Report of the Board of Directors


FINANCIAL SUMMARY TANDBERG’s 2005 operating revenues were 345.2 MUSD (305.0 MUSD)1. The Group’s 13.2% (36.6%) revenue growth was driven by TANDBERG’s continuous efforts to expand the market for visual communications. The slowdown in growth from 2004 reflects internal execution issues and somewhat more challenging market dynamics in the second half of 2005. Despite this, operating fundamentals were strong throughout the year, and TANDBERG delivered a gross margin of 67.5% (67.4%). Operating expenses comprised 39.7% (40.2%) of the Group’s revenues, leaving an operating profit of 85.4 MUSD (77.5 MUSD) after depreciation of 10.7 MUSD (5.4 MUSD). The operating profit margin of 24.7% (25.4%) illustrates consistent execution and a strong business model. Profit before tax ended the year at 90.8 MUSD (80.0 MUSD). With a tax expense of 20.7 MUSD (22.4 MUSD), the Group’s net income was 70.1 MUSD (57.6 MUSD), generating earnings per share of 0.554 USD (0.428 USD).

Cash flow from operations totaled 91.2 MUSD (61.5 MUSD), demonstrating a solid cash flow conversion. The repurchase of TANDBERG shares, acquisitions and the 2004 dividend, totaling 148.3 MUSD, primarily offset by cash flow generated from operations and share issues to employees, resulted in a net decrease in liquid assets of 40.1 MUSD from the previous year-end. As of 31 December 2005, the Company had a cash balance of 202.8 MUSD (242.9 MUSD). The equity ratio at year-end 2005 was 75.5% (78.5%). The Company has no outstanding overdraft or interest-bearing debt.

THE VISUAL COMMUNICATIONS MARKET After exceptional market growth in 2004, market conditions were generally good in 2005 and improved cautiously for the majority of the year. In terms of revenues from videoconferencing endpoints, compared to the same periods in 2004, the industry experienced a strong 12% (29%) increase in the first quarter, a 10% (25%) increase in the second quarter, an 8% (20%) increase in the third quarter and an estimated 7% decrease (24% increase) in the fourth quarter. The estimated decrease in the fourth quarter is a result of weaker internal execution and changing market dynamics, including customer demand for total solution sales, which are more complex and carry longer lead times. Measured in revenue for the full year, the market for videoconferencing endpoints showed 5% estimated growth, compared to 24% in 2004 and a 4% decrease in 2003. The market experienced higher year-over-year growth in terms of units sold, estimated at 10% (28%). The decline in TANDBERG’s Average Sales Price (ASP), from 8,590 USD in 2004 to 7,911 USD in 2005, was primarily due to changes in product mix, including an increased focus on personal, or individual, video systems in addition to general price pressure throughout the market.

For the first time, TANDBERG has become the largest supplier of videoconferencing equipment worldwide in terms of revenue, sharing this title with its main competitor. The race for the number one spot in this industry has never been closer. Measured in terms of unit shipments, TANDBERG continues to be the second largest supplier worldwide.

In a market dominated by only a few vendors, TANDBERG’s performance has a significant impact on the performance of the industry as a whole. TANDBERG experienced solid profitability for the year overall, with the first three quarters demonstrating sequential year-over-year growth. TANDBERG’s estimated global market share for endpoints by the fourth quarter of 2005 was 40% (39%) in terms of revenue and 25% (25%) in terms of units sold. TANDBERG exceeded its competition and the industry overall in terms of growth; continued to demonstrate an industry-leading product portfolio; and increased its market share across the product range. The Company’s industry-leading total visual communication solution, strategic positioning and alliances, supported by high quality channel partnerships and programs, are driving the profitable growth and strengthening the TANDBERG brand.

TANDBERG’s total revenue from network infrastructure products (MPS, MCU, Gateways, Gatekeeper, and Border Controller) in 2005 continued to increase with revenues up 29.2% (129.7%) compared to last year, ultimately accounting for 12.3% (10.8%) of total revenue for the year. The Company’s technological leadership also allowed TANDBERG to enjoy a rising market share, with an estimated infrastructure product market share reaching 23% (17%) by the end of 2005. Infrastructure and total solution-selling are some of the key priorities for 2006.

Revenue from Value-Added Services in 2005 grew at a rate of 25.2% (57.6%) and reached 12.9% (11.7%) of total revenue.

Integration with other workplace tools and technology breakthroughs addressing security, ease of use and mobility – combined with increasing adoption of visual communication – gave the global market an uplift in 2005. Continued focus on increasing business productivity and lower cost of ownership will likely make 2006 a year of sustained growth for the industry.


TANDBERG AMERICAS

TANDBERG’s revenues in the Americas represented 55% (55%) of the Company’s total revenues and amounted to 189.3 MUSD (168.3 MUSD), up 12% year-over-year. Sales of TANDBERG’s end-to-end solution drove a healthy product mix for endpoints and an increase in sales for network infrastructure products and services, allowing for margin expansion. TANDBERG Americas ended the year with an operating profit of 7.7 MUSD (7.2 MUSD).

Mr. Rick Snyder joined TANDBERG in April 2005 as President of the Americas theatre. The Americas’ sales, marketing and sales support employee base was expanded by 17% including a new field engineering team, created to improve the coverage model and to allow the Company to bring to market end-to-end solutions.

Federal sales were flat in 2005 over the previous year. A strong second half of the year turned a marginal revenue decline for the first six months into a balanced full year. TANDBERG’s Federal revenue reflects a reduced 2005 Federal Government budget and delays in spending that were offset by the Company’s gain in market share. A new Vice President of Federal sales has been recruited to lead the Company’s efforts in this market.

Americas’ enterprise revenue grew 19% year-over-year. In particular, growth occurred in the Northeast U.S., Southwest U.S., and Latin America. Strengthening the sales organization, the enterprise market was divided into eastern and western territories.

The Company has successfully leveraged an expanded presence in the video infrastructure market, led by MPS and Expressway firewall traversal sales. New partner and service programs launched in the Americas theatre during the second half of 2005 improved service attach rates and renewal rates.

Focus areas for 2006 include increased emphasis on infrastructure sales, recalibrating partner programs, ensuring a long-term sales pipeline and a further refinement of operational initiatives to improve inventory controls, days-sales-outstanding and margins.


TANDBERG EUROPE, MIDDLE EAST, INDIA & AFRICA (EMEA)

Revenues in EMEA accounted for 36% (34%) of the Company’s total revenues and amounted to 125.8 MUSD (102.2 MUSD), up 23% year-over-year. A large and growing base of global customer relationships, a competent partner base and solution- driven sales ensured strong, stable margins. EMEA’s sales, marketing and sales support employee base was expanded by 18% to strengthen the coverage model in the individual regions. TANDBERG EMEA ended the year with an operating profit of 7.6 MUSD (3.9 MUSD).

Mr. Odd J. Winge was promoted to President of the EMEA theatre in November 2005. The management of EMEA has since been restructured, with a new management team in place and sales segmented into five regions (Northern Europe, United Kingdom & Ireland, Southern Europe, Central Europe and Emerging Markets). While these organizational changes are impacting sales in the short term, they are setting the stage for growth in 2006.

Southern Europe and Emerging Markets showed particularly strong growth throughout the year with multiple large strategic wins in the Education, Public and Enterprise sectors. The United Kingdom strengthened its management, leading to the hire of a new Managing Director entering the Company in the final quarter. Central Europe developed acceptably with good growth and solid margins. Northern Europe performed below expectations for the year.

TANDBERG EMEA continued to expand its vertical market presence, with strategic wins within the Banking/Finance, Manufacturing and Defense sectors.

Sales of service programs continued to gain momentum in 2005. A series of new initiatives in solution-selling built competence in the sales force and partner community and produced positive results. Several long-term service contracts were signed with large, global organizations and invoiced service revenues exceeded the corporate target for total revenues from value-added services.

Focus areas for 2006 include total solution- and infrastructure sales, organizational improvements designed to improve the long-term sales pipeline and organizational effectiveness, improving the service delivery model and recalibrating channel partners.


TANDBERG ASIA PACIFIC (APAC)

Revenues in Asia Pacific represented 9% (11%) of the Company’s total revenues and amounted to 30.1 MUSD (34.5 MUSD), down 13% year-over-year. Margins improved throughout the year but could not offset the negative effect from a larger cost base. TANDBERG APAC ended the year with an operating loss of 2.0 MUSD, compared with a profit of 0.1 MUSD last year. APAC was still in investment mode in 2005, but returned a profit in the fourth quarter, indicating that the necessary infrastructure and team finally is in place and positioned to get off to a running start in 2006.

Mr. Benny Lee joined TANDBERG as President for APAC, effective January 2005. Additional management changes include a new managing director in Japan and new management for channels and operations.

Under the new leadership, the distribution model has been enhanced in key markets. TANDBERG’s ability to provide adequate coverage within the region overall for sales, channel support and service has been expanded and strengthened.

Sales in Australia and Southeast Asia are performing particularly well, while China continues to be a challenging market with some unique characteristics. Key deployments were in the manufacturing, healthcare, and utilities markets.

Focus areas for 2006 include growing revenue per employee and operational efficiency through close monitoring of cost and margin development, improved partner coverage and development of targeted marketing and sales programs.

STRATEGIC ALLIANCES AND M&A ACTIVITY In 2005, acquisitions and alliances furthered TANDBERG’s mission to make visual communications accessible to anyone, anywhere and anytime. TANDBERG announced in July 2005 the acquisition of Ivigo, a division of TNO, the Netherlands Organisation for Applied Scientific Research, and a leading developer of video services for 3G mobile phones. The acquisition enables TANDBERG to offer mobility solutions to new and existing customers through a 3G Gateway, allowing 3G mobile phone users to reach any group or personal video system from anywhere.

In October 2005, TANDBERG acquired the New Zealand-based technology firm Ectus Ltd. furthering its vision of extending the reach of video to a broader community. The move positioned TANDBERG to be the first company to deliver a streaming and archiving server that is tightly integrated into a full end-to-end video solution. The solution allows streaming and archiving of business-quality video content, complete with multimedia presentations, for large audiences that can easily access that content in any media format.

Throughout 2005 TANDBERG continued to build on its strategic alliances with Cisco Systems, Inc. and Microsoft Corp., two companies that are driving the expansion of the visual communication market. Building on these relationships, TANDBERG continued to introduce products that easily integrate with any organization’s existing infrastructure and business tools.

Importantly, TANDBERG introduced a complete portfolio of video endpoints that provide easy integration with Cisco CallManager for business-quality video telephony, and Cisco began shipping a co-branded IP video phone, the Cisco 7985G, stimulating the video telephony desktop market.

Building on TANDBERG’s commitment to provide interoperable and standardsbased solutions through strategic partnerships, all TANDBERG MXP endpoints now support Session Initiation Protocol (SIP) to interoperate with Microsoft Office Live Communications Server 2005 and connect to Windows Messenger for video calls.

TANDBERG’s visual communication solution is also integrated with IBM’s Lotus Notes and, announced in January of 2006, with Lotus Sametime. TANDBERG is the first to ship an IBM-integrated video solution.

PRODUCT DEVELOPMENT New groundbreaking products and features from TANDBERG entered the market throughout the year across its portfolio of visual communications solutions, consisting of endpoint systems, network products, management software and value-added services.

TANDBERG’s revolutionary introduction of the Expressway firewall traversal solution illustrated the Group’s technology leadership in visual communication. Expressway creates a secure path through network firewalls and establishes a universal dial plan for video calls. Organizations can now call customers, suppliers and home office workers, building a global video community. Offering a secure solution for affordable IP networks, Expressway has opened up entirely new markets for visual communication. The solution, with the Border Controller at its core, quickly gained traction with customers and was the basis for H.460.18 and .19, the International Telecommunication Union’s (ITU) ratified standard for firewall traversal.

Other significant product launches in 2005 included expansion of the network products line, with the MPS 200 multipoint control unit for medium-sized enterprises and the Gatekeeper, as well as security features added across the entire product portfolio, new and re-engineered vertical products and the launch of the MXP Profile Series with widescreen flat panel displays. Following the Ivigo and Ectus acquisitions, a 3G Gateway and a streaming and archiving Content Server were launched in January 2006. The combination of firewall traversal, 3G-mobility and content streaming allow for a seamless end-to-end solution in an IP world. With all MXP products already high definition (HD) ready, TANDBERG will be the only solution provider incorporating HD into an end-to-end solution shipping during the first quarter of 2006. The new products and solutions all strategically complement TANDBERG’s portfolio, resulting in a complete end-to-end solution and allowing for a single software platform across all technologies.

The Company spent 28.2 MUSD (19.2 MUSD) on applied and basic research and product development in 2005, of which 10.9 MUSD (5.7 MUSD) was capitalized according to IFRS.

OPERATIONS TANDBERG outsources functions such as procurement, production, transportation, and warehouse services. As of year-end, five production partners in Scandinavia and two in the United States were contracted. Gross margins remained at the 67% level as a result of an extended and improved portfolio of products and services, continuous process improvements and cost reductions.

The Company delivered a total of 32,618 (27,532) endpoint systems in 2005, up 18.5% from 2004, and shipped a record 8,478 units in the fourth quarter. The TANDBERG 770, 880, 990, 2000, 2500 and 3000, the Company’s mid-range MXP systems, represented 49% (53%) of total systems sold. High-end MXP systems, including the TANDBERG 6000, 7000, 8000, Maestro and specialized systems for the healthcare, education, judicial, legal and public safety markets, represented 15% (20%) of all systems sold, while the low-end range, the TANDBERG 150, 550, 1000, 1500 and OEM units, accounted for 36% (27%).

ORGANIZATION TANDBERG headquarters are in Oslo, Norway and New York, United States. The Company has offices and representation in Norway, United States, Australia, Belgium, Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand and U.K. TANDBERG provides sales, support, and value-added services in more than 90 countries worldwide.

TANDBERG ended the year with 772 (589) employees, an increase of 31%, reflecting the Company’s profitable growth momentum and continuous efforts to expand the market for visual communications. Approximately 50% (56%) work in sales and marketing, 33% (29%) in research and product development and 17% (15%) in logistics, operations, accounting/finance and administration.

The Company’s administrative functions were further strengthened in 2005 to keep up with the growth and increasing complexity of the rest of the organization, with a focus on logistics and IT functions. By improving the internal service levels through a continuous focus on responsiveness and by developing the Company’s infrastructure, the administrative functions are now in a proactive mode, playing a key part in reaching the Company’s overall goals and positioning the Company for future growth.

TANDBERG’s sales organization was strengthened with local expertise as the Company continues to expand geographically, and with significant specialist know-how to serve the growing vertical markets. The growth in revenues from value-added services, and increased service attach rates and renewal rates, is a direct result of reinforced sales and technical support functions. The R&D team has broadened its expertise within new technologies by internal development and training, hiring of skilled employees and through acquisitions.

The Company continued to attract high caliber talent successfully strengthening its middle and senior management teams in 2005. Attracting, developing and retaining the best people in the industry remains a top priority for TANDBERG.

Training is a steady focus at all levels and in every function of the Company. As the organization grows and becomes ever more geographically dispersed, there is a continuous focus on developing the organization and managers at all levels. TANDBERG University trained 230 new and existing employees in product knowledge, the organization and TANDBERG’s culture and core values.

On 16 December 2005, Andrew M. Miller resigned as CEO of TANDBERG with immediate effect. The Board of Directors accepted Mr. Miller’s resignation, and would like to express its gratitude for his term as CEO. During Mr. Miller’s tenure, the Company significantly expanded its global presence and built a highly proficient sales force. The Board of Directors appointed Fredrik Halvorsen, then current CFO, to the position as Chief Executive Officer. Under Mr. Halvorsen’s leadership, the Company moves into the next phase of growth as a leader in the multimedia collaboration and communication industry.

CORPORATE GOVERNANCE TANDBERG’s guidelines for Corporate Governance are in accordance with the Norwegian Code of Practice for Corporate Governance, dated 7 December 2004, as required for all listed companies on the Oslo Stock Exchange with effect from 2005. The guidelines are included in this Annual Report and are also available on TANDBERG’s web-site: www.tandberg.net. TANDBERG will update its guidelines and apply the new revised Code of Practice as published on 8 December 2005 from the 2006 financial year.

WORKING ENVIRONMENT TANDBERG has a strong corporate culture built around core values that include speed and precision, enthusiasm and integrity, exceeding expectations, fun and profit, and TANDBERG First. The strength of TANDBERG’s corporate culture is what sets the Company apart from its competition.

TANDBERG encourages diversity and believes it is an asset to the Company. People with diverse backgrounds and perspectives are critical to innovation, and innovation is critical to TANDBERG’s success.

TANDBERG is a socially responsible company committed to equal opportunity in the workplace. Equal opportunity in the workplace is a TANDBERG policy, approved and promoted by the board of directors and management. TANDBERG management believes that all employees should have equal access to opportunities whatever their gender, race, religion, national origin, age, or disabilities. This applies to all aspects of employment.

TANDBERG offers a working environment that is congenial, safe, productive and well-balanced. Of the Company’s 772 employees, 23% are women. TANDBERG is committed to making the Company an attractive workplace for women at all levels and in all functions and is especially encouraging and actively working on increasing the number of women within R&D and Sales. Significant progress was made within R&D in 2005, adding 20 women in key areas to its team. The Company is also actively seeking to identify highly-qualified candidates for positions at the middle- and top management levels. There are currently no women in the Group’s Leadership Team, however, women occupy senior positions at numerous locations across the Company, and women occupy two seats on the Board of Directors.

Absence due to illness in 2005 was less than 2.5%. No accidents or incidents involving personal injury or material damage occurred.

ENVIRONMENTAL STATEMENT TANDBERG provides visual communication solutions to the global market. As a manufacturer of electrical and electronic equipment, the Company is responsible for compliance with the requirements in the European Directives 2002/96/EC (WEEE) and 2002/95/EC (RoHS).

The EU Directive Waste Electrical and Electronic Equipment (WEEE - 2002/96/EC) became effective throughout Europe on 13 August 2005. The implementation into national law varies between the concerned European countries, for the deadlines as well as for the requirements. TANDBERG is aware of the producer’s responsibilities and will meet the obligations together with our partners within the European Union. TANDBERG will register as a producer in the European countries where this is required.

TANDBERG Telecom AS is registered as a member of Elretur AS in Norway. Elretur AS is a nationwide take-back company for the collection, recycling and environmentally sound processing of scrapped electrical and electronic equipment (WEEE).

TANDBERG has labeled all products placed on the market after 13 August 2005 according to the requirements in the WEEE Directive.

Global concerns over the human health and environmental risks associated with the use of certain environmentally-sensitive materials in electronic products have led the European Union to enact the Directive on the Restriction of the use of certain Hazardous Substances (Directive 2002/95/EC). From July 2006 TANDBERG is committed to comply with the European Union’s RoHS Directive and restrict the use of lead, mercury, cadmium, hexavalent chromium and two bromine-containing flame retardants, PBB (polybrominated biphenyls) and PBDE (polybrominated diphenyl ethers), in all products.

From July 2006 TANDBERG is committed to comply with the European Union’s RoHS Directive and restrict the use of lead, mercury, cadmium, hexavalent chromium and two bromine-containing flame retardants, PBB (polybrominated biphenyls) and PBDE (polybrominated diphenyl ethers), in all products.

TANDBERG understands the environmental risks associated with these substances and will comply with the RoHS Directive requirements set by the European Union. RoHS substances will be eliminated, to levels below legal limits, for all TANDBERG products subject to the RoHS Directive.

FINANCIAL RISKS The visual communications market is still in its infancy, and two dominant players, of which one is TANDBERG, have historically been able to operate in the market with market shares of approximately 40% each. As the demand for video conferencing products increases, other companies have and will enter the market, increasing competition and hence possibly negatively impacting margins across the whole product portfolio. The Company’s market risks would typically also include risks related to the development of new videoconferencing products that meet the customers’ demands, competing technologies and other products offering similar capabilities as today’s products. The market for video conferencing products is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. The success of TANDBERG’s new products depends on proper definition, cost, timeliness, positioning in relation to the total product portfolio, and differentiation of new products from those of our competitors. Additionally, properly addressing the complexities associated with selling total visual communications solutions, compatibility issues, channel partner training, technical and sales support are factors that may affect TANDBERG’s success in the visual communication market.

The Group has low exposure to financial risks, and has no funding need or liquidity risk with a cash balance at 31 December 2005 of 202.8 MUSD (242.9 MUSD), no interest bearing debt and an equity ratio at year-end 2005 of 75.5% (78.5%).

The Company is exposed to foreign exchange risk and credit risk in its ordinary business activities, risks that are closely monitored and limited to acceptable levels. It is the Company’s policy not to use financial instruments in order to reduce/increase the Company’s foreign exchange risks. All new customers are checked for credit rating and all customers are checked against credit limits before contracts are closed. Over the past few years, TANDBERG’s operations have expanded in some emerging markets, Latin- and South America and Asia Pacific regions. Credit terms are typically longer in these regions than for Northern Europe and North America, negatively impacting accounts receivable balances, and correspondingly the overall credit risk has grown. However, some of this risk is mitigated through prepayment and Letter of Credit. Loss on 11 accounts receivables has been below 1% the last three years and there are no significant concentrations of credit risk within the Group.

TRANSITION TO AND ADOPTION OF IFRS Listed companies in the EU adopted and applied International Financial Reporting Standards (IFRS) to their consolidated financial statements beginning in 2005. Through the EEA agreement, this also applies to listed Norwegian companies.

With effect on the financial statements from 1 January 2004, TANDBERG has applied IFRS in the consolidated accounts. The impact of the change of accounting standards along with comparative information regarding TANDBERG’s financial reporting in 2004 in accordance with IFRS, were presented in the “Transition to IFRS” document released on 6 April 2005. Accordingly, 2004 financial information included in this annual report is not comparable to the 2004 annual report (please refer to Note 20 in the financial statements for further information).

GOING-CONCERN In accordance with Norwegian accounting law, it is confirmed that the annual financial statements have been prepared on a going-concern basis.

SHARE BUYBACK PROGRAM In view of the Company’s strong cash flow and cash position, the Board of Directors called an Extraordinary General Meeting on 10 November 2004 and obtained authorization for a share buyback program which opens for buyback up to 10% of TANDBERG’s shares (13,428,460 shares at 10 November 2004) in the market, and which is valid until 10 May 2006. The intention is to use the shares in connection with incentive schemes for employees or acquisitions, or to cancel the shares through a capital reduction. All transactions under this program will be disclosed to the Oslo Stock Exchange, and on www.tandberg.net.

As of 31 December 2004, TANDBERG was holding 3,955,470 own shares. With a net increase of 7,816,282 shares in 2005, the position had increased to 11,771,752 own shares as of 31 December 2005, corresponding to 8.77% of the authorization. During 2005, the Company sold a total of 4,200,047 own shares to employees in accordance with the conditions in the 2003-2004 share option program, and a total of 43,171 shares were used as a component of the total consideration related to the acquisition of Ectus Ltd.

SHAREHOLDERS As of 31 December 2005, there were 134,324,806 shares outstanding. There were no share issues during 2005. The Company had 4,592 shareholders at year-end, and 31.1% of the shares were owned by Norwegian shareholders, 26.3% by U.S.-based shareholders, 16.4% by U.K.-based shareholders, 24.1% by other European-based shareholders and 2.1% by other nationalities.

FUTURE OUTLOOK TANDBERG’s position as one of the two leading contenders in the industry was further manifested in 2005. Positioned to create and capitalize on industry growth, TANDBERG gained market share in key markets and executed across all sectors of business strategy, including technology innovation, alliances, verticals, and acquisitions.

The appointment of a new CEO in December 2005, constituted a planned strategic turning point, ensuring growth, the long-term success of the Company and strong focus on shareholder value creation.

While it is not possible to accurately chart the growth path of emerging industries, the Board of Directors views the visual communication industry’s longterm prospects as positive. TANDBERG exhibits an efficient organizational structure, technology leadership and a focus on balanced growth making it a formidable competitor in a market that exhibits good long term growth prospects. In this light, the Board is optimistic and expects that the Company will meet its longterm objectives.

ALLOCATION OF THE YEAR’S PROFIT The net profit of the parent company, TANDBERG asa, was NOK 696,068,000. The Board recommends the following allocation of net profit for 2005, hereunder a dividend of NOK 0.65 per share (NOK 0.55), an increase of 18.2% (37.5%) from 2004 and equivalent to a payout ratio of 11.4% (36.0%) of net profit for 2005: