2) (83) (0) Total financial income and expenses (5 120) 51 453 (327) 3 289 PROFIT BEFORE TAX 333 754 262 714 21 331 16 791 Corporate income tax expense (40 623) (15 079) (2 596) (964) NET PROFIT FOR FINANCIAL YEAR 293 131 247 635 18 735 15 827 incl. net profit attributable to equity holders of the parent company 290 178 242 000 18 546 15 467 minority interest 2 953 5 635 189 360 Earnings per share for profit attributable to the equity holders of the parent company (basic and diluted, in EEK and EUR) 16,39 13,67 1,05 0,87 BALANCE SHEET AS OF 30.06.2008 consolidated, in thousand EEK and EUR EEK EUR 30.06.2008 31.12.2007 30.06.2008 31.12.2007 ASSETS Current assets Cash and cash equivalents 704 614 205 564 45 033 13 138 Trade and other receivables 946 687 1 201 942 60 504 76 818 Inventories 1 989 425 2 025 426 127 147 129 448 Total current assets 3 640 726 3 432 932 232 684 219 404 Non-current assets Long-term financial investments 250 635 290 852 16 018 18 589 Investment property 12 831 7 361 820 470 Property, plant and equipment 176 772 172 912 11 298 11 051 Intangible assets 12 457 12 574 797 804 Total non-current assets 452 695 483 699 28 933 30 914 TOTAL ASSETS 4 093 421 3 916 631 261 617 250 318 LIABILITIES AND OWNERS' EQUITY Current liabilities Borrowings 424 953 304 879 27 159 19 485 Trade and other payables 1 060 037 1 032 210 67 749 65 970 Government grants 1 483 1 498 95 96 Short-term provisions 75 139 73 212 4 802 4 680 Total current liabilities 1 561 612 1 411 799 99 805 90 231 Non-current liabilities Long-term borrowings 194 074 397 713 12 404 25 418 Long-term payables to suppliers 7 587 11 091 485 709 Long-term suppliers advance payments 0 46 332 0 2 961 Total non-current liabilities 201 661 455 136 12 889 29 088 Total liabilities 1 763 273 1 866 935 112 694 119 319 Equity Minority interest 30 355 33 939 1 940 2 169 Equity attributable to equity holders of the parent company Share capital 177 000 177 000 11 312 11 312 Statutory reserve capital 17 700 17 700 1 131 1 131 Currency transl. adjustment (11 227) (5 085) (718) (325) Retained earnings 2 116 320 1 826 142 135 258 116 712 Total equity attributable to equity holders of the parent company 2 299 793 2 015 757 146 983 128 830 Total equity 2 330 148 2 049 696 148 923 130 999 TOTAL LIABILITIES AND EQUITY 4 093 421 3 916 631 261 617 250 318 Toomas Annus Chairman of Board +372 6 805 220 merko@merko.ee