| THE CONTENT

Introduction

Review of Commercial and Financial activities

Freight transportation

Passenger transportation

Rolling-stock

Infrastructure

Technical Development and Investment policy

Traffic safety

Environmental protection

Information Technologies

International relations

Human resources

Management structure

Main events

Independent Auditor's report

Balance sheets

Income statements

Dear Readers,

The year 2007 was a successful year for AB “Lietuvos geleþinkeliai”. Labour productivity in the Company rose by approximately 20 per cent, the turnover exceeded LTL 1.4 billion, while investments made up over LTL 400 million. The Company funds accounted for almost 64 per cent of all investments. The major share of investment – about 70 per cent – has been allocated for railway infrastructure over the past five years. The largest part of freight is being carried on International Transport Corridor IX; that is why the main goals of the Lithuanian railway infrastructure development include reconstruction of the tracks and structures on this transport corridor, as well as modernisation of telecommunications, signalling and power supply equipment. The use of modern superstructure elements and advanced working technologies allowed ensuring a speed of 100 to 120 km/h on the reconstructed sections, this being of utmost importance in view of the increasing traffic flows. The modernisation of railway infrastructure is just one of the measures for the development of Lithuanian railways. Modern track, advanced rolling stock and contemporary management – these are the trends taken in developing Lithuanian railways. During the period of 20042007, the Company modernised existing freight locomotives and repaired or purchased new freight wagons. AB “Lietuvos geležinkeliai” is investing quite a lot of funds in the passenger rolling stock fleet, i.e., in the acquisition of new carriages, electric or diesel passenger trains. The most important event in the year 2007 occurred in the autumn: the first modern freight locomotive Eurorunner was delivered to the Company. A total of four new diesel electric locomotives were supplied by the German company Siemens by the end of the year. It is no coincidence that this publication contains illustrations demonstrating the history of Lithuanian railway locomotives: from the oldest steam locomotive to the newest Eurorunner. Thus and so, we wanted to focus your attention on the most significant event of the year.

Yours sincerely,

Stasys Dailydka Director General of AB “Lietuvos geležinkeliai” | MAIN INDICATORS

Indicators 2007 2006 Assets and Liabilities Assets (LTL million) 3,267.4 2,900.6 Equity (LTL million) 2,081.6 1,850.5 Total revenues LTL million 1,433.2 1,246.6 Revenues from core activities (sales) (LTL million) 1,406.9 1,206.8 Revenues from financial and investing activities (LTL million) 12.2 4.7 Other revenues (LTL million) 14,1 35,1 Total Costs LTL Million 1,269.2 1,104.8 Costs of core activities (LTL million) 1,250.1 1,087.9 Costs of financial and investing activities (LTL million) 16.9 15.5 Other costs (LTL million) 2.2 1.4 Result Profit before tax (LTL million) 164.0 141.8 Net profit (LTL million) 133.6 111.7 Financial Indicators Liquidity (current assets/current liabilities), % 1.1 0.9 Gross profitability (gross profit/sales), % 21.5 20.9 Net profitability (net profit/sales), % 9.5 9.3 EBITDA (earnings before interest, taxes, depreciation and 410.7 335.7 amortisation) (LTL million) Return on Assets (ROA) (net profit/assets), % 4.1 3.8 Return on Equity (ROE) (net profit/equity), % 6.4 6.0 Financial leverage coefficient (liabilities/equity), % 19.6 20.3 Investment Investment (LTL million) 419.1 327.4 Company funds invested (LTL million) 266.8 272.5 Staff Number of staff 10,535 10,827 Average monthly salary (LTL) 2,452 1,904 Sales income per employee (LTL thous./person) 133.5 111.5

| CHANGES IN THE BALANCE SHEET In 2007, the assets of the Company went up by 13 per cent amounting to LTL 3,267.4 million. The long- term assets accounted for 90 per cent in the total asset structure, an increase of 10 per cent up to LTL 2, 940.7 million, compared to the 2006 figures. This was determined by an increase in the material assets of the Company (new rolling stock acquired, investment, land plots received from the municipalities by trust). The financial assets of the Company rose by 12 per cent due to the investments in subsidiary companies, up to LTL 109.0 million. The current assets went up by 41 per cent to LTL 326.7 million and accounted for 10 per cent in the total asset structure of the Company. A total of 30 per cent of the current assets accounted for money and short-term investments. During the year 2007, the shareholders' equity grew by 12 per cent to LTL 2,081.6 million and accounted for 64 per cent of the total assets of the Company. By the end of 2007, the loan portfolio of the Company had reached LTL 259.4 million. It comprised the financial liabilities to | TOTAL REVENUES credit institutions related to the infrastructure investment projects. In (LTL million) 2007, the Company repaid the full loan amount to Nordea Bank Danmark A/S raised for the modernisation of telecommunications equipment. On 14 December 2007 an amendment to the Agreement with the European Investment Bank was signed for increasing the loan amount to EUR 64.0 million for partial financing of the acquisition of new freight locomotives, as well as for waiving the commercial bank 2003 2004 2005 2006 2007 guarantees.

| REVENUES In 2007, the revenues of the Company increased by 15 per cent, compared to 2006, up to LTL 1,433.2 million. The major part of revenues came from freight transportations (cf. 87.8 % in 2006), this | REVENUES STRUCTURE determining the activity results of the Company: IN 2007 (%) · THE REVENUES FROM FREIGHT SERVICES rose by 18 per cent. Positive changes in freight transportation resulted from a significant boost in transportation volumes and effective pricing. More revenues were derived from transit freight, as well as from supplementary services provided at stations (rolling stock handling, the presence of private wagons and containers on the tracks, the use of freight wagons, etc.); · THE PASSENGER REVENUES accounted for 4.5 per cent Freight in the total revenue structure in 2007, a rise of 17 per cent over 2006. Passenger This was determined by higher numbers of passengers on international Other activities lines and by an increase in traffic fares. Revenues earned from Other supplementary services passenger services and state subsidies did not cover the costs incurred,

Financial & investment activities therefore, passenger services were making loss. A total of LTL 19.2 million subsidies were allocated for financing passenger traffic in 2007 to reimburse privileged passengers or to cover losses in domestic traffic; · The revenues from rendering OTHER SUPPLEMENTARY SERVICES (repair and maintenance of private rolling stock, lease of own assets, wholesale trade, freight handling and storage services, and other transport-related services) grew by 4 per cent. The major growth in this group of revenues was from the increased volumes of freight handling and storage services, as well as from customs intermediary services. The revenues from other supplementary services made up 5.8 per cent in the total revenue structure; · THE REVENUES FROM OTHER ACTIVITIES accounted for 1.0 per cent of the incomes earned, thus dropping by 2.5 times. In previous years, more revenues in this group had been derived from the sales of the assets unnecessary or ineffective for the Company's activities; · THE REVENUES FROM FINANCIAL AND INVESTING | COST STRUCTURE ACTIVITIES accounted for 0.9 per cent of the total revenues, a rise by IN 2007 (%) 2.6 times. The Company succeeded in managing the risk in the changes in exchange rates, thus avoiding the loss in this field, and earned more 32,7% interest due to different short-term investment measures applied.

| COSTS The costs of the Company, with taking into account the impact of subsidies provided for passenger services, amounted to LTL 1,269.2 16,9% million in 2007, an increase of 15 per cent over 2006. The growth in costs was determined by higher volumes of work and increased inflation; the Remuneration leap in prices for fuel and labour force resulted in higher costs for staff, Fuel fuels and power supply. Staff-related costs accounted for 32.7 per cent Depreciation (amortisation) in the total cost structure, the costs for fuels and power supply made up Energy resources

16.9 per cent and 1.8 per cent respectively. Materials In order to accumulate sufficient funds for the renovation of the Repair work assets used by the Company the depreciation norms for long-term Financial and investment costs material assets were adjusted to those economically grounded, this Other costs resulting in the increase in depreciation costs.

| PROFIT In 2007, the growth in the Company's revenues exceeded that in costs due to the increased volumes of freight transportations, and the profit of the Company before tax made up LTL 164.0 million (cf. LTL 141.8m in 2006). A higher than the previous year state subsidy allocated to the Company for financing passenger services to reimburse the losses incurred had also had an impact on the amount of profit.

| PROFIT BEFORE TAX The Company's profit after tax was LTL 133.6 million in 2007 (cf. (LTL million) LTL 111.7m in 2006).

| ACTIVITY RESULTS OF SUBSIDIARY COMPANIES AB “Lietuvos geleþinkeliai” subsidiary companies are UAB “Geleþinkelio tiesimo centras”, UAB “Gelmagis”, UAB “Vilniaus lokomotyvø remonto depas”, UAB “Gelsauga”, and associated company UAB “VAE Legetecha”.

Company Profit (loss) during the year Core activity reported for (LTL thous.) UAB “Gelmagis” 810.2 Railway construction UAB “Geleþinkelio tiesimo centras”1,371.5 Railway construction

UAB Vilniaus lokomotyvø remonto depas 1,409.7 Major overhauls to locomotives “”and diesel trains UAB “Gelsauga” -850.7 Railway security services UAB “Legetecha” 1,003.2 Turnout manufacturing The first steam locomotives that were in use in Lithuania on the lines St. Petersburg–Warsaw and Liepaja–Romnai

In 2007, AB “Lietuvos geleþinkeliai” carried 53.5 million tonnes of freight, a rise of 6.5 per cent over 2006. Transit freight accounted for 19.8 million tonnes or 37 per cent of the total freight. Compared to 2006, the volumes of transit freight went down by 1.8 per cent (cf. 20.2 million tonnes in 2006). This was due to the decline in the volumes of oil and oil products from 11.7 million tonnes to 10.6 million tonnes, i.e. down 9.6 per cent. The majority of transit rail freight was transported in Lithuania | FREIGHT VOLUMES on International Corridor IX D (line Kaiðiadorys–Kybartai, the CIS (LTL million) freight) and on Corridor IX B (line Kena–Klaipëda, freight going to the port of Klaipëda). IX B line is of exceptional importance to Lithuanian railways, as it is quite complicated to attract freight flows to this direction under the circumstances of fierce competition with the ports of other countries. Freight to Klaipëda Port is transported under especially favourable conditions, which are being constantly improved: discounts on freight tariffs are provided, additional variable discounts are available depending on the quantities of the freight to be carried, and the technologies for freight carriage are being constantly improved. Import freight showed a considerable increase from 11.7 million tonnes in 2006 to 16.32 million tonnes in 2007. The volumes of oil and oil products rose by almost 2.2 times (cf. 2.5 million tonnes in 2006 and 5.7 million tonnes in 2007). Optimum logistics conditions and application of competitive tariffs boosted the carriage of mineral and chemical fertilisers from Belarus to Klaipëda Port by 32.3 per cent. A rise of 2.2 times was recorded in the transportation of plant products, that of 28.2 per cent in timber and paper, 21.0 per cent in hard mineral fuel, 16.3 per cent in chemical products, 14.0 per cent in foodstuffs, and 22.4 per cent in machinery, mechanical and electrical equipment. A fall of 9.3 per cent was recorded in the transportation of mineral products, and that of 8.6 per cent in ferrous metals. Export freight amounted to 5.1 million tonnes in 2007, a rise of 1.0 per cent over 2006.Volumes of timber products went up by 22.0 per cent, ferrous products by 61.8 per cent, and those of machinery, mechanical and electrical equipment, or some other products by 26.3 per cent. Volumes of foodstuffs went down by 45.7 per cent, mineral products by 9.7 per cent, and those of oil and oil products by 1.6 per cent. Domestic freight showed a further decline due to the fall in the volumes of oil and oil products. A total of 12.3 million tonnes was transported on domestic lines in 2007. Compared to 2006, the transportation of oil and oil products declined by 3.0 million tonnes or 42.5 per cent. However, transportation flows of other commodities increased on domestic lines. Volumes of chemical and mineral fertilisers rose by 18.7 per cent, plant products by 40.9 per cent, chemical products by 80.9 per cent, and those of timber by 79.9 per cent. Rail freight traffic in Lithuania was also determined by the tendencies dominating on the rail transport markets of other countries. For instance, the increasing popularity of container- and combined traffic in Europe had resulted in the growth of container flows in Lithuania, at the port of Klaipëda in particularly. In view of this, Lithuanian, Belarusian and Ukrainian railway undertakings, ports and stevedoring companies launched the Viking project of combined traffic in 2003. The train Viking operates on the line Klaipëda–Odessa–Klaipëda. The freight is carried from/to Western and Northern Europe via railway ferry line Sassnitz–Mukran–Klaipëda not only to/from Belarus and Ukraine, but also to/from Turkey, Georgia, and other Transcaucasian countries. Currently, the train Viking carries contrailers and containers. The uniform competitive tariff has been set for freight transportations on this train on the territories of all countries involved in the project. All countries participating in the project have also assigned train operators. AB “Lietuvos geleþinkeliai” operator is LG Ekspedicija, a subdivision of the Company. In 2007, a total of 40.1 thousand TEU containers were carried on this train, while in 2006 this figure was 23.5 thousand. This project is one of the most successful rail freight projects of the Company. Lithuanian railways are linked with the EU railway system by European Transport Corridor I from the Lithuanian border with Poland through Mockava, where the European gauge (1435 mm) tracks are interlaced with the wide gauge (1520 mm) tracks. Liquid freight brought by European standard wagons is reloaded into the wide gauge wagons or road transport vehicles at Mockava station, while other freight is reloaded at Ðeðtokai railway station. On Corridor I, the freight is carried according to CIM, i.e., the rules applied in the EU countries. Each year, the Company concludes over 100 contracts for freight traffic with the forwarders from Lithuania and other countries. LG Ekspedicija, a subdivision of the Company, also provides forwarding services by arranging rail freight traffic in Lithuania or other countries, selecting and adjusting optimum lines, organising reloading operation at Šeštokai railway station or at the terminals of other countries, and by rendering other services related to freight traffic. On access roads of about 416 kilometres, the Company provides services to companies engaged in oil refinery, production of fertilisers and building materials, as well as to Klaipëda Port stevedoring companies, etc. In 2007, the Company's trains operated on 42 domestic lines and on 8 international lines: | PASSENGER TRANSPORTATION 131 trains on domestic lines, and INDICES IN 2006-2007 (LTL million) 8 trains on international lines (to/from Moscow, St. Petersburg, Minsk, Simferopol). The revenues from passenger services went up by 17 per cent to approximately LTL 9.3 million, compared to 2006. Passenger revenues including the State subsidies amounted to LTL 65 million. Compared to 2006, the number of passengers decreased by 1 million in 2007. Passengers on international lines showed a boost of 3 per cent; however, those on domestic lines declined by about 20 per cent. A total of 4.1 million passengers were transported on domestic lines, 1.1 million on Local transportation international lines, and around 707.6 thousand were transit passengers. International transportation

The Company's passenger train to St. Petersburg is going to start Total operating daily from the end of May 2008. The negotiations with Polish Railways are to be further continued on restoring the direct communication between Vilnius and Warsaw. Later the train would operate on the new Rail Baltica line. | PASSENGER REVENUES In 2008, the Company is going to implement a new booking and IN 2006-2007 (LTL million) ticketing system: the single database will contain information on the schedules of domestic and international trains, as well as tariffs. The new system will ensure accessibility to information about the services provided through all modern measures (the Internet, sales systems of other companies, etc.), as well as creating favourable conditions for booking, paying for and receiving the tickets (on the Internet at home or at work using a simple printer or by text messages to mobile phones with the help of electronic wallet for completing electronic transactions). The project aims eventually at developing with other Lithuanian transport companies the Subsidies national electronic ticket system applicable for all public transport. International haulage The company is planning to invest about LTL 520 million in the Local haulage modernisation of the passenger rolling stock fleet by the year 2013, of which LTL 28 million will come from the EU funds. The investments will be used Other for acquiring 11 electric trains, 13 diesel trains, 2 railcars, and 33 passenger Total coaches; in addition, LTL 12 million is to be allocated for developing the booking and ticketing system. Timely and qualitative preparedness of the rolling stock of AB “Lietuvos geleþinkeliai” is one of the most important factors determining traffic intensity, efficiency and traffic safety, as well as the factor related to environmental pollution. | PERFORMANCE OF FREIGHT TRAINS (million gross tkm) The traction fleet of the Company consisted of the following in 2007: · 96 freight locomotives 2M62, of which 25 locomotives 2M62K with internal combustion engine D49 and 25 locomotives 2M62M with internal combustion engine Caterpillar; · 41 freight locomotives M62, of which 2 standard gauge locomotives and 16 locomotives M62K with D49; · 9 passenger locomotives TEP60, 4 passenger locomotives TEP70, and 4 passenger locomotives TEP70BS; · 47 shunting locomotives TEM2, 40 shunting locomotives | AVERAGE DAILY LOCOMOTIVE RUN (km) ÈME3, 1 shunting locomotive ÈME3M, an 1 shunting locomotive TGK2. The locomotives are allocated to Vilnius or Radviliðkis Locomotive Depots, or to their workshops at Kaunas, Klaipëda, and Bugeniai. Traction rolling stock is registered within the Register of Rolling Stock and Containers. A total of LTL 122.0 million was invested in the traction rolling stock fleet in 2007. The performance of the traction rolling stock was 29,018 million gross tkm in 2007, exceeding the figure of 2006 by almost 10.6 per cent. | AVERAGE GROSS WEIGHT OF A FREIGHT TRAIN (t) | FREIGHT ROLLING STOCK FLEET The performance of the freight traction rolling stock was 27,571 million gross tkm in 2007, a rise of 10 per cent over 2006. On average, 60.5 freight locomotives were operated daily (cf. 54.8 locomotives in 2006). The average daily efficiency of freight locomotives was 1,248.9 thousand gross tkm, a rise of 0.7 per cent over 2006. The average daily run of freight locomotives amounted to 520.8 km, a fall of approximately 1.8 per cent from the 2006 figure. The average freight train weight was 2,652 tonnes (cf. 2,621 tonnes in 2006), and the operating speed grew from 45.9 km/h in 2006 to 46.3 km/h in 2007. Diesel fuel consumption per 10 thousand gross km fell to 22.9 kg (cf. 24.2 kg in 2006). The total diesel fuel consumption went up by 3.1 thousand tonnes to 65.3 thousand tonnes (cf. 62.2 thousand tonnes in 2006). The number of unscheduled repairs to freight locomotives fell by 6 (cf. 784 in 2006 and 778 in 2007). In 2007, the plan for maintenance and repairs to freight locomotives was realised by 104.2 per cent. Running repair ER–3 was carried out to 73 locomotive units. Overhaul repair KR–1 was done to two locomotives TEM2, while that of KR–2 to two locomotives TEM2 and to four locomotives ÈME3. The major overhauls were performed in cooperation with Daugavpils Locomotive Repair Plant and UAB “Vilniaus lokomotyvø remonto depas”, a subsidiary of AB “Lietuvos geleþinkeliai”. The reengining of the old internal combustion engines 14D40 by the new D49 or Caterpillar engines on locomotives 2M62 was continued in 2006. A total of 3 locomotives 2M62 and 4 locomotives M62 were modernised (reengined by D49), 6 locomotives 2M62 and one locomotive ÈME3 were reengined by Caterpillar. The modernisation amounted to LTL 46.9 million. In July 2005, the contract for procurement of 34 new freight locomotives was signed between AB “Lietuvos geleþinkeliai” and Siemens TS AG. The first locomotive ER20 CF was delivered in September 2007, while 3 more were supplied by the end of the year. Currently, the trial tests are being performed to the locomotives; their commissioning will follow soon. The Company focuses its attention on the modernisation of freight wagons. Modernisation of freight wagons is being conducted in two ways: (1) purchase of new wagons, and (2) overhaul repairs to existing wagons with the aim to extend their life cycle. The Company's wagon fleet consisted of 9,486 wagons with different purposes, of which 29 were standard gauge wagons. A total of 50 mineral wagons and 50 covered wagons were acquired in 2007. Scheduled repairs of freight wagons – low-sided, flat, covered, tank wagons, etc. – are conducted at Radviliðkis Wagon Depot. A special workshop is being constructed at the Depot for overhaul repairs of wagons (Wagon Modernisation Depot). The new workshop will annually enable overhaul repairs to 200 wagons with extending their life cycle. A total of 1,213 wagons were modernised in the period of 2001–2007, of which 699 flat wagons were transformed into fitting flat wagons, 100 flat wagons were equipped with removable equipment for timber transportation, 20 tank wagons for transportation of cement were upgraded for the transportation of oil products, and 24 flat wagons were readjusted to a flat wagon unit for the transportation of refrigerating containers. Around 3,000 to 5,000 wheel sets for freight wagons are annually assembled at Radviliðkis Wagon Depot. The Depot modernised 7,064 units of bogies type 18–100 during the period of 2004–2007. The investments in the freight wagon fleet totalled LTL 82.23 million in 2007. | PASSENGER ROLLING STOCK FLEET In 2007, the passenger rolling stock fleet of the Company consisted of the following: 144 passenger cars; 47 diesel trains; 15 electric trains. In order to improve passenger rolling stock state, the following works were performed in 2006: · 3 two-seat upholstered carriages of compartment type were purchased for the transportation of passengers on international lines at a speed of 160 km/h; · Modernisation of compartments of 2 electric trains; · Replacement of the power units to 2 diesel trains; · Modernisation of 14 carriages completed; · Upon the order placed by the Company, ÈKD VAGONKA a.s. (Czech Republic) started the construction of 2 double-deck electric trains in 2007. In 2007, the contract was concluded with UAB “TMHB” for the purchase of 4 diesel trains and 2 trailer coaches. The operation of these trains will start in 2008.

In 2007, the renovation of some passenger rolling stock maintenance units was completed (diesel train maintenance workshop, electric train depot boiler-house, etc.). A total of LTL 39.81 million was invested in the passenger rolling stock fleet in 2007. Steam locomotive of series P at Radviliðkis Depot in 1930

Narrow-gauge steam locomotive at Šanèiai, Kaunas, in 1930

Four-axle railcar made at Kaunas Central Railway Workshop in 1935 Interwar. The train at Kaunas Tunnel

Interwar. Steam locomotive of series P hauling a train at Ðiauliai (approximately 1930–1935)

Narrow-gauge steam locomotive P4 1-D-1 operating on the line Panevëþys–Ðvenèionëliai in 1939 | STRATEGIC PROJECTS. The infrastructure modernisation work of the two International Transport Corridors, I B and IX D, crossing the territory of Lithuania was continued in 2007. The tracks were reconstructed and the station tracks extended (up to 1,050 metres at 7 stations), marshalling yards modernised (the reconstruction of Radviliðkis Station completed and the reconstruction of Vaidotai Station started), the reconstruction of Kaunas Tunnel started, signalling, telecommunications and power supply installations modernised (295 km of fibre optic cable constructed on the sections Panevëþys–Radviliðkis–Tauragë–Pagëgiai and Kaiðiadorys–Kybartai, 13 new telephone exchanges installed and tested), and the reconstruction of bridges and viaducts continued (in 2007, 4 bridges were reconstructed). The year 2007 saw the renewal of the project Lithuanian Railways Radio Communication System Modernisation by GSM; the contract for construction work was signed. This is the largest infrastructure modernisation project to be implemented by the Company amounting to LTL 186.9 million, of which LTL 156.4 million comes from the Cohesion Fund. The project is to be implemented within a period of 2.5 years. Klaipëda railway junction was further developed using the assistance from the European Regional Development Fund (the reconstruction of Anglinë, port, ferry line tracks started, the reconstruction of track 205/206 conducted, track 201 aligned), the passenger building at Kaunas Railway Station reconstructed, as well as level crossings (the contract was signed and the design work started). Special attention has been paid by the Company to the modernisation of automated control measures for rolling stock, this being one of the most important projects related to traffic safety. In 2007, a total of 20 such stations were installed. The value of the project is LTL 58.5 million, of which LTL 34.5 million accounts for the EU assistance. The project is to be completed in 2008. In 2007, the Company started implementing a new project, Rail Baltica. The design work for Rail Baltica up to Marijampolë is to be financed from the TEN–T Fund (the EU financial assistance for implementing the Trans-European transport networks development projects) by 19.42 per cent, the rest amount coming from the State budget. An application for financing the design and construction work of other sections on the territory of Lithuania on the railway line Warsaw–Kaunas–Riga–Tallinn–Helsinki has also been submitted to the TENT–T Fund. The 2000 –2006 projects financed from the Cohesion Fund will have been completed by the end of 2010, the deadline for the Cohesion funds eligibility date, while those financed from the European Regional Development Fund by the end of 2008, the deadline for said funds eligibility date.

| OTHER INVESTMENT PROJECTS AND WORKS. In 2007, a total of 20 investment projects financed from the Company funds were implemented: the connecting railway lines restored and modernised, the interlocking installation at Vilnius Station reconstructed, the pedestrian viaduct and boiler houses at Paneriai Station renovated, Vilnius Station tracks and Pauostis tracks at Klaipëda Station fenced off, the track area reconstruction started, telecommunications and security equipment acquired, design works completed, etc. In 2007, the reconstruction of connecting lines Kuþiai–Maþeikiai–Bugeniai and Vilnius–Stasylos–State Border was completed (the value of the project was LTL 113.0 million): overhaul repairs to 85 km of tracks carried out, 92 turnouts replaced by new ones, of which 76 sets were turnouts with concrete or wooden sleepers of new designing in line with the LST-EN standard. The work was performed by applying the new technologies and using modern Western or Eastern superstructure materials, as well as high-performing and efficient heavy track machinery. For the improvement of or overhaul repairs to the tracks, the Company utilised the funds provided by the EBRD, as well as own funds. The speed of 120 km/h was ensured on the reconstructed sections. This was of great importance to face the increasing flows of trains. The Company is planning to implement 18 railway infrastructure projects financed from the EU funds (Cohesion, European Regional Development Fund, and TEN–T) in 2008, amounting to LTL 766.1 million. These projects include the modernisation of signalling and telecommunications equipment, installation of the GSM–R system, renovation of bridges and viaducts, reconstruction of Kaunas Tunnel, extension of station tracks (up to 1,050 m), and the modernisation of marshalling yards. The technical development strategy of the Lithuanian railways is based on the market research analysis, feasibility studies, and research works performed. Its implementation will ensure reliable and fast transportations of freight and passengers, running of heavy trains to the Klaipëda Port and Kaliningrad Oblast, solve some overall transport problems, as well as decreasing the negative environmental impact caused by transport. In order to enhance competitiveness of the railway transport system on international and domestic service markets, the railway lines are being further reconstructed. The rail infrastructure systems are being modernised and the tracks repaired to reach a speed of 160 km/h for passenger trains and a weight of 6,000 tonnes freight trains. The Company makes considerable investment in the modernisation of rolling stock with an aim to have the most modern fleet of freight locomotives in both the Baltic States and in Eastern and Central Europe. The main projects on the renewal of freight rolling stock fleet having been completed, the 2009–2013 investment priority is to be the establishment of contemporary passenger rolling stock fleet. The Company aiming at providing diversified services to its clients (including handling of documents, preparing delivery schedules, transportation, loading, unloading and reloading of freight, warehousing, customs clearance, insurance, safeguarding, credit financing, cargo inspection, marketing and advertising) envisages to develop freight terminals or logistics centres. Investments in the development of railway infrastructure of terminals and in logistics services will create favourable conditions for boosting intermodal freight traffic and help transfer road freight to railways. One of the investment priorities is the development of IT. The increased flows of information require the Company to develop the IT infrastructure, install backup server farm, replace obsolete hardware, acquire systems software, and to further introduce new SAP (financial management system) modules. The Company's Long-Term Investment Plan has been prepared in view of the development tendencies specified in the Company's long-term strategy and is based on the Long-Term (by 2025) Development Strategy of the Lithuanian Transport System approved by the Government of the Republic of Lithuania on 23 June 2005. The Company's strategic investment trends in 2008–2013 are as follows: · Modernisation and development of infrastructure on Railway Transport Corridors I and IX; · Renovation of connecting railway lines; · Development of Klaipëda railway junction; · Modernisation of the fleets of freight and passenger rolling stock; · Development of logistics centres; · IT development. Around LTL 4,404.5 million is to be invested in the revival and modernisation of Lithuanian railways in 2008–2013. Major part of investment will be the own funds (about 45 per cent). | INVESTMENT IN 2007 In 2007, the Company invested in Lithuanian railways LTL 419.1 million, of which LTL 266.8 million was own funds, LTL 121.0 million came from the EU funds, LTL 19.2 million from the State budget, and | STRUCTURE OF LTL 12.1 million as loans with the State guarantee. INVESTMENT IN 2007 (%) Over 62.5 per cent of investment was made in the modernisation and development of infrastructure: 40.1 km of railways were repaired, 75 sets of turnouts replaced by new ones, about 150 km of telecommunications networks laid, and 4 bridges reconstructed. In 2007, the following investment projects were completed: power supply modernisation on the Kaiðiadorys–Radviliðkis section, modernisation of telecommunications on the Kaiðiadorys–Kybartai section (123.5 km of cable constructed), reconstruction of bridges and Own funds viaducts on Corridor IX (the reconstruction of 47 bridges completed). Borrowed funds The feasibility studies were carried out for the following projects: (1) Funds from State budget modernisation of Corridor IX B line Kena–Vilnius–Kaiðiadorys and EU funds Corridor IX D line Kaiðiadorys–Kaunas–Kybartai, and (2) modernisation of Corridor I line Kaiðiadorys–Radviliðkis– Ðiauliai–Joniðkis and that of Corridor IX B, except the line Kena–Vilnius–Kaiðiadorys. The year 2007 saw the renewal of the project Lithuanian Railways Radio Communication System Modernisation by GSM–R, i.e., the global mobile communication system will be installed. As a result, the functions of the radio communication system will be expanded, the train traffic safety increased, and new communication services will be provided to freight- and passenger carriers. The investment in railway infrastructure resulted in an increase of train speeds, line capacities and traffic safety. In 2007, a total of 4 freight locomotives ER20CF were delivered by Siemens (all 34 locomotives will have been supplied by mid-2009). This 6-axle locomotive weighing 138 tonnes has been designed for Lithuanian railways; it will be able to carry one third more freight than the existing old locomotives. The 2000 kW diesel engine mounted on a Siemens locomotive allows reaching a maximum speed of 120 km/h. The year 2007 saw further modernisation of the freight rolling stock fleet: 10 engines on freight locomotives 2M62 were modernised, and the modernisation of shunting locomotives ÈME3 started. The modernisation of a locomotive resulted in a decline of about 30 percent in operating costs. The Company purchased 100 freight wagons in 2007. The Company also invested in the passenger rolling stock: the modernisation of diesel train DR1A was started, the compartments of 2 electric trains modernised, 14 passenger coaches modernised, 3 new two-seat upholstered carriages of compartment type purchased for transportation of passengers on international lines at a speed of up to 160 km/h, and two diesel trains reengined. Upon the Company's order, ÈKD VAGONKA a.s. (Czech Republic) started the construction of 2 double-deck electric trains. The first new comfortable electric trains are to be put in operation already in 2008. The increasing number of the systems in operation together with the increasing number of their users, as well as the growth in information flows resulted in 2007 in the development of IT infrastructure, replacement of obsolete hardware and acquisition of systems software. The financial management system, SAP, was further introduced. In September 2007, the Company's balance sheets and income statements for a period of 9 months prepared with the help of the SAP system were presented; the SAP modules for the investment accounting and for the project management were installed.

| INVESTMENTS IN BUSSINESS IN 2007

Railway infrastructure LTL 262.1m 62.5 % Freight transportation LTL 98.6m 23.5 % Passenger transportation LTL 46.0m 11.0 % Information technologies LTL 12.4m 3.0 % Total LTL 419.1m In order to ensure traffic safety on Lithuanian railways, modern technologies are being introduced, staff training courses arranged, technical standard documentation drafted complying with the requirements of the EU and other international railway organisations (UIC and OSJD), effective defectoscopy, diagnostic and traffic safety control equipment used. Constant checks are being conducted on the compliance with traffic schedules, work ethic and technological requirements. A total of 59 traffic accidents were recorded in 2007, a rise of 18 per cent over 2006 (cf. 50 traffic accidents in 2006). The growth in the number of traffic accidents was determined by the increased volumes of freight transportations by Lithuanian railways in 2007. A total of 81 per cent of the reasons for all traffic accidents on Lithuanian railways accounted for the human factor (cf. 69.5 per cent in 2006). In order to avoid traffic accidents with the human factor involved, it is necessary to speed up the station modernisation work and to train the staff to use new equipment. The main reasons for traffic accidents involving the human factor were as follows: non-compliance with the instructions, work technologies or job descriptions. The main reasons for traffic accidents involving the technical factor were as follows: locomotive breakdowns, heating of axle boxes on freight or passenger cars. A total of 16 road accidents occurred at the level crossings in 2007 (vehicle drivers ignored restrictive aspects and entered the level crossing area), during which 4 people perished and 5 were injured. Service railcar in the 1950s

Children's railway train at Vingis Park in Vilnius in the 1950s

Steam locomotive that belonged to Kaunas Hydro-Electric Power Plant in 1962 At Vilnius Diesel Train Depot in 1975

Freight steam locomotive that was in use in Lithuania before 1979

1986 m., elektrinis traukinys ER29–1 Naujosios Vilnios traukiniø depe. The Company has tended to focus particular attention on environmental protection and on the prevention of pollution. Air Protection. The inventory of air pollution sources, the maintenance of air cleaning equipment and check measurements of stationary pollution sources were conducted at the Company in 2007. Air pollution is reduced due to the acquisition of new rolling stock or the modernisation of the existing, both passenger and freight rolling stock. Water Resources Protection. While implementing the EU financed project on the modernisation of Coridor IX marshalling yards (Vaidotai), the surface water cleaning installations at Vaidotai Station were repaired. Waste management. The waste is sorted out (into secondary, communal, construction, hazardous, etc.) and delivered to waste management companies. The costs of the delivery of communal and hazardous waste amounted to approximately LTL 0.5 million. Soil and Groundwater Protection. Groundwater monitoring programmes are being carried out at the Company. Noise Abatement. The Company's specialist staff are collecting information on the problems related to railway noise. In 2007, upon the Company's request a study on the Measurements of Railway Noise and Vibration was conducted specifying the train noise levels at the main railway tracks. Pollution Taxes. As per existing regulations, the Company pays annual taxes on natural resources, air pollution resulting from mobile and stationary pollution sources, taxable packages and items. The said taxes paid by the Company in 2007 amounted to over LTL 2 million. In 2007, the Company's main IT projects were related to the establishment of data communication network, the design and installation of the cargo accounting systems, as well as ensuring information security. The year 2007 saw further development and modernisation of the Company's data communication network. The trunk segment was installed on sections Kaiðiadorys–Kaunas–Kazlø Rûda–Kybartai, Kazlø Rûda–Marijampolë–Ðeðtokai, Ðiauliai–Gubernija–Joniðkis, Vilnius–Naujoji Vilnia–Kena, and Naujoji Vilnia–Kyviðkës–Valèiûnai–Vaidotai. Within the framework of said project, the data acquisition and distribution segment of the data communication network was modernised on sections Pagëgiai–Ðilutë–Vilkyèiai–Rimkai–Klaipëda, Mauruèiai–Kazlø Rûda–Pilviðkiai–Vilkaviðkis–Kybartai, Vilnius–Lentvaris–Vievis–Þasliai–Kaiðiadorys– Pravëniðkës–Palemonas–Kaunas, and Akmenë–Maþeikiai aiming at ensuring data transmission between cities/stations and connecting local data transmission networks and installations to the trunk segment (the trunk segment aims at transmitting data flows between cities). The infrastructure objects (entities) in Ðiauliai and Klaipëda regions were networked by special communication equipment and connected to the trunk segment. Successful development and modernisation resulted in proper and safe access to the Company's centralised information resources on the aforementioned sections and entities. The trunk segment of the data communication network on the section Pagëgiai–Klaipëda–Ðiauliai–Vilnius was completed (its installation was started in 2004); a total of 84 entities were networked to the data communications trunk. In order to ensure proper management and service of the data communication network, the necessary software was acquired and installed. In 2007, the information systems related to the computerisation of accounting freight transportations were further developed.

| INFORMATION SYSTEM “KROVINYS” (CARGO) · The Customer Service Module software was specified allowing customers to access all the cargo accompanying documents within the information system “Krovinys”; · The interface between “Krovinys” and Financial Accounting and Management System was completed; · Since mid-October 2007, all customs clearance procedures have been handled only within the information system “Krovinys”. The electronic cargo declarations and data exchanges with the Customs Department information systems were tested; · The formalisation of CIM consignment note was adjusted to the new requirements; · Part of the information system “Krovinys” related to the application of the Tariff Book was edited; the application of the Tariff Book was adjusted more to the calculation of charges in view of the exceptions in the Tariff Book; · The new module Application for Carriage was completed allowing the Company's forwarders to handle freight shipping documents and financial specialists to control the compliance with the requirements related to the application for carriage within the information system “Krovinys”.

| THE OPERATIVE COMPUTERISED INFORMATION SYSTEM FOR HAULAGE (OPKIS) · Basing on the OPKIS central database established on the data accumulated from wagon lists and freight train movement notices, a new software was developed for accounting freight wagon flows (incoming, outgoing, and transit) via border stations; · A programming measure was developed for submitting information to the Kena railway station weighing system; · Wagon search task was improved; · As of June 2007, the data is being received from Belarusian Railways about AB “Lietuvos geleþinkeliai” wagons on the territory of Belarus, as well as the wagons loaded for Lithuanian railway stations or those carried by transit to the Kaliningrad Oblast; therefore, a new note “Wagon Deployment on Belarusian Railways” was developed in the OPKIS system; · Additional functions were developed for gathering and control of information on locomotives.

With an aim to enhance the Company's information systems security, the following documents were drafted in 2007: · The procedure for coordinating information security: a working group was set up, a cooperation agreement with other organisations signed, and organisations for cooperation in the field of information security specified; · The procedure for responsibility distribution: the owners of information systems were identified and the scope of responsibilities for information systems maintenance staff defined; · The procedure for planning the continuity of activities: a plan for the continuity of the Company's information systems activity was developed applicable in the event of disturbance or emergency; · The procedure for staff security: information security dissemination programme was developed and put on the Company's intranet; · The procedure for backup copies: backup and recovery procedure was developed to be used in all Company's information systems, positions of recovery process participants specified, as well as their functions and interconnection; · The procedure for user access management and supervision: the registration and access rights procedure for the users of information systems was developed. AB “Lietuvos geleþinkeliai” activities are noted for close cooperation with main international organisations in Europe and globally, as well as with business partners from Eastern and Western Europe, and Asia. The Company's representatives have been actively participating in international working parties, conferences and seminars seeking to exchange experiences and information, this allowing us to maintain the strategic partnership relations with our peers from other countries and to ensure the successful integration of the Company into the European railway environment. AB “Lietuvos geleþinkeliai” is a member of the following international organisations: · Organisation for Cooperation of Railways (OSJD) The Company has been participating in the activities of OSJD since 1992. OSJD addresses the issues related to transport policy, legal, economic and environmental aspects of rail transport, and develops principles of the uniform international transport law. · International Union of Railways (UIC) The Company has been participating in the activities of UIC since 1992 m. UIC's mission is to foster cooperation between railway companies at a worldwide level. With this mission, UIC's tasks include preparing standards, regulations and recommendations to facilitate international traffic, carrying out projects for international cooperation, fostering exchanges of information and experience between railways, and international training initiatives. · Intergovernmental Organisation for International Carriage by Rail (OTIF) By joining the Convention concerning International Carriage by Rail (COTIF) in 1995, Lithuania became a member of OTIF the same year. OTIF's principal aim is to establish a uniform system of law applicable to the carriage of passengers, luggage and goods in international traffic by rail. · International Rail Transport Committee (CIT) The Company joined CIT in 1995. CIT's main tasks include the uniform application and practical implementation of the intergovernmental Convention concerning International Carriage by Rail (COTIF), representation of the interests of CIT members in dealings with public and private institutions, and standardisation of the legal relations between customers, railway undertakings and infrastructure operators, as per COTIF. · The Community of European Railway and Infrastructure Companies (CER) The Company has been participating in the activities of CER since 2003. CER aims at coordinating the activities of railway undertakings in the EU member states, i.e., developing of railway networks strategy, equal conditions for the use of infrastructure, regulation of customs and rail traffic, and contributing to the development of new transport-related EU regulations. · Railway Transport Council of the CIS, Estonia, Latvia, Lithuania and Bulgaria LG signed an Agreement with the direction of the CIS Railway Transport Council in February 1993. As per this Agreement, LG participates in the meetings of the Council as an observer in a consultative capacity. The main aims of the Council are regulation of carriage of passengers, luggage and goods, and dealing with the issues related to settlement for the use of freight wagons. In 2007, the Company organised a number of major international events. The meeting dedicated to the Rail Baltica Project was held at the Company on 28 February 2007 with the participation of Pavel Telièka, European coordinator for Rail Baltica project, James Pond, representative of the Directorate-General for Energy and Transport, and the Company's specialist staff. The focus was laid on the following issues: the maximum utilisation of EU funds allocated for the project, as well as attracting private capital and financing from the Cohesion Fund and EIB for project implementation. On 9 March 2007, the Minister of Transport and Communications of the Republic of Lithuania and the Minister of Transport and Maritime Economy of the Republic of Poland signed a Memorandum of Understanding on the Rail Baltica Border Crossing Point. Meetings of Lithuanian and Russian railway undertaking representatives were held on 29–30 March and 15 May 2007. On 3–5 April 2007, the meeting of General Managers of Belarusian and Lithuanian railways was held at the Company to discuss the 2006 cooperation effects and the prospects for 2007. On 15 May 2007, the delegation of Berlin Senate Transport Department visited the Company. The participants were familiarised with the strategy for company development. On 12 June 2007, the Company hosted the meeting of LithuanianPolish WP on the Rail Baltica project to discuss the project implementation plan. On 23 July 2007, the plaque was unveiled at Mockava Station during the opening ceremony to commemorate the start of Rail Baltica modernisation. On 11-12 [trumpasis bruksnys?] September 2007, the 9th meeting of CIM/SMGS legal group was held at the Company with the participation of representatives from Russian, Polish, German, Latvian, Austrian and other railways to discuss possibilities for common use of CIM/SMGS consignment notes. The Company employed 10,535 people in 2007. In 2007, the following restructuring changes were made: a new division Logistics Centre was established, a subsidiary company UAB “Gelsauga” was set up after the Railway Security Centre had been abolished, and a representative office of AB “Lietuvos geleþinkeliai” was opened in Moscow (the Russian Federation). | CHANGE IN LABOUR EFFICIENCY (LTL thousand/worker) The labour productivity went up to LTL 133.5 thousand of sales income per employee, a rise of 20 per cent. The costs for staff remuneration rose by 25.0 per cent in 2007. The average level of monthly salaries increased by 28.8 per cent or LTL 548 and amounted to LTL 2,452, compared to the year 2006. In order to manage effectively the human resources, to specify the expedient needs for improving staff qualifications and developing their competencies, to conduct career planning and to establish a proper stock of employees, the Company is carrying out the project The Evaluation of Social and Managerial Competencies of the Employees. The number of staff with university education grew by 15 per | CHANGE IN LABOUR NUMBER (people) cent, while that with non-university education by 29 per cent. In 2007, a total of 160 employees accomplished extramural studies in universities and colleges, 36 full-time students were employed in the Company after they had graduated from their educational institutions. The number of staff studying at the extramural departments of universities and colleges is 546 (243 in universities and 303 in colleges). The Company provides financing for university studies in railway transport professions. In 2007, the Company allocated LTL 64.2 thousand for financing said studies, i.e., 1.5 times more than in 2006. Every year, refresher- and retraining courses are conducted for the staff. The Company's management and specialist staff participate in strategic planning, investment management, managerial and other courses. In 2007, a total of LTL 4 million was allocated for staff training, of which LTL 3 million was granted by the European Social Fund (ESF) for partial financing of the Company's project Development of AB “Lietuvos geleþinkeliai” Management and Staff Competencies and Capacities. The project is being successfully implemented. More than 80 training courses on different subject matter were organised for the Company's employees. The courses attracted some 4,525 participants, of which 3,579 attended the training courses financed from the European Social Fund. The increasing financial standing of the Company allows an annual increase in the funds allocated for meeting the social needs of its staff. In 2007, the Social Fund grew to LTL 5.0 million (cf. LTL 4 million in 2006). The funds are used for paying benefits, financing studies, recreation, health care and cultural projects. More funds are allocated to finance the leisure of staff and their children at summer camps. In 2007, over LTL 13.0 million was spent on occupational safety and health care. This resulted in establishment of or repairs to welfare spaces in production units, and in reduction to standard of professional risk at 38 work places. Extensive medical examinations of the staff working in specific areas were performed at specialised medical institutions; all staff members could have free vaccination against flue. Professional feasts and mastery contests are being arranged for the staff. MINISTRY OF TRANSPORT AND COMMUNICATIONS OF THE REPUBLIC OF LITHUANIA

State Railway Inspectorate

AB “LIETUVOS GELEÞINKELIAI”

Freight Directorate

Railway Infrastructure ADMINISTRATION Passenger Directorate Directorate

IT Centre Subsidiary Companies Freight locomotive hauling a train in 1994

1435 mm gauge locomotive M62 made at Lugansk and received by LG in 1994–1995

Vienintelë Lietuvoje automotrisë AR2–02 (pagaminta Latvijoje) Diesel train arriving in Vilnius

Passenger train at Ignalina in 2004

The new freight diesel locomotives of Siemens · 8 January: AB “Lietuvos geleþinkeliai”, AB “Kauno tiltai” and UAB “Volker-Rail Lietuva” signed a contract for design works for the reconstruction of Kaunas railway tunnel. · 20 February: Passenger train Vilnius–Moscow–Vilnius started its first trip with a modernised 30-seat restaurant car. The restaurant car was modernised by the Polish company Pesa. · 28 February: The repair to the Vilnius railway station underpass was completed. · 8 March: AB “Lietuvos geleþinkeliai”, “Belam Riga SIA” and UAB “Fima” signed a contract for the modernisation of telecommunications systems on the railway section State Border with Latvia–Panevëþys–Radviliðkis–Tauragë–Pagëgiai. The value of the project totalled LTL 27.9 million. · 9 March: The Minister of Transport and Communications of the Republic of Lithuania and the Minister of Transport and Maritime Economy of the Republic of Poland signed a Memorandum of Understanding on the Rail Baltica Border Crossing Point. · 13 June: The telecommunications modernisation project was completed on the section Kaiðiadorys–Kybartai connecting to the Kaliningrad Oblast. · 23 July: The plaque was unveiled at Mockava Station during the opening ceremony to commemorate the start of Rail Baltica modernisation. · 28 September: Extra-heavy cargo designed for Ignalina Nuclear Power Station – a transformer weighing 208 tonnes – arrived at Vaidotai Railway Station on a special wagon. It has been one of the heaviest cargoes over the last years. · 5 October: A modern freight locomotive Eurorunner of Siemens was presented at Vilnius Railway Station. · 12 November: The two new two-seat passenger carriages of compartment type made in Tver Rolling Stock Construction Plant (the Russian Federation) were put into operation. · 20 December: The first shunting locomotive modernised at UAB “Vilniaus lokomotyvø remonto depas”, AB “Lietuvos geleþinkeliai” subsidiary, was presented.

AB “Lietuvos geleþinkeliai” Mindaugo str. 12/14 LT-03603 Vilnius, Lithuania Tel. +370 5 2692038 Fax +370 5 2692128 E-mail: [email protected] www.litrail.lt