Management's Discussion and Analysis Overview For 2Q07, AIS and its subsidiaries ("The Group") reported strong subscriber growth. The Group added in total of 3.17 million subscribers in the first six months of 2007, of which 1.60 million were added in 2Q07. This represented a 16% subscriber growth from the end of previous year. Total subscribers at the end of June 2007 were 22.7 million, comprising of 2.7 million postpaid and 20 million prepaid subscribers. The strong subscriber growth and relatively higher tariffs for the period helpedsupport 6.4% year on year (y-o-y) growth in service revenue to Bt19,597 million in 2Q07 from Bt18,422 million in 2Q06. Since the end of March 2007, the Group had continue raising price for prepaid new subscribers, setting tariffs on a per-minute basis and discontinued per-call packages offered last year. On a quarter on quarter (q-o-q) basis, service revenues continued to increase slightly 0.5% despite second quarter is seasonally weak compared to the first quarter. Sales revenues were Bt3,082 million, a fall of 24.6% y-o-y and 23.1% q-o-q from Bt4,086 million in 2Q06 and Bt4,006 million in 1Q07 due to lower handset unit sales as well as lower average handset selling prices. However, this would not have material impact to company's bottom line since sales margin were normally thin and contributed marginally to the consolidated net profit. As a result, total revenues in 2Q07 were relatively stable at Bt22,678 million or 0.8% growth y-o-y from Bt22,508 million in 2Q06 but declined 3.5% q-o-q over 1Q07. Total cost dropped 1.7% y-o-y to Bt13,728 million in 2Q07 due to lower cost of sales which dropped 21.6% y-o-y following lower sales revenue, while concession fee increased 6.4% y-o-y in proportion of service revenue growth and cost of service grew 4.5% y-o-y from higher amortization. Amortization cost started to pick up 6% q-o-q in this quarter given a significant amount of network investment last year and a shortening concession life. SG&A expenses increased 29% y-o-y and 5.6% q-o-q to Bt3,301 million due to higher marketing expenses, bad debt provision and staff costs. Marketing expenses as a percentage to total revenue was stable q-o-q at 3.8% in 2Q07 and was within a 4% budget for the full year 2007. Bad debt expenses as a percentage to total postpaid revenues increased in 2Q07 to 8.1%, rose from 6.6% in 1Q07 and 0.6% in 2Q06 due to aggressive postpaid subscriber acquisition since 3Q06 and the Group's conservative provisioning policy. Quality of account receivables remained high with over 90% of gross account receivable aging are current and due less than 3 months. For 2Q07, net profit were Bt3,663 million declined 11.2% y-o-y from Bt4,126 million in 2Q06 and 8.1% q-o-q from Bt3,984 million in 1Q07. For the first six-month period of 2007 (1H07), the Group generated total revenues of Bt46,177 million, a 2.2% drop from Bt47,196 million in 1H06. Net profit was Bt7,647 million, declined 18.8% from Bt9,415 million in 1H06 from lower service and sales revenue as well as increased SG&A and interest expense. As at end of June 2007, the Group had total borrowings of Bt31,321 million (including swap contract payable), an increase of Bt8,353 million from the end of June 2006. This increase was for the group to continue network investment to maintain strong position in the market while maintaining dividend payment to shareholders. Despite of debt increase, capital structure remained strong with net debt to equity of 30% and total liabilities to equity of 74%. For 1H07, the Group generated Bt17,879 million of operating cash flow, together with the increased debt, helped support total capex of Bt9,663 million compared to a full year estimate of Bt18,000 million, as well as cash dividend for the total amount of Bt9,753 million paid on 10 May 2007, implying a dividend per share of Bt3.30. Financial summary 2Q07 2Q06 % 1Q07 % (Bt million) change change y-o-y q-o-q Service revenue 19,597 18,422 6.4% 19,493 0.5% Sales revenue 3,082 4,086 (24.6%) 4,006 (23.1%) Total revenue 22,678 22,508 0.8% 23,499 (3.5%) Total cost 13,728 13,968 (1.7%) 14,293 (4.0%) Gross profit 8,950 8,540 4.8% 9,206 (2.8%) SG&A 3,301 2,559 29.0% 3,126 5.6% Earnings before 5,795 6,246 (7.2%) 6,270 (7.6%) interest and tax Net profit 3,663 4,126 (11.2%) 3,984 (8.1%) 1H07 1H06 % change (6-mths) (6-mths) y-o-y Service revenue 39,089 39,689 (1.5%) Sales revenue 7,087 7,507 (5.6%) Total revenue 46,177 47,196 (2.2%) Total cost 28,020 28,091 (0.2%) Gross profit 18,156 19,106 (5.0%) SG&A 6,427 5,376 19.6% Earnings before 12,064 14,282 (15.5%) interest and tax Net profit 7,647 9,415 (18.8%) Revenues & Profitability Total Revenue In 2Q07, total revenues consist of (1) 86.4% service revenues and rentals (2) 13.6% sales of handsets and SIM cards. Total revenues in 2Q07 were Bt22,678 million, increased 0.8% y-o-y from Bt22,508 million in 2Q06 due to higher service revenue but declined 3.5% q-o-q from Bt23,499 million in 1Q07 due to lower sales revenue. (1) Service revenues in 2Q07 increased 6.4% y-o-y to Bt19,597 million, from Bt18,422 million in 2Q06, based on strong subscriber growth and relatively higherm tariffs for the period. Since the end of March 2007, the Group had continued raising the price for prepaid new subscribers, setting the tariff on a per-minute basis and discontinued a per-call basis packages offered during 2Q06. As a result, on a q-o-q basis, service revenues were relatively flat (+0.5%) despite that service revenues in the second quarter are usually weak due to seasonality. For 1H07, service revenue were Bt39,089 million, decreased 1.5% from Bt39,689 million in 1H06. (2) Sales revenue declined 24.6% y-o-y and 23.1% q-o-q to Bt3,082 million in 2Q07 from both lower units sales of handset and falling average selling prices. For 1H07, sales revenues were Bt7,087 million, decreased 5.6% from Bt7,507 million in 1H06. Total Cost Total cost comprises of (1) cost of services and equipment rentals, (2) concession fee, and (3) cost of sales. For the 2Q07, the Group incurred total cost of Bt13,728 million, a fall of 1.7% y-o-y and 4.0% q-o-q due to lower cost of sales. (1) Cost of services and equipment rentals in 2Q07 were Bt6,020 million, increased 4.5% y-o-y and 3.7% q-o-q from higher amortization cost, utilities and other network related expenses. Amortization cost on asset under concession started to pick up 6% q-o-q in this quarter following a large spending on network investment last year and shortening concession life. (2) Concession fee were Bt 4,838 million in 2Q07, increased 6.4% y-o-y and 0.5% q-o-q in proportion of higher service revenue. Concession fee and excise tax as percentage of service revenue remains the same at 24.7% in 2Q07, compared to that of 2Q06 and 1Q07. (3) Cost of sales in 2Q07 was Bt 2,871 million, decreased 21.6% y-o-y and 21.9% q-o-q due to lower unit of handset sales and lower average handset selling price.Sales margin continued to decline to 6.9% in 2Q07 compared to 10.4% in 2Q06 and 8.2% in 1Q07; this usually fluctuates from quarter to quarter depending on different margins from different handset models sold in each period. For 1H07, total cost was relatively flat at Bt28,020 million, compared to Bt28,091 million in 1H06. Selling and administrative expenses (SG&A) The group incurred SG&A expenses of Bt3,301 million in 2Q07 or 14.6% of total revenue compared to Bt2,559 million in 2Q06 or 11.4% of total revenue. The y-o-y increase was a result of higher bad debt provision, staff cost, and marketing spending. Comparing q-o-q, SG&A also rose 5.6% from Bt3,126 million in 1Q07 or 13.3% of total revenue mainly from higher bad debt provision, operating expense and staff cost. As the group has been launching a number of low-end postpaid packages (mostly at Bt299/month) since 3Q06, postpaid subscribers had since increased instead of falling trend during the past two years. As a result, bad debt provision for the quarter rose to Bt440 million or 8.1% of postpaid revenues from Bt31 million or 0.6% in 2Q06 and Bt363 million or 6.6% in 1Q07. However, quality of account receivables remained high given over 90% of gross account receivable aging fell under 3 months overdue and the provision covered more than amount overdue of over 3 months. Marketing spending for the quarter was Bt863 million or 3.8% of total revenue, increased from the same quarter last year of Bt737 million or 3.3% of total revenue as most of marketing spending last year was pushed toward the second half of the year. However, spending was more evenly on q-o-q basis with a slight decline from Bt874 million in 1Q07 or 3.7% of total revenue. Competitive landscape in 1H07 was much different from 1H06 when marketing activities slowed down and subscriber growth was relatively much smaller. As a result, SG&A expenses for 1H07 rose 19.6% y-o-y from the increase in bad debt and marketing spending. However, marketing spending in 1H07 of 3.8% of total revenue remained within 4% budget for the full year 2007. Interest expense The group increased total outstanding debt to Bt31,321 million (including swap payable) from Bt22,968 million in 2Q06 in order to continue network investment to maintain strong position in the market while maintain dividend payment to shareholders. Interest expense for the period, as a result, increased 27.7% y-o-y to Bt417 million from Bt327 million in 2Q06. Compared to the previous quarter, interest expense slightly declined 6.8% q-o-q from Bt448 million in 1Q07. For 1H07, interest expense increased 32% to Bt865 million from Bt655 million in 1H06 from higher outstanding debt. Of the total borrowings, majority had fixed interest rate whereas floated rate debt represented only 21% of total amount as of 2Q07. The group had weighted average interest rate of 5.33% per annum. Net Profit Despite of improving service revenue y-o-y, SG&A and interest expense increased y-o-y, as a result, net profit for the quarter of Bt3,663 million decline 11.2% from Bt4,126 million in 2Q06. Comparing q-o-q, net profit decline 8.1% from Bt3,984 million in 1Q07 from higher amortization and increased SG&A expenses. For the six month period, net profit was Bt7,647 million declined 18.8% y-o-y from Bt9,415 million from lower service and sales revenue, higher marketing spending, bad debt provision and interest expense. Liquidity As of 30 June 2007, current ratio declined to 65% from 74% as of 31 December 2006 due to less cash outstanding from dividend payment during 2Q07. Current assets The current assets as of 30 June 2007 were Bt 19,842 million, declined 13.3% from Bt22,893 million at the end of 4Q06 mainly from less cash and cash equivalents. 30 June 2007 31 December 2006 Million % Total Million % Total Baht assets Baht assets Cash and cash equivalents 8,935 6.8% 12,742 9.5% Trade receivables 5,120 3.9% 4,898 3.6% Inventories for network spare part 1,908 1.5% 2,055 1.5% Other current assets 3,878 3.0% 3,197 2.4% Total current assets 19,842 15.1% 22,893 17.0% Current liabilities Current liabilities slightly decreased to Bt30,662 million from Bt 31,039 million at the end of 2006 as there was less portion of long-term debt due in 1 year. 30 June 2007 31 December 2006 Million % Total Million % Total Baht Liabilities Baht Liabilities Short term loans 3,916 7.0% 1,000 1.8% Trade payable 5,113 9.2% 5,760 10.2% Portion of long-term debt 2,509 4.5% 6,507 11.5% due in 1 year Concession right payable, accrued 9,381 16.9% 7,155 12.6% concession fee and excise tax Unearned income 3,516 6.3% 3,659 6.5% Income tax payable 3,080 5.5% 2,963 5.2% Other current liabilities 3,147 5.7% 3,994 7.0% Total current liabilities 30,662 55.2% 31,039 54.7% Assets Total assets as of 30 June 2007 was Bt131,126 million, decreased from Bt 134,301 million as of 31 December 2006 as a result of lower current asset. Fixed assets including Property Plant and Equipment and assets under concession represented 68% of total assets. 30 June 2007 31 December 2006 Million % of Million % of Baht Total Baht Total assets Assets Current assets 19,842 15.1% 22,893 17.0% Property, plant and equipment,net 8,260 6.3% 7,797 5.8% Asset under concession agreement,net 80,883 61.7% 81,096 60.4% Intangible assets 11,457 8.7% 12,197 9.1% Deferred tax assets 10,007 7.6% 9,763 7.3% Other non-current assets 677 0.5% 555 0.4% Total assets 131,126 100% 134,301 100% Capital structure The Group's capital structure remained strong with debt to equity ratio at 41% as of 30 June 2007. Net debt to equity (Net debt = total debentures and borrowings minus cash) was 30% slightly increased from 26% as of 31 December 2006. 30 June 2007 31 December 2006 Total liabilities to equity 74% 73% Debt to equity 41% 43% Net debt to equity 30% 26% Debentures and Loans As of 30 June 2007, total debentures and borrowings were Bt31,321 million, declined from Bt33,149 million at the end of 4Q06. The decline was mainly from retirement of Bt4,750 million of long-term debentures during the first half of 2007, despite that the Group had increased its short-term borrowing to Bt3,916 million from Bt1,000 million at the end of December 2006. 30 June 2007 31 December 2006 Million % Total Million % Total Baht Liabilities Baht Liabilities Short term borrowing 3,916 7.0% 1,000 1.8% Portion of long-term debt 2,509 4.5% 6,507 11.5% due in 1 year Long-term debt 24,896* 44.8% 25,642* 45.2% Total debts 31,321 56.4% 33,149 58.5% * including swap contract payable incurred from JPY-denominated syndicated loan which was swapped into Thai Baht in total of Baht 9,485 million Shareholders' equity The Group's shareholder's equity was Bt75,556 million as of 30 June 2007 compared to Bt77,599 million as of 31 December 2006 a slight decline due to dividend payment in 2Q07. Cash Flow For the six-month period, the Group generated Bt17,879 million of cash flow from operations (after interest, tax, and changes in working capital) and raised another Bt2,893 million in short-term loan. Of this amount, the group spent Bt9,663 million on capital expenditures, repaid Bt4,760 million of long-term debentures and finance lease, and paid Bt9,753 million in dividend. As a result, the group had net decrease in cash of Bt3,368 million for the period. Significant Event Pursuant to the letter of the Ministry of Information and Communication Technology to the Council of State requesting opinion on whether the amendments or supplements to the agreement between TOT Public Company Limited who is the Telephone Organization of Thailand at that time ("TOT") and Advance Info Service Public Company Limited after the enforcement of the Act on Private Participation in State Undertaking, B.E. 2535 are legitimately effected and in case those amendments or supplements to the Agreement are not legitimately effected according to such Act, what guidelines TOT should implement. The Council of State was of the opinion by its Memorandum of the Council of State no. 291/2550 on Enforcement of the Act on Private Participation in State Undertaking, B.E. 2535 (in the case of the Agreement Permitting Undertaking of Cellular Mobile Telephone Services between TOT Public Company Limited and Advanced Info Service Public Company Limited) that *"... since TOT being the contracting party in this case acted on behalf of the State by virtue of the authority and duty pursuant to Telephone Organization of Thailand Act, the executed Agreement thus represents the agreement between the State and the private sector in order to authorise the private sector to provide public services to the public on behalf of the State. The State therefore is obligated to perform according to those stipulated in that Agreement. However, since the amendments to the Agreement upon which the consultation is being sought were not legitimately carried out according to the Act on Private Participation in State Undertaking, B.E. 2535 which was in force at the time of effecting those amendments because those amendments had not been proposed for the consideration of the Coordination committee according to Section 22 and not forwarded to the Cabinet, being the organ charged with the authority to approve of the amendments to the Agreement pursuant to the Act as aforesaid, the amendments made to the Agreement with TOT as the contracting party were therefore carried out without legal authority. However, the procedures to amend the Agreement represent administrative juristic acts which are capable of being separated from the amendments to the Agreement already effected and those amendments to the Agreement are still in force so long as they are not rescinded or extinguished by statute of limitation or by other causes. In case the Cabinet, vested with the authority under the law and having considered the causes for the rescission, the impact, and the propriety on the basis of the State's and the public interest, is of the opinion that the illegitimate procedures have resulted in damage that warrants rescinding the amendments to the Agreement already effected, the Cabinet may legitimately rescind such amendments to the Agreement. However, if the Cabinet, upon having considered the same, deems it justified, with regard to the State's or the public interest and the continuity of providing public services, the Cabinet may exercise its discretion to grant approval for the procedures to further amend the Agreement, as appropriate, with the unit owning the project and the Coordination committee pursuant to Section 22 being the parties to submit the facts, justifications, and opinion for the consideration of the Cabinet". *The above clauses in "..." represent some parts of the Memorandum of the Council of State no. 291/2550 translation, provided by the Company's legal advisor. The full text Memorandum of the Council of State is available only in Thai language.